Thursday, February 18, 2021

Does Texas Order Keeping Natural Gas In State Violate the Dormant Commerce Clause?

 by Michael C. Dorf

The ongoing crisis in Texas and other states that have experienced atypically wintry weather is first and foremost a humanitarian challenge for the people affected. I feel nothing but concern for those suffering from cold, power outages, unsafe drinking water, and the associated ills. I urge readers who share that concern to donate to one or more relief organizations providing direct aid. I also hope that no one will mistake the following analysis of legal issues raised by one aspect of the response to the crisis for callousness or insensitivity.

As was widely reported, yesterday Texas Governor Greg Abbott ordered that natural gas slated for delivery out of state be offered first to in-state power operators. In a moment I'll turn to the question that titles today's essay, but I want to begin with some procedural complexities. The story just linked refers to "a copy of Abbott’s order seen by Bloomberg" News. Likewise, a press release issued by Governor Abbott states that he "has ordered natural gas producers not to export product out of state until February 21st and instead sell it to providers within Texas." However, neither the Bloomberg story, the press release, nor any source I could find links to an actual order of the Governor. Instead, there are multiple references to a letter that Abbott sent to the Texas Railroad Commission--which, despite its name, has long had authority to regulate the energy sector in Texas. That letter apparently states:

I hereby mandate that all sourced natural gas be made available for sale to local power generation opportunities before leaving the state of Texas, effective through February 21, 2021. . . . I ask that you immediately take all reasonable and necessary steps to ensure that this mandate is carried out.

It is not clear whether there is a separate order that Governor Abbott issued or whether the letter itself is the order (as its use of "hereby mandate" suggests). In any event, nothing in my ensuing analysis turns on whether there is a stand-alone order as well as the letter or only the letter. The two key points I wish to raise are (1) it is unclear whether the Governor of Texas has the authority under state law to mandate the diversion of natural gas or whether that authority, if it exists anywhere in Texas, is lodged with the Railroad Commission; and (2) assuming that the Governor has the authority under state law or that if he doesn't, the Railroad Commission adopts the same order, the substance of the order could violate the dormant Commerce Clause of the U.S. Constitution. Below I'll explain why the uncertainty of issue (1) could actually aid Texas in evading review of issue (2).

Let's begin with what I've called issue (2). Article I, Section 8 of the U.S. Constitution gives to Congress the power to regulate interstate and foreign commerce (as well as commerce with Indian tribes), but the Supreme Court has long construed the Commerce Clause as not merely a grant of power to Congress but also a limit on state regulatory authority even when Congress does not enact legislation. Under modern doctrine, the so-called "dormant" Commerce Clause forbids states from discriminating against interstate commerce and from imposing non-discriminatory restrictions that unduly burden interstate commerce. (The cases almost all involve interstate rather than foreign, much less Indian, commerce, so I'll somewhat oversimplify by referring only to interstate commerce.)

The Abbott restriction facially discriminates against interstate commerce. It is therefore subject to what the Supreme Court has repeatedly called (e.g., in this 1994 case) a "virtually per se rule of invalidity." What does that mean? At various points (including the case just linked and ones quoted therein) the Court has further described the virtually per se rule as the "strictest scrutiny," which calls to mind the exacting standard applicable to race discrimination and content-based restrictions on speech. At least in the context of laws disadvantaging racial minorities, the late Professor Gerald Gunther famously referred to the strict scrutiny standard as "strict in theory, but fatal in fact." That sounds quite a lot like a virtually per se rule of invalidity.

And indeed, the Supreme Court's dormant Commerce Clause cases nearly always turn on a threshold determination. Parties challenging state regulations argue that they discriminate, whereas state regulators typically defend their laws by arguing that even those that might at first appear to be discriminatory are not in fact protectionist measures and thus subject only to the much more forgiving balancing test.

Meanwhile, the further articulation of the "virtually per se rule"/strictest-scrutiny test is highly confusing. Here's how the Court has gone on to characterize it: the test requires that in order to be sustained, a state law that discriminates against interstate commerce must "advance[] a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives." Students and scholars of constitutional law will find that language perplexing. Merely "legitimate" purposes are the stuff of the lowest level of judicial scrutiny, so-called rational-basis scrutiny. Strict scrutiny in the equal protection and free speech contexts require a compelling interest, not a mere legitimate one.

What explains the substitution of the flabby term "legitimate" for "compelling" in the dormant Commerce context? I suspect the answer is simply that the dormant Commerce Clause jurisprudence developed along its own path, with older cases using the term "legitimate" long before the Court mashed the tests together. If so, then "legitimate" is something of an artifact.

No matter, though. Regulation is almost never struck down on the ground that the government's interest is insufficiently important--whether under strict scrutiny or something less exacting. Instead, the government can almost always articulate a sufficiently weighty interest. The real action then focuses on whether the means chosen adequately advance that interest. And here the dormant Commerce test seems roughly to approximate the requirement of "narrow tailoring" or "least restrictive means" that one sees in the equal protection and free speech contexts.

