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Why Are States Freezing Out Competition in Transmission Line Projects?

A boom is coming in transmission line construction. But legislatures in a dozen states, under pressure from utilites, have passed “right of first refusal” laws that are raising concerns about higher energy costs for consumers.

This article originally appeared on Inside Climate News, a nonprofit, independent news organization that covers climate, energy and the environment. It is republished with permission. Sign up for their newsletter here.

The power grid near Chicago, much like the region’s highways, is often congested.

Just about everyone involved agrees that the grid needs an upgrade, including a plan for a new transmission line that would run south of Chicago, across northern Indiana and into Michigan.

What they don’t agree on is whether local utilities should have first priority to build and own these kinds of projects and collect decades of guaranteed income from their use. The alternative is to have a competitive bidding process, usually overseen by the grid operator, to decide who gets the contracts.

The issue is almost as obscure as it is important, with implications for how the grid will add enough transmission lines to accommodate growth in renewable energy.

In the world of energy regulation, the shorthand for the policy utilities want is “ROFR,” or “right of first refusal.” The companies have persuaded legislatures in 12 states to pass laws that codify this right as it applies to transmission lines. Other builders of transmission lines, and some analysts, say the laws will lead to higher costs, and will stifle the market at a time when the process needs to be more open to allow for rapid expansion.

“If we give the utility industry a monopoly, our transmission system is going to evolve to meet utilities’ needs,” said Ari Peskoe of the Harvard Law School Environmental and Energy Law Program. “And those needs are not always aligned with public interest or with the clean energy transition.”

The Illinois-Indiana-Michigan transmission line has an estimated cost of $261 million, according to Midcontinent Independent System Operator, or MISO, the grid operator that will oversee the project. The nonprofit company lists the line among 18 that are a high priority for improving the grid’s reliability across the Midwest.

In Indiana last week, state lawmakers debated a bill requiring that local utilities have a right of first refusal to build the Indiana sections of multi-state transmission projects, along with just about any other transmission project. The bill, which awaits the governor’s signature, wouldn’t affect the MISO project, which is already moving forward, but utilities would be positioned to build the other big-ticket projects likely to follow.

The spread of state laws granting right of first refusal is no coincidence as large utilities operate in many states, and they and their trade groups want to be the ones to reap the income from an expected boom in transmission projects. The lines make money through charges embedded in consumer bills, which leads to income for as long as a project is operational.
(Inside Climate News)
But the downside is that this patchwork of laws adds complexity for the companies that want to build some of the largest transmission projects. Instead of one company building the whole thing, some sections may need to be handed off to local utilities, to the point that megaprojects may make less sense.

Grid operators, the entities that often oversee transmission planning at the regional level, are caught in the middle of the conflict and reluctant to take a side.

The debate comes down to a question of whether local utilities should automatically be the ones to build and own transmission lines in their territories, or should they be forced to compete in a bidding process with a variety of other companies that want to build and own the lines. One thing that can be confusing is that some of the competitors placing bids, like NextEra Energy, own utility companies, but they also have subsidiaries that seek to build projects in other utilities’ territories.

As of the beginning of this year, ROFR laws were in place in Alabama, Iowa, Indiana, Michigan, Minnesota, Montana, Nebraska, North Dakota, Oklahoma, South Dakota and Texas. Since then, Mississippi adopted its law, and lawmakers are still considering right-of-first refusal measures in Kansas and Missouri.

The laws have been most common in states that have strong wind energy resources in their rural areas. The wind resources lead to a need to build transmission lines to transport electricity from wind farms to urban areas.

Indiana is a special case because it already has a right-of-first refusal law from 2013 that covers small transmission projects. The current proposal would expand the law to include just about all transmission projects.

The losers are energy companies with divisions that specialize in building large transmission projects. This includes LS Power of Missouri and NextEra of Florida.

The opponents of the laws have help from conservative groups like Americans for Prosperity, an affiliate of the Koch network of nonprofits, which are aghast at the anticompetitive nature of the laws. The opponents also have allies in groups often associated with the political left, like consumer advocacy organizations, which worry the laws will translate into higher utility bills, and environmental groups, which have concerns that utilities won’t build transmission lines as efficiently as needed for a smooth transition to clean energy.

But these opponents often don’t have enough firepower to overcome the entrenched power of local utilities to get what they want from state legislatures.

