NextEra v. Lake

United States Court of Appeals

for the Fifth Circuit United States Court of Appeals

Fifth Circuit

FILED

August 30, 2022

No. 20-50160 Lyle W. Cayce

Clerk

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,

versus

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.

Appeal from the United States District Court

for the Western District of Texas

USDC No. 1:19-CV-626

No. 20-50160

Before Dennis, Elrod, and Costa, Circuit Judges.

Gregg Costa, Circuit Judge:

Imagine if Texas—a state that prides itself on promoting free enter-

prise—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 signifi-

cant questions under the dormant Commerce Clause. Cf. Granholm v. Heald,

544 U.S. 460, 465–66 (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.

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No. 20-50160

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

(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 (1927)). While states

could continue to oversee local retail markets, only Congress could regulate

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interstate wholesale transactions. Ark. Elec. Co-op. Corp. v. Ark. Pub. Serv.

Comm’n, 461 U.S. 375, 378 (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. 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 (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

(quoting New York, 535 U.S. at 7). 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

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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

1

RTOs and ISOs are similar umbrella entities that “operate the transmission

system independently of wholesale market participants and foster competition for

electricity generation.” Federal Energy Regulatory Commission, Energy

Primer: A Handbook of Energy Market Basics 39 (April 2020),

https://www.ferc.gov/sites/default/files/2020-06/energy-primer-2020.pdf.

2

Image from RTOs and ISOs, FERC, https://www.ferc.gov/industries-

data/electric/power-sales-and-markets/rtos-and-isos (last visited August 28, 2022).

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No. 20-50160

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 ¶ 253 (explaining that

failing to remove federal rights of first refusal might “result in rates . . . that

are unjust and unreasonable”). In making its decision, FERC considered—

and rejected—the argument “that the reliability of the transmission system

is a function of the number of public utility transmission providers of that

system.” Id. at ¶ 266. Historical data suggested the opposite, as “public

utility transmission providers have . . . connected to the transmission systems

of others” “to enhance reliability.” Id. (noting that “nonincumbent

transmission developers[] that successfully develop a transmission

project[] . . . must comply with all applicable reliability standards”).

Despite its many reforms, Order 1000 took “great pains to avoid

intrusion on the traditional role of the States.” S.C. Pub. Serv. Auth., 762

F.3d at 76. So even if the prohibition created “opportunities for

nonincumbents, such developers must still comply with state law.” Id.

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B

Order 1000 is consistent with the Federal Power Act in leaving room

for state regulation. Elec. Supply Ass’n, 136 S. Ct. at 780 (observing that the

Act “makes federal and state powers ‘complementary’ and

‘comprehensive’”). States may, for example, oversee “facilities used for the

generation of electric[ity,] . . . local distribution or only for the transmission

of electric[ity] in intrastate commerce.” 16 U.S.C. § 824(b)(1). States also

have “authority over the location and construction of electrical transmission

lines.” Ill. Com. Comm’n, 721 F.3d at 773; see also Piedmont Envt’l Council v.

FERC, 558 F.3d 304, 310 (4th Cir. 2009) (“The states have traditionally

assumed all jurisdiction to approve or deny permits for the siting and

construction of electrical transmission facilities.”). But cf. Piedmont, 558

F.3d at 310 (noting that 16 U.S.C. § 824p “gives FERC the authority in

national interest corridors to issue permits for the construction . . . of

transmission facilities in certain instances”).

In Texas, the Public Utility Commission of Texas (PUCT) regulates

electric utilities. TEX. UTIL. CODE § 14.001. To build a new transmission

line in the state, a utility must first obtain a certificate of “convenience and

necessity” from PUCT. Id. § 37.051(a). This process is independent of any

approvals that the utility must also obtain from its governing ISO or RTO.

As shown below, an ISO—the Electric Reliability Council of Texas

(ERCOT)—covers most of Texas, including the Houston, Dallas-Fort

Worth, San Antonio, and Austin areas. Because ERCOT is wholly within

Texas, PUCT has exclusive jurisdiction over utilities in its territory. Pub.

Util. Comm’n of Tex. v. City Pub. Serv. Bd. of San Antonio, 53 S.W.3d 310, 312

(Tex. 2001).

Three other RTOs also operate in Texas, but because they also cover

areas outside the state, they are subject to concurrent state and federal

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jurisdiction. Pertinent here, the Midwest Independent System Operator

(MISO) and the Southwest Power Pool (SPP) control territory in East

Texas.3

In line with Order 1000, SPP and MISO removed federal rights of first

refusal from their agreements and established competitive systems to build

transmission lines. Texas followed suit, with the PUCT declaring that

utilities without any presence in Texas could construct transmission lines in

SPP and MISO territory. Joint Petition of Sw. Pub. Serv. Co. & Sw. Power

Pool, Inc. for Declaratory Order, 341 P.U.R. 4th 195, 2017 WL 5068379, at

3

Image from Electric Maps, Public Utility Commission of Texas,

http://www.puc.texas.gov/industry/maps/maps/ERCOT.pdf (last visited August 28,

2022).

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*15 (Oct. 26, 2017). The declaration clarified that transmission-only

companies, and not just vertically integrated monopolies, could engage in

that work. Id.

This regime allowing open competition in the building of transmission

lines did not last long. 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.4 Under

the new law, Senate Bill (or SB) 1938, a certificate of convenience and

necessity to build, operate, or own transmission 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) (emphasis added). If that

incumbent chooses not to pursue a project, other owners may step into its

shoes. But not just any owner—the incumbent utility may only “designate

another electric utility that is currently certificated by [PUCT] within the

same electric power region,” for example, SPP or MISO, “to build . . . a

portion or all of” the new lines. Id. § 37.056(g). So the only way a company

without a Texas presence can build, operate, or own transmission lines is to

buy a utility that already owns a power facility in the state. See id. § 37.154(a)

(requiring that the buyer also convince PUCT that its purchase “will not

diminish the retail rate jurisdiction of this state” and will result in continued

“adequate service”).

Five other states restored incumbent’s rights of first refusals after

FERC took them away. See MINN. STAT. § 216B.246, subdiv. 3; NEB.

REV. STAT. § 70-1028; OKLA. STAT. tit. 17 § 292; S.D. CODIFIED

LAWS § 49-32-20; N.D. CENT. CODE § 49-03-02(2). But none of those

4

A similar restriction applies to ERCOT under its statutorily binding Protocols.

TEX. UTIL. CODE § 39.151(j); ERCOT Nodal Protocols § 3.11.4.8 (August 1, 2020),

http://www.ercot.com/mktrules/nprotocols/current (last visited August 28, 2022).

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laws is as restrictive as Texas’s. Only one other (North Dakota) is like Texas

in placing no time limit on the incumbent to exercise its right; the others

require incumbents to exercise their right of first refusal within 90 days. And

no other state completely bars out-of-state entrants or allows an incumbent

to designate its replacement if it declines a project.

C

Against the changing regulatory landscape in Texas, NextEra and two

of its subsidiaries sought to enter the state’s market. NextEra is a Florida

corporation that, together with its affiliates, owns “approximately 7,300

miles of transmission line[s] . . . in multiple states.” It does not, however,

have a foothold in Texas. After the removal of the federal rights of first

refusal, NextEra tried to build and buy high-voltage transmission lines in

Texas.

The project that the parties focus on, the Hartburg-Sabine Line,

envisioned the construction of five new high-voltage transmission lines and a

substation in East Texas. Although the new lines would be built in Texas,

they would form part of MISO’s interstate grid and, as a result, be paid for

by customers across MISO’s 15 states. In November 2018, after a

competitive bidding process, MISO selected NextEra to build the line,

concluding that the company’s proposal offered “an outstanding

combination of low cost and high value, with best-in-class cost and design,

best-in-class project implementation plans, and top-tier plans for operations

and maintenance.” MISO also noted that the proposal would reap

“substantial benefits to ratepayers over time.”

