Texas Rejects Right of First Refusal for Transmission Utilities
October 31, 2017
On October 20, 2017, the Public Utility Commission of Texas (“PUCT”) issued an order concluding that a Texas utility did not have the exclusive right to build transmission facilities within its service territory (i.e., a “Right of First Refusal” or “ROFR”). Southwestern Public Service (“SPS”) had asked the PUCT to determine whether Texas law on ROFR over-ruled the Federal Energy Regulatory Commission’s (“FERC”) Order No. 1000. It also questioned whether Southwest Power Pool (“SPP”), a regional transmission organization (“RTO”), can designate other entities to construct a transmission line in SPS’ service territory.
FERC issued Order No. 1000 in 2011 to reform FERC’s electric transmission planning and cost allocation requirements for public utility transmission providers. The Order established regional planning reforms and modified the way that the costs for new wholesale transmission facilities will be allocated among stakeholders.
Importantly, Order No. 1000 required that FERC-regulated transmission providers remove from their tariffs and agreements a federal ROFR for a transmission facility selected in a regional transmission plan for purposes of cost allocation, subject to the following limitations: (1) elimination of ROFR did not apply to a transmission facility that is not selected in a regional transmission plan for purposes of cost allocation; (2) the Order allows, but does not require, public utility transmission providers in a transmission planning region to use competitive bidding to solicit transmission projects or project developers; and (3) nothing in the ROFR requirement affects state or local laws or regulations regarding the construction of transmission facilities, including but not limited to authority over siting or permitting of transmission facilities.
In 2012, then-FERC Chairman John Wellinghoff described the intent of the ROFR provisions as follows: “In Order No. 1000, the Commission stated that it is unjust and unreasonable to grant incumbent transmission providers a federal right of first refusal with respect to certain transmission projects because doing so may result in the failure to consider more efficient or cost-effective solutions to regional needs and, in turn, result in the inclusion of higher-cost solutions in the regional plan. In Order No. 1000-A, the Commission further stated that “expanding the universe of transmission developers offering potential solutions can lead to the identification and evaluation of potential solutions to regional needs that are more efficient or cost-effective.” The Commission therefore directed elimination of provisions that establish a federal right of first refusal for an incumbent transmission provider with respect to transmission facilities selected in a regional transmission plan for purposes of cost allocation.”
The ROFR provisions in Order No. 1000 were some of the most contentious issues raised by stakeholders. Many transmission utilities challenged FERC’s conclusion that they did not have a “first right” to construct wholesale transmission facilities within their jurisdictional service territories. In 2014, the D.C. Court of Appeals upheld the substance of Order No. 1000 and in 2016 the Court also held that the ROFR did not violate the Mobile-Sierra doctrine.
Order No. 1000, however, was focused on federal ROFR and it did not address the rights of state commissions to determine that a state jurisdictional utility had a “first right” to construct transmission facilities in a state where an RTO had proposed new transmission facilities. Thus, on February 28, 2017, SPS and SPP sought a declaration from the PUCT as to the validity of ROFR under Texas law. SPS contended that it had “the exclusive right to construct and operate new regionally funded transmission facilities in areas of Texas that lie within SPS’s service area,” which is entirely outside of ERCOT and thus is subject to FERC’s jurisdiction. SPP countered that “there is no clear statement in Texas law that incumbent utilities have such a right of first refusal, and therefore SPP is proceeding as if there is no right of first refusal under Texas law”. SPP stated that its FERC-approved tariff “requires the competitive solicitation and designation of transmission owners, including non-incumbents, to construct and operate new transmission facilities in areas of Texas within the SPP footprint.”
On October 20, 2017, the PUCT concluded that “SPS does not possess an exclusive right to construct and operate transmission facilities, including new regionally-funded transmission facilities, within its service area.” The PUCT explained, in part, that such an exclusive right “would be inconsistent” with the PUCT’s authority to issue certificates of convenience and necessity for transmission facilities, which is not limited to only utilities that have a certificated service area in which the facilities would be located.
Although many transmission utilities are concerned about the absence of a federal ROFR, in practice the overwhelming majority of all transmission facilities are still constructed by the incumbent utility with a jurisdictional service territory, in spite of Order No. 1000.
This Eckert Seamans Energy Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contact Daniel Clearfield at (717) 237-7173 – dclearfield@eckertseanans.com.