ROFR
Subscribe to ROFR's Posts

Transmission Planning and Construction Right of First Refusal Ruled Unduly Discriminatory, Not Mobile-Sierra Protected

The provision contained in incumbent electric utility tariffs—conferring on the holder the right of first refusal (ROFR) to construct additions to the high-voltage electrical grid, regardless of who conceived of and proposed the addition—is unduly discriminatory, the U.S. Circuit Court of Appeals for the D.C. Circuit held in a July 1 decision in Oklahoma Gas & Electric Co. v. FERC, No. 14-1281.   The court’s decision upheld utility-specific applications of the FERC mandate—a central open-access innovation of the agency’s Order No. 1000 (Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities)—that directed independent system operators and regional transmission organizations (ISO/RTO) to remove from their existing tariffs and membership agreements the ROFR provision (Removal Mandate).

Earlier in South Carolina Public Service Authority v. FERC, 762 F.3d 41 (D.C. Cir. 2014), the same court generally had upheld the Removal Mandate as applied to ISO/RTOs but had reserved judgment on whether the 60-year-old Mobile-Sierra presumption that the rates in negotiated arm’s length natural gas and power sales agreements are just and reasonable applied to the ROFR provisions of the ISO/RTO tariffs and membership agreements.  In Sierra, the Supreme Court of the United States held that the presumption applies against not only the parties to a negotiated agreement but against FERC itself; thus, if it were found to apply to the ROFR, FERC could overcome the presumption only by showing that the ROFR seriously harmed the public interest.

The court could have resolved ISO/RTO and incumbent utilities’ challenges to the Removal Mandate in either of two ways.  First, it could have determined that the context in which the ROFR provision was included in the tariffs and membership agreements prevented the presumption from applying in the first instance because of infirmities or unfair dealings in contract formation, such as fraud or duress.   Second, it could determine that the presumption did apply and then address the question of whether FERC had overcome the presumption with evidence that the ROFR in member agreements seriously harmed the public interest.  The court took the former course.  It ruled that the Mobile-Sierra presumption never applied in the first instance because (quoting Order No. 1000 and citing South Carolina), the ROFR “created ‘a pre-existing [i.e., not negotiated] barrier to entry’ for nonincumbent transmission owners.”  Citing precedent from the Seventh Circuit, the court found that “such terms” as the ROFR are “self-protective and anti-competitive [and] cartel-like.”

By cabining its holding to the anticompetitive effects of the ROFR, the court was able to bypass two other and possibly more complicated issues.  First, it bypassed the issue of whether the Mobile-Sierra presumption applies not only to the rates in regulated natural gas and power sales agreements, but also to agreement terms that affect rates.  As the court noted, both the petitioners and FERC argued the case based “on the premise” that the presumption applies to both to rates and agreements terms that affect rates.  Second and possibly more nettlesome is whether the Mobile-Sierra presumption would protect other provisions of ISO/RTO tariffs even [...]

Continue Reading




FERC Defers to Exclusionary State and Local Laws in Transmission Planning

In three separate rehearing orders issued last Thursday, May 15, 2014, the Federal Energy Regulatory Commission reversed course on its decision in Order No. 1000 to prohibit references in transmission tariffs to state laws such as rights of first refusal (ROFR) to build transmission expansions.  The Commission determined on further consideration that excluding such state and local laws from transmission tariffs could lead to inefficiencies and delays in the regional transmission planning process because regions would have to spend time and resources evaluating potential transmission developers that would ultimately be prohibited by state or local law from developing a transmission project.  Commissioner Norris issued a statement opposing the Commission’s orders on the basis that they will exclude non-incumbents from participating in the regional transmission planning process, choking innovation and insulating incumbents from competition.

Order No. 1000 requires public utilities to participate in regional transmission planning and cost allocation planning for new transmission facilities.  In order to allow competitive bidding of projects and developers, Order No. 1000 requires public utility transmission providers to remove provisions in Commission-jurisdictional tariffs that establish a federal ROFR for an incumbent transmission provider with respect to building transmission facilities selected in a regional transmission plan.  Order No. 1000-A stated that it was not “intended to preempt or otherwise conflict with state authority over sitting, permitting, and construction of transmission facilities.”  However, the order also stated that it “would be an impermissible barrier to entry to require, as part of the qualification criteria, that a transmission developer demonstrate that it either has, or can obtain, state approvals necessary . . . to be eligible to propose a transmission facility.”

On rehearing of compliance orders for the PJM Interconnection, Midcontinent Independent System Operator and South Carolina Electric & Gas Company, the Commission held that while it will continue to require the elimination of federal ROFRs, regional operators and utilities could recognize exclusionary state and local laws and regulations as a threshold issue in the regional transmission planning process.  Specifically, the rehearing orders provided that tariffs could include state and local laws, giving incumbent utilities ROFRs and provisions excluding projects that alter the transmission providers’ use or control of rights-of-way.  The Commission reasoned that ignoring these state or local laws or regulations at the outset of the regional transmission planning process would be counterproductive and inefficient, and could delay needed transmission facilities.  In a dissenting statement, Commissioner Norris argued that this approach was irreconcilable with Order No. 1000 and condemns consumers to bear the burden of incumbents’ lack of innovation in developing transmission solutions and interest in preserving the status quo.




STAY CONNECTED

TOPICS

ARCHIVES