NextEra and MISO entered into a “Selected Developer Agreement”

for the project. But before starting construction, the agreement required

NextEra to obtain a certificate of convenience and necessity from PUCT.

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NextEra “anticipated being able to” get a certificate at the time, but once SB

1938 was enacted it could no longer obtain one.

The Hartburg-Sabine Line was not NextEra’s only intended project

in Texas. In 2017, NextEra “entered into an asset purchase agreement to

acquire 30 miles of . . . transmission line[s] from” a utility located in SPP’s

jurisdiction, again in East Texas. This project, called the Jacksonville-

Overton Line, required the utility to transfer its certificate of convenience

and necessity to NextEra, which needed PUCT’s approval. Id. § 37.154(a).

NextEra applied for the transfer, and although PUCT staff recommended

approval in October 2018, the application remains pending. SB 1938 requires

that it be denied.

Having been shut out of Texas’s power market by SB 1938, NextEra

sued PUCT Commissioners in federal court a month after the law was

enacted. Citing its two stalled projects, NextEra alleged that the Texas ban

violates the Commerce and Contracts Clauses. It asked the district court for

declaratory and injunctive relief.

The Commissioners moved to dismiss for failure to state a claim. The

district court agreed and dismissed NextEra’s complaint with prejudice.

Starting with the Commerce Clause allegation, the district court concluded

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.” And rejecting NextEra’s

argument that SB 1938—in its text, through its purpose, and by its effect—

unconstitutionally discriminates against out-of-state providers, the district

court determined that:

• the law’s text establishes a preference for incumbency, not geography;

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• “legislative history indicates that the Texas Legislature disagreed

with . . . PUCT’s declaratory order and enacted SB 1938 to eliminate

any uncertainty in Texas law”; and

• “most incumbent providers in Texas are owned by out-of-state com-

panies.”

The district court also rejected NextEra’s argument that, under Pike v. Bruce

Church, Inc., 397 U.S. 137, 142 (1970), the burden imposed by SB 1938 is

“clearly excessive in relation to the putative local benefits.” It then held that

NextEra failed to state a Contracts Clause claim, as the company did not have

reasonable contractual expectations that the law could impair.

NextEra appeals.

II

We first consider whether there is a jurisdictional impediment to this

case even though the Commissioners do not see one. The claims related to

the Hartburg-Sabine Line might seem premature because NextEra never

applied for a certificate of convenience and necessity. The Constitution’s

cases-and-controversies requirement prohibits federal courts from resolving

“abstract disagreements.” Abbott Lab’ys v. Gardner, 387 U.S. 136, 148

(1967), abrogated on other grounds by Califano v. Sanders, 430 U.S. 99 (1977);

see also Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 670 n.2

(2010) (explaining that the ripeness doctrine “reflects constitutional

considerations that implicate ‘Article III limitations on judicial power,’ [and]

‘prudential reasons for refusing to exercise jurisdiction’” (quoting Reno v.

Cath. Soc. Servs., Inc., 509 U.S. 43, 57 n.18 (1993)). So when a “case is

abstract or hypothetical,” a court must dismiss it for lack of ripeness. New

Orleans Pub. Serv., Inc. v. Council of City of New Orleans, 833 F.2d 583, 586

(5th Cir. 1987). In determining whether a case is ripe, we examine “the

fitness of the issues for judicial decision” and “the hardship to the parties of

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withholding court consideration.” Nat’l Park Hospitality Ass’n v. Dep’t of

Interior, 538 U.S. 803, 808 (2003).

Generally speaking, a case is ripe if it presents questions of law;

“conversely, a case is not ripe if further factual development is required.”

Choice Inc. of Tex. v. Greenstein, 691 F.3d 710, 715 (5th Cir. 2012) (quoting

New Orleans, 833 F.2d at 587). This case presents two constitutional

questions: whether SB 1938 violates the dormant Commerce Clause or the

Contracts Clause. No further factual development or exercise of agency

discretion is required for resolution of those legal questions. It would be futile

to require NextEra to obtain agency rejection of its application when SB 1938

makes that a foregone conclusion. See Blanchette v. Conn. Gen. Ins. Corps.,

419 U.S. 102, 143 (1974) (“Whe[n] the inevitability of the operation of a

statute against certain individuals is patent,” a plaintiff need not “await the

consummation of threatened injury to obtain preventative relief.” (quoting

Pennsylvania v. West Virginia, 262 U.S. 553, 593 (1923))). The Supreme

Court recognized as much in another case involving the power industry.

Because a state moratorium on the approval of new nuclear power plants left

no possibility of agency approval, the utility’s suit challenging the law was fit

for immediate judicial resolution. Pac. Gas & Elec. Co. v. State Energy Res.

Conservation & Dev. Comm’n, 461 U.S. 190, 201–02 (1983).

Pacific Gas also recognizes that NextEra would suffer hardship if,

before filing suit, it had to spend time and money applying for a certificate all

agree would be denied. Pac. Gas, 461 U.S. at 201 (finding hardship even

though the utilities had not yet applied for certification, as postponing

resolution of the case would force them to “proceed in hopes that, when the

time for certification came, either the required findings would be made or the

law would be struck down”); Cooper v. McBeath, 11 F.3d 547, 552 n.7 (5th Cir.

1994) (“Substantial hardship—the touchstone for determine when review

i[s] appropriate—exists whe[n] the enforcement of a statute is assured and

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the only obstacle to ripeness is merely a delay before the action or

proceedings commence.”).

We therefore agree with the parties that the claims are ripe for review.

III

The Constitution extends to Congress the “Power . . . [t]o regulate

Commerce . . . among the several States.” U.S. Const. art. I, § 8, cl. 3.

On its face, this provision says nothing about state authority over interstate

commerce. But it is settled that because Congress can regulate interstate

commerce, the states cannot erect barriers to the free flow of that commerce.

“This ‘negative’ aspect” of that power, known as the dormant Commerce

Clause, “prevents the States from adopting protectionist measures and thus

preserves a national market for goods and services.” Tenn. Wine & Spirits

Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2459 (2019) (quoting New Energy

Co. of Ind. v. Limbach, 486 U.S. 269, 273 (1988)).

A

Although this “negative aspect” of the Commerce Clause (especially

a judicially enforceable one) remains controversial, see, e.g., Comptroller of

Treasury of Md. v. Wynne, 575 U.S. 542, 571–72 (2015) (Scalia, J., dissenting);

Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 610

(1997) (Thomas, J., dissenting), it has a deep pedigree. During the tumultu-

ous 1780s, fledgling state governments—beset by a collapsing economy and

other crises—“began discriminating against the trade of their neighbors.”

Michael J. Klarman, The Framers’ Coup 23 (2016). Predictably,

victims of those “protective laws” retaliated, “rais[ing] costs of importing,

shipping, and selling goods.” Brannon P. Denning, Confederation-Era Dis-

crimination Against Interstate Commerce and the Legitimacy of the Dormant

Commerce Clause Doctrine, 94 Ky. L.J. 37, 47 (2005); see also id. at 72–73

(“States eager to gain commercial advantage and retain the revenue that

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trade afforded . . . passed laws that palpably affected the commerce of other

states.”). That harmful patchwork of legislation undermined the Articles of

Confederation and helped inspire the Constitutional Convention. See Tenn.

Wine, 139 S. Ct. at 2460; Klarman, supra, at 23.

Convention debate about the Commerce Clause Power was limited.

