In a May 17 order (the "New England Compliance Order")
on the New England compliance filing in response to Order No.
1000[1] ("Order 1000"), the Federal Energy
Regulatory Commission ("FERC") rejected efforts by the
New England transmission owners to retain their exclusive rights to
build new transmission in the region. In doing so, FERC declared
its "plenary authority" to abrogate or substantially
modify contracts - even those protected by the
Mobile-Sierra doctrine[2] - if changes in
FERC's jurisdictional industries warrant such actions.
FERC's bold sweeping away of federal rights of first refusal
("ROFRs") or exclusive rights to build and own regional
transmission, including one expressly protected by a
Mobile-Sierra provision, will likely result in federal
appeals that will further shape Mobile-Sierra law. In the
meantime, FERC has reshaped the electric transmission industry to
open it up to competitive transmission development.
Order 1000, which resulted from a FERC rulemaking proceeding, is
designed to reform FERC's electric transmission planning and
cost-allocation requirements for public utility transmission
providers. The ROFR elimination is the most controversial aspect of
Order 1000 compliance and brings into play Mobile-Sierra
legal precedent. Under Mobile-Sierra precedent, for FERC
to order any nonvoluntary change to contracts protected under
Mobile-Sierra, FERC must first find that allowing the
subject contract provisions to stay in place would harm the public
interest, a more stringent standard than the ordinary "just
and reasonable" standard. Thus, to abrogate or involuntarily
modify contracts that have Mobile-Sierra protection, FERC
must first conduct a public interest analysis. FERC announced its
intention to eliminate ROFRs first in Order 1000, reaffirmed that
intent on rehearing in Order No. 1000-A, and first implemented that
intent in its orders on the compliance filings of PJM and MISO in
March ("the PJM and MISO Compliance Orders"). In the PJM
and MISO Compliance Orders, FERC was able to eliminate the ROFRs
without going through a public interest analysis because the
contracts did not have express Mobile-Sierra protection by
their own terms and FERC found no presumption of
Mobile-Sierra protection was justified. FERC reasoned that
the Mobile-Sierra presumption applies to a contract only
if the contract has certain characteristics that justify the
presumption. FERC found the MISO and PJM contract provisions in
question apply beyond the parties that negotiated the contract to
limit the rights of third parties and arose in circumstances that
do not provide the assurance of justness and reasonableness
associated with arm's-length negotiations, because the
negotiations were aimed at protecting a common interest among
transmission owners. Based on this analysis, FERC concluded the
Mobile-Sierra presumption did not apply to protect the
ROFR provisions in MISO and PJM.
In the New England Compliance Order, FERC was faced with an express
Mobile-Sierra provision protecting the ROFR. FERC had
approved that provision in its 2004 RTO order for New England.
Nevertheless, FERC overcame that obstacle to its policy, based on
the following analysis. FERC first determined no automatic
Mobile-Sierra protection applied to the New England ROFR,
because it is a contract rate of general applicability that
restricted the rights and abilities of others to compete and
because it was negotiated among transmission owners with common
interests. Second, although in the 2004 RTO order FERC determined
that Mobile-Sierra protection would apply to the New
England ROFR, FERC found here that the public interest would be
harmed by retaining the ROFR, because the transmission industry has
changed since then. In support FERC found there is a greater need
for new transmission, and there are independent transmission
developers awaiting the opportunity to compete to build this needed
transmission. FERC found that retaining the ROFR would prevent such
competition and hinder needed transmission development. FERC stated
that removal of barriers to participation by nonincumbent
transmission developers in the regional transmission planning
processes lies at the core of Order 1000 and is essential to
meeting the demands of changing circumstances facing the electric
industry. Third, FERC concluded it may use its generic findings
regarding the harmful effects of ROFRs in the Order 1000 rulemaking
to support its public interest determination and noted it has
previously abrogated and modified contracts based on generic
rulemaking findings, with such determinations being upheld on
appeal, most notably under its landmark Orders No. 888 and 636.
Framing the battle for the almost certain appeal, FERC asserted the
Mobile-Sierra doctrine does not bar FERC from exercising
its "plenary authority" to modify or abrogate contracts
that adversely affect the public interest, especially in the
context of implementing new regulations.
Thus, with the New England Compliance Order FERC has eliminated the
final and best-protected ROFR, at least for now. Requests for
rehearing of the New England Compliance Order are due by
mid-June.[3] After FERC rules on the rehearing requests,
parties can appeal the ruling to the U.S. Court of Appeals. Perhaps
years from now we will find out from a federal appeals court how
well FERC's view of its authority squares with the legal
requirements for abrogating or modifying
Mobile-Sierra-protected contract rights. In the meantime,
transmission providers across the country must prepare for the bold
new world of competitive regional transmission development.
Footnotes
[1] Transmission Planning and Cost Allocation by
Transmission Owning and Operating Public Utilities, Order No.
1000, FERC Stats. & Regs. ¶ 31,323 (2011), order on
reh'g, Order No. 1000-A, 139 FERC ¶ 61,132, order on
reh'g, Order No. 1000-B, 141 FERC ¶ 61,044 (2012).
[2] The Mobile-Sierra doctrine originated in the Supreme
Court's decisions in United Gas Pipe Line Co. v. Mobile Gas
Service Corp., 350 U.S. 332 (1956) (Mobile), and
FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956)
(Sierra).
[3] Requests for rehearing of the PJM and MISO Compliance Orders on
the issue of the ROFR elimination were filed on April
22.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
ARTICLE
25 May 2013
FERC Rules That Competitive Transmission Trumps Negotiated Contract Rights
In a May 17 order (the "New England Compliance Order") on the New England compliance filing in response to Order No. 1000 ("Order 1000"), the Federal Energy Regulatory Commission ("FERC") rejected efforts by the New England transmission owners to retain their exclusive rights to build new transmission in the region.