Texas officials prevailed in the first round of a legal fight that carries implications for the national grid, but federal courts will have more chances to shape the outlook of competitive transmission in the U.S.
The Texas saga involves a state law passed last year as S.B. 1938, which essentially gives incumbent utilities first dibs on building new high-voltage power lines that serve the state.
In February, U.S. District Court for the Western District of Texas Judge Lee Yeakel issued an order dismissing with prejudice a complaint from affiliates of Florida-based NextEra Energy Inc. NextEra argued the law could freeze it out of a planned transmission project and a pending power line acquisition in Texas. A motion for a preliminary injunction also was dismissed.
NextEra has since filed notice of an appeal. And it asked the district court to block application of the law on the two deals while the appeal is pending — a request that drew a scathing rebuke from Texas' attorney general and others representing the defendants.
A case in Minnesota involves a similar grid issue, in which an affiliate of a major U.S. power company, LS Power, is fighting the state's right of first refusal law in federal court. That case has moved to the 8th U.S. Circuit Court of Appeals after LS lost in district court.
Discussions of transmission have taken on added relevance for the power sector as states and regional transmission organizations consider how to build new power lines as more renewable energy enters the grid.
"The future of competitive transmission is on the line," said Ari Peskoe, director of Harvard Law School's Electricity Law Initiative. "The question will be ... if these laws are upheld by these two federal appeals courts, are other states going to follow suit?"
Critics have said the Texas measure effectively cuts out new entrants, clashes with the state's history of competition and could raise the costs of transmission projects that factor into consumers' power bills. Proponents counter the language preserves Texas' approach to electricity and should help ensure reliability and affordability.
Examinations of how or when there should be a right of first refusal for electric utilities on transmission projects have popped up in various places over the years. For example, a proposed bill in Colorado could link the use of that right to joining a regional transmission organization.
In Texas, the main power market is managed by the Electric Reliability Council of Texas (ERCOT). The region features wholesale competition and some areas with both retail choice and regulated wires utilities. ERCOT's region already relies heavily on existing utilities for transmission projects.
Areas of Texas outside the ERCOT region may see more immediate effects from the new state law. They have utilities with integrated business models and ties to other markets. And that's where the case in question is focused — outside of ERCOT.
The complaint last year from affiliates of NextEra listed several defendants, including Texas' attorney general and three state utility commissioners. It alleged the Texas law violates the U.S. Constitution.
Judge Yeakel's order last month said the complaint's allegations were "based on the premise that the Commerce Clause grants Plaintiffs the right to compete to build transmission lines in Texas." But the order said plaintiffs "failed to demonstrate that SB 1938 discriminates against out-of-state transmission-line providers or has a discriminatory purpose or effect."
The order also said Texas' regulation of electric transmission "has a long and extensive history." And it concluded that plaintiffs "failed to plead a claim under the Contracts Clause."
Harvard's Peskoe has said he doesn't see the benefit of closing the transmission market to competition. And he said yesterday that the district court decision in Texas "didn't appear to seriously grapple with the constitutional arguments" from NextEra and its allies.
It's "somewhat of a longshot" that the district court will grant an injunction after having dismissed the complaint, Peskoe said.
S.B. 1938 had significant support from the utility and business sectors last year. Tony Clark, a former member of the Federal Energy Regulatory Commission, spoke in favor of the Texas transmission bill on behalf of several utility companies at a Senate committee hearing. He argued that the legislation was meant to preserve existing practices and expand them across the state.
The legislation overcame potential hurdles, such as a letter from the Department of Justice's Antitrust Division in response to a note from a state lawmaker.
The DOJ said FERC's Order 1000 from 2011 eliminated certain federal rights of first refusal (ROFR) and that the order had withstood court challenges. The department noted that several states have put ROFR laws in place, but it said such laws can reduce competition and harm consumers.
Watching for a decision
The new Texas law is especially relevant for NextEra because the Midcontinent Independent System Operator (MISO) previously said one of the company's affiliates was selected to develop a 500-kilovolt line and related infrastructure proposed in Texas.
The project was slated to cost an estimated $115 million, according to a 2018 news release. And NextEra has said it would be in Entergy Texas' service territory. Entergy Texas was among the parties whose request to intervene in the district court case was denied, though it has filed an appeal.
In a statement yesterday, MISO said it's "committed to delivering the benefits of the Hartburg-Sabine Junction transmission project in East Texas." MISO said it's assessing how developments in Texas state law may affect the project.
"MISO is also aware of the recent federal court action," the grid operator said.
In seeking an injunction related to S.B. 1938, NextEra said it's likely to lose the right to build, own and operate the Hartburg-Sabine line that it won in a competitive bidding process. The filing suggested MISO could order a reassignment of the Hartburg-Sabine project soon.
NextEra also noted a pending contract to acquire the Jacksonville-Overton transmission line, which it said it's also likely to lose because of S.B. 1938. It's seeking expedited consideration of its request for an injunction related to those projects. The appeal of the district court's decision will go to the 5th U.S. Circuit Court of Appeals in New Orleans.
"An injunction pending appeal will temporarily prevent the imminent, irreversible loss of a hundred-million-dollar-plus project for NextEra while the Fifth Circuit considers the substantial Constitutional issues presented here," NextEra said. The company argued such an injunction wouldn't harm Texas or the state's consumers.
Texas Attorney General Ken Paxton and others representing the defendants offered a much different response, accusing NextEra of seeking "a truly extraordinary remedy: an injunction against the enforcement of an important Texas statute that simply codified the state's long-standing general practice regarding the certification of the new transmission lines needed to ensure reliable electric service in the state."
The court filing added: "Any injunction against the enforcement of this statute would seriously harm Texas and its electric consumers." Possible harms, the filing said, include regulatory uncertainty and the delay and impairment of needed transmission-line development, as well as reliability risks and wasted expense and increased costs.
While an appeal may take a while, Peskoe said precedent in the 5th Circuit could be difficult for NextEra to overcome. He'll be watching for a decision on the Minnesota case from the 8th Circuit in the meantime.
"We could get a decision from the 8th Circuit any day, and that will certainly, I think, inform the 5th Circuit," Peskoe said.