Recently, the United States Court of Appeals for the Seventh Circuit took up three cases involving competition in the utility industry. See MISO Transmission Owners, et al. v. FERC, No. 14-2153 (7th Cir. April 6, 2016). These cases and the opinion focused on the Federal Energy Regulatory Commission’s (“FERC”) ability to block right of first refusal, traditionally held by regional planning organizations.
First, some background. MISO is a regional electric transmission organization. It coordinates power transmission throughout U.S. and Canadian regions by monitoring and managing power supplies. And it checks competition by permitting companies to step into new territories. The case against a free market here was that traditionally, the right of first refusal helped prevent waste. That is, when one company was already suited to developing transmission in an area, the native company would have the right of first refusal on necessary projects. The ability to grant such rights was changed in 2011 with the FERC Order No. 1000. The Order required, by its terms, regional planning to identify and allocate costs and, importantly, removed the right of first refusal. This brings us to the three cases, here.
First Case—The Mobile-Sierra Doctrine
The first case challenged what deference FERC would give to MISO’s members’ agreement permitting the right of first refusal. Specifically, the challengers argued that under principles known as the “Mobile-Sierra doctrine,” FERC would not get involved where the utilities had contracted with each other.
The Seventh Circuit described the doctrine’s origins. Slip op. at 8–9; See also United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956); Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348 (1956). That doctrine arose out of cases in which utilities contracted for below reasonable prices. Seeking relief, the utilities sought to get out from under those rates. Ultimately, the Supreme Court reversed the Federal Power Commission’s intervention, noting that although the Commission could not force a utility to charge a less-than-fair-return rate, it was not required to step in when a utility had itself bargained for a less-than-fair-return rate, assuming that the public interests were not adversely affected (for example, by impairing the financial ability of the utility to continue, impose excessive burdens on other consumers, or be unduly discriminatory). Slip op. at 8 (citing Sierra, 350 U.S. 348, 355).
The challengers here relied on the doctrine—the presumption that utilities that had contracted with each other would be left to the contract unless it threatened the public interest—to support their argument that FERC had no business interfering in their bargained-for MISO Transmission Owners Agreement, which contained the right of first refusal. Put another way, they argued that FERC could not touch MISO’s agreement unless there were a threat against the public interest.
Judge Posner, writing for the court, however, distinguished the agreements at issue in Sierra, which were bargained-for competitive agreements, with the agreement here. with those here (noting that MISO’s is “a contract in which the parties are seeking to protect themselves from competition from third parties”).
Second Case—Local or Regional?
But even under the new Order No. 1000, there are ways in which a competitor can be stymied. This was demonstrated in the second case. Even after the Order, FERC has allowed some of MISO’s members to build certain types of projects under a right of first refusal. Specifically, these types of projects are called “baseline reliability projects.” These are projects with the sole purpose of solving reliability problems in electrical transmission and they are contrasted with multi-value projects, which are larger, have a more regional focus, and spread costs across regions. The reason the baseline reliability projects are allowed to maintain their rights of first refusal is that the costs to consumers are limited to the local service area. Accordingly, a limitation to this exception is that FERC is not allowed to exempt all reliability projects from cost sharing but it can exempt some as long as other types of transmission projects can be included in a regional plan for purposes of cost allocation.
The second case concerned that exemption, ultimately turning on the definition of local and regional. LSP, a transmission company wanting to compete for baseline reliability projects in a region, challenged FERC’s decision to allow right of first refusal for baseline reliability projects, arguing that this decision violates Order No. 1000.
The challenger, LSP, argued that by classifying baseline reliability projects as “local,” an entire type of transmission facility is exempted from regional cost sharing, and that when a project spans more than one pricing zone, it must be considered regional. But Judge Posner writes that if costs are allocated to the pricing zone in which the facility is located, the project is not regional. And even where there is some spillover of benefits to other zones, the exemption was still acceptable because the local allocation of costs is equal to the allocation of benefits, considering any spillover of benefits to other zones is minimal. Slip op. at 11.
Third Case—Obstacles to Expansion?
The third case was also brought by LSP, challenging three obstacles made by FERC relating to expanding its operations in the MISO region. Again, in short, LSP wanted to compete in the MISO region. The court addressed the three challenges and rejected them in turn.
The first obstacle, argued LSP, was MISO’s refusal to base its authorization decisions on estimates of cost of building. FERC gave MISO its consent to do this. The court was not persuaded by LSP’s arguments against this, noting that there is no indication that the criteria that MISO did use favored their incumbent developers.
The second obstacle, LSP claimed, was MISO’s ability to include a provision in its tariff to honor rights of first refusal created by state and local law. Order No. 1000 only applies to federal rights of first refusal, as FERC did not want to intrude on the State’s traditional role in regulating the siting and construction of transmission facilities. LSP also argues that even if MISO can allow right of first refusal by state law, they cannot exclude outsiders from competing. The court concluded requiring MISO to disregard the end game—the state-imposed right of first refusal—would be a “waste of time.” Slip op. at 13. The court also noted that FERC has imposed some constraints and has not given MISO unlimited discretion to rely on state law in making its decisions. See id. Specifically, the court pointed to FERC’s decision to prohibit organizations, like MISO, from basing their decision on the transmission developer’s getting or ability to get state approval for things like operation, public utility status, and the right to eminent domain.
The third obstacle of which LSP complained was FERC’s treatment of Entergy Corp. Again, FERC eliminated federal rights of first refusal only for regional projects, not local projects. Accordingly, the argument here was whether Entergy Corp. should be classified as local or regional. Entergy does business in Texas, Arkansas, Louisiana, and Mississippi through separate operating companies. Here, the court explained that “local” is relative and does not follow the usual definition of “local” when dealing with “the service area of a giant electrical transmission utility.” Slip op. at 14. But, as the court noted, even though Entergy had its component companies in separate states, they actually operated as one. Therefore, Entergy was determined to be a local company, although its operating range straddled multiple states.
With all three obstacles addressed, the court rejected LSP’s arguments in the third case. And with that, the Court denied all three challenges to rulings by the FERC.