Nextera Energy Capital Holdings, Inc. v. Lake

48 F.4th 306

NEXTERA ENERGY CAPITAL HOLDINGS, INCORPORATED; NextEra Energy Transmission, L.L.C.; NextEra Energy Transmission Midwest, L.L.C. ; Lone Star Transmission, L.L.C.; NextEra Energy Transmission Southwest, L.L.C., Plaintiffs—Appellants,

v.Chairman Peter LAKE, Public Utility Commission of Texas, in his official capacity, Commissioner Lois Cobos, Public Utility Commission of Texas, in her official capacity; Commissioner Jimmy Glotfelty, Public Utility Commission of Texas, in his official capacity; Commissioner Kathleen Jackson, Public Utility Commission of Texas, in her official capacity; and Commissioner Will McAdams, Public Utility Commission of Texas, in his official capacity, Defendants—Appellees.

No. 20-50160

United States Court of Appeals, Fifth Circuit.

FILED August 30, 2022

Stuart H. Singer, Esq., Pascual Armando Oliu, Boies, Schiller & Flexner, L.L.P., Fort Lauderdale, FL, Jeffrey M. Tillotson, Tillotson Johnson & Patton, Dallas, TX, for Plaintiffs-Appellants.

Lisa Bennett, Assistant Solicitor General, Office of the Attorney General for the State of Texas, Austin, TX, Lanora Christine Pettit, Office of the Attorney General of Texas, Office of the Solicitor General, Austin, TX, John Richard Hulme, Esq., Assistant Attorney General, Office of the Attorney General, Environmental Protection & Administrative Law Division, Austin, TX, for Defendants-Appellees.

Adam Daniel Chandler, Matthew C. Mandelberg, U.S. Department of Justice, Antitrust Division, Appellate Section, Washington, DC, for Amicus Curiae United States of America.

Paul D. Clement, Erin Murphy, Clement & Murphy, P.L.L.C., Alexandria, VA, Kasdin M. Mitchell, Kirkland & Ellis, L.L.P., Washington, DC, for Amicus Curiae LSP Transmission Holdings II, L.L.C.

Matthew E. Price, Jenner & Block, L.L.P., Washington, DC, for Amicus Curiae Southwestern Public Service Company.

Larry Edward Gee, Lower Colorado River Authority, Legal Authority, Austin, TX, for Amicus Curiae Lower Colorado River Authority.

Rex D. VanMiddlesworth, Michael Andrew McMillin, O'Melveny & Myers, L.L.P., Austin, TX, for Amicus Curiae Texas Industrial Energy Consumers.

Thomas S. Leatherbury, Esq., Vinson & Elkins, L.L.P., Dallas, TX, Ethan James Nutter, Vinson & Elkins, Austin, TX, John C. Wander, Vinson & Elkins, L.L.P., Dallas, TX, for Amicus Curiae Oncor Electric Delivery Company, L.L.C..

Michael Andrew Boldt, Catherine Garza, Esq., Lino Mendiola, III, Eversheds Sutherland (US), L.L.P., Austin, TX, for Entergy Texas, Incorporated.

Before Dennis, Elrod, and Costa, Circuit Judges.

Gregg Costa, Circuit Judge:

Imagine if Texas—a state that prides itself on promoting free enterprise—passed a law saying that only those with existing oil wells in the state could drill new wells. It would be hard to believe. It would also raise significant questions under the dormant Commerce Clause. Cf. Granholm v. Heald , 544 U.S. 460, 465–66, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005) (holding unconstitutional two state laws that allowed only wineries with an in-state physical presence to ship wine to state residents).

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. 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." TEX. UTIL. CODE § 37.056(e). The law applies not just to transmission lines that are part of Texas's intrastate electricity market, but also to lines that are part of interstate transmission networks. Those lines that carry electricity through multiple states are classic instrumentalities of interstate commerce.

The operator of one such multistate grid awarded Plaintiff NextEra Energy Capital Holdings, Inc. the right to build new transmission lines in an area of east Texas that is part of an interstate grid. The grid operator determined that NextEra's bid offered an "outstanding combination of low cost and high value" and would produce "substantial benefits to ratepayers over time." But before NextEra obtained the necessary construction certificate from the Public Utilities Commission of Texas, the state enacted the law that bars new entrants from building transmission lines.

NextEra challenges the new law, as it applies to the interstate electricity networks in Texas (but not the intrastate ERCOT network), on dormant Commerce Clause grounds. It also argues that the law violates the Contracts Clause by upsetting its contractual expectation that it would be allowed to build the new lines. Once we wade through the thicket of electricity regulation, the ban's interference with interstate commerce becomes as clear as it is for the oil well hypothetical. We thus conclude that the dormant Commerce Clause claims should proceed past the pleading stage. But the Contracts Clause claim fails as a matter of law under the modern, narrow reading of that provision.

