Seventh Circuit Upholds FERC's Authority to Abrogate Transmission Owner Rights of First Refusal

By Harvey Reiter and Craig Silverstein

Does FERC have authority to override contracts between a regional transmission organization (RTO) and incumbent utilities giving the latter rights of first refusal (ROFR) to build new regional transmission facilities? It does, said the Seventh Circuit in an April 6, 2016 decision involving the Midcontinent Independent System Operator (MISO). But in a ruling that allows both independent transmission providers and incumbent utilities to claim partial victories, the court also held that FERC's decision to grant a ROFR to incumbents to build "local" facilities – even where "local" means a five state area – is reasonable. And, it added, FERC acted reasonably in allowing MISO to honor ROFRs given to incumbent utilities by state or local laws.

The court's ruling on the contract abrogation issue is likely to have the most wide ranging consequences. The MISO transmission owners, like incumbent transmission owners that have joined other RTOs, conditioned their transfer of operational control of their transmission assets to the RTO on retaining ROFRs to build any new regional transmission facilities approved by the RTOs in their planning processes. FERC Order No. 1000 directed RTOs to eliminate ROFRs from their open access tariffs, but did not directly answer the question whether it would honor contracts that had preserved incumbent ROFRs. FERC decided that issue against the incumbent utilities in the MISO case. In affirming FERC's ruling, the Seventh Circuit held that Supreme Court precedent giving primacy to the terms of freely negotiated contracts – the "Mobile-Sierra" doctrine – could not insulate the ROFRs. That doctrine, the court said, was intended to protect contract rights in cases involving contracts between buyers and sellers – parties who bring "broad adverse interests to the table."

"That's different," the court emphasized, “from a contract in which the parties are seeking to protect themselves from competition from third parties." Besides, the court added, MISO had offered no reason why the public interest would be protected by blocking competition.

The independent transmission developers also lost their several challenges to the ROFR provisions of the tariff. They had argued that the ROFR protection given incumbents to develop local transmission reliability projects should not have extended to projects located in multiple pricing zones within MISO. But the court said that as long as benefits and costs of the facilities largely went to the zones where the facilities were built the ROFR was reasonable. And, while the facilities weren't "local" in the usual sense, they were facilities located within the boundaries of several operating companies that have operated as a single utility for half a century. While granting ROFR protection to local facilities ran counter to FERC's Order No. 1000 policy to promote competition, the court ruled that the result was still reasonable because it allowed MISO to avoid the "inevitable" delays that would result if multiple parties could compete to construct reliability projects. As to the independent transmission provider objections that MISO should not have deferred to ROFRs based in state or local law, the court again sided with FERC, holding that "it would be a waste of time for MISO to conduct a protracted bidding and evaluation process when the incumbent transmission company has a right of first refusal conferred by state law."

Read a copy of the Seventh Circuit's decision in MISO Transmission Owners, et al. v. FERC, No. 14-2153 (7th Cir. April 6, 2016).

If you have any questions about the court's ruling, please contact Harvey Reiter, Craig Silverstein, or the Stinson Leonard Street attorney with whom you regularly work.

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