Transmission owners in the Midcontinent ISO (MISO) should not have a right of first refusal (ROFR) to build large projects, and FERC reasonably determined when the ROFR should apply for smaller projects, a federal appeals court ruled April 6.
The decision, ruling on three separate cases brought before the U.S. Court of Appeals for the Seventh Circuit, upheld the ROFR elements of FERC’s Order 1000 that were challenged by two different types of transmission owners.
One case involved utility transmission owners in MISO, who argued unsuccessfully that they should retain the ROFR that FERC eliminated in Order 1000, and the other two cases involved LSP Transmission Holdings LLC (LSP), affiliated with competitive transmission developer LS Power. Looking to compete with utilities to build baseline reliability projects, LSP asserted that FERC’s decision to allow the ROFR for local reliability projects violated the principles of competition embedded in Order 1000, the court noted.
In Order 1000, FERC eliminated the ROFR for large projects where costs would be spread out among all members in a regional transmission organization (RTO), but allowed utilities to retain the ROFR for smaller projects to improve reliability, the court noted.
While legal challenges to FERC eliminating the ROFR were filed with a different court, MISO transmission owners petitioned the Seventh Circuit, based in Chicago, to protect their ROFR, according to the decision.
But the transmission owners did not convince the court that allowing them to have the ROFR is in the public interest – apart from when it is deemed necessary by state law, which FERC acknowledged in Order 1000 by not treading on state authority to address the issue. “Neither in their briefs nor at oral argument were they able to articulate any benefit” that having an ROFR for large projects in MISO would confer on consumers or on society as a whole, the court said.
Although the ROFR that the transmission owners sought to protect originated in a contract based on negotiations among the companies that joined MISO and was thus a right created by contract, “contract rights are not sacred, especially when they curtail competition,” the court said.
FERC’s Order 1000 brought competition to the development and construction of large projects by eliminating the ROFR, yet the MISO transmission owners asserted that the ROFR was not intended to curtail competition but to recognize that competition in transmission development was not contemplated and the purpose was to simply allow MISO to require transmission owners to build needed facilities in their service territories, the court said.
“But that makes no sense,” Circuit Judge Richard Posner wrote for the three-judge panel. “Had there been no intention or expectation of competition, there would have been no need for a right of first refusal,” the order said.
In response to competitive firms that filed briefs supporting the elimination of the ROFR, MISO countered that the parties that established it in the 1998 contract were “sophisticated,” the court noted.
“No doubt—sophisticated enough to understand the benefits of a contract that would give each party protection against competition in the creation of new facilities. Their sophistication could be counted on to lead them to protect their own interests, not those of potential new entrants,” the court said.
The decision referred to FERC’s March 22, 2013, order on compliance filings in the case, when the commission said that the negotiations that led to the ROFR provisions in the original contact were among parties aiming to protect themselves from competition in transmission development.
Because such contracts are not protected under legal precedent, FERC’s abrogation of the ROFR in the MISO transmission owners contract was lawful, the court concluded.
In the other cases discussed in the ruling, the court backed FERC’s decisions that allowed MISO utilities to retain the ROFR for smaller reliability projects where the costs are not spread out among other utilities.
LSP argued that by classifying baseline reliability projects as “local,” FERC has exempted a large group of transmission projects from regional cost sharing and competition, the court related. LSP also challenged FERC’s deference to states that want to impose an ROFR through legislation, and the classification of separate Entergy Corp. (NYSE:ETR) utilities as individual utilities even though the corporate parent operates in multiple states, the court noted. That last element was challenged because LSP asserted that Entergy transmission projects should be treated as regional facilities subject to competition instead of “local” projects within an individual Entergy utility territory.
FERC’s justification for retaining the ROFR – a quick resolution of reliability problems compared with the lengthy process of competitive transmission development – was deemed reasonable by the court. “Delays will be inevitable if companies outside the service area are permitted to bid for the project, since competitive bidding takes time and may get bogged down in litigation,” the court said.
LSP admitted that projects within a utility’s service territory should not be selected for regional cost allocation, but it objected to having a utility retain an ROFR when a baseline reliability project spans two or more pricing zones within MISO, asserting that such a project should be considered a regional project without an ROFR.
But a transmission line is not regional for purposes of cost allocation if the costs and benefits are allocated to the pricing zone in which it is located, the court said. It agreed with FERC’s reasoning that any spillover of benefits to other zones would be modest enough to make the local allocation of costs “roughly commensurate” with the allocation of benefits.
In Order 1000, FERC sought to avoid intruding on state authority on siting transmission lines, so the ROFR elimination does not apply if states enact laws to grant utilities such rights, the decision related. “That was a proper goal even though LSP has cited state laws that might interfere with regional transmission development,” the court said, pointing to a law in Minnesota that gives an incumbent utility the right to build facilities approved by a federally registered planning authority that connect with the incumbent utility.
Rejecting LSP’s challenge, the court said it would be a waste of time for MISO to conduct a competitive bidding and evaluation process in such states when the incumbent utility has an ROFR as a result of state laws.
Lastly, the court supported FERC’s determination that the Entergy region should be treated as a single “local” area even though the separate Entergy utilities operate in Texas, Arkansas, Louisiana and Mississippi. The term “local” is a relative term, and it need not retain its usual understanding when used to designate the service area of a large transmission entity, the court said.
“New York City is a huge city yet as a matter of scale is ‘local’ relative to New York State, or to the Northeast,” the court said.
Entergy’s service territories can be deemed “local” because the different utilities actually operate as one and have done so for more than 50 years, the decision concluded.