EMP S2E18: Everything you always wanted to know about ROFR - but were afraid to ask. We talked with LS Power's Sharon Segner

LS Power Senior Vice President Sharon Segner discusses the multibillion-dollar stakes involved in the arcane dispute before the Federal Energy Regulatory Commission over ROFR, or right of first refusal. 

FERC has proposed to allow incumbent monopoly utilities first crack at building the vast new network of transmission lines that must be constructed in order to transition to a clean-energy grid and economy. There would be no competing bids to determine if the utility build is the least-cost option, and under monopoly regulation the utility receives the full cost of the build, plus a generous rate of return. Then when the utility build goes grossly over budget, the monopoly utility goes back to the state regulatory commission for full cost recovery plus that generous rate of return. There's no opportunity for a competitive process to determine if the utility build  is the least-cost option.

Or, as Segner notes, "What FERC has teed up here is, should the clean-energy transition be a clean-energy monopoly or should it be competitive?"

Segner's company is the plaintiff in one of two conflicting U.S. appeals court rulings directly addressing the concept of ROFR under FERC regulation. LS Power was rebuffed by the 8th Circuit U.S. Court of Appeals in its constitutional challenge to ROFR in Minnesota. But utility giant NextEra Energy prevailed in its challenge to ROFR in Texas, where the 5th Circuit U.S. Court of Appeals strongly supported NextEra's and LS Power's assertion that such laws are unconstitutional due to a legal principle known as the Dormant Interstate Commerce clause. The conflicting court opinions would appear to make the issue ripe for appeal to the Supreme Court with its newly dominant conservative supermajority in place.

We try to unpack it all for you.

Transcript

EMP S2E18 Sharon Segner, Senior Vice President, LS Power
(edited for clarity) 

EMP: Welcome to the energy markets podcast. I'm your host, Bryan Lee. And today's conversation is with Sharon Segner, Senior Vice President with LS Power. Sharon, thanks for talking with us today.

SS: Thanks for having me.

EMP: We're going to talk today about a key issue the Federal Energy Regulatory Commission will address in a pending rulemaking that everyone in the industry is eagerly following. So let's try to “unpack” this as NPR says. You know, Sharon, I gotta tell you, there are some wacky acronyms in electricity land, but ROFR has to be one of the more outlandish, right? 

SS: Absolutely.

EMP: ROFR stands for right of first refusal. This refers to a monopoly utility’s right under law to be offered first refusal to build any necessary transmission expansions. And under the two major bills Congress passed and which President Biden signed into law in recent months - those bills being the infrastructure bill and the Inflation Reduction Act - we're about to spend buckets and buckets of money on big new transmission projects. And these monopoly utilities with ROFR, they will get the work automatically at what's called a cost-plus rate. They get what it costs to build the line plus a rate of return. Then, if it costs more than the amount they told the regulatory oversight commission it would cost, or in other words, if they bid too low and their costs exceed the approved amount, then the commission allows them to come back and get cost recovery for that plus a rate of return. Nice work if you can get it.

SS: Absolutely, absolutely. What we're having a discussion about across the country today is, in order to facilitate the clean energy transition, there's going to be a big need for a lot of new transmission. And what FERC has teed up here is should the clean energy transition be a clean energy monopoly? Or should it be competitive?

EMP: Your company wanted to build a transmission line in Minnesota. But the state said, no, the monopoly utilities there have a ROFR so you couldn't competitively bid on the transmission expansion project that the FERC-regulated Midwest ISO said needed to be built. So ultimately, after a lot of billable hours, you took the matter before the 8th Circuit U.S. Court of Appeals. Tell us the rationale for the appeals court's determination that ROFR precluded you from bidding on the transmission expansion project and potentially saving consumers money.

