Why ROFR Will Not Go Quietly

Why ROFR Will Not Go Quietly

As I wrote a few days ago, right of first refusal (ROFR) legislation was introduced in the Wisconsin Senate (SB28) and Assembly (AB25) this past week. 

After the failure of last session's ROFR legislation (AB470), the reemergence of this bill is not too surprising. Even less surprising is the possibility that ROFR legislation will be introduced a third time––either later this year or early next year––should the current legislation meet the same fate as its predecessor.

The reason for ROFR legislation possibly being introduced a third time is simple: precedent.

In 2018, a large competitive project was authorized by MISO, put up for competitive bidding, awarded to the winning bidder, and then denied to the awardee because of the successful passing of a state ROFR law. 

The state's ROFR law was deemed sufficient grounds to terminate the project and therefore rescind the offer made to the competitive developer. A series of events which led to the filing of multiple complaints and even litigation.

Importantly, this exact scenario could play out right here in Wisconsin.

This precedent means that new ROFR legislation could spring-up at a later date and effectively terminate competitive projects authorized in the state, even after developers have been selected. 

The result? The elimination of the last vestige of competition in an otherwise monopoly-run industry, and higher rates for Wisconsin ratepayers.

However, while this precedent leaves open the potential for what would, in effect, be the outlawing of competitive electric transmission development, a more recent precedent has been established which could serve to preserve and protect the competitive process in a way the first precedent does not.

FERC Eliminates ROFR, Permits Competition

Competition in the electric transmission industry is a novelty. Electric, water and gas utilities are state-created monopolies who virtually never have to worry about losing customers to new or better utility providers, and rarely have to worry about whether they will have enough revenue to pay their bills. Only recently, and only in regional electric transmission development, has a modicum of competition been allowed by regulators.

Until 2011, the Federal Energy Regulatory Commission (FERC) enforced its own ROFR policy, guaranteeing the development of electric transmission projects to whichever utility company the project happened to connect to. But that all changed with FERC's Order 1000.

Order 1000's objective was to prevent undue discrimination in regional transmission projects by eliminating the Federal ROFR provision and thereby enabling the competitive development of transmission projects. FERC's new Order states that it...

FERC went on to specify the rationale for the propagation of this new rule:

But while FERC acknowledged the detrimental and anticompetitive effects of a Federal ROFR, the Commission explicitly left room for state-provided ROFR laws––allowing individual states to prohibit competition if they so choose:

FERC's refusal to interfere with state lawmaking was perhaps an acknowledgment of federalist principles; a principle which many states then took advantage of.

For example, of the 15 states wholly or partially within the Midcontinent Independent System Operator (MISO) grid, 8 have had ROFR laws on the books. Today, only 6 states have such laws currently in effect. But in those states where ROFR laws are in effect, MISO projects normally subject to competitive bidding are automatically barred from the competitive process.

This barring of competition is precisely the reason for transmission companies' efforts to put state ROFR laws into effect. For example, Wisconsin's largest transmission company, ATC, commissioned a Report arguing a state ROFR law is essential for reducing costs to ratepayers (Readers can look at MacIver's latest study for a more comprehensive analysis of that Report).

Suffice it to say, companies like ATC are less concerned with costs to ratepayers and more concerned with securing for themselves the $1.8 billion worth of competitive projects that will be built in Wisconsin.

But even if SB28 and AB25 fail to pass in the legislature, ATC and others still have an opportunity to capture Wisconsin's competitive projects. As was seen in Texas, the Wisconsin legislature could pass a ROFR law after Wisconsin's competitive projects have already been awarded to developers, and thereby transfer those projects to ATC and other incumbent Wisconsin utilities.

Here's what happened in Texas...

Texas and the Hartburg-Sabine Project

In 2018, MISO announced its second-ever competitive transmission project––the Hartburg-Sabine project in East Texas. The project consisted of five new transmission lines and a new substation, and was estimated to cost roughly $122.4 million (p.5).

The project opened up to competitive bidding in February 2018 and the winner was announced 9 months later in November. The winner of the project was NextEra Energy––a company who offered to construct the project at a cost of $103.9 million, 15% less than what MISO estimated. 

In addition to their reduced project cost, NextEra also offered a number of cost-containment, revenue and return on equity "caps" (p.21-29) and guarantees––guarantees which are entirely absent from non-competitive projects:

• Rate Base Cap (ATRR): Capped the total Annual Transmission Revenue Requirement over a 40-year period at $114.8 million, in 2018 dollars.
• Capped Return on Equity (ROE): Capped their profit rate (ROE) at 9.8% (lowest = 9.75%, highest = 10.7%).
• Capped Operation and Maintenance (O&M) Costs: Capped O&M costs for the first 10 years of project operation.
• Schedule Guarantee: Guaranteed the project would be in-service by a specific date.
• Forewent AFUDC: Offered not to collect a return on Funds Used During Construction.
• Forewent CWIP: Offered not to collect a return on Construction Work In Progress expenses.