I

A

Powering the modern world is no easy task. An energy source must first generate electricity; that electricity must then travel, often for long distances, over high-voltage wires for distribution; and distributors must deliver electricity to consumers over low-voltage wires. Some providers, known as vertically integrated utilities, perform all of these functions. S.C. Pub. Serv. Auth. v. FERC , 762 F.3d 41, 49 (D.C. Cir. 2014). Others—like plaintiff NextEra, a transmission-only company—perform just one. Id. at 50.

In the early 1900s, when the power industry was dominated by vertically integrated utilities, electricity providers were subject to only state and local oversight. FERC v. Elec. Power Supply Ass'n , 577 U.S. 260, 265–66, 136 S.Ct. 760, 193 L.Ed.2d 661 (2016). That changed in 1927, when the Supreme Court held that the Commerce Clause prohibited states from regulating "wholesale [electricity] sales (i.e. , sales for resale) across state lines." Id. (citing Pub. Util. Comm'n of R.I. v. Attleboro Steam & Elec. Co. , 273 U.S. 83, 89–90, 47 S.Ct. 294, 71 L.Ed. 549 (1927) ). While states could continue to oversee local retail markets, only Congress could regulate interstate wholesale transactions. Ark. Elec. Co-op. Corp. v. Ark. Pub. Serv. Comm'n , 461 U.S. 375, 378, 103 S.Ct. 1905, 76 L.Ed.2d 1 (1983).

Congress exercised its new-found authority for the first time as part of the New Deal. In enacting the Federal Power Act of 1935, Congress declared "that federal regulation of interstate electric energy transmission and its sale at wholesale is ‘necessary in the public interest.’ " S.C. Pub. Serv. Auth. , 762 F.3d at 49 (quoting 16 U.S.C. § 824(a) ). Congress also established the Federal Power Commission, the precursor to the Federal Energy Regulatory Commission (FERC), and gave it jurisdiction to regulate "all facilities for such transmission or sale of electric energy." 16 U.S.C. § 824(b)(1) ; see also Nat'l Ass'n of Regul. Util. Comm'rs v. FERC , 964 F.3d 1177, 1181 (D.C. Cir. 2020) (noting that the Federal Power Act provides FERC with "exclusive authority over" the wholesale transmission market).

As the power industry evolved, so did the federal regulatory approach. In the decades following passage of the Federal Power Act, federal regulators policed vertically integrated utilities—most of which were local monopolies—by setting "just and reasonable" wholesale prices. 16 U.S.C. § 824d(a) ; Elec. Power , 577 U.S. at 267, 136 S.Ct. 760. But in the 1970s and 1980s, technological advances encouraged market entrants to challenge vertically integrated utilities. New York v. FERC , 535 U.S. 1, 7, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002). As a result, "[i]ndependent power plants now abound, and almost all electricity flows not through ‘the local power networks of the past,’ but instead through an interconnected ‘grid’ of near-nationwide scope." Elec. Power , 577 U.S. at 267, 136 S.Ct. 760 (quoting New York , 535 U.S. at 7, 122 S.Ct. 1012 ). Adapting to "this new world," FERC shifted away from price setting—the traditional tool "used to prevent monopolistic pricing"—and instead focused on enhancing competition. Id.

To that end, FERC encouraged utilities that owned transmission lines to form voluntary associations that would coordinate and "manage wholesale markets on a regional basis." Id. ; see also 16 U.S.C. § 824a(a) ("direct[ing] [FERC] to divide the county into regional districts for the voluntary interconnection and coordination of facilities for the ... transmission and sale of electric energy"). These associations, called regional transmission organizations (RTOs) and independent system operators (ISOs),¹ now control most of the electrical grid. Ill. Com. Comm'n v. FERC , 721 F.3d 764, 769 (7th Cir. 2013). This map shows the various RTOs and ISOs:²

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For years, RTOs and ISOs included rights of first refusal to build transmission lines in their FERC-sanctioned rate agreements. MISO Transmission Owners v. FERC , 819 F.3d 329, 332 (7th Cir. 2016). That meant utilities that already owned transmission lines, called "incumbents," would "have a first crack at constructing a[ ] ... transmission project." Id. at 331–32. In other words, they would have "the opportunity to build it without having to face competition from other firms that might also like to build it." Id. at 331.

In 2011, FERC abolished those provisions. The agency reasoned that federal rights of first refusal might "be leading to rates ... that are unjust and unreasonable," in large part because "it is not in the economic self-interest of incumbent[s] to permit new entrants to develop transmission facilities," even if those facilities "would result in a more efficient or cost-effective solution." Transmission Planning & Cost Allocation by Transmission Owning & Operating Public Utilities, 136 FERC ¶ 61,051, at ¶ 256 (F.E.R.C. July 21, 2011) (final rule) (Order 1000); see also id. at ¶...