Commentary - DC Circuit Upholds FERC’s Rejection of Incumbent Right of First Refusal to Build Transmission in Oklahoma Gas & Electric Co. v. FERC - Decision Promotes Competition in Wholesale Electricity Markets

In a recent decision, the District of Columbia Court of Appeals rejected a challenge to an important reform adopted by the Federal Regulatory Energy Commission (FERC) to promote competition in transmission development.  The court also narrowed the scope of the Mobile-Sierra doctrine, which limits FERC’s ability to reject regulated utilities’ negotiated agreements.  Oklahoma Gas & Elec. Co. v. FERC, No. 14-1281, 2016 WL 3568086 (D.C. Cir. July 1, 2016).  The decision is available here.

In Order No. 1000, FERC adopted a framework of reforms to ensure that nonincumbent transmission developers have the opportunity to participate in the transmission development process.  In particular, public utility transmission providers were required to eliminate federal rights of first refusal from Commission-jurisdictional tariffs and agreements, and to develop not unduly discriminatory qualification criteria and processes governing the submission and evaluation of proposals for new transmission facilities.  FERC found that such rights of first refusal had the potential to deter rival transmission providers from proposing much needed infrastructure reforms, discourage competition within the industry, and potentially drive up the cost of wholesale electricity services.  

The DC Circuit upheld FERC’s general authority to regulate transmission rights of first refusal in a prior case.  The issue presented in Oklahoma Gas was whether FERC’s decision requiring the Southwest Power Pool (SPP) to remove the rights of first refusal contained in its membership agreement was inconsistent with the Mobile-Sierra doctrine, which establishes a presumption that a contract rate for wholesale energy is just and reasonable.  The DC Circuit found in FERC’s favor, holding that the Mobile-Sierra doctrine was not applicable to the anticompetitive rights of first refusal, and thus FERC could ban them without having to meet a stringent public-interest standard.

In the decision under review, FERC determined that Mobile-Sierra applies to individualized contract rates, terms, and conditions negotiated freely at arms-length, but not to generally applicable tariff rates, terms and conditions such as those contained in SPP’s membership agreement.  The membership agreement failed the threshold “arms-length” bargaining test, according to FERC, because it is a product of a tariff development process, not contract negotiations between adverse parties.  Indeed, FERC noted that the negotiations that led to the right of first refusal provision were among parties with a common interest in protecting themselves from competition in transmission development.

Moreover, FERC relied on the fact that prospective members of the RTO (including new transmission providers) must sign the agreement, a standardized form contract, with limited room for negotiation.  Any modification to the agreement must be negotiated with all other parties who have entered into the agreement, thus creating a substantial barrier to amending the right of first refusal provision and limiting prospective members’ bargaining power.

The DC Circuit agreed with FERC’s bargaining-test analysis, stating that “even if the Mobile–Sierra doctrine might apply to [the agreement] generally, FERC did not err in determining that the doctrine does not extend to anti-competitive measures that were not arrived at through arms-length bargaining.  In other words, the term must be the product of adversarial negotiations between independent parties pursuing independent interests [for the Mobile-Sierra doctrine to apply].”  Oklahoma Gas, 2016 WL 3568086, at *4.  

The court went on to note that just as duress, fraud, and unfair dealing will remove a provision from the ambit of Mobile-Sierra, so will terms arrived at by horizontal competitors with an interest to exclude competition.  Such was the case here, where the right of first refusal created an entry barrier for non-incumbent transmission providers.

In short, the court agreed with FERC that the right of first refusal provision of SPP’s membership agreement worked as an exclusionary device that restricted competition.  Because the process by which the provision was agreed to was not arms-length bargaining, the court held that the “just and reasonable” presumption under Mobile-Sierra did not apply.  By denying the petition for review, the court’s decision leaves in place FERC’s authority to order RTOs and utility companies to remove contract clauses mandating that incumbent utilities have the first opportunity to build new transmission facilities in their respective service areas.

