On March 25, 2020, the United States Court of Appeals for the Eighth Circuit (“Eighth Circuit”) upheld a Minnesota law granting a right of first refusal (“ROFR”) to incumbent electric transmission owners to construct, own, and maintain electric transmission lines connecting to their existing facilities. In its complaint brought before the United States District Court for the District of Minnesota (“District Court”), LSP Transmission Holdings, LLC (“LSP”) argued that Minnesota’s ROFR statute discriminates against out-of-state transmission developers and places an undue burden on interstate commerce in violation of the dormant Commerce Clause. The Eight Circuit affirmed the District Court’s dismissal of LSP’s complaint finding, de novo, that Minnesota’s ROFR provision does not violate the dormant Commerce Clause.

The Minnesota ROFR provision challenged by LSP provides, in relevant part, that “[a]n incumbent electric transmission owner has the right to construct, own, and maintain an electric transmission line that has been approved for construction in a federally registered planning authority transmission plan and connects to facilities owned by that incumbent electric transmission owner.” This law was enacted following FERC’s issuance of Order No. 1000, which, in part, eliminated the federal ROFR for regionally cost allocated transmission projects that gave incumbent utilities a right of first refusal over the construction of new electric transmission facilities approved by a  regional transmission organization (“RTO”) or independent system operator (“ISO”). As a result of Order No. 1000, public utility transmission providers were required to remove all federal ROFR provisions from jurisdictional Tariffs and agreements.

Pursuant to Order 1000, the Midcontinent Independent System Operator, Inc. (“MISO”), a FERC-approved RTO that provides open access transmission service in the Midwest United States (including in Minnesota), revised its Tariff to both remove the federal ROFR provisions and incorporate Minnesota’s ROFR law. LSP challenged MISO’s incorporation of the Minnesota ROFR provision in the MISO Tariff arguing that FERC should preclude states from enacting ROFR laws; however, FERC—and ultimately the United States Court of Appeals for the Seventh Circuit—dismissed LSP’s arguments, finding that Order No. 1000’s focus is on federal ROFR provisions and did not require transmission providers to remove from their Tariffs references to state or local laws regulating the construction of transmission facilities.

Subsequently, on March 3, 2017, a Minnesota-based public utility and a Minnesota-based transmission company (the “Minnesota Parties”) jointly exercised their ROFR under Minnesota law to construct the Huntley-Wilmarth line—a proposed 345 kV electric transmission line approved by FERC and scheduled to be completed by January 1, 2022. On September 29, 2017, LSP filed suit against Minnesota’s Public Utilities Commission and Department of Commerce, challenging the constitutionality of Minnesota’s ROFR provision as being in violation of the dormant Commerce Clause. The Minnesota Parties intervened and filed a motion to dismiss LSP’s complaint, arguing among other things, that the Supreme Court’s decision in General Motors Corp. v. Tracy, 519 U.S. 278 (1997) (“Tracy”), foreclosed LSP’s arguments that Minnesota’s ROFR law overtly discriminates against out-of-state transmission companies. The District Court granted the Minnesota Parties motion to dismiss. Specifically, the District Court concluded that the dismissal of the dormant Commerce Clause challenge in Tracy applies to LSP’s complaint because many of the entities in Minnesota that own existing transmission facilities are regulated public utilities serving captive customers, and because there is no competition for such sales of electricity, the dormant Commerce Clause does not apply.

On October 16, 2019, LSP appealed the District Court’s decision to the Eighth Circuit. On appeal LSP asserted Minnesota’s law expressly grants a ROFR to in-state entities only, giving them impermissible preferential treatment “to build new MISO-approved transmission lines in Minnesota.” LSP further argued that it is irrelevant that some of Minnesota’s incumbents with in-state operations are headquartered in other states, and that the District Court erred in considering this point. Instead, LSP provided, the District Court should have considered whether the entity has a meaningful presence within the state.

The Eight Circuit reviewed the District Court’s dismissal de novo, following a two-step analysis: (1) whether the Minnesota ROFR law overtly discriminates against interstate commerce; and, if not (2) whether the law imposes a burden on interstate commerce that “is clearly excessive in relation to its putative local benefits”—i.e., the “Pike” test.

First, with respect to LSP’s assertion that the Minnesota ROFR is facially discriminatory in favor of an in-state transmission provider, the Eighth Circuit found that LSP’s facial discrimination claim fails. Specifically, the Eighth Circuit held that the Minnesota ROFR applies evenhandedly to all transmission owners with existing facilities, regardless of whether they are based in Minnesota or out-of-state. The Eighth Circuit further noted that an entity that does not already own an existing transmission facility in Minnesota—whether a Minnesota or an out-of-state entity—will also face the Minnesota ROFR provision’s incidental hurdle. As a result, the Eighth Circuit found no discriminatory effect.

Second, the Eighth Circuit noted that the Pike test requires legitimate local public interests be balanced against the law’s incidental burden on interstate commerce. On appeal, LSP argued that the Minnesota ROFR is unduly burdensome because (i) it precludes non-incumbent utilities from competing for MISO-approved transmission projects located in Minnesota, and (ii) it would nullify Order No. 1000’s abolition of the federal ROFR being adopted on a widespread basis. The Eighth Circuit rejected LSP’s arguments finding that Minnesota enacted its own ROFR law in response to the uncertainty created by Order 1000, and in order to preserve the status quo surrounding the State’s regulation of the intrastate transmission of electric energy. The Eight Circuit further found that the record did not sufficiently demonstrate that the cumulative effect of state ROFR laws would nullify Order No. 1000 and eliminate competition. Finally, it noted that the Supreme Court rarely invokes the Pike balancing test to invalidate state regulation under the Commerce Clause. As a result, the Eighth Circuit was unable to conclude that the burden imposed by Minnesota’s ROFR law is clearly excessive, and affirmed the dismissal of LSP’s complaint.

Click here to read the decision.