On August 30, 2022, the U.S. Court of Appeals for the Fifth Circuit issued an order in NextEra Energy Capital Holdings, Inc. v. Lake, a case raising dormant Commerce Clause challenges to a 2019 Texas law that bans new entrants from building transmission lines that are part of a multistate electricity grid. The majority reversed the lower court’s Rule 12(b)(6) dismissal of NextEra’s petition, thereby allowing the case to proceed to trial in district court.

The Texas law, SB 1938, permits only those persons who own an existing utility facility in Texas to build, own, or operate new transmission lines that directly interconnect with said facility.

NextEra owns approximately 7,300 miles of transmission lines in multiple states, but does not have assets in Texas. In November 2018, the Midwest Independent System Operator (“MISO”) awarded NextEra the right to build a new transmission line in east Texas, in an area that is part of an interstate grid. Despite the fact that the Texas Public Utility Commission (“PUCT”) recommended approval of NextEra’s transmission line, the application remains pending, as SB 1938 requires its denial.

NextEra brought the instant challenge against the PUCT seeking to build its lines. NextEra claimed that, inter alia, SB 1938 discriminatorily excludes nonincumbents—i.e., utilities that do not own transmission lines in the state—from participating in the Texas interstate transmission market on its face, as well as in its purpose and effects. The PUCT moved to dismiss for failure to state a claim, and the U.S. District Court for the Western District of Texas agreed, finding that “SB 1938 does not … regulate the transmission of electricity in interstate commerce; it regulates only the construction and operation of transmission lines and facilities within Texas.” It rejected NextEra’s argument that SB 1938, through its purpose and by its effect, unconstitutionally discriminates against out-of-state providers.

On appeal, the Fifth Circuit determined that the case was ripe for review even though NextEra never applied for a certificate of public convenience and necessity from the PUCT. The Court found the case ripe on the basis that it presents constitutional questions and NextEra would suffer hardship if, before filing suit, it had to expend resources applying for a certificate that would ultimately be denied.

The Court then considered whether SB 1938 is facially discriminatory. In so doing, the Court noted that SB 1938’s presence requirement equates to a residency requirement that a recent U.S. Supreme Court case concluded “plainly” favored in-state interests in violation of the Commerce Clause.

The Court then considered the extent to which the Texas law’s purpose and effects are discriminatory. The Court determined that evaluating a law’s purpose and effects are highly fact-dependent inquiries that benefit from a full trial record. The Court thus concluded that, because NextEra’s petition raised plausible allegations of discriminatory purpose and effect, the lower court erred in dismissing the petition.

The Court went on to invoke the U.S. Supreme Court’s analysis in Pike v. Bruce Church, which requires evaluating whether the claimed local benefit of the law at issue outweighs the burden imposed on out-of-state providers. The Court concluded that NextEra plausibly alleged that the claimed local benefit of reliability was “insignificant and illusory” to warrant further factual development at trial.

Circuit Judge Elrod concurred in part and dissented in part, objecting to the majority’s conclusion that SB 1938 is facially discriminatory. According to Judge Elrod, the majority—but not SB 1938 itself—reads a distinction into the law, but the law itself “draws a neutral distinction between entities based on incumbency status, which does not depend on residency.”

A copy of the ruling can be found here.