Utilities Defend Their Turf

Debate over the Indiana proposal, House Bill 1420, showed some of the patterns that have become familiar as states talk about transmission ROFR legislation.

In an April 13 committee hearing, the testimony was close to evenly split between people and groups supporting the bill and those opposing it.

Among the opponents was Neil Chatterjee, a Republican and former chairman of the Federal Energy Regulatory Commission, who now is a Washington-based lobbyist.

“I’m a big believer in competition,” he said.

He dismissed the idea, stated by supporters of the bill, that Indiana utilities were most familiar with the state and therefore best equipped to do local projects.

“These are not fly-by-night operators who are coming in trying to build out transmission,” he said. “These are thoroughly vetted, sophisticated players.”

Supporters of the bill appealed to the idea of home-state loyalty and said that a competitive bidding process would be time-consuming for projects that already take too long to develop.

Vernon Beck of the United Steelworkers spoke on behalf of union workers employed by the utilities. He said that having utilities build, own and maintain transmission projects means that the people doing the work would be highly experienced and local.

“These jobs are important to us, because we need to maintain these good things for union people in our community—not from Florida, not from Missouri, but from Indiana,” he said.

Despite the talk of the local character of the utilities, most of them are subsidiaries of giant companies with headquarters in other states. This includes AES of Virginia, American Electric Power of Ohio, CenterPoint Energy of Texas and Duke Energy of North Carolina.

Only one of the state’s investor-owned electric utilities is based in the state: NiSource, which owns NIPSCO, the utility that covers northwestern Indiana.

Matt Pawlowski of NextEra argued that his company is local too because it owns and operates projects in the state, including a transmission line. He said competitive bidding for transmission projects clearly leads to lower costs for consumers.

He quoted from an Iowa Supreme Court ruling from last month that put that state’s right-of-first-refusal law on hold.

“The provision is quintessentially crony capitalism,” he said. “This rent-seeking protectionism legislation is anti-competitive.”

Is This Constitutional?

The Iowa ruling was a win for opponents of right-of-first refusal laws, but the larger record of legal challenges has not yet produced a clear answer of whether the laws are unconstitutional on the state or federal level.

Before 2011, federal rules gave local utilities a right of first refusal on transmission projects. That year, FERC issued Order 1000, a landmark case designed to open the market to competition by requiring a bidding process on large projects.

The order led to the growth of companies that sought to specialize in large transmission projects and would compete for contracts in multiple states.

According to utilities and their trade group, the Edison Electric Institute, Order 1000 has been a failure.

“FERC’s decision to eliminate the federal ROFR did not lower project costs, spur innovation, or promote needed transmission expansion,” said Phil Moeller, an EEI executive vice president, in an email. “To the contrary, it has delayed project development, injected uncertainty into transmission planning, and increased costs to customers.”

ROFR opponents say critics of the FERC order are being disingenuous by looking at problems that are normal for large infrastructure projects and making the leap to saying that competitive bidding is to blame.

But the argument that competitive bidding adds to project timelines can be an effective one considering ongoing concerns that it takes too long to build transmission lines, with waits that can be a decade or more to get regulatory approvals and complete construction. And yet, this argument can cut both ways because a months-long bidding process doesn’t feel long considering how long it takes to do most projects.

Utilities responded to Order 1000 by looking for help from their state legislatures, leading to years of argument in statehouses and then in courts.

States have authority to set rules for projects within their borders, but it’s less clear whether that authority extends to deciding which companies get preferential treatment in building projects that affect electricity grids that cover multiple states. The U.S. Supreme Court has yet to take up a case that would resolve this question.

One case that may provide clarity has come out of the U.S. Court of Appeals for the Fifth Circuit in Texas, which issued a ruling in August that said Texas’ right-of-first refusal law, passed in 2019, was discriminatory.

“Imagine if Texas—a state that prides itself on promoting free enterprise—passed a law saying that only those with existing oil wells in the state could drill new wells,” said the majority opinion. “It would be hard to believe.”

The U.S. Supreme Court has not said whether it will consider an appeal of this case.

Regardless of legal questions, there’s also a track record to consider with utilities.

Peskoe of Harvard noted that local utilities have shown a tendency to go slow on the energy transition and should not be the ones entrusted with building these crucial connections in the grid.

“By allowing other entities to participate in the development process and build projects and make money from those projects, I think we’ll have more innovation,” he said. “We will have a system that meets a wider set of needs than just the parochial interests of the utility industry.”
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