All of that is a somewhat circuitous way of saying that whether Governor Abbott's restriction on out-of-state shipments of natural gas absent a right of first refusal for in-state power generators passes constitutional muster will depend on whether Texas could achieve its admittedly legitimate, indeed compelling, interest in preventing its people from freezing to death by other means. Could it?

I do not know nearly enough about energy markets, disruptions of supply, and the other relevant factors to  answer that question. But here's the thing: Neither do any of the judges before whom a challenge to the Governor's order would likely end up--at least not without some substantial presentation of evidence. All of that would take time, of course. And given that the Governor's order by its terms expires in three days, it seems impossible to develop a record that would allow a judge to make an informed ruling on the necessity question before the case for an injunction becomes moot.

Hold on! The government bears the burden of justifying regulations that trigger strict scrutiny. If there is uncertainty about whether Texas has other means of providing power to its citizens over the next few days, doesn't that mean that the uncertainty should be resolved against the state, unless and until it provides evidence that the Governor's order is truly necessary?

Maybe in theory, but not in reality, because of the pace of litigation. If, say, an out-of-state purchaser of natural gas were to go to federal court today seeking to block the Governor's order, or an in-state producer were to do the same in order to be able to ship its natural gas out of state, the plaintiff would be seeking a temporary restraining order or a preliminary injunction--either of which would require the plaintiff to establish both a likely substantive entitlement to relief and that the balance of equities favor the plaintiff. As a practical matter, a judge would not block the Governor's order without some evidentiary showing by the plaintiff that it is not necessary.

There is a further procedural obstacle to blocking the Governor's order in a timely fashion. If I were representing Texas in defending against a federal court lawsuit seeking to invalidate the Governor's order on dormant Commerce Clause grounds, I would urge the judge to abstain from issuing any equitable relief under a doctrine that, interestingly enough, is most closely associated with . . . wait for it . . . the Texas Railroad Commission. That's right, in the 1941 SCOTUS case of Railroad Comm'n of Texas v. Pullman, Justice Felix Frankfurter wrote for a majority that federal courts should stay their hand and not enjoin allegedly unconstitutional state action where there is uncertainty over whether the challenged action is even authorized by state law. Under what has come to be known as Pullman abstention, the federal court should dismiss such an action, and the plaintiffs should file any objection in state court. Here, as in Pullman itself, the state courts can figure out the lines of authority under Texas law.

There is some irony here. If Governor Abbott clearly had state law authority to order Texas sources of natural gas to give in-state power producers the right of first refusal, then a federal court action could proceed. The fact that his order is doubly rather than singly dubious--possibly violating state as well as federal constitutional law--keeps the case out of federal court and thus ensures that it is evaluated by a likely friendlier state court judge. To be sure, it is possible that a state court judge will rule against the Governor, but it seems a safer bet that the order will expire of its own terms before any such order.

Finally, I should acknowledge that expiration of the order in three days will moot a request for injunctive relief but not necessarily all litigation. Even if no natural gas shipments are directly impacted, the order has already had an impact on energy markets. While the state of Texas may be able to assert state sovereign immunity in any retrospective suit for damages after the crisis passes, it is possible to imagine the dormant Commerce Clause issue arising in a lawsuit between private parties. If it does, perhaps I'll write a sequel to today's entry.

9 comments:

hardreaders said...

I'm a little proud of myself that I guessed it was Pullman by the end of the 3rd paragraph. (Although I failed to recall that it concerned the very same TX Commission.) Sometimes you have to revel in the small victories!

It seems like Abbott was a disguised Marxist this whole time. The moral of the story is then IOKIYAR.

Also, this isn't my forte, but does Abbott's order similarly implicate federal preemption—for example, I do know there is a Natural Gas Act!—and/or the jurisdiction of FERC?

egarber said...

Good information and overview.

Broadening the topic a little, does the dormant commerce clause say anything about state incentives that lure business? For example, think of the bidding wars for Amazon, or all the tax credits on offer here in Atlanta for movie makers.

My guess is that mere incentives to set up shop probably don't implicate anything, since although attractive packages might DISTORT some pure notion of markets, they don't seem to burden interstate commerce. But might they discriminate against it?

Now suppose the tax incentives were conditioned on specific benefits for a given state - i.e., Amazon only gets the breaks if some number of local people are hired, or local vendors are exhausted before looking outside the state. I may be wrong, but I think this kind of thing was part of the NY negotiations. Even if not, the hypothetical might be helpful.

In my latter scenario does it come down to the difference between a regulation and mere incentives? The former jacks up interstate commerce in a substantial way, while mere incentives pose more of a choice for companies? Even there, it seems plausible that tax incentives can effectively be a form or "regulation." Sure, Amazon has a choice, but so does a drug addict working with a dealer. Wow, did I just compare Amazon and NY to something self destructive? Oops :)

egarber said...

*be a form of "regulation". typo :)

hardreaders said...