SS: So I would say that, in the aftermath of Order 1000, a number of states, primarily in the Upper Midwest, passed these right-of-first-refusal laws, and LS Power was active on the ground when these laws were moving through. And we looked at the situation and we, first of all, take the viewpoint that FERC can address these state right-of-first refusal laws, and we believe they have the power to address these state right-of-first-refusal laws. But we looked at the situation and we said, there's another problem with these laws. They're not constitutional. And the reason that they're not constitutional is that FERC has exclusive authority over the transmission grid. And the costs of these lines are paid for by surrounding states. The Minnesota line that was the subject of this litigation was paid for 60% by consumers in Iowa. And here you have these laws being passed by a state to protect the incumbent owners in that particular state, yet they're being paid for by citizens of other states. And we said that really doesn't make a lot of sense from a Dormant Commerce Clause standpoint. Because transmission in and of itself is innately interstate. And basically, we looked at the situation and said, they violate the Dormant Commerce Clause. We took the case to the Minnesota - to the lower court and then at the 8th Circuit. The Department of Justice filed a statement of interest in the lower court decision, as well as at the 8th Circuit, which is actually very unusual for the United States Department of Justice. And the Department of Justice says, they've (LS Power) raised some good points. There's some real issues here from a Dormant Commerce Clause standpoint. The 8th Circuit didn't see it that way. And the 8th Circuit focus - and we think that they got it wrong in a very significant way - because the 8th Circuit decision took positions that perhaps transmission is more intrastate than interstate.

EMP: As I understand the Dormant Commerce clause is a legal principle that states can't adopt a state law that impedes interstate commerce. In other words, back when I was a reporter, I wrote a ton of stories about states trying to bar solid waste shipments - you know, garbage - to a different state. And the states would enact laws to keep it out and the courts have roundly said, no, you can't do that because of the Dormant Commerce Clause. So that brings us to Texas. 

SS: So in Texas, Texas has ERCOT under it. But also pieces of Texas have MISO, SPP, and a region called WestConnect. And those SPP, MISO and WestConnect areas are FERC jurisdictional. There was a competitive process in MISO in eastern Texas, and NextEra won that project fair and square. And so essentially, after NextEra was awarded the project from MISO, the competitive process that happened, the incumbent transmission owners in the state got together and said, let's stop competition in Texas. And so they passed a law that essentially said that new entrants can't get a (certificate of need and necessity). And so essentially, it was a direct target of the MISO competitive process to essentially yank the project from NextEra. And so NextEra brought the case - and certainly there are lots of other parties such as LS power that are quite interested in it as well - but the 5th Circuit looked at the situation and said, hey, this is a protectionist law. It's protectionist through and through, and we can't be passing these laws. Just like the Supreme Court has said, you can't pass protectionist laws relating to milk and whiskey. The same thing is true for electric transmission. And the 5th Circuit clearly understood that in the case of the Texas project, that was part of MISO, that was paid for by citizens outside of the state of Texas. And here you have the legislature getting involved in what other states are paying for, and that's just not right. So we're really excited to see that decision, and the 5th Circuit got it right. I hope that it provides FERC the courage as well, to look very suspiciously at these state ROFR laws. And there's also now a case that was filed a couple months ago at FERC that is relating to all of these MISO ROFR laws in aggregate that have passed, asking FERC to address them. Clearly FERC has the authority. So essentially, the history with that issue is that when the Order 1000 compliance filings were going through, FERC initially said, hey, we're not going to allow these sort of state ROFR laws to impact the regional planning process. And then in the rehearing process for MISO and SPP’s orders, essentially at that point, FERC said, they reversed themselves on rehearing, and they said they would recognize them. So essentially FERC provided an incentive for these state ROFR laws to happen and the incentive is twofold. First of all, if one of these laws passes, the project automatically, essentially, goes to the transmission owners. But there's an additional incentive from the TO standpoint that you don't even have to have a competitive process in MISO or SPP. So the existence of one of these laws also precludes even the consumers knowing what their alternatives were. And these are things that were not originally part of Order 1000. They were part of the compliance filings for MISO and SPP. And so clearly, the situation with these ROFR laws is clearly within FERC's prerogative to address them because they could correct these issues that came out of the compliance filings as well.

EMP: So let's talk a little bit about how you've got transmission that's FERC-regulated but the states have authority over it?

SS: Yeah, so essentially, what FERC regulates is the rates and to ensure that the rates that are paid for over a multistate region or multizone region are just and reasonable. And what the states have authority over is the actual siting and the construction of those lines. And so, basically, you know, what is happening now in MISO, is you have projects that have a right-of-first-refusal associated with them, where the rates are being paid for by other states. And clearly, that is a situation that is under FERC’s clear authority.

