We’ll Have What They’re Having: The Potential Impact of Tennessee Wine on Indiana Utility Law

 

The United States Supreme Court recently issued its decision in a case that, on the surface, appears to impact the wine and liquor industry. However, the ruling is promising for out-of-state companies wishing to operate as public utilities in Indiana, as such entities currently face a comparable citizenship hurdle under Indiana law. [1]

In Tennessee Wine and Spirits Retailers Association v. Thomas, the Court held that a Tennessee law, which required a minimum of two years of Tennessee residency for entities wishing to operate retail liquor stores, was an unconstitutional limitation of interstate commerce. Tennessee Wine and Spirits Retailers Association v. Thomas, No. 18-96, slip op. at 36 (2019). Though admittedly deemed “less extreme” than other Sixth Circuit attempts to limit interstate commerce, the law was ultimately found to violate the Commerce Clause due to its express discrimination against nonresidents and its “highly attenuated relationship” to public health or safety. Id. at Syllabus 4.

Under the law at issue in Tennessee Wine, a person and/or company attempting to obtain proper licensure for the first time to operate a retail liquor store must have resided in Tennessee for two or more years at the time of application. Id. at 3. Despite not having been citizens for at least two years, two liquor businesses applied for such licenses in 2016. Id. at Syllabus 4. The Tennessee Alcoholic Beverage Commission recommended that the two applications receive approval; however, the Tennessee Wine and Spirits Retailers Association threatened to sue the Commission if the applications were granted. Id. at 4. The Commissions’ executive director then filed a declaratory judgement action in State court to settle the question of the residency requirements’ constitutionality. Id. The case was removed to federal court, where the district court found the Tennessee law to be unconstitutional. Id. The Sixth Circuit Court of Appeals affirmed the decision of the district court. Id. at 6.

Ultimately, the Supreme Court followed suit, as it, too, deemed the Tennessee law unconstitutional. Id. at 36. Specifically, the Court found that the predominant effect of the two-year residency requirement was both discriminatory and only in place to “protect the Association’s members from out-of-state competition.” Id. While the Court did mention that each state is allowed some leeway “to enact measures to address the public health and safety effects of alcohol use and other legitimate interests,” the Court made clear that states cannot go so far as to “adopt protectionist measures with no demonstrable connection to those interests.” Id. at 31-32. Despite the Association’s arguments that the Tennessee law was necessary to ensure, among other concerns, that (1) retailers were subject to process in state courts; (2) only law-abiding and responsible applicants received licenses; and (3) oversite could be maintained over liquor store operations across Tennessee, the Court concluded that “obvious alternatives” exist which better serve those goals without having needing to discriminate against non-residents. Id. at 36.

Though Tennessee Wine involved alcohol law, the decision could impact out-of-state entities attempting to operate as public utilities in the Hoosier State. Arguably, Indiana law (Ind. Code § 8-1-2-91) imposes an even stricter citizenship requirement before an entity may operate as a public utility in the state. Though the constitutionality of § 8-1-2-91 has yet to be challenged in a state or federal court, the Indiana Utility Regulatory Commission (“IURC”) has ruled that it is a valid statute and has, in some cases, required public utilities in Indiana to show that they are Indiana entities prior to approving requests for relief such as public utility status or authorization to merge or consolidate.[2]  Petition of PSI Energy, Inc., Order of June 25, 1993, Cause No. 39646. In other cases, the issues has not been raised and the IURC has granted approval to foreign LLCs to own and operate electric generation facilities, which approval of independent generation projects, which are deemed “public utilities” for purposes of Ind. Code § 8-1-2-1.[3] Given the IURC’s inconsistent treatment of the issue, entities have been reluctant to challenge it, opting instead to reorganize as Indiana entities to comply with the statute, much like PSI ultimately did in 1993. See In Re Consumers Indiana Water Co., June 19, 2002 Order in Cause No. 42190 (Illinois corporation formed an Indiana corporation to comply with the statute) and In Re Grain Belt Express Clean Line, LLC, May 22, 2013 Order in Cause No. 44264 (Texas corporation converted to an Indiana company in accordance with the statute).

Based on this history, it is difficult to argue that Ind. Code § 8-1-2-91 does not place an unconstitutional burden on interstate commerce, as it patently discriminates against out-of-state competitors. The new Tennessee Wine precedent might be enough to convince an out-of-state entity looking to operate as a public utility in Indiana to challenge the constitutionality of the statute.

Read the full Tennessee Wine decision here: https://supreme.justia.com/cases/federal/us/588/18-96/case.pdf.

__________________________________

[1] Ind. Code 8-1-2-91 provides: “No license, permit or franchise to own, operate, manage or control any plant or equipment of any public utility shall be hereafter granted or transferred except to a corporation duly organized under the laws of the state of Indiana or to a citizen of such state.”
[2] In Petition of PSI Energy, Inc., Order of June 25, 1993, Cause No. 39646 at 25, the IURC determined that the statute was unambiguous and would likely be deemed constitutional, as the state has a “vital interest in this essential service which, under the plain meaning of the statute, may be rendered only by domestic corporations in Indiana.” If the meaning PSI argued was given, then IC §8-1-2-15 had indirectly been repealed and that the Court’s jurisdiction would not be as easily enforceable against a foreign corporation as it would an Indiana corporation. The Commission noted that restrictive statutes are not unique to Indiana; in fact, Ohio, California, Illinois, Arizona, New Hampshire, Wisconsin, and Virginia all have statutes that have been upheld by courts. Ultimately, the Commission granted IPL’s motion to dismiss because IC §8-1-2-91 is unambiguous and has not been specifically superseded by other general statutory provisions.
[3] June 18, 2014 Order in Cause No. 44440 (finding Apex Wind I, LLC, a Delaware LLC, to be a public utility as that term is defined by Ind. Code § 8-1-2-1(a) and authorizing LLC to purchase, own and operate Spartan Windpower Project in Newton County, Indiana); May 7, 2014 Order in Cause No. 44438 (authorizing Pattern Energy, LP, a Delaware LP, purchase, own and operate the Fowler Ridge IV wind generation project in Benton County, Indiana); March 3, 2010 Order in Cause No. 43781 (finding DEGS Wind I, LLC, a Delaware LLC, to be a public utility as that term is defined by Ind. Code § 8-1-2-1(a) and authorizing LLC to construct and operate the Spartan Windpower Project in Newton County, Indiana); November 20, 2007 Order in Cause No. 43338 (finding Fowler Ridge Wind Farm, LLC, a Delaware LLC, to be a public utility as that term is defined by Ind. Code § 8-1-2-1(a) and for purposes of Ind. Code § 8-1-8.5-1 et seq and authorizing LLC to construct and operate the Fowler Ridge wind generation project in Benton County, Indiana).

 

Erin Borissov is a partner in the law firm of Parr Richey Frandsen Patterson Kruse with offices in Indianapolis and Lebanon, Indiana. She advises utilities and business clients in the areas of utility regulatory law, electric cooperative law, easement and right-of-way law, commercial transactions, corporate governance, and corporate compliance.

The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.