Yet despite NextEra's selection as the best developer with the highest benefit-cost ratio, NextEra never got to develop the project.

Instead, in May of 2019, Texas enacted a ROFR law which prohibited the Texas Public Utility Commission (PUCT) from issuing permits to NextEra (Sec. 37.056). MISO, the regional system operator who originally authorized the project, then conducted a review of the Hartburg-Sabine project, where it decided to terminate the project.

The awarding of the Hartburg-Sabine project to NextEra was therefore rescinded, and the project was never developed.

As a result of the cancellation, NextEra pursued litigation against the PUCT by filing a lawsuit with the U.S. District Court for the Western District of Texas. Fortunately for NextEra, the Court ruled in their favor and Texas's ROFR law was deemed unconstitutional on the grounds that the law violated the Commerce Clause of the U.S. Constitution.

However, even though the Court ruled in NextEra's favor, the subsequent cancellation of the Hartburg-Sabine project after Texas's passing of a ROFR law still works to establish a precedent that is favorable to incumbent utilities like ATC.

In other words, the precedent thus established means that incumbent utilities who lose the initial round of bidding can work to affect state ROFR laws leading to the cancellation of those projects, and effectively giving incumbents a second chance at developing those projects should MISO decide to reauthorize them and begin the competitive process anew.

The fact that a court ruled in favor of NextEra and against Texas's ROFR law is a significant deterrent to pro-ROFR utilities in other states. But nevertheless, rather than be deterred, those utilities could instead be emboldened by the events that took place in Texas. While utilities might recognize the inevitable defeat of ROFR laws, they might also recognize that ROFR's defeat won't materialize until a lengthy period of litigation has concluded. In which case, the ultimate failure of ROFR laws is mitigated by the short-term success of cancelling competitive projects in the interim.

The experience of Texas and its Hartburg-Sabine project, therefore, establishes a precedent that is both troublesome and reassuring to anti-ROFR advocates.

But as it happens, a similar precedent set in Iowa––also pertaining to a state ROFR law––supports the Texas Court's ruling on the unconstitutionality of state ROFR laws, and may wind up preventing further cancelations of competitive projects. This is even more likely considering the U.S. Supreme Court refused to hear (Dec 11 2023) Texas's PUCT petition to appeal the District Court's decision.

Iowa and the LS Power Lawsuit

Between the years 2020 and 2023, Iowa had an experience very similar to Texas's. During that period, Iowa passed a ROFR law which was later found to be unconstitutional by two courts: the Iowa District Court for Polk County, and the Iowa Supreme Court.

In June of 2020, the Iowa legislature successfully passed a ROFR law in the form of HF2643. Within that piece of legislation was a provision that granted incumbent electric transmission owners "the right to construct, own, and maintain an electric transmission line that has been approved for construction in a federally registered planning authority transmission plan..."

In short, it granted incumbent utilities a right of first refusal, and subsequently received significant pushback from competitive developers.

The pushback came in the form of a lawsuit filed by LS Power and Southwest Transmission against Iowa and the Iowa Utilities Board. In the lawsuit filed with the Iowa District Court, LS Power argued that Iowa's ROFR law was unconstitutional on the grounds that it violated three parts of the Iowa constitution. Two of those violations were procedural––they argued the law was not passed in the right way. The last violation, though, was substantive––LS Power argued that any ROFR law, no matter the form, was unconstitutional.

The District Court, however, ruled that LS Power had no standing and dismissed the case. LS Power then appealed to the Iowa Appellate Court, who also ruled against LS Power for the same reasons. LS appealed again, this time to the Iowa Supreme Court, who found that LS did have standing, and thereby forced the District and Appellate courts to review the case.

In the Iowa Supreme Court's Opinion, the high court stated the following:

The significance of the Iowa Supreme Court's Opinion is not only that it overruled the decisions of the District and Appellate courts, but also granted an injunction. The injunction is incredibly important because it prevents the enforcement of the ROFR law until LS Power's litigation has been resolved.

After the high court wrote its Opinion, the District Court, who first heard the case, revised its decision and ruled in favor of LS Power, declaring Iowa's ROFR law unconstitutional:

With these rulings, Iowa's ROFR law is no longer in effect and cannot be used. The result of this decision was significant: the District Court barred Iowa's incumbent utilities from doing anything with the $2.6 billion worth of MISO approved projects that were assigned to them, and which would have been subject to competitive bidding.

Understandably, the State of Iowa and the Utilities Board appealed that decision, and the Iowa Supreme Court is set to hear the case (Case No. 24-0641) sometime soon.

But given that Iowa's Supreme Court was the first to order a review of the case––believing LS Power had standing to litigate––it seems likely that the Court will rule in favor of LS Power, and against Iowa's ROFR law.

Nevertheless, the frequent and lengthly proceedings that have occurred in both Texas and Iowa, at the federal and state level, guarantees one thing and one thing only: ROFR will not go quietly.