I'm not sure about the history of the New Starts program (FTA Sec. 5309 grant) to go into detail about the process, which currently requires that some projects (i.e. those over some value) go through a process which requires mode selection to be a consideration. I do know that some small value projects and some bus rapid transit projects do not need to go through the mode selection process.
As for the history of the corridor:
The first subway study in the late 60s and early 70s assumed lines to the southwest (near Hennepin), and south (following Chicago, 12th, and Bloomington roughly). MTC (predecessor to Metro Transit) was created by state legislature in 1967, and acquired a number of private bus companies between ~1967 and 1973. MTC quickly developed an express bus system, especially focused on the 35W South corridor. I believe that the bus stop at 35W&Lake was opened in the early 1970s, more or less the same time that the freeway opened. HOV lanes were eventually added in the early 1990s, from 494 to Hwy 13.
In the early to mid 1990s, MnDot conducted a study that would completely reconstruct the freeway with a light-rail line running down the center from Downtown to 95th or 98th St. I think they were considering a co-location with the SW Line under Nicollet Ave north of Lake St. MnDot eventually canceled the plan, because I believe they couldn't materialize funding for either the freeway construction or light-rail line.
In the early 2000s, MnDot conducted a study to expand the HOV lanes north from 494 to Minneapolis. MnDot also contemplated a BRT service using median stations and the HOV lanes. Also at the same time, Metro Transit launched the Central-South restructuring study which created the 535 line, stopping at interchanges along 35W. The 2005 BRT study is at: http://www.dot.state.mn.us/projects/brt/
Since the BRT study, Met Council/Metro Transit organized the transitway system and gave the 35W BRT line the Orange Line name. Also, Metro Transit has worked with MnDot to secure funding for the station improvements as the reconstruction projects have advanced.
It's good to note that the Orange Line isn't a singular cohesive project. The downtown stations and the 46th St station were built as separate projects. The Lake St station and the 12th St ramp are another separate project. The Knox underpass will likely tie in with a 494 project, and the other stations at 66th, 98th, and Burnsville happen to be low-cost projects that can be done at the same time to try to link everything together into the Orange Line.