By Rich Heidorn Jr.

A federal appeals court Wednesday unanimously upheld FERC Order 1000’s right-of-first-refusal provisions, rejecting challenges from the MISO Transmission Owners and LSP Transmission Holdings.

The 7th Circuit Court of Appeals in Chicago ruled after consolidating a challenge by the transmission owners, who sought to preserve the ROFR in the MISO transmission agreement (14‐2153), with two by LSP that contended FERC did not go far enough in injecting competition into transmission development (14‐2533, 15‐1316).

MISO ROFR

The three-judge panel was especially critical of the TO’s challenge to Order 1000’s requirement that federal ROFRs be removed from FERC jurisdictional tariffs. Invoking the Mobile-Sierra doctrine, the TOs said FERC should presume that their contractual ROFR is reasonable.

“But why?” Judge Richard A. Posner asked in the opinion. “The owners have made no effort to show that the right is in the public interest. Neither in their briefs nor at oral argument were they able to articulate any benefit that such a right would (with limited exceptions …) confer on consumers of electricity or on society as a whole. … Contract rights are not sacred, especially when they curtail competition.”

The TOs contended that their ROFR was not intended to prevent competition but to give MISO power to require TOs to build needed facilities in their service territories. “But that makes no sense,” the court said. “Had there been no intention or expectation of competition, there would have been no need for a right of first refusal.”

Baseline Reliability Projects

In the second case, LSP asked the court to overturn FERC’s decision to allow a TO the right to build any baseline reliability projects whose costs are allocated to that company’s territory alone and not subject to regional cost allocation. FERC justified this exception on the grounds that requiring competition on such projects — which often require quick turnarounds — could lead to delays because of the time required to conduct bidding and the potential for litigation by losing bidders.

LSP said reliability projects covering more than one pricing zone should be considered regional and thus open for competition.

“But a transmission facility is not regional for purposes of cost allocation if all its costs are allocated to the pricing zone in which it is located,” the court said. “A right of first refusal would be problematic, therefore, only if the benefits of a baseline reliability project were largely or entirely realized in pricing zones other than the one in which the project was to be built.”

State ROFRs, Entergy

LSP raised a related complaint in the third suit, challenging FERC’s decision to treat the entire Entergy footprint — Texas, Arkansas, Louisiana and Mississippi — as a “local” area not subject to competition and regional cost allocation.

“The vast region covered by Entergy’s multiple operating companies hardly complies with the usual understanding of ‘local,’” the court acknowledged. “But ‘local’ need not retain its usual understanding when used to designate the service area of a giant electrical transmission entity. It is a relative term; New York City is a huge city yet as a matter of scale is ‘local’ relative to New York state, or to the Northeast. Entergy’s retail distribution service territories can be said to be ‘local’ for a different reason: the separate operating companies actually operate as one and have so operated for more than 50 years.”

LSP also challenged FERC’s approval of MISO rules implementing Order 1000, including its rules for evaluating competitive bids, which consider not only the project’s estimated cost but also its design and the quality of the bidder’s management.

The court rejected LSP’s desire to make cost the primary criteria for selection, saying, “There is no indication that any of MISO’s criteria favor incumbent developers over nonincumbent ones who have demonstrated an equal ability to execute a project effectively.”

The judges also upheld MISO’s acknowledgment of state ROFRs, over which FERC has no jurisdiction. LSP cited a Minnesota law that grants an incumbent TO the right to construct, own and maintain any lines that connect to the TO’s system.

“It would be a waste of time for MISO to conduct a protracted competitive bidding and evaluation process when the incumbent transmission company has a right of first refusal conferred by state law,” the court said.

The 7th Circuit’s ruling is the second to uphold Order 1000’s removal of federal ROFRs, following one by the D.C. Circuit Court of Appeals in August 2014 that consolidated more than a dozen cases. (See FERC Order 1000 Upheld.)

There are at least six pending cases involving compliance by PJM, Columbia Grid, ISO-NE, SPP and WestConnect in the D.C. Circuit and the 5th Circuit, according to FERC.