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Developer challenges Minn. right of first refusal law

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Developer challenges Minn. right of first refusal law

Transmission developer LSP Transmission Holdings LLC has filed a lawsuit in federal district court challenging a Minnesota's statute that grants in-state utilities the right of first refusal to build needed new transmission projects. Passed in 2012 in response to the Federal Energy Regulatory Commission's Order 1000, the Minnesota law grants incumbent utilities "the right to construct, own, and maintain an electric transmission line that has been approved for construction" by FERC's transmission planning process.

Issued in 2011, Order 1000 banned the employment of right of first refusal, or ROFR, in commission-approved tariffs and agreements because it could be anti-competitive. Challenged in court multiple times, the order has been upheld by rulings from several federal courts including the U.S. Court of Appeals for the District of Columbia Circuit in 2014.

In its filing, LSP Transmission, a unit of LS Power Group, argues that "the law has no legitimate, non-protectionist purpose and asks the court to declare the law unconstitutional because it violates the dormant Commerce Clause," according to a statement from the State Power Project, a program based at Harvard Law School's Environmental Policy Initiative.

State protections

The commission enacted Order 1000 to ensure that rates for transmission service are just and reasonable, said Ari Peskoe, a senior fellow in electricity law at Harvard.

"ROFR laws inhibit competition to construct new transmission lines," Peskoe added. "They may not prevent new lines from being constructed, but may make those lines more expensive."

Several states, including Minnesota, North Dakota, South Dakota and Oklahoma, have enacted laws protecting ROFR for incumbent utilities. According to a 2013 analysis from the National Regulatory Research Institute, each of those laws, "though written with the intent to protect local reliability and preserve local affordability, appears to be facially discriminatory."

LSP Transmission is challenging Minnesota's ROFR law under a legal doctrine known as the "dormant Commerce Clause." Inferred by courts from the Interstate Commerce Clause of the U.S. Constitution, the dormant Commerce Clause holds that even when no federal law specifically regulates an interstate commerce activity, states cannot discriminate or unduly burden that activity. It effectively bars states from impeding interstate commerce.

According to LSP's complaint, Minnesota legislators granted the ROFR "to protect its incumbent utilities from being required to compete with out-of-state-developers." The lawsuit comes at a time when private transmission developers are facing various financial and regulatory hurdles to getting large interstate transmission projects built.

'Underwhelming' opportunities for competition

In April, the D.C. Circuit upheld Order 1000 in a case involving ISO New England. Denying two petitions for review of FERC's order allowing the regional transmission organization to remove incumbent utilities' ROFR on new transmission facilities in their service areas, the court dismissed transmission owners' claims that the order contradicted earlier FERC rulings and was based on faulty evidence.

In a separate case, LSP challenged FERC's application of Order 1000 in the Midcontinent ISO. Specifically, FERC allowed transmission owners the first right to build baseline reliability projects whose costs are allocated to that company's territory alone, rather than across the wider region. In a strongly worded response in April 2016, the U.S. Court of Appeals for the Seventh Circuit shot down that challenge along with a petition filed by MISO transmission owners to preserve rights of first refusal in some cases. “The [transmission] owners have made no effort to show that the right [of first refusal] is in the public interest," Judge Richard Posner wrote in the decision.

During a panel at the Platts Transmission Planning and Development Conference in Arlington, Va., in June, Sharon Segner, a vice president at LS Power Development LLC, also a part of LS Power Group, said "carve-outs" to Order 1000 continue to exempt many projects from being opened to competition. Six years after Order 1000 ostensibly opened doors for most qualified developers to participate, competitive windows for developers to bid are still lacking, Segner said.

The opportunities for valid competition for interregional transmission projects have been "underwhelming," Duke-American Transmission Co. Executive Vice President George Dawe said at the same conference. Duke-American Transmission is a partnership of Duke Energy Corp. and American Transmission Co. LLC.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.