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April 27, 2015

New FERC Chair Takes Aim At State Protections For Incumbent Transmission Owners

In Order No. 1000,[1] FERC adopted sweeping changes to its rules governing transmission planning and cost allocation. One of the most hotly contested reforms was FERC’s proposal to eliminate the utilities’ so-called “right of first-refusal”, i.e., the utilities’ priority right to build and own certain new transmission facilities in their service territories deemed needed by regional transmission plans. In rejecting the utilities’ objections, FERC held that allowing non-incumbents an even opportunity to compete for the opportunity to develop those facilities was necessary to promote efficient transmission development.

In ordering this change, FERC was careful to acknowledge that states exercise substantial control over transmission construction.  FERC made clear that it was only directing transmission providers to remove first-refusal rights arising under federal law from their tariffs, and that it did not intend to override any such rights arising under state and local law or regulation. Order No. 1000 at P 287.

On April 16, 2015, just one day after he assumed the chairmanship of the agency, Commissioner Bay took the opportunity provided by a rehearing order in an Order No. 1000 compliance proceeding to issue a separate statement warning that state laws that protect or favor in-state transmission providers at the expense of out-of-state competitors may violate the dormant commerce clause of the US Constitution. While he noted that the existence of such a violation was a matter for a federal or state court to determine, his statement offers a glimpse of possible FERC priorities under his leadership.

Chairman Bay’s concurrence came in Southwest Power Pool, Inc. (“SPP”)151 FERC ¶61,045 (2015). LS Power Transmission, LLC and LSP Transmission Holdings, LLC (together “LS Power”), who also actively advocated in the Order No. 1000 proceedings for more competitive transmission development opportunities,[2] sought rehearing of a Commission decision allowing SPP to recognize state and local laws and regulations when deciding whether to hold a competitive solicitation for a transmission facility selected in the regional transmission plan for purposes of cost allocation. LS Power argued that the Commission should prohibit SPP from using state or local laws or regulations to categorically exclude transmission projects from competitive solicitation for those transmission projects. SPP, 151 FERC ¶61,045 at P 13.

LS Power contended that there was a difference between including references to state or local law in transmission tariffs, which Order No. 1000 allowed, and SPP’s proposed provision, that “categorically excludes transmission projects from competitive solicitation based on SPP’s determination that state or local law would mandate a specific outcome or prohibit a non-incumbent transmission developer from developing the transmission project.” Id. at P 15. LS Power asserted that there were practical problems with SPP attempting to interpret state law, particularly where SPP had as yet not specified how it would go about doing so; and that allowing SPP to exclude transmission projects from competitive solicitations based on state and local laws or regulations “would abdicate the Commission’s responsibility [to ensure justness and reasonableness of rates, terms and conditions of service] to state or local authorities.” Id. at P 14.

LS Power also argued that the Commission’s approach encouraged anti­competitive state or local legislation intended to undermine Order No. 1000 (Id. at P 17). It pointed out that Nebraska and Oklahoma, states identified by SPP as providing a right of first refusal to incumbent utilities, had passed their laws providing those rights after Order No. 1000 was  promulgated, evidently in a direct attempt to circumvent FERC’s authority to determine which transmission projects are eligible for regional cost allocation. Id. at P 16.

LS Power acknowledged that the Commission based its decision in part on concerns over inefficiencies and delays that could arise in the absence of provisions referencing state and local laws and regulations (e.g., a project might be awarded to a non-incumbent transmission developer, only to be tied up in litigation over whether the incumbent provider enjoyed priority development rights under state law). However, in LS Power’s view, the Commission failed to balance those concerns against the harm from categorically excluding certain projects from competing to meet regional transmission needs. Id. at P 18.

Finally, LS Power argued that “alternatives exist to a categorical exclusion that would still result in a competitive determination, but would also account for assertions of state or local law in the evaluation process.” Id. at P 18.

The Commission denied rehearing, finding several flaws in LS Power’s arguments. The Commission disagreed with LS Power’s reading of SPP’s tariff language, holding that the tariff effectively did no more than acknowledge the potential applicability of state and federal law, as permitted by Order No. 1000. Id. at PP 29, 32-33. It stated that in arguing that SPP was prohibited from recognizing state or local laws when deciding whether to hold a competitive solicitation for a transmission facility, LS Power itself was “seek[ing] to expand the reach of Order No. 1000’s reforms…” Id. at P 33. Far from abdicating its authority, FERC stated, the Commission was simply acknowledging the potential applicability of state and local laws and regulations, which would exist regardless of whether FERC allowed transmission providers to refer to them in their tariffs. Id. at P 34.

With respect to LS Power’s argument that it did not properly balance the harm from diminished competition against concerns about delays and inefficiencies if SPP omitted references to state and local law in its tariff, FERC held that the basis for allowing SPP to include those references was not because of those delays and inefficiencies, but rather because including those references was fully consistent with Order No. 1000. In FERC’s view, allowing those references was in effect a non-issue, since some state and local laws and regulations would come into play regardless of whether they were mentioned in the tariff. Id at P 30.

FERC also made short shrift of LS Power’s objections to making SPP responsible for interpreting state and local laws, stating that it expected states to “provide input regarding their state or local laws or regulations,” and anticipated that “SPP will work closely with the states throughout the transmission planning process and that SPP’s procedures will provide transparency regarding any state or local laws or regulations it uses in its decision-making process.” Id. at P 35.

