States pass, implement ROFR laws in response to Order 1000

Three states in the Midwest ISO’s (MISO) footprint have passed legislation establishing rights of first refusal (ROFR) for incumbent transmission developers, in direct response to FERC’s issuance of Order 1000.

Since FERC issued its notice of proposed rule-making for Order 1000 in 2010, North Dakota, South Dakota and Minnesota have all passed ROFR laws, in large part because of the lobbying efforts of the utilities in those states. Minnesota’s went into effect on Aug. 1.

“The FERC order was the genesis for our thinking about ROFR legislation,” the Minnesota Department of Commerce said. “It was the initiative of our transmission-owning utilities, who asked to work with us in developing the legislative language that we did.”

Though the order requires that ROFR language be removed from all federally approved transmission tariffs and agreements, FERC said it would defer to states on their own transmission laws.

A consortium of 11 utilities is constructing CapX2020, a series of transmission lines in Minnesota, South Dakota, North Dakota and Wisconsin designed to support increasing demand and integrate renewable resources into the grid.

“Had that not been the case and if we weren’t seeing the level of development we felt was essential, I think we would have been less open to ROFR-type language,” the Department of Commerce said.

The ability to implement a ROFR allows each state to determine whether it needs to invite the type of competition that FERC is trying to generate through its ROFR removal requirement, according to Priti Patel, director of strategic transmission incentives for Xcel Energy (NYSE:XEL). Furthermore, the fact that the Dakotas and Minnesota have passed ROFRs is an acknowledgement that the type of transmission development taking place “is going quite well and that creating and maintaining an orderly process is a good thing,” Patel added.

Representatives from the North Dakota Public Service Commission (PSC) and the South Dakota Public Utilities Commission (PUC) said that the state utilities lobbied for the legislation to be passed, despite the lack of significant independent transmission development underway in those states.

“No independent transmission is going on in the state,” Chris Nelson, chairman of the South Dakota PUC, said. “There’s always talk of some kind of Green Power Express line going from the west to the east, but nothing concrete has been in the works.”

Asked why a ROFR needed to be passed in a state in which no independent transmission development is taking place, Nelson said, “We thought it best to give the local utilities that provide great service in the state the first opportunity to do that development.”

The chairman added that South Dakota’s ROFR includes statutory language giving firm deadlines for local utilities to move forward on a project.

“We wanted to make sure the local utilities couldn’t just sit on a project; if they exercised their option, they had to move forward with it,” Nelson said.

In Minnesota, another driver for passing the legislation was protecting consumers from non-incumbent developers that would apply for incentive rate treatment under Order 679, potentially making their projects more expensive than projects incumbents would execute without incentive rate treatment.

“If we have incumbent utilities that are building projects based on a state-level authorized rate of return, we didn’t feel the need to impose those higher costs of FERC-ordered rates of return on customers,” the Department of Commerce said.

The Department of Commerce added that passing the ROFR law was not emblematic of tension between state and federal authority.

“From our perspective, this wasn’t so much about resisting federal authority or a perceived attempt to diminish state authority; this was more about recognizing where we were in terms of transmission build-out and costs that are imposed on consumers,” the Department of Commerce said. “We certainly would not stand in the way of more competitive markets if the existing market wasn’t delivering the new transmission we need.”

ROFRs support regulatory compact

The utilities involved in the CapX2020 project made a “strong effort” to assemble a draft bill, develop the proposal and arguments and lobby legislators, Rick Evans, director of regional government affairs for Xcel Energy, said.

“Right of first refusal legislation adopted unanimously by the Minnesota legislature, and strongly supported by this administration, is an important tool that will help protect consumers from burdensome costs, help maintain a competitive marketplace, and continue our state’s forward progress toward achieving a transmission system that meets the needs of Minnesota’s new energy economy,” Mike Rothman, commissioner for the Department of Commerce, said in a statement supplied to TransmissionHub.

Xcel Energy lobbied for the ROFRs on the grounds that if a utility is required by the state to serve and provide safe and reliable electricity to customers, then it should not have to compete with an entity that does not also have to meet that requirement.

“If we’re going to be a regulated utility with an obligation to serve our customers in our service territory and be subject to the regulatory scheme that we are subject to in the state, it contemplates an integrated system of transmission, generation and distribution,” Evans said. “To take a piece of that, like a transmission line, and say, ‘You’re still responsible to the state of Minnesota under the law to make sure that line is being built, to make sure that line is working, but you are no longer permitted to exercise the right to build, design, operate it yourself,’ you’ve started to separate the operation and control of the system from the state regulation that is part of the whole regulatory compact.”

Opposing the utilities’ lobbying efforts were independent transmission developers American Transmission Company (ATC) and LS Power Group, according to Priti and Evans. ITC Holdings (NYSE:ITC), the largest U.S. independent transmission company, supported the bill.

“We have long supported the concept of a time-limited right-of-first refusal, which we believe recognizes the important and complex roles that the incumbent utility has with respect to planning, maintaining and operating the system,” ITC spokesperson Bob Doetsch said in a statement supplied to TransmissionHub. “ITC does not believe that the existence of a ROFR in and of itself has been a major impediment to the development of transmission infrastructure in this country.”

RTOs work on ROFR compliance

MISO is in the midst of honing its ROFR compliance with Order 1000, but does not see the state ROFRs necessarily complicating that compliance.

“The order seems to be pretty clear that these requirements don’t impact any state laws or regulations, so from our perspective … it answers that question of who’s going to be the developer,” Jesse Moser, manager of strategic infrastructure study for MISO, told TransmissionHub. “So, for example, if we had a project in a state that has one of these laws, it would basically go to the incumbent because we cannot change those state laws that are on the books.”

If an approved project straddles two states, one that has a ROFR and one that doesn’t, the portion of the line in the state with the ROFR would by default go to the incumbent, despite a potential partial ownership scenario, Moser said.

MISO has been involved in two contentious ownership disputes between incumbents and nonincumbents, in which the nonincumbents have argued that the incumbents’ claims to the lines is unjust and unreasonable under FERC’s ROFR removal requirement in Order 1000. Though FERC ultimately ruled in favor of the incumbents, the commission noted that the ROFR language in MISO’s tariff was unjust and unreasonable. 

One of the nonincumbents, ATC, plans to file for rehearing in the order. 

The Southwest Power Pool (SPP) has argued that the ROFR should be kept in place under three specific situations.

Order 1000 was issued in July 2011, and Order 1000-A, FERC’s order on rehearing, was issued May 17.

Regional compliance filings are due Oct. 11, and interregional compliance filings are due April 11, 2013.

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.