Denning, supra, at 83. But when the issue came up, it “was uniformly men-

tioned as a device for preventing obstructive or partial regulations by the

states.” Albert Abel, The Commerce Clause in the Constitutional Convention

and in Contemporary Comment, 25 Minn. L. Rev. 432, 471 (1941). And

although “[t]here was even less commentary at state ratifying conventions,”

Denning, supra, at 83, the Federalist Papers critiqued state protectionism in

advocating for national control over interstate commerce, see Abel, supra at

473 (citing The Federalist No. 22 (Alexander Hamilton)). Years later,

James Madison remembered that the Commerce Power “grew out of the

abuse of the power by the importing States in taxing the non-importing, and

was intended as a negative and preventative provision against injustice among

the States themselves, rather than as a power to be used for the positive pur-

poses of the General Government.” W. Lynn Creamery, Inc. v. Healy, 512

U.S. 186, 193 n.9 (1994) (quoting 3 Max Farrand, Records of the

Federal Convention of 1787, 478 (1911)).

One of the early landmark decisions of the Supreme Court recognized

“great force” in the argument that, “as the word ‘to regulate’ implies in its

nature, full power over the thing to be regulated, it excludes, necessarily, the

action of all others that would perform the same operation on the same

thing.” Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 209 (1824). By the end of

the nineteenth century, this notion of a dormant or negative Commerce

Clause was “firmly established.” Tenn. Wine, 139 S. Ct. at 2459–60 (citing

Case of the State Freight Tax, 82 U.S. (15 Wall.) 232, 279–80 (1873)). And

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just last year, the Supreme Court “reiterate[d] that the Commerce Clause by

its own force restricts state protectionism.” Id. at 2461.

As is so often the case, Justice Jackson expressed the principle best:

Our system, fostered by the Commerce Clause, is that every

farmer and every craftsman shall be encouraged to produce by

the certainty that he will have free access to every market in the

Nation, that no home embargoes will withhold his export, and

no foreign state will by customs duties or regulations exclude

them. Likewise, every consumer may look to the free

competition from every producing area in the Nation to protect

him from exploitation by any. Such was the vision of the

Founders; such has been the doctrine of this Court which has

given it reality.

H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 539 (1949).

B

Like the farmers and craftsmen of old, NextEra seeks “free access”

to the interstate transmission market. Id. The company contends that

although Texas may restrict competition in its intrastate ERCOT market

without Commerce Clause scrutiny, excluding nonincumbents from the

interstate transmission market violates the Constitution.

The Commissioners respond that even their regulation of the

interstate transmission market enjoys immunity from the Commerce Clause.

They rely on General Motors Corp. v. Tracy, 519 U.S. 278 (1997), which

rejected a claim that a law discriminated against interstate commerce by

granting a tax exemption to local monopoly distributers of natural gas but not

to out-of-state bulk gas sellers.

This much is certain: Utilities, despite their history as monopolies and

the vestiges of that tradition even in deregulated markets, are not “immune

from [] ordinary Commerce Clause jurisprudence.” Tracy, 519 U.S. at 291

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n.8; see also Wyoming v. Oklahoma, 502 U.S. 437, 457, 458–59 (1992)

(invalidating an Oklahoma law on dormant Commerce Clause grounds

because it required in-state “utilities to supply 10% of their needs for fuel

from Oklahoma coal”); New England Power Co. v. New Hampshire, 455 U.S.

331, 339 (1982) (applying the dormant Commerce Clause to invalidate a New

Hampshire agency ruling that prohibited a utility “from selling its

hydroelectric energy outside the State”); Pennsylvania, 262 U.S. at 596–600

(holding unconstitutional a West Virginia law that required pipeline

companies to serve in-state customers first).

Harder to decipher is when Tracy cuts into the general principle that

utilities are subject to the dormant Commerce Clause. The Ohio local

distributors exempt from the state’s 5% general tax on goods and services

primarily sold natural gas in a “captive market.” Tracy, 519 U.S. at 282, 303–

04, 310. In that market, gas one was one of the “bundled” services over

which they enjoyed a monopoly. Id. at 297–98. As a regulated monopoly in

that local distribution market, the distributors had to serve all customers at

restricted rates. Id. at 299. But the utilities also competed, “at least at the

margins,” in a separate market with independent companies that sold

“unbundled” gas to bulk industrial customers like General Motors. Id. at

297–98, 307. Contending that its out-of-state gas suppliers operated at a

disadvantage because they did not enjoy the tax exemption, General Motors

sought a refund, on dormant Commerce Clause grounds, of the taxes it paid.

Id. at 285.

A key to unraveling Tracy is the type of claim it considered. As we will

discuss further, a dormant Commerce Clause challenge can be based on the

text of the law, its effects, or its intent. Tracy emphasized that it was just

dealing with the first type: a claim that the law discriminated on its face,

which if true results in a “virtually per se rule of invalidity.” Tracy, 519 U.S.

at 298 (noting that the Court was just considering a challenge to the text of

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the Ohio law); id. at 310 (holding that the “enterprises should not be

considered ‘similarly situated’ for purposes of a claim of facial discrimination

under the Commerce Clause”). The problem with saying that the Ohio tax

exemption was discriminatory on its face was that it operated in two different

retail markets. There were no legal concerns with giving the tax exemption

in the residential market; the utilities had a lawful monopoly there. The

problem was that the utilities-only exemption also applied in the competitive

gas market for large industrial users. Id. at 303–04. The case thus came down

to whether the Court should “accord controlling significance to the

noncaptive market in which they compete, or to the noncompetitive captive

market in which the local utilities alone operate.” Id.

The Supreme Court determined that the local, captive market was the

utilities’ “core market.” Id. at 301. There was only a “possibility of

competition” in the noncaptive market for industrial users. Id. at 302. The

predominance of the monopoly market prevented classifying the statute as

discriminatory on its face. Because the law gave the utilities a tax exemption

for all retail sales—those occurring in its primary monopoly market as well as

in the incidental competitive one—the utilities and out-of-state sellers were

not similarly situated for all, or even most applications, of the statute.

Accordingly, the text of the statute did not discriminate against interstate

commerce, which would trigger the strong medicine of per se invalidity.

The dilemma that the Ohio tax exemption posed—how to treat a law

that gives in-state businesses a preference in both captive and noncaptive

retail markets—does not exist here. The statute limiting who can build

transmission lines governs only a competitive market. In the market for

transmission of electricity, vertically integrated utilities and transmission-

only companies compete and offer the same services: building, operating, and

owning transmission lines. Unlike the congressional decision to give states

exclusive authority over retail sales, Tracy, 519 U.S. at 310, the Federal Power

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Act gives general authority over interstate transmission markets to federal

regulators. 16 U.S.C. § 824(a). And for the state authority that remains over

matters like siting and certification, transmission-only companies face the

same regulatory requirements as vertically integrated utilities. See Pub. Util.

Comm’n of Tex. v. Cities of Harlingen, 311 S.W.3d 610, 617 (Tex. App.—

Austin 2010, no pet.).

Consequently, unlike the Tracy tax exemption, SB 1938 has no

application in a “noncompetitive, captive market in which the local utilities

alone operate.” 519 U.S. at 303–04. We would have a Tracy issue if the

challenged law provided vertically integrated utilities with the same benefit

in both the monopolistic distribution market and the competitive

transmission market. But as a law addressing a single market

(transmission)—one that is undoubtedly competitive—SB 1938 is not

immune from Commerce Clause scrutiny. See Camps Newfound, 520 U.S. at

582 n.16 (observing that the Tracy court “premised its holding that the

statute at issue was not facially discriminatory on the view that [the marketers

and utilities] were principally competing in different markets”); Tracy, 519

U.S. at 298–99 (emphasizing that the utilities and marketers “provide

different products”). Put another way, when it comes to transmission, a

vertically integrated utility and a transmission-only company are similarly

situated.