FERC’s order, and the DC Circuit’s decision upholding it, are consistent with the AAI’s long-running advocacy to ensure that incumbent utility control does not stifle transmission development and that the RTO transmission development process promotes competition in wholesale electricity markets.  Transmission development issues have been a topic of AAI’s Annual Energy Roundtable and numerous regulatory and court filings, a complete list of which can be found below.  See, e.g., AAI Joins Electric Co-ops and Public Power in Rehearing Request in New York Transco, LLC (May 1, 2015); AAI Files Comments in FERC’s Proceeding Involving the Transmission Merger of ITC and Entergy (Jan. 22, 2013); AAI Files Comments with the FERC Regarding Allocation of Capacity on New Merchant and Participant-Funded Transmission Projects (Sep. 24, 2012); AAI Comments on FERC’s Transmission Planning and Cost Allocation Rulemaking (Sep. 29, 2010); AAI Files Amicus Brief in New York Regional Interconnect v. FERC (FERC’s obligation to consider competition) (July 28, 2010).

Contacts:
Rick Brunell, Vice President and General Counsel, American Antitrust Institute
(617) 435-6464
rbrunell@antitrustinstitute.org

Diana Moss, President, American Antitrust Institute
(202) 536-3408
dmoss@antitrustinstitute.org

 

List of Transmission Competition Issues:
5/1/15: AAI Joins Electric Co-ops and Public Power in Rehearing Request in New York Transco, LLC, et al
The AAI joined the New York Association of Public Power, National Rural Electric Cooperative Association, and American Public Power Association today in asking the Federal Energy Regulatory Commission to reconsider an order. FERC’s order in New York Transco LLC, et al (FERC Docket No. EC15-45-000) found that the Commission had no jurisdiction under the Federal Power Act (S. 203) to review a transaction involving a joint venture of transmission assets. The request for rehearing highlights the basis for and importance of FERC’s jurisdiction in the important area of interstate commerce.

1/22/13: AAI Files Comments in FERC’s Proceeding Involving the Transmission Merger of ITC and Entergy
Today the AAI filed comments in FERC Docket EC12-145 -- the merger of the ITC and Entergy transmission systems. In the comments, the AAI encouraged the Commission to take a closer look at the competitive effects of consolidating transmission.

9/24/12: AAI Files Comments with the FERC Regarding Allocation of Capacity on New Merchant and Participant-Funded Transmission Projects
AAI files comments with the Federal Energy Regulatory Commission Proceeding in the proposed Policy Statement: "Allocation of Capacity on New Merchant Transmission Projects and New Cost-Based, Participant-Funded Transmission Projects; Priority Rights to New Participant-Funded Transmission."

9/29/10: AAI Comments on FERC’s Transmission Planning and Cost Allocation Rulemaking
AAI today filed comments in FERC's Notice of Proposed Rulemaking on transmission planning and cost allocation (Docket No. RM10-23). The comments emphasize the importance of crafting policies based on the goal of promoting competitive wholesale electricity markets.

7/28/10: New York Interconnect v. FERC (FERC’s obligation to consider competition)
The AAI filed an amicus brief in the D.C. Circuit Court of Appeals urging the Court to reverse a decision of the Federal Energy Regulatory Commission (FERC) that makes it more difficult for new transmission lines to be built in New York than in other parts of the country with regional transmission organizations.  According to the brief, FERC’s decision fails to appreciate the role of expanded transmission capacity in promoting competitive wholesale generation markets, and fails to take seriously FERC’s role in preventing anticompetitive conduct.  The brief was written by AAI Director of Legal Advocacy Richard Brunell with the help of AAI Vice President Diana Moss.

11/23/09: AAI Comments on FERC’s Electricity Transmission Planning Policy
The AAI filed comments today in the Federal Energy Regulatory Commission's proceeding involving transmission planning policy. The AAI comments address competitive issues involving transmission planning in wholesale electricity markets, including the importance of more tightly linking the goals of transmission planning and wholesale competition, tradeoffs between technical coordination and anticompetitive coordination, and the importance of considering standard-setting and market structure issues relating to demand-response and Smart Grid technologies.

4/16/09: AAI Jointly Files Intervention with APPA and NRECA in FERC Proceeding Involving Transmission Rules
Today the AAI signed on with the American Public Power Association and the National Rural Electric Cooperative Association in a motion to intervene out of time, saying FERC must consider competitive issues involving transmission rules proposed by the New York Independent System Operator.