While the U.S. Army Corps of Engineers eventually constructed Bluestone Dam as a federal facility, private power companies planned to develop hydroelectric dams on the New River in the early twentieth century. By 1910, a group of residents from nearby Hinton, West Virginia, commissioned a set of drawings and specifications for a dam in hopes of attracting a utility company to the region for hydroelectric power. Area residents presented their plan to the Appalachian Power Company, a private utility created in 1911 through the merger of several power plants along the New River. Appalachian Power expressed immediate interest in building a hydroelectric dam at the Bluestone site.
In a final demonstration, five men ascended the New River from Hinton to Allisonia in a sixteen-foot boat powered by an outboard motor. The journey was undertaken in July 1936, when the river was at its normal summer low water stage. Despite the fact that it became necessary to pull or push the boat for over a mile upstream, the Corps of Engineers cited this journey as evidence that the New River remained a navigable stream.
In 1939, the federal government made a second attempt to condemn the land needed for Bluestone Lake, but West Virginia Power Company obtained an injunction in federal district court to again block construction. In September of 1940 the case went to the U.S. Circuit Court of Appeals in Richmond, Virginia, which upheld an earlier district court ruling that declared the New River non-navigable. In United States vs. Appalachian Power Company, lawyers for the opposing sides argued the case before the U.S. Supreme Court on October 14 and 15, 1940. While the evidence remained the same as in the previous two cases, on December 16, 1940 the Supreme Court overturned the decision of the two lower courts and found that the New River remained a navigable waterway. This decision supported the constitutionality of the federal government's construction of the Bluestone Dam and Reservoir, and cleared the way for land acquisition by the Corps.
The Supreme Court's majority emphasized that the actual condition of a waterway was not the only criterion by which to judge navigability, but that the potential for developing the river into a viable transportation route had to be taken into account. Furthermore, the need to construct navigational aids to render a river feasible for transportation did not prevent a stream from being defined as navigable, and once rendered navigable, "a waterway remains so." The decision recognized the documentation offered by the U.S. Army Corps of Engineers regarding the river's development during the 1870s and 1880s as evidence of the waterway's navigability. The court went on to say that, "Nor is it necessary that the improvements should be actually completed or even authorized." In summary, the high court supported the idea of the federal government's eminent authority over the nation's rivers, whether or not those streams were currently developed to their fullest potential. Regarding the lapse in New River development during the late nineteenth and early twentieth centuries, the Court responded, "Even absence of use over long periods of years, because of changed conditions, the coming of the railroad or improved highways does not affect the navigability of rivers in the constitutional sense."
Ramifications of this critical court decision extended far beyond the Bluestone Dam project. It prioritized federal control over the nation's waterways, and the actual or potential commerce exercised on those rivers. In addition, it confirmed the federal right of eminent domain in acquiring and developing the land necessary to support the transportation and hydroelectric potential of the nation's waterways, and it established the federal government's central authority in decisions affecting flood control measures. The case also had broad implications on the issue of states' rights. Forty-one state governments (including West Virginia, Virginia, and Kentucky) filed amicus briefs with the Supreme Court supporting Appalachian Power's contention that the New River was neither navigable nor under federal jurisdiction. Moreover, the states maintained that regulation of rivers (like the New) that were not currently capable of supporting commercial navigation should be regulated by the states, and not by federal authorities. The Supreme Court decision meant that states no longer had primary authority to regulate rivers like the New, but would instead have to submit to federal oversight.
On November 10, 1941, the United States Supreme Court refused to revisit its decision that the Hinton to Allisonia section of the New River was navigable and therefore under federal jurisdiction. This decision cleared the last obstacle to federal construction of Bluestone Dam. Consequently, the day after announcing the Supreme Court's decision, the U.S. Army Corps of Engineers stated that it would advertise for bids on the project.