The Commissioners and their supporting amici read Tracy more

broadly. They essentially contend that it provides Commerce Clause

immunity to any law that grants a preference to a company that has at least

one foot in a captive market. To be sure, Tracy explained Ohio’s rationale

for giving the utilities the exemption even in the competitive market: it

enhanced their economic viability and thus their ability to meet their public

obligation of universal service in the captive market. Id. at 307 (explaining

that doing away with the exemption in the competitive market would reduce

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No. 20-50160

the utilities’ customer base and thus “increase the unit cost of the [regulated]

bundled product”). But if that alone were enough, Tracy would not have had

to grapple with the Ohio law’s application in both captive and noncaptive

retail markets and decide which was the utilities’ “core” market. Id. at 301–

02. The Commissioner’s broad reading is also irreconcilable with the

longstanding principle, reiterated in Tracy, that there is no “public utilities

exception” to the dormant Commerce Clause. Tracy, 519 U.S. at 291 n.8. If

a state law’s propping up a utility in a noncaptive market to enhance its

viability in a captive market created immunity from Commerce Clause

scrutiny, then a state could grant in-state utilities the exclusive right to

operate coal mines in the state (or, for that matter, the exclusive right to sell

ice cream in the state).

Texas has an interest in promoting reliable electricity service,

including the power to approve the siting and construction of transmission

lines. But as with other police powers a state enjoys, that authority is not

immune from Commerce Clause scrutiny when it impacts the interstate

market.5 Tracy prevented classifying a law as textually discriminatory only

because it applied primarily to grant utilities a tax preference in a market

where they were monopolies. SB 1938 operates at “the opposite end of the

local-to-interstate spectrum,” LSP Transmission Br. at 21–22, in a wholly

competitive market, and is an outright ban on new entrants. The state’s

safety interest may end up justifying that differential treatment, but it does

5 The Supreme Court’s most recent dormant Commerce Clause decision involved

the state police power over alcohol that the Constitution expressly recognizes. U.S.

Const. Amdt. XXI, § 2; see Tenn. Wine, 139 S. Ct. at 2449. Even that police power, the

Supreme Court held, is not immune from dormant Commerce Clause scrutiny. Tenn.

Wine, 139 S. Ct. at 2467–2474.

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not prevent us from answering the threshold dormant Commerce Clause

question: whether SB 1938 is discriminatory.

C

Because Tracy does not shield SB 1938 from dormant Commerce

Clause scrutiny, we must decide whether the law “discriminates against

interstate commerce.” Dep’t of Revenue of Ky. v. Davis, 553 U.S. 328, 338

(2008). A law can discriminate against interstate commerce by its text (or

“face”),6 effects, or purpose. Allstate Ins. Co. v. Abbott, 495 F.3d 151, 160

(5th Cir. 2007). We first address whether the words of the statute

discriminate against interstate commerce.

1

Supported by the Department of Justice’s Antitrust Division,

NextEra argues that the reasons the district court cited for rejecting the

Commerce Clause challenge are flawed. We agree.

6

Despite the overlapping “facial” labels, whether a statute discriminates on its

face for dormant Commerce Clause purposes is a different concept from the general notion

of a facial challenge to a statute. NextEra is not bringing the latter type of suit. It recognizes

that the part of SB 1938 regulating the intrastate ERCOT market is constitutional. As a

result, the remedy it seeks—which is what the general concept of “facial challenges” is

about, see Citizens United v. FEC, 558 U.S. 310, 331 (2010) (noting that, although the

difference between “facial” and “as-applied” challenges “is not so well defined,” the

distinction “goes to the breadth of the remedy employed by the Court”)—is not holding

the entire law unconstitutional.

The facial inquiry for dormant Commerce Clause challenges is just one asking

whether the statutory language is discriminatory (as opposed to whether the statute has a

discriminatory purpose or effect). That question can be asked of laws, like SB 1938, that

apply to both intrastate and interstate markets. See Dean Milk v. City of Madison, 340 U.S.

349, 354 n.4 (1945) (“It is immaterial that Wisconsin milk from outside the Madison area

is subject to the same proscription as that moving in interstate commerce.”). As NextEra

concedes here, only the enforceability of the law in the interstate market is at issue.

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One of the district court’s rationales was that SB 1938 does not

discriminate against interstate commerce because it “regulates only the

construction and operation of transmission lines and facilities within Texas.”

That is wrong for the areas of Texas that are part of interstate electricity

networks. SPP and MISO territory in East Texas is part of an

“interconnected ‘grid’ of near-nationwide scope” that has long been subject

to FERC oversight. Elec. Power, 577 U.S. at 267; see also North Dakota v.

Heydinger, 825 F.3d 912, 915 (8th Cir. 2016) (“MISO controls over 49,000

miles of transmission lines, a grid that spans fifteen states . . . and parts of

Canada.”). New lines in these areas thus 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.” New York, 535 U.S. at 7; cf. Buck

v. Kuykendall, 267 U.S. 307, 316 (1925) (holding that an Oregon law limiting

what parties could travel on a stretch of highway within the state was “a

regulation, not of the use of [Oregon’s] highways, but of interstate

commerce”). These transmission lines cannot and do not serve Texas

consumers alone.

Indeed, transmission lines that are part of an interstate grid are much

closer to the heartland of interstate commerce than the wine stores, dairies,

or waste processing facilities that have faced dormant Commerce Clause

scrutiny. See Tenn. Wine, 139 S. Ct. at 2462; C&A Carbone, Inc. v.

Clarkstown, 511 U.S. 383, 391–92 (1994); Dean Milk Co. v. City of Madison,

340 U.S. 349, 352 (1951). The Supreme Court recognized the interstate

character of the electricity market a decade before it recognized that

Congress could regulate factories because of their effect on interstate

commerce. Compare Attleboro Steam & Elec. Co., 273 U.S. at 90 (1927), with

NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 40–41 (1937). Because the

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electricity grid is on its own an interstate market, state protectionist measures

regulating its instrumentalities run a much greater risk of harming out-of-

state interests—the ability of companies to compete, the prices consumers

pay—than regulations on retail wine stores. Ark. Elec. Co-op Corp., 461 U.S.

at 377 (“[T]ransmission of energy is an activity particularly likely to affect

more than one State, and its effect on interstate commerce is often significant

enough that uncontrolled regulated by the States can patently interfere with

broader national interests.”); Old Dominion Elec. Coop. v FERC, 898 F.3d

1254, 1257 (D.C. Cir. 2018) (discussing FERC order that allocated costs for

new transmission lines built in Virginia to numerous utilities located

throughout the states in the interstate grid). The interstate transmission lines

SB 1938 regulates are part of interstate commerce.

Nor does it save SB 1938 that most of the in-state incumbents it

protects are incorporated outside Texas. In finding dormant Commerce

Clause violations, the Supreme Court did not even mention the place of

incorporation for the wineries in New York, coal mines in Oklahoma, or

dairies in Madison, Wisconsin that received an unlawful benefit because of

their local presence. Granholm, 544 U.S. at 475; Wyoming, 502 U.S. at 457–

59; Dean Milk, 340 U.S. at 352 (holding unconstitutional an ordinance that

discriminated on the basis of where milk pasteurization occurred, not the

facility owner’s state of incorporation); see also Healy, 512 U.S. at 203–04

(holding that law benefitting dairy farms located in Massachusetts violated

Commerce Clause without asking whether those farms were owned by

Massachusetts citizens or companies). We also do not know the place of

incorporation of the company that operated the solid waste transfer station

granted an unlawful monopoly by a small New York town. C&A Carbone,

Inc., 511 U.S. at 387 (calling the company a “local private contractor”). The

Commissioners cite no Supreme Court case holding that a law is

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nondiscriminatory for Commerce Clause purposes because the local interests

it benefits are incorporated or headquartered in another state.7

Most circuits have rejected the idea that a law survives Commerce

Clause scrutiny if many of the favored interests are incorporated elsewhere.

