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Appeals court upholds FERC's elimination of MISO owners' contractual ROFR

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Appeals court upholds FERC's elimination of MISO owners' contractual ROFR

Afederal appeals court April 6 rejected challenges by transmission owners in theMidcontinent Independent SystemOperator Inc. to FERC's directive that they give up theircontractual right to build new regional transmission projects, and atransmission developer's challenge to FERC's decision to allow MISO to considerfactors other than cost when selecting a project builder.

Althoughthe MISO transmission owners' right of first refusal to build new transmission projects"originated as a contract right based on arms'-length negotiations amongthe companies that joined MISO and was thus a right created by contract,contract rights are not sacred, especially when they curtail competition,"reasoned Judge Richard Posner, who penned the court's .

Inits landmark transmission planning and pricing rule, Order 1000, FERC orderedjurisdictional utilities to remove from their FERC-approved tariffs andagreements any provisions granting them the right of first refusal, or ROFR, tobuild new transmission projects selected in MISO's regional planning processand eligible for regionwide cost allocation, with certain limited exceptions.The change therefore required transmission owners to compete with otherwould-be developers to build regional projects, which FERC predicted wouldresult in lower rates to consumers of electricity.

TheU.S. Court of Appeals for the District of Columbia Circuit in August 2014upheld Order 1000 andits ROFR directive, finding that the agency adequately justified thatrequirement.

TheMISO transmission owners' attack on the provision in the U.S. Court of Appealsfor the 7th Circuit differed in that they claimed FERC must presume that theRTO's contract with them containing a ROFR is reasonable and thereforeprotected. They further argued that their ROFR was not intended to curtailcompetition but rather to recognize that "competition in transmissiondevelopment was not contemplated," and its purpose was simply to allowMISO to require transmission owners to build needed facilities in their serviceareas.

In asharply worded opinion, the 7th Circuit was having none of it. Noting that"no one likes to be competed against," Posner said that thetransmission owners made no effort to show that maintaining their ROFR is inthe public interest. "Neither in their briefs nor at oral argument werethey able to articulate any benefit that such a right would (with limited exceptions)… confer on consumers of electricity or on society as a whole under currentconditions," Posner recalled.

Moreover,the judge noted that while the transmission owners said they never would havejoined MISO without the ROFR, they did not say that MISO is likely to fallapart if that right was repealed. As for the transmission owners' argument thatthe purpose of the ROFR was to ensure that needed transmission facilities getbuilt, the judge said it "makes no sense."

"Amarket that can support only one firm because conditions of supply and demandleave room for no more … has no need for a right of first refusal," wrotethe judge. Moreover, Posner said any concern that the facilities identified byMISO as being needed will not get built without the ROFR is unfounded given thefirms now willing compete to build those new facilities.

"Notthat competition is an unmixed blessing. It can result in costly duplication,and in politicking aimed at courting favor with MISO or FERC or for that matterCongress. But if there are indeed good things to be said about the rights offirst refusal claimed by the petitioners, they are not said in any of thevoluminous filings in this case," Posner wrote.

Adifferent argument addressed by the court in the consolidate case centered on"baseline reliability projects," the sole purpose of which is toresolve reliability issues. FERC allows the transmission owners that MISO hasauthorized to build such projects in their respective service areas to retain aROFR because the costs of those projects are allocated to their consumersrather than across an entire region since their customers are the ones thatbenefit from the upgrades.

Developer's argument fails aswell

LSPTransmission Holdings, a transmission company affiliate of private developerLS Power Group thatwould like to compete with the incumbent transmission companies to buildbaseline reliability projects, argued that FERC's decision to allow this ROFRviolates Order 1000. The court struck this challenge down as well.

"FERC'sjustification for this departure from the order's emphasis on promotingcompetition is the benefit, which is surely very considerable, of a quickresolution of reliability problems. Delays will be inevitable if companiesoutside the service area are permitted to bid for the project, sincecompetitive bidding takes time and may get bogged down in litigation,"Posner reasoned.

Moreover,the court noted that the ROFR exception is limited to only those reliabilityprojects that confer largely local benefits.

LSPTransmission also challenged three obstacles to expanding its operations in theMISO region that the developer claimed were erected by FERC. The first is thecommission's approval of MISO's refusal to focus on estimates of the cost ofbuilding transmission facilities when deciding who gets to build thoseprojects. Instead, MISO considers a variety of factors, such as managementquality and the ability to complete the project within a reasonable time frame.

Thecourt struck down this challenge too, reasoning that the broader criteriaemployed by MISO with FERC's approval "relate directly to efficiency,cost-effectiveness, and reliability, all of which translate into lower ratesfor consumers. And there is no indication that any of MISO's criteria favorincumbent developers over nonincumbent ones who have demonstrated an equalability to execute a project effectively."

LSPTransmission also complained about FERC's decision to allow MISO to include inits tariff a provision that allows it to honor ROFRs created by state and locallaw because it did not want to intrude on the traditional role of the states inregulating the siting and construction of transmission facilities.

"Thatwas a proper goal even though LSP has cited state laws that might interferewith regional transmission development," the court said. And given thoserights, the court found that requiring MISO to conduct a protracted competitivebidding and evaluation process as suggested by LSP when the incumbent transmissioncompany has a ROFR conferred by state law "would be a waste of time."

Finally,LSP Transmission assailed FERC's decision to treat the combined retaildistribution service areas of Entergy Corp. as a single market for purposes ofdetermining whether proposed transmission projects in Entergy's market shouldbe considered local rather than regional, even though Entergy does business inArkansas, Louisiana, Mississippi and Texas, and does so through separate operatingcompanies in each state.

Thevast region covered by Entergy's multiple operating companies "hardlycomplies with the usual understanding of 'local,'" Posner noted. Yet healso noted that the term local "need not retain its usual understandingwhen used to designate the service area of a giant electrical transmissionentity."

Instead,the court stressed that the term local is a relative term, noting that New YorkCity is a huge city but as a matter of scale is "local" relative toNew York state, or to the Northeast.

"Entergy'sretail distribution service territories can be said to be 'local' for adifferent reason: the separate operating companies actually operate as one andhave so operated for more than fifty years," Posner concluded.

JudgesFrank Easterbrook and David Hamilton joined in the decision, MISO Transmission Owners v. FERC, et al.No. 14-2153, et al.