EMP: Okay, so let's take it out of that realm and take it into the regulatory realm. We're going to talk about what FERC proposed in its NOPR, or notice of proposed rulemaking (RM21-17). Let's talk about FERC and ROFR in the NOPR. So FERC has proposed that states can have ROFR, or should have ROFR, I don't know explain it to me because they don't pay me to read these things anymore. 

SS: So essentially, the law of the land today in MISO and SPP is that these state laws, or these state ROFR laws, are recognized in the federal planning process today. And then in April, FERC came out with their transmission NOPR and so they didn't address the issue with the state ROFRs, but instead FERC suggested that they would add two additional ROFRs. And, essentially, the practical effect of both of those suggested ROFRs very much provides a very bleak outlook for competitive transmission in the United States. 

EMP: Okay, so like I said, nobody's paying me to read these things anymore. But from reading the trade press it seems to me that FERC’s ROFR proposal generated a lot of comment, and that a lot of the comment was opposed to that. Am I correct?

SS: Yes, that is correct. So it added up it's about 150 parties across the United States.

EMP: Was that a majority of the commenters?

SS: Yes. And I think very notably, the United States Department of Justice, as well as the Federal Trade Commission, weighed in strongly opposing the comments and the ideas that FERC had as well. And the filing from the Department of Justice and the Federal Trade Commission was a essentially 24-, 25-page filing and the Federal Trade Commission often does comment in these rulemakings. It's somewhat unusual, but not, you know, it's rare.

EMP: It's not unheard of. 

SS: It's not unheard of. But in this situation, the Federal Trade Commission comments went up to the full commissioners at the Federal Trade Commission, and on a five-zero Commissioner vote, in a bipartisan vote, the Federal Trade Commission said to FERC, this is a very bad idea. And that's very unusual because sometimes you see staff comments, but in this situation, you have the full weight of not only the staff of the Federal Trade Commission, but also the five commissioners on a bipartisan basis, of course, and the United States Department of Justice with a very strong punch line at the end reminding FERC of the President's executive order about a year and a half ago for a whole-of-government approach toward competition.

EMP: Now, we've had on the podcast in the past, Rob Gramlich of Grid Strategies, and Larry Gasteiger of WIRES, and on their conversations with me, they asserted that competition hasn't worked for transmission. And so that's why we should just go with the ROFR. But there's a study, one study, part of the record that I think refuted that. Can you talk to that?

SS: Yes. And I would also say that the 7th Circuit and all of the court cases that upheld Order 1000, which ushered in competition, all strongly supported the legal basis for competition in transmission. So FERC would have to deal with all of that precedent if they move forward with this idea. But in addition, though, studies were part of the record that the Department of Justice offered in their comments, as well as the Federal Trade Commission, on the benefits of competition. The California PUC, filed comments, extensive comments, updating the benefits of what they've seen on the benefits of the competitive processes, and NextEra in their comments filed affidavits. And then in addition, the Massachusetts Attorney General filed affidavits on their economic studies. And then last, but not least, the United Kingdom six - about a year ago, excuse me - did their own assessment of the of the benefits of competition in the United States, and the UK came to the conclusion that the competitive processes in the United States generally have yielded between 22%  and 42% cost savings. And the number that they're using in their analysis is that 22% cost savings.

EMP: That's helpful. So you're saying that, it seems to me from looking at the situation that competition hasn't had a chance to work in transmission. Do you agree with that?

SS: I would say that the competition that we've had has been successful. And, but in terms of have we had enough of it? No, we haven't had enough of it. I've always thought of it that the original, the original goal and kind of where FERC’s head was when Order 1000 came out was that roughly 25% of the transmission would be competitive in the United States. And what we've seen over the last decade, depending on the region, anywhere from 3% to 10%. And we've also seen a lot of significant transmission get built in the states of New York and California, but in particularly in New York, under the competitive frameworks, and it's been highly successful.

EMP: Well, so you have a different point of view than Rob and Larry. 

SS: With respect, yes.

EMP: So let's talk about what's called bundled rates. Okay? Which goes back to my question about this conflict between state and federal jurisdiction. So electricity is basically three components. It's the energy, and then it's the interstate transmission, which is FERC regulated, which brings the energy to the distribution system that's state regulated. And this issue was actually, you know, addressed by the Supreme Court in its opinion upholding Orders 888 and 889 from FERC. You know, Enron, may it rest in peace, argued that FERC had the authority under the Federal Power Act to assert jurisdiction over that part of transmission bundled into this bundled (state-regulated) rate. And I think outside of standard market design, there's not been an effort to really pursue that invitation from the Supreme Court, have they?