As the Eleventh Circuit explained, if “place of incorporation alone” were

controlling, “then a state[’s] dormant Commerce Clause liability would turn

on the empty formality of where a company’s articles of incorporation were

filed, rather than where the company’s business takes place or where its

political influence lies.” Fla. Transp. Servs., Inc. v. Miami-Dade Cnty., 703

F.3d 1230, 1259 (11th Cir. 2012); accord Walgreen Co. v. Rullan, 405 F.3d 50,

58 (1st Cir. 2005). That reasoning strikes at what the Supreme Court has

recognized as a primary concern of the dormant Commerce Clause: “when

‘the burden of state regulation falls on interests outside the state, it is unlikely

to be alleviated by the operation of those political restraints normally exerted

when interests within the state are affected.’” United Haulers Ass’n, Inc. v.

Oneida-Herkimer Solid Waste Mgmt. Auth., 550 U.S. 330, 345 (2007) (quoting

7 A state can discriminate based on business form. See Wal-Mart Stores, Inc. v.

Texas Alcoholic Beverage Comm’n, 945 F.3d 206 (5th Cir. 2019) (considering a Texas law

“ban[ning] all public corporations from obtaining” a permit to sell alcohol), cert. denied,

141 S. Ct. 874 (2020); Exxon Corp. v. Maryland, 437 U.S. 117, 125 (1978) (rejecting a facial

discrimination claim because the law discriminated based on business form, not an entity’s

local contacts). The district court did not conclude that SB 38 was such a law, but the

Commissioners suggest it is. They argue that because most incumbent transmission

facilities are owned by vertically integrated utilities, the law is a permissible protection of

companies with that business form.

But SB 1938 does not itself make that business-form distinction. It allows

incumbent entities other than vertically integrated utilities, namely electric cooperatives,

to compete. See TEX. UTIL. CODE § 37.056(f). Indeed, NextEra’s Jacksonville-Overton

project hinges on its ability to buy high-voltage lines from Rayburn Country Electric

Cooperative, Inc. And SB 1938 does not allow vertically integrated utilities without a Texas

presence to build lines in the state. SB 1938 conditions a company’s ability to compete only

on its preexisting operations in Texas, not on its corporate form.

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No. 20-50160

S. Pac. Co. v. Arizona ex rel. Sullivan, 325 U.S. 761, 767–68 (1945)). For the

concern about in-state interests being able to obtain favorable treatment over

out-of-state interests, local presence, rather than place of incorporation,

should matter. Which business is more likely to have the clout to enact

protectionist measures: a Delaware corporation that employs thousands of

workers in a state, or a company that paid a nominal filing fee to be

incorporated in state but has its “principal operations” elsewhere? Lewis v.

BT Inv. Managers, Inc., 447 U.S. 27, 42 (1980). Surely the former, as the swift

enactment of SB 1938 after the state regulatory agency rejected rights of first

refusal may demonstrate.

One circuit has taken the opposite view that place of incorporation

controls. See LSP Transmission Holdings, LLC v. Sieben, 954 F.3d 1018, 1027–

29 (8th Cir. 2020), cert. denied, No. 20-641, 2021 WL 769770 (Mar. 1, 2021).

The Eighth Circuit case involved a Minnesota law that will sound familiar: it

grants incumbent utilities a right-of-first refusal to build new transmission

lines, though it does not go nearly as far as the Texas law in banning new

entrants outright. Compare MINN. STAT. § 216B.246, subdiv. 3 (providing

a right of first refusal that allows any entity—even those without a Minnesota

transmission facility—to seek to enter the market if the incumbent does not

exercise its rights to compete within 90 days), with TEX. UTIL. CODE

§ 37.056. The court concluded that the preference for incumbents was not

discriminatory because it “applie[d] evenhandedly to all entities, regardless

of whether they are Minnesota-based entities or based elsewhere.” LSP

Transmission Holdings, LLC, 954 F.3d at 1028.8 As we have explained,

8

LSP Transmission seems to equivocate a bit on this point. A footnote says that

the court is not deciding “whether an entity that has an in-state presence but is

headquartered elsewhere is considered an in-state entity for the purpose of dormant

Commerce Clause review.” 954 F.3d at 1029 n.7. Yet its rejection of the facial

discrimination claim seems to rely on the notion that “incumbents in Minnesota include

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however, a focus on where a company is “based,” which could mean either

where it is incorporated or headquartered, is irreconcilable with Supreme

Court dormant Commerce Clause jurisprudence addressing physical-

presence requirements. In light of that Supreme Court precedent, the

majority view of courts of appeals that where a company is “based” is not

controlling, and the underlying concern about local clout leading to

protectionist legislation, a law can discriminate against interstate commerce

even though most of the incumbent transmission-line providers that benefit

from SB 1938 are incorporated or headquartered outside Texas.9

What matters instead is that the Texas law prevents those without a

presence in the state from ever entering the portions of the interstate

transmission market that cross into Texas. A law that “discriminates among

affected business entities according to the extent of their contacts with the

local economy” may violate the Commerce Clause. Lewis, 447 U.S. at 42

entities headquartered in Iowa, North Dakota, South Dakota, Wisconsin, and Minnesota”

and “[m]any of these entities also own and operate facilities in states other than

Minnesota.” Id. at 1028.

9

The district court also cited SB 1938’s allowing a nonincumbent to enter the

market by purchasing a Texas incumbent as a reason why the law is not discriminatory.

Tex. Util. Code § 37.154(a). But holding that a law complies with the Commerce

Clause because an out-of-state firm can obtain the in-state favoritism by acquiring a firm

with the required in-state presence would require wiping away a broad swath of dormant

Commerce Clause jurisprudence. In many cases, the excluded entity would have had the

ability to buy the in-state entity and thus obtain the benefit of protectionism. To take just

one example, consider again Dean Milk. 340 U.S. at 352. What would have prevented a

dairy operating in Illinois from purchasing a pasteurization facility in Madison and then

selling milk from that acquired facility to Madisonians?

There is a more fundamental problem with the view that a law’s allowing an out-

of-state interest to acquire a protected incumbent precludes a finding of discrimination. It

ignores that the dormant Commerce “Clause protects the interstate market, not particular

interstate firms, from prohibitive or burdensome regulations.” Exxon, 437 U.S. at 127–28.

The harm to the market flows from the granting of the exclusive right to in-state interests.

That protectionism lessens thus raises prices in the interstate market.

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(concluding that a Florida statute was discriminatory, as only financial

institutions “with principal operations outside Florida [we]re prohibited from

operating . . . within the State”). In fact, “in-state presence requirement[s]”

have been a fertile ground for recent dormant Commerce Clause challenges.

See Granholm, 544 U.S. at 475. Consider the New York winery case. Id. A

New York statute was discriminatory because it required out-of-state

wineries to establish “a branch factory, office, or storeroom within the state”

to make direct sales to consumers. Id. at 470 (quoting N.Y. Alco. Bev. Cont.

§ 3(37)). The law did not define in-state wineries as those incorporated or

headquartered in New York. Swedenburg v. Kelly, 358 F.3d 223, 228 (2d Cir.

2004), rev’d by Granholm, 544 U.S. at 493. All that was required to be “in-

state” was a physical presence in the state. Id. at 229. The Court equated

that presence requirement—for a brick-and-mortar facility in the state—to a

residency requirement. Granholm, 544 U.S. at 475.

The Supreme Court’s most recent dormant Commerce Clause case,

one also involving alcohol, readily concluded that a law requiring two-years

of residency to own a liquor store “plainly” favored in-state interests. Tenn.