@egarber

Maybe I missed something, but how does localities giving out sweetheart deals to the likes of Amazon et al. in any plausible way either burden or discriminate against interstate commerce? Isn't Amazon one of the purest embodiments of interstate commerce on the planet? So how is it a burden or discrimination to show favoritism to an entity fully engaged in interstate commerce? Likewise for the movie makers, because I assume those are out-of-state entities being wooed by the tax credits. Almost by definition, these state incentives operate as special bonuses only available to those conducting interstate commerce. That's sort of the exact opposite of what the DCC forbids, is it not?

Next, taking the specific benefits one at a time, I guess I don't see the issue with hiring local people. If a company relocates somewhere, by definition wouldn't it either hire locals or bring current employees with it? But in the latter case, once relocated, those employees then become local right? Similarly for local vendors, that seems like an obvious place to look even if there wasn't some kind of requirement in place.

I suppose there is some limited or tenuous "burden"—or you could conceive of it as "discrimination" instead—in the sense that the state is conditioning its offer on Amazon directing some portion of its spend to local vendors, when it would otherwise go to national outfits. But for one, the national outfits don't have any entitlement, AFAIK (and putting aside any contractual limits on termination), to continue to receive business from Amazon. One day, Amazon could wake up and decide not to do business with them for any reason or no reason at all. In that same vein, it's really Amazon making the decision based on its cost/benefit analysis of the tax breaks on offer. If it decides the offer's not that good, it'll keep things as they are and keep using the national outfits. The state doesn't control that decision-making; Amazon has free will here. Moreover, as I stated above, the tax credits obviously help Amazon, so if anything, it's a *benefit* to interstate commerce, not a burden. And of course, Amazon is just one company out of many, albeit one of the most gargantuan on the planet. That all seems a very far cry from the TX order being discussed here, where the state directly forbids all NG producers from doing what they would otherwise want to do, and commands them to favor in-state entities.

I also don't follow your analogy with Amazon/NY and drug dealers. Are you suggesting that NY had the leverage in the negotiations? If so, could you share some of your primo stash with me? As we all know, Amazon was happy to walk away when its demands weren't met, so I'm not sure how you conclude that NY had leverage.

In closing, you are certainly right to point out that there is something a little unseemly about states and municipalities—which should be very careful in how they disburse the public fisc—showering perks on the richest and most powerful companies around. But I just don't think that really implicates DCC, or e.g., antitrust, in the mine run of cases. And it's not like there is no other remedy. People can vote out and/or put heat on the politicians who keep approving these deals. To me, that's exactly what happened in the NY case. Democracy in action, what a rare sight to behold.

egarber said...

Yeah, I’ll be the first to admit my examples are strained. I’m essentially just asking if there’s any potential DCC implication tied to this stuff - states fighting each other via public policy to sort of game “interstate commerce” in their favor. On any level, can that be construed as discriminating or burdening IC? It could be that at most, it causes distortion, like I said.

egarber said...

And correct me if I’m wrong, but aren’t there unsettled doctrinal questions around the DCC and business subsidies generally?

hardreaders said...

@egarber

I think it's fine to come up with examples and it's fair to ask the question of whether DCC is implicated by those. But I just don't see how it would be. Your scenario involves, as I view it, states/municipality competing with one another to see who can offer the most *benefits* to companies operating in IC. That just seems totally orthogonal to the policies that DCC is meant to further. Again, that's not to say those kinds of deals are good policy. In most cases I've seen, the locality ends up getting taken to the cleaners.

This is just me shooting from the hip though. Maybe folks out there have done scholarly treatments on the subject. If so, I'll be the first to admit to not having consulted those. But you could look around for some, or maybe other regulars around here are familiar with them.

hardreaders said...

@egarber

We're zipping past each other in the ether.

Like I said, I don't claim to be well-versed on the subject, but I'm not aware of anything notable w.r.t. gov't subsidies and DCC concerns. You seem to be though, so why don't you fill us all in?

PQuincy said...

It's interesting and valuable to hear a law blog explore the ramifications of the Texas governor's letter, which might be a mandate or an order to the Railroad Commission, which might have taken steps to prevent the export of natural gas from Texas. Thanks!

That said, and given the uncertainty around both the form, status, and validity of the governor's action, would any rational natural gas producing or pipeline company feel much pressure to act differently on its basis. If company A with a stock of gas has offers from Texas power plants for price X, and from, say, Louisiana or Oklahoma power plants for price 2X, is there any reason to believe they'd sell in Texas? Oklahoma and Louisiana people have outages and freezing weather too, after all. Would a company that took the better out-of-state price face much risk of legal consequences?

Thus, I'm inclined to believe that the governor's action is largely political posturing: "Your Governor has bravely made sure that every cubic foot of Texas gas is gonna to stay right here for the brave people of Texas." Given that the brave people of Texas have little way to know how true that statement is, the benefit to the governor is not increased electric production and heater operation, but in "showing strength" and "taking action" rather than flying off to Cancun, it would seem.