US appeals court favors NextEra in interstate power transmission dispute with Texas

Texas must allow competition for the construction, operation and ownership of transmission projects connected to interstate power grids, the 5th US Circuit of Appeals Court has ruled, which may facilitate upgrades in the Midcontinent Independent System Operator and Southwest Power Pool.

In an opinion issued Aug. 30, US Circuit Judge Gregg Costa compared the idea of banning new entrants to the market for interstate transmission projects to the idea of "saying that only those with existing oil wells in the state could drill new wells."

"Texas recently enacted such a ban on new entrants in a market with a more direct connection to interstate commerce than the drilling of oil wells; the building of transmission lines that are part of multistate electricity grids," Costa said. "A 2019 law says that the ability to build, own, or operate new lines 'that directly [connect] with an existing utility facility ... may be granted only to the owner of that existing facility.'"

However, the US Constitution's Commerce Clause prohibits states from interfering in interstate commerce, Costa said, and that is why the 5th Circuit remanded the case of NextEra et al. v. Public Utility Commission of Texas Chairman Peter Lake et al. to the US District Court for the Western District of Texas.

Issues in East Texas projects

The case arose out of MISO awarding Florida-based NextEra Energy Capital Holdings the right in 2018 to build the Hartburg-Sabine line, five new high-voltage transmission lines and a substation in East Texas, which would serve the Entergy Texas area.

Also, NextEra in 2017 made a deal to buy 30 miles of transmission, the Jacksonville-Overton line, from a utility in a part of East Texas connected to the SPP grid.

After the Federal Energy Regulatory Commission issued Order No. 1000 in 2011, eliminating the right of first refusal for incumbent transmission utilities, Texas' PUC said non-incumbent utilities could build transmission lines in areas interconnected to grids outside Texas, meaning only areas outside the Electric Reliability Council of Texas, an exclusively intrastate power grid.

An Entergy official confirmed Aug. 31 that construction has not begun on the Hartburg-Sabine project, but SPP had not yet responded regarding the status of the Jacksonville-Overton project.

"This regime allowing open competition in the building of transmission lines did not last long," Costa wrote. "In May 2019, the Texas Legislature overruled PUCT's decision and barred companies from competing in MISO or SPP territory unless they already owned a transmission facility in Texas."

Five other states restored incumbents' rights of first refusal, but none is as restrictive as Texas, and "no other state completely bars out-of-state entrants," Costa wrote.

Case remanded to district court

In response to NextEra's lawsuit claiming that the state law (Senate Bill 1938) violated the constitution's Commerce and Contracts clauses, the district court dismissed the complaint with prejudice, concluding that the law "does not ... regulate the transmission of electricity in interstate commerce; it regulates only the construction and operation of transmission lines and facilities within Texas."

The district court also ruled that the Contracts Clause claim did not apply, "as the company did not have reasonable contractual expectations that the law could impair," Costa wrote, and on this point, the 5th Circuit Court concurred.

"But as a law addressing a single market (transmission) – one that is undoubtedly competitive – SB 1938 is not immune from Commerce Clause scrutiny," Costa wrote.

The district court's reasoning that the Texas law prohibiting non-incumbents from building or owning transmission on interstate grids is "flawed," Costa wrote, as new lines in such areas "are instrumentalities of interstate commerce that carry electricity over a broad swath of the country."

"That certain lines might run entirely within Texas is irrelevant, as 'any electricity that enters the grid immediately becomes part of a vast pool of energy that is constantly moving in interstate commerce,'" Costa said, citing a 1925 ruling. "These transmission lines cannot and do not serve Texas consumers alone."

Therefore, the 5th Circuit Court remanded the Commerce Clause claims "for further proceedings consistent with this opinion," which would allow the district court "to determine whether NextEra is entitled to any preliminary injunctive relief."

Paul Cicio, chairman of the Electricity Transmission Competition Coalition, called the 5th Circuit ruling "a victory for households and businesses across the state of Texas and throughout the US.

In an Aug. 31 news release, Cicio said the decision should discourage FERC from advancing a notice of proposed rulemaking that would reduce competition for transmission projects, adding that "Competition has been proven to lower electricity costs for consumers". "FERC should listen to the law and act on its mandate to lower costs for consumers".