Appeals court upholds FERC ruling on ‘rights of first refusal’ for building transmission

The U.S. Court of Appeals for the District of Columbia Circuit has upheld a FERC ruling that went against Oklahoma Gas and Electric (OG&E) and other petitioners.

The decision by a three-judge panel of the D.C. Circuit was issued July 1 after being argued May 4. In a nutshell, the appeals court said that FERC had not erred in finding that changes sought by OG&E and other petitioners could potentially harm the interest of non-incumbent developers of electric transmission infrastructure.

“As the Commission in its expert judgment already determined, the rights of first refusal created “a pre-existing barrier to entry” for non-incumbent transmission owners,” the appeals court said in the 11-page decision written by Circuit Judge Robert Wilkins.

“Rather than promote competition, FERC found they created disincentives for non-incumbents to identify and commit resources to cost-effective solutions to transmission needs,” the D.C. Circuit said.

“The Seventh Circuit has gone so far as to describe such self-protective and anti-competitive agreements as cartel-like,” the D.C. Circuit said.

“While Petitioners decline to acknowledge any anti-competitive intent behind Section 3.3, we accept the Commission’s determination that the provision restricts competition,” the D.C. Circuit held.

OG&E and the other petitioners – including Southwestern Public Service, ITC Great Plains, Xcel Energy Services among others – are members of the Southwest Power Pool (SPP) which provides transmission service to approximately six million households across portions of eight states.

The current dispute arose over OG&E’s position that the FERC policy on rights of first refusal should not apply to a certain section of the membership agreement when the utility joined SPP, which is a Regional Transmission Organization (RTO).

OG&E argued that FERC had erred in its case.

Court said FERC did not err on anti-competitive safeguard

“We hold that the Commission painted with a broader brush than necessary in applying potentially applicable Supreme Court precedent, but we deny the petition nonetheless because nothing in the Mobile-Sierra doctrine requires its extension to the anti-competitive rights of first refusal at issue here,” the appeals court said.

Although public utilities previously were vertically integrated – meaning they generated, transmitted, as well as distributed electricity – FERC in the past two decades has undertaken a number of structural reforms to unbundle the wholesale sale of power from its transmission, and to require utilities to provide open access to transmission lines in a nondiscriminatory fashion.

Yet another reform was FERC Order 1000, which required the removal from utilities’ tariffs and agreements of federal rights of first refusal to construct transmission facilities in the regional transmission plan, the D.C. Circuit said.

Until recently, incumbent public utilities were free to include in their tariffs and agreements “the option to construct any new transmission facilities in their particular service areas, even if the proposal for new construction came from a third party,” the court said.

But in practice, FERC has said that rights of first refusal have downsides, the court said.

“Fearful of deterring non-incumbents from proposing much-needed infrastructure reforms, discouraging competition within the industry, and potentially driving up the cost of rates charged for wholesale electricity service, the Commission ordered utilities to remove rights of first refusal from their existing tariffs and agreements,” the court said.

In a prior ruling on a case in South Carolina, FERC “had reserved judgment on whether to apply this presumption to the rights of first refusal until evaluating the individual utilities’ compliance filings, and therefore so did we,” the appeals court said.

OG&E, as well as several intervenors, “now petition for review from FERC’s determination at the compliance stage,” the appeals court said.

Tariffs are the mechanism where regulated utilities set their rates and terms of services. In contrast, rates and terms can also be set by agreement with individual electricity purchasers, through bilateral contracts. Both tariffs and contracts are typically filed with FERC before they go into effect.

At issue in the current case is a portion of the membership agreement that petitioners executed with SPP.

The petitioners’ refusal rights were contained in Section 3.3 of their agreement. In its filing to comply with the order, SPP proposed to FERC the necessary deletions to Section 3.3, but simultaneously argued that FERC should not implement the revisions because the agreement is protected by something called the Mobile-Sierra doctrine, the court said.

“The Commission thought otherwise,” the appeals court noted. FERC also said that the right-of-first refusal presumption much be viewed in distinguished between individualized rates, terms, and conditions negotiated freely at arm’s length, and generally applicable, so-called “tariff” provisions that do not arise from such negotiations.

The Supreme Court has held that when evaluating if a contract is “just and reasonable” the sole concern of FERC should be “whether the rate is so low as to adversely affect the public interest – as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory,” the appeals court said.

“More importantly, this precedent reflects that no matter the contract provision at issue, even if the Mobile-Sierra doctrine might apply to it generally, FERC did not err in determining that the doctrine does not extend to anti-competitive measures that were not arrived at through arms-length bargaining,” the appeals court said.

“In other words, the term must be the product of adversarial negotiations between sophisticated parties pursuing independent interests,” the appeals court said.

Oklahoma Gas and Electric v. FERC is case No. 14-1281.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.