SS: That's a great point. If you look at the New York versus FERC case, going back 20 years ago, which dealt with the issues that you're raising, I think that a lot of what the Supreme Court very clearly said is that FERC has exclusive authority over transmission. And they have the ability to assert authority over the local planning process. To date, I would say it's been a light-handed approach that FERC has used. And folks have given a lot of criticisms and said, hey, under order 1000, there's been a lot more, you know, local planning going on. FERC has the authority to get this situation under control, and it's sitting in that Supreme Court case. And so what FERC has to do is, with due respect, they have to use the authority. And that's what's required here. I think the Supreme Court spoke in New York versus FERC. FERC has the authority to address the situation. In addition, Order 1000 was very clear that the interregional planning process trumps the regional planning process, and the regional planning process trumps the local planning process.

EMP: what they call the IRP. 

SS: Yes. 

EMP: The Integrated Resource Plan.

SS: That's correct. And the Order 1000 regions are supposed to be strong regional planners. FERC has the full authority today, to enforce that. They need to use the tools that are in their tool bag. And I do not think that addressing these situations and in the various issues that are going on - a rulemaking is one option. And certainly the country is opining on a rulemaking - but that is not the only tool that FERC has in their tool bag, and FERC can use their tools. At the end of the day, you look at the transmission system that's going on across the country, and transmission is the fastest growing portion of consumers bills on their energy bill. We have to have a FERC that's using its powers.  And in competition, with all due respect, this is a lot of money. And competition brings consumer benefits and competition should be fully used. 

EMP: Well, this argument sounds familiar to me, this argument that competition hasn't worked well. I guess on face value, that's true because of ROFR. It hasn't worked well. But you say it's worked well where competition has been allowed to happen. That resonates with me, because for many years I was a media consultant for the Retail Energy Supply Association. And we constantly hear in the retail markets, that competition hasn't worked. We should go back to rate regulation. And really competition hasn't been given a chance to work at retail except in Texas. And so it seems to me that if we're going to transition to a clean-energy economy, and the grid’s a big part of that, we're going to be plugging in EVs left and right and that's going to, what, double electricity demand? So transmission is the fastest growing segment of that bundled rate. And I think the energy price is probably on an inflation-adjusted basis, the lowest it's ever been.

SS: Absolutely. And I would point to, if you look at the NOPR comments that were just filed, NRG, in their comments, had a very good appendix where they had an independent study, broken out on where those cost increases are occurring by state in energy versus transmission. And I thought that their appendix made a very compelling case for what's going on with transmission spend in this country.

EMP: Yeah, so it's really clear that if we're going to make this transition at least cost to consumers, we need to have competition.

SS: That's what my company would say. And we are appreciative and grateful to see that in the NOPR comments that there were over 150 parties that came out saying, FERC, you're on the wrong track. And we do not think that FERC has the record for these sort of proposals. Examples of parties that came out opposing FERC’s idea to soften up on competition: the California PUC, NESCO, the majority of OPSI states. In addition, I would add that you saw the Clean Energy Buyers Association. You also saw EPSA, large trade associations, and a huge coalition of large energy consumers saying across the country, this is a very bad idea.

EMP: So there's been the rule proposal earlier this year, then there were comments on a rule proposal. And now you’ve finished the reply comments stage of the rulemaking process, right? And so now, the record is in FERC’s capable hands, and they have to come up with a decision.

SS: That's correct. And this is the point in the process where ideas get dropped. And this is a great time to drop that ROFR idea.

EMP: Well, having been inside 888 First Street Northeast, I wonder if there weren't some commissioners at FERC that wanted ROFR versus others that wanted to do away with ROFR. And so, maybe, Rich Glick, the FERC Chairman, decided to propose ROFR as the outcome in order to build the record he needed to convince the other Commissioners.

SS: I hope so but I think the record is compelling. And the record is very strong that competition is and should be here to stay.

EMP: I'll leave it at that. Sharon Segner LS power. Thank you very much. 

# # #