In addition to its attack on the tariff language addressing state and local laws and regulations relating to a right of first refusal, LS Power sought rehearing of FERC’s determination that SPP’s Integrated Transmission Planning process leads to the selection of more cost-effective transmission solutions, as required by Order No. 1000. Id at P 44. Under the process in question, SPP stakeholders first made a recommendation to the SPP Board as to the nature of the transmission project that would best meet the identified transmission system need. Only after the SPP Board accepted that recommendation would SPP solicit competitive bids to develop the project. In evaluating bids, SPP used a point scoring system under which project cost was one of five evaluation criteria. Out of a total possible score of 1000 points, project cost could account for up to 225 points, with the other criteria accounting for the remaining 775 points. Id. at PP 39-40 & fn. 76.

LS Power argued that selection in the initial stakeholder process did not result from an evaluation of the relative efficiency and cost-effectiveness of any proposed solution; that it was inconsistent with Order No. 1000 and the opinion of the court of appeals affirming that order to determine relative efficiency and cost-effectiveness of a proposed solution before evaluating developers’ bids in the competitive solicitation; that SPP failed to show that reliance on factors other than those referring specifically to project costs would allow SPP to select the appropriate developer; and that the FPA does not permit selection of projects based on consideration of factors that do not directly affect costs. Id. at PP 44-48. It also claimed that SPP’s process was not meaningfully different than it had been before Order No. 1000 was implemented. Id. at P 46.

The Commission also denied LS Power’s request for rehearing on this issue, holding that SPP’s process satisfied Order No. 1000’s requirements. According to the Commission, SPP’s process did not make the RFP to select the project developer irrelevant to the determination of the most efficient and cost-effective transmission solution irrelevant, since SPP was required to consider those criteria in evaluating competing bids. The Commission said that LS Power misinterpreted Order No. 1000 as requiring that majority weight be accorded to cost-based factors in awarding projects and that, as such, LS Power’s argument amounted to an impermissible collateral attack on Order No. 1000. The fact that the SPP’s process may not be significantly different from what it had been prior to Order No. 1000 was also irrelevant, as Order No. 1000 itself contemplated that pre-existing transmission planning processes might already satisfy many of its requirements. Id. at PP 49-52.

As noted, Chairman Bay issued an opinion concurring in the Commission’s order denying rehearing. He began by quoting the statement in Order No. 1000 that “federal rights of first refusal in favor of incumbent transmission providers deprive customers of the benefits of competition in transmission development, and associated potential savings.” Concurrence at p. 1, quoting from Order No. 1000, supra, at P 285. “The Commission noted, however, that Order No. 1000 was not ‘intended to limit, preempt, or otherwise affect state or local laws or regulations with respect to construction of transmission facilities.’” Id., quoting from Order No. 1000 at P 287.

While he concurred in the results of the SPP Order, which he characterized as affirming that Order No. 1000 does not compel the removal of tariff provisions that permit the recognition of state laws and regulations that grant a right of first refusal with respect to construction of transmission facilities or the use of existing rights of way, he wrote “to note that the Constitution limits the ability of the states to erect barriers to interstate commerce. State laws that discriminate against interstate commerce—that protect or favor in-state enterprise at the expense of out-of-state competition—may run afoul of the dormant commerce clause.” Id. (footnotes omitted).  “The Commission’s order today,” he continued, “does not determine the constitutionality of any particular state right-of-first refusal law. That determinatinon, if it is made, lies with a different forum, whether state or federal court.” Id. at pp. 1-2.

This concurrence is essentially identical to another  issued by then-Commissioner Bay in PJM Interconnection, L.L.C., 150 FERC ¶ 61,038 (January 22, 2015). Chairman Bay’s action in issuing these separate concurrences suggests that he is more sensitive than his fellow commissioners to the potential for regulated entities to attempt to use their local political clout to undermine FERC’s pro-competition policies. That should not be surprising, given his background as FERC Director of Enforcement. In that role, he would have been immersed in identifying and overcoming schemes of entities seeking to circumvent the reach of agency regulation. It is also consistent with the notion that his enforcement background is likely to shape his policies as Commission Chair.

The concurrences are significant in another respect as well. Recent years have seen an upsurge in disputes concerning the intersection of federal and state policies affecting electricity markets, with the recent litigation over FERC’s authority to regulate participation of demand-response in wholesale electricity markets being only the latest example.[3] Chairman Bay’s action in calling attention to the unconstitutionality of state action that compromises federal competition policy suggests that he may not shy away from those controversies.

[1] Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Order No. 1000, FERC Stats. & Regs. ¶ 31,323 (2011), order on reh’g, Order No. 1000-A, 139 FERC ¶ 61,132, order on reh’g and clarification, Order No. 1000-B, 141 FERC ¶ 61,044 (2012), aff’d sub nom. S.C. Pub. Serv. Auth. v. FERC, 762 F.3d 41 (D.C. Cir. 2014).

[2] See, e.g., Order No. 1000 at P 272 (“LS Power argues that the Commission has a duty to stamp out all forms of discrimination in the form of a right of first refusal, whether written in the OATT or other agreement, or simply as part of a long-standing bias arising from a closed planning process”).

[3] Electric Power Supply Ass’n v. FERC, 753 F.3rd 216 (D.C. Cir. 2014), petition for cert. pending.


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