Wine, 139 S. Ct. at 2462 (addressing law that required individual owners to

be residents of Tennessee for at least two years and required officers and

owners of corporation to be Tennessee residents for two years). It took a

single sentence to note that such a residency requirement would violate the

Commerce Clause for the typical business; the tougher issue was whether the

authority the Twenty-First Amendment grants States over alcohol regulation

changed that result. Id. at 2474. An earlier case also found “plain[]”

discrimination when a Madison, Wisconsin ordinance allowed sales of milk

only by companies with a pasteurization facility within five miles of the city

center. Dean Milk, 340 U.S. at 354; see also Lewis, 447 U.S. at 38–44 (finding

discriminatory a Florida law that prevented banks with their “principal

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operations” outside the state from owning investment advisory businesses in

the state).

What is true for alcohol and milk under the dormant Commerce

Clause must be true for electricity transmission.10 Cf. Elec. Power Supply

Ass’n, 136 S. Ct. at 767 (discussing the near century long application of the

Clause to the power industry). Requiring boots on the ground discriminates

against interstate commerce. See also Lewis, 447 U.S. at 42 n.9 (instructing

that “discrimination based on the extent of local operations is itself enough

to establish the kind of local protectionism we have [cautioned against]”).

And SB 1938’s defining feature is a local-presence requirement. Only

companies that already have transmission lines can build new lines that

connect to the existing lines. Only such companies can receive a transfer of

rights from another incumbent owner that chooses not to build lines

connecting to its existing lines.

The Commissioners and partial dissent contend that a law limiting

competition to incumbents is not subject to dormant Commerce Clause

review. But “incumbent” is just another word for an entity that already has

a presence. Incumbent, Merriam Webster (defining incumbent as “one

that occupies a particular position or place”). In fact, an incumbency

requirement is a more anticompetitive version of the in-state presence

requirements held unconstitutional in cases like Granholm or Dean Milk. SB

10

The alcohol and milk cases cannot be distinguished, as the district court thought,

on the ground that they involved “the flow of goods in interstate commerce” or

“precondition[s] for allowing the flow of goods.” The dormant Commerce Clause has long

applied to both “goods and services.” Tenn. Wine, 139 S. Ct. at 2459; C&A Carbone, 511

U.S. at 391 (“[T]he article of commerce is not so much the solid waste itself, but rather the

service of processing and disposing of it.”); Camps Newfound/Owatonn, 520 U.S. at 577

n.10 (“We have long noted the applicability of our dormant Commerce Clause

jurisprudence to service industries.”).

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1938 is a local-presence requirement frozen in place. If a company had not

built transmission lines in Texas before 2019, it can never build such lines. In

contrast, a dairy with facilities in Illinois could still sell milk in Madison if it

built a pasteurization facility there. And a winery with California vineyards

could sell wine to New Yorkers by establishing a winery in the Empire State.

It is hard to see why the more stringent physical-presence requirement of SB

1938 should escape the fate of the physical-presence laws that still allowed

ways for those without a local footprint to establish one and compete.11

We fail to see the partial dissent’s distinction between the laws in

Granholm and Dean Milk, which “add requirements that discriminate against

out-of-state entities,” and SB 1938, which “merely recognizes a pre-existing

physical-presence requirement.” Opinion Concurring in Part and Dissenting

in Part 3. Id. 4. SB 1938 was not meaningless; it added a physical-presence

requirement to Texas utility law. Before SB 1938, NextEra had the right to

build the new transmission lines. Indeed, in 2017 the PUCT declared that

utilities without any presence in Texas could construct transmission lines in

11 The Commissioners and partial dissent rely on the Fourth Circuit’s comment

that “incumbency bias . . . is not a surrogate” for the protectionist impulses the dormant

Commerce Clause seeks to prevent. Colon Health Ctrs. of Am., LLC v. Hazel, 813 F.3d 145,

154 (4th Cir. 2016). But the ellipses hide three critical words: “in this context.” Id. And

the context of that case was that it addressed a Virginia law that required all medical service

providers—both those with current operations in the commonwealth and those with no

history in Virginia—to obtain a certificate of public need before adding operations. Id. at

149. As the challenged law had no in-state presence requirement, the plaintiffs did not even

argue that it was discriminatory on its face. Id. at 152. So the court considered only

whether the law was discriminatory in its purpose or effects. Id. at 153–60. The court made

the statement about “incumbency bias”—far from an incumbency requirement—in

explaining why an expert report concluding that incumbent medical providers were more

successful in the facially neutral process for obtaining certificates did not require a finding

of discriminatory purpose or effects. Id. at 154. Colon Health Centers thus says nothing

about a law that restricts economic opportunities to firms that already have a presence in a

state.

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SPP and MISO territory. Supra 9–10. In 2018, MISO approved NextEra to

build the Hartburg-Sabine Line despite the company’s not having a physical

presence in Texas. Supra 11. And NextEra would be allowed to build new

transmission lines for interstate grids in any other state. The vast majority of

states would not disfavor NextEra in any way for being a nonincumbent; five

states would give incumbents a right-of-first refusal. Supra 10–11. Only in

Texas do nonincumbents like NextEra face a lifetime ban on building lines

for interstate grids that reach into the state. Id. Nothing, then, in the natural

order of things makes SB 1938 any less of an intrusion on interstate commerce

than the (less onerous) physical-presence requirements in cases like

Granholm, Dean Milk, and C & A Carbone. See also United Haulers, 550 U.S.

at 338 (explaining that “discrimination” under the dormant Commerce

Clause “simply means differential treatment of in-state and out-of-state

economic interests that benefits the former and burdens the latter” (citation

omitted)).

The Commissioners justify SB 1938’s incumbency requirement as a

law that promotes the safety and reliability of the electricity grid by ensuring

that only those with a track record of building transmission lines in Texas can

build new lines. That may end up justifying the discrimination against out-

of-state interests, but it does not avoid the conclusion that the law

discriminates. Companies with existing transmission lines in Texas may

continue to compete in the transmission line market; companies without any

lines in Texas cannot build lines in the state. That is no different than the oil

well hypothetical we posed at the beginning. Limiting competition based on

the existence or extent of a business’s local foothold is the protectionism that

the Commerce Clause guards against. Granholm, 544 U.S. at 466; Lewis, 447

U.S. at42; Dean Milk, 340 U.S. at 352.

We therefore reverse the Rule 12(b)(6) dismissal of the claim that the

very terms of SB 1938 discriminate against interstate commerce. On remand,

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the district court will consider whether the Commissioners can show that

Texas has no other means to “advance[] a legitimate local purpose.” Or.

Waste Sys., Inc. v. Dep’t of Envtl. Quality of State of Or., 511 U.S. 93, 94 (1994).

2

Our conclusion that SB 1938 discriminates on its face may focus the

remaining litigation on that aspect of dormant Commerce Clause

jurisprudence alone. But NextEra also challenges the dismissal of its claims

that SB 1939 has a discriminatory purpose or effect. In addition, it invokes

the strand of dormant Commerce Clause caselaw providing that a law having

only incidental effects on interstate commerce may nonetheless be unlawful

if the “burden imposed on such commerce is clearly excessive in relation to

the putative local benefits.”12 Pike, 397 U.S. at 142. Apart from what we have

said about general Commerce Clause principles, pleadings-stage dismissal of

these claims was premature. Claims that turn on intent and effects typically

require factual development. Healy, 512 U.S. at 201 (recognizing that

Commerce Clause decisions require a “sensitive, case-by-case analysis of

purposes and effects); Wal-Mart, 945 F.3d at 218 (noting that

“discriminatory intent is factual matter”); Colon Health Ctrs. of Am., LLC v.

Hazel, 733 F.3d 535, 545 (4th Cir. 2013) (reversing the Rule 12 dismissal of

dormant Commerce Clause purpose and effects claims because of the “fact-

intensive quality of the substantive inquiry”); Cachia v. Islamorada, 542 F.3d

839, 840–41 (11th Cir. 2008) (reversing the dismissal of a discriminatory-

12

We have previously recognized that the difference is not clear between a

“discriminatory effects” claim and a Pike balancing claim, which also turns on effects.

Churchill Downs Inc. v. Trout, 589 F. App’x 233, 235 (5th Cir. 2014) (observing that the

Supreme Court “has failed to produce a readily discernable standard for distinguishing

between statutes that have discriminatory effects and those that merely create incidental

burdens” on interstate commerce). We need not flesh that out at this stage of this litigation

when there is no evidence of the law’s effect.

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effects claim); Waste Mgmt. Holdings, Inc. v. Gilmore, 252 F.3d 316, 334 (4th

Cir. 2001) (denying summary judgment because whether the challenged law

discriminated in its effects or purpose were “[q]uite obviously . . . questions

of fact”). That is the case here.

Start with the discriminatory-purpose claim. It requires us to consider

several factors, including “the specific sequence of events leading up to the

challenged decision.” Allstate, 495 F.3d at 160. NextEra’s allegation, though

far from proven at this stage, supports a plausible inference of discrimination

based on the on the timing of SB 1938. It contends that, at incumbents’

prodding, the legislature suddenly enacted the law excluding new entrants

after MISO selected NextEra’s bid to build the Hartburg-Sabine Line. If

proven, such a reaction to the entry of a disfavored group could support a

finding of discriminatory purpose. See Lewis, 447 U.S. at 32 (“There is

evidence that the amendment was a direct response to Banker Trust’s

pending application, and that it had the strong backing of the local financial

community.”). Other “purpose” factors are likewise factbound. Indeed,

our most recent dormant Commerce Clause “purpose” case had the benefit

of a full trial record. Wal-Mart, 945 F.3d at 212. Because NextEra has at least

raised plausible allegations that SB 1983 had a discriminatory purpose, that

claims gets to the discovery stage.

The effects-focused claims are just as, if not more, fact dependent.

The Pike inquiry requires assessing both the burdens and benefits of the law.

In response to the contention that allowing only incumbents to build new

lines promotes reliability, NextEra points to FERC’s rejection of that notion,

MISO’s requirements for reliable service, and the successful record of the

few out-of-state transmission companies that have run lines in ERCOT

before SB 1938. Given that SB 1938 is a complete ban on new entrants and

NextEra has at least plausibly alleged that the claimed local benefit of

reliability is “insignificant and illusory,” this claim warrants the factual

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development that effects claims typically receive. See, e.g., Wal-Mart, 945

F.3d at 221 (reviewing Pike claim after bench trial); United Transp. Union v.

Foster, 205 F.3d 851, 863 (5th Cir. 2000) (reversing summary judgment on

the plaintiffs’ Pike claim because “of an empty record”); Colon, 733 F.3d at

546 (reversing the dismissal of the plaintiffs’ Pike claim because it

“present[ed] issues of fact that cannot be properly resolved on a motion to

dismiss”); Cachia, 542 F.3d at 841 (reversing the dismissal of a

discriminatory-effects claim because the complaint alleged that the challenge

ordinance did “not simply raise the costs of operating a [chain] restaurant in

Islamorada, but entirely prohibit[ed] such restaurants from opening”); see

also Colon, 813 F.3d at 153–55 (holding, after reversing Rule 12 dismissal of

effects claims, that claim did not survive summary judgment based on record

that included expert testimony from both sides).

We reverse the Rule 12(b)(6) dismissals of the purpose, effects, and

Pike claims.

IV

The district court did not err, however, in dismissing NextEra’s claim

under the Contracts Clause. One of the original Constitution’s only express

limitations on state power, it directs that “No State shall . . . pass any . . . Law

impairing the Obligation of Contracts.” U.S. Const. Art. I, § 10. The

Contracts Clause was a response to the state laws relieving debtors during

the 1780s. James W. Ely, Jr., The Contract Clause: A

Constitutional History 1, 8, 15–17 (2016). In the first century or so

of the Republic, before the Bill of Rights restricted states, the Contracts

Clause was “the primary vehicle for federal review of state legislation.” Id.

at 1. Some of the greatest hits of the antebellum Supreme Court were

Contracts Clause cases. See Fletcher v. Peck, 10 U.S. (6 Cranch) 87 (1810);

Trs. of Dartmouth Coll. v. Woodward, 17 U.S. (4 Wheat.) 518 (1819);

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Proprietors of Charles River Bridge v. Proprietors of Warren Bridge, 36 U.S. (11

Pet.) 420 (1837).

But unlike the dormant Commerce Clause, the Contracts Clause is

not what it once was. See Sveen v. Melin, 138 S. Ct. 1815, 1827–28 (2018)

(Gorsuch, J., dissenting); Ely, supra, at 5–6, 220–23, 245–47. The Supreme

Court substantially narrowed its scope during the Great Depression. Home

Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 428 (1934) (“[T]he [Clause’s]

prohibition is not an absolute one and is not to be read with literal exactness

like a mathematical formula.”). Under modern caselaw, states have some

leeway to alter parties’ contractual relationships “to safeguard the vital

interests of [their] people.” Energy Reserves Grp., Inc. v. Kan. Power & Light

Co., 459 U.S. 400, 410 (1983) (quoting Blaisdell, 290 U.S. at 434).

A related principle that has sapped the Contracts Clause of its earlier

force applies here. We now recognize that parties contract with an

expectation of possible regulation. See Energy Reserves Grp., 459 U.S. at 413.

That is especially true in highly regulated industries like power. That history

of regulation put NextEra on notice that Texas could enact additional

regulations affecting its two projects. Id. (“Significant here is the fact that

the parties are operating in a heavily regulated industry.”); Ely, supra, at

246 (explaining that Energy Reserves recognized that “parties in regulated

industries must be deemed to enter contracts with the understanding that

further regulations might affect their contractual terms”). After Order 1000,

there was substantial uncertainty about how state regulators would respond.

See Chrysler Corp. v. Kolosso Auto Sales, Inc., 148 F.3d 892, 897 (7th Cir. 1998)

(highlighting that the plaintiff “should have known . . . that it did not have a

solid right to prevent a dealer from changing the location of the dealership”).

Despite PUCT’s declaration that transmission-only companies could enter

the market, Texas courts never weighed in on the issue. Moreover, the

emergence of state rights of first refusal signaled that Texas could enact

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something similar, if not even more restrictive. Cf. id. at 895 (concluding that

the challenged law “was in the direct path of the plausible . . . evolution of

Wisconsin’s program for regulating automobile dealership contracts”).

Given all that, SB 1938 did not impair NextEra’s reasonable expectations.

At a more basic level, SB 1938 did not interfere with an existing

contractual right of NextEra’s. Both of NextEra’s contracts required it “to

secure any necessary” certificates of convenience and necessity to build the

Hartburg-Sabine Line or purchase the Jacksonville-Overton Line. Yet

PUCT never issued them. Consequently, NextEra did not have a concrete,

vested right that the law could impair. See Colon de Meijas v. Lamont, 963

F.3d 196, 202–03 (2d Cir. 2020) (rejecting a similar challenge because “no

contractual right exist[ed]”); Lazar v. Kroncke, 862 F.3d 1186, 1200 (9th Cir.

2017) (“Because Lazar never possessed a vested contractual right, she

suffered no contractual impairment.”); Burlington N. R.R. Co. v. Nebraska,

802 F.2d 994, 1106 (8th Cir. 1986) (affirming the denial of relief because the

alleged right was “conditional”). It thus fails at the threshold question for

proving a modern Contracts Clause violation. Energy Reserves Grp., 459 U.S.

at 413.

***

We AFFIRM the dismissal of the Contracts Clause claim. We

REVERSE the dismissal of the Commerce Clause claims and remand those

for further proceedings consistent with this opinion. We leave it for the

district court to determine whether NextEra is entitled to any preliminary

injunctive relief.

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Jennifer Walker Elrod, Circuit Judge, concurring in part and

dissenting in part:

Today’s holding about S.B. 1938 applies only “to the interstate

electricity networks in Texas (but not the intrastate ERCOT network).”

Ante at 2. The territory at issue, which is controlled by MISO and SPP, “is

part of an ‘interconnected “grid” of near-nationwide scope’ that has long

been subject to FERC oversight.” Ante at 22. Because the majority opinion

specifically excludes the intrastate ERCOT grid, I concur in much of the

majority’s opinion. But I dissent from its further conclusion that S.B. 1938

discriminates on its face.*

The “regulation of utilities is one of the most important of the

functions traditionally associated with the police power of the States.” Ark.

Elec. Co-op Corp. v. Ark. Pub. Serv. Comm’n, 461 U.S. 375, 377 (1983). And

as the majority opinion recognizes, “Texas has an interest in promoting

reliable electricity service, including the power to approve the siting and

construction of transmission lines.” Ante at 20. To ensure “a robust,

reliable, and well-regulated electric grid,” S.B. 1938 ties construction rights

to endpoint ownership to determine who can build, own, and operate new

transmission facilities. Tex. H. Comm. on State Affs., Bill Analysis, Tex.

H.B. 3995, 86th Leg., C.S.H.B. at 1 (2019). As one of the amici stresses, S.B.

1938 “is an exercise of local control over what is inherently a local business.

This local character is seen especially in the areas of ERCOT served by public

power utilities, which are community-owned or managed, vertically

integrated monopoly systems.” Brief for The Lower Colorado River

Authority, as Amicus Curiae Supporting Defendants–Appellees, at 9.

*

As the majority opinion notes, this facial discrimination claim under the dormant

Commerce Clause should not be confused with a facial challenge to S.B. 1938, which this

claim is not. Ante at 21 n.6.

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Although the majority opinion does not disturb ERCOT’s grid, which is

wholly intrastate and makes up most of Texas’s electrical system, the right

of first refusal so crucial to ERCOT may also be important to the portion of

Texas’s grid within FERC’s jurisdiction.

As the majority opinion states, a law may discriminate against

interstate commerce in three ways: on its face (i.e., by its very text), by its

purpose, or in its effect. Ante at 21 (citing Allstate Ins. Co v. Abbott, 495 F.3d

151, 160 (5th Cir. 2007)). And a law having only incidental effects on

interstate commerce may nonetheless be unlawful if the “burden imposed on

such commerce is clearly excessive in relation to the putative local benefits.”

Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). While I agree with the

majority that we should reverse the 12(b)(6) dismissals of NextEra’s

discriminatory-purpose, discriminatory-effect, and Pike claims, ante at 33, I

disagree that “S.B. 1938 discriminates on its face” against interstate

commerce, ante at 31.

The majority opinion purports to draw a distinction in S.B. 1938

between in-state and out-of-state entities or interests. In reality, it draws a

distinction into S.B. 1938, because the text does not bear that out. Rather,

S.B. 1938 draws a neutral distinction between entities based on incumbency

status, which does not depend on residency. In LSP Transmission Holdings,

LLC v. Sieben, the Eighth Circuit considered an incumbency preference

nearly identical to this one. 954 F.3d 1018, 1023–24 (8th Cir. 2020). In

holding that the law was not facially discriminatory, the court noted that the

law’s “preference is for electric transmission owners who have existing

facilities, and its law applies evenhandedly to all entities, regardless of

whether they are Minnesota-based entities or based elsewhere.” Id. at 1028.

True, “laws that restrain both intrastate and interstate commerce may be

discriminatory,” but “[t]his is not such an instance.” Id. The incumbency

requirement here, as in Sieben, is not an illicit residency requirement. Cf.

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Hignell-Stark v. City of New Orleans, No. 21-30643, 2022 WL 3584037, at *5

(5th Cir. Aug. 22, 2022) (holding that New Orleans’s “residency

requirement discriminated against interstate commerce”).

Similarly, S.B. 1938 draws a neutral distinction based only on

incumbency status. Thus, the majority needs a further inferential step to

conclude that S.B. 1938 amounts to discrimination against out-of-state

entities. Citing three Supreme Court cases, the majority opinion makes that

inferential step by saying that “[w]hat is true for alcohol and milk under the

dormant Commerce Clause must be true for electricity transmission.

Requiring boots on the ground discriminates against interstate commerce.”

Ante at 28 (citations omitted). But this inferential step lands beyond the

realm of facial discrimination. If the text does not distinguish between in-

state and out-of-state interests—which it does not—S.B. 1938 cannot be

facially discriminatory.

To illustrate, S.B. 1938’s incumbency requirement is meaningfully

different than discriminatory in-state presence requirements. In each of

these three cases, the laws add requirements that discriminate against out-of-

state entities. Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449,

2456–59 (2019); Granholm v. Heald, 544 U.S. 460, 465–66 (2005); Dean Milk

Co. v. City of Madison, 340 U.S. 349, 350–52 (1951). Without the

discriminatory laws in Granholm and Dean Milk, the goods at issue—wine

and milk, respectively—could readily be supplied by providers without any

physical presence in the state. Wineries could ship wine directly to

consumers in New York and Michigan, and milk producers could send their

dairy products into Madison from Chicago. Granholm, 544 U.S. at 467–68;

Dean Milk, 340 U.S. at 352–53. And without the law in Tennessee Wine &

Spirits, out-of-state entities and individuals could open new liquor stores

without residing in Tennessee for any meaningful period of time. 139 S. Ct.

at 2458. Under those laws, however, out-of-state producers could no longer

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ship product into the state or the city, and out-of-state entities could not

immediately open liquor stores. Thus, those laws violate the Commerce

Clause because they add requirements that discriminate against out-of-state

entities.

In contrast, S.B. 1938 does not add any such requirements. By offering

a right of first refusal to owners of incumbent utility facilities, S.B. 1938

merely recognizes a pre-existing physical-presence requirement: an electric

company cannot provide transmission-and-distribution services without

some sort of existing physical presence in the state. Thus, unlike the three

cases cited by the majority, S.B. 1938 does not add, either explicitly or

implicitly, any in-state presence requirements.

Moreover, the nature of the transmission-and-distribution market

means that all existing market providers must have some sort of physical

presence within the state. Thus, the mere fact that an entity had a physical

presence in Texas before 2019 says only that the entity was an existing market

provider at that time, and nothing more. It says nothing about whether the

entity is an in-state or an out-of-state entity, or whether the law favors in-

state over out-of-state interests. See Colon Health Ctrs. of Am., LLC v. Hazel,

813 F.3d 145, 154 (4th Cir. 2016) (“[I]ncumbency bias in this context is not a

surrogate for the ‘negative[] impact [on] interstate commerce’ with which

the dormant Commerce Clause is concerned.” (alterations in original) (quot-

ing Colon Health Ctrs. of Am., LLC v. Hazel, 733 F.3d 535, 543 (4th Cir.

2013))).

The distinction between incumbents and non-incumbents in S.B.

1938’s text, without more, does not constitute facially discriminatory treat-

ment of out-of-state entities. That something more would have to be evi-

dence of discriminatory purpose or discriminatory effect. And as the major-

ity stated, the “pleadings-stage dismissal of [the discriminatory-purpose,

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discriminatory-effect, and Pike] claims was premature. Claims that turn on

intent and effects typically require factual development.” Ante at 31. On

remand, I have no doubt that the able district court will carefully analyze

these thorny issues.

40