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Supreme Court Declines to Review Order No. 1000 Appeal Involving Right of First Refusal

April 03, 2017 posted by Eric Christensen

Another Milepost In The Long, Strange Trip
Of the Mobile-Sierra Doctrine

            On March 6, the U.S. Supreme Court denied a petition to review the Seventh Circuit’s decision in MISO Transmission Owners v. FERC, thus putting to rest the last set of challenges to the Federal Energy Regulatory Commission’s (“FERC”) Order No. 1000, which established mandatory regional transmission planning processes for the nation’s electric transmission system and helped open transmission markets to independent transmission providers.  Specifically, the Seventh Circuit upheld FERC’s decision to eliminate the “right of first refusal,” which previously allowed incumbent utilities operating in regional transmission organizations to construct transmission projects within their service territory, even when proposed by another entity.  With the Supreme Court’s refusal to review the Seventh Circuit’s decision, all legal challenges to Order No. 1000 have been finally rejected and FERC’s policy of opening transmission markets to competition therefore stands on firm legal ground.  The Court’s ruling also represents an important advance in the often-halting development of the Mobile-Sierra doctrine.

            Order No. 1000 was previously upheld by the D.C. Circuit and has now been largely implemented through regional transmission planning processes.  An important element of Order No. 1000 is the elimination of the right of first refusal because this mechanism previously allowed incumbents to take over and build transmission facilities proposed by third parties.  FERC concluded that this practice was anti-competitive because it discourages independent investment in the transmission system -- incumbents can adopt projects proposed by potential competitors, leaving those competitors with no way to recoup the often-substantial investments necessary to identify transmission projects.  As part of its lengthy ruling upholding Order No. 1000, the D.C. Circuit concluded that FERC acted within its authority when it ordered the elimination of the right of first refusal.  The Seventh Circuit decision rejects a second line of attack mounted by transmission incumbents against this aspect of Order No. 1000, arguing that because the right of first refusal is created by contracts governing the formation of MISO and other regional transmission organizations, FERC is required under the Mobile-Sierra doctrine to presume the contracts are reasonable. 

            That the transmission incumbents were credibly able to raise this argument perhaps demonstrates the extent to which the Mobile-Sierra doctrine has drifted from its roots, but the Seventh Circuit’s rejection of the argument helps place the doctrine in its proper context.  The doctrine is based on a pair of 1956 Supreme Court decisions holding that, when a regulated utility agrees to a specific rate by contract, the utility cannot use the Federal Power Act’s rate adjustment mechanism to adjust contract rates upwards.  This contrasts with tariff rates, which can be adjusted upward as a utility’s cost of service increases.  Over the years, the Mobile-Sierra doctrine has been described as everything from “refreshingly simple” to so complex that it is “akin to a dark and arcane science.”

            The Seventh Circuit’s decision, written by Judge Richard Posner, helps simplify the doctrine.  Judge Posner interprets Mobile-Sierra as holding that:

[I]f a power company makes a contract that turns out to be disadvantageous to it but it does no harm to the broader public, a regulatory commission has no business bailing the company out.  It’s a big boy; it took a risk; the risk materialized; but the adverse consequences are contained, they do not ramify, so there is no occasion for regulatory intervention.

In other words, Judge Posner concludes, Mobile-Sierra presumes that a contract agreed to at arm’s length between sophisticated parties with opposing interests meets the statutory “just and reasonable” standard. 

            But the same presumption does not apply where “parties are seeking to protect themselves from competition from third parties.”  Where that occurs, even though a contract is involved, “contract rights are not sacred, especially when they curtail competition.”  The contracts governing the formation of the Midwest Independent System Operator, which incorporated a right of first refusal mechanism, are not presumed reasonable under Mobile-Sierra because they “created a potential for higher rates to consumers of electricity than if competition to create transmission facilities in transmission companies’ service areas was allowed.” 

            By rejecting the last challenge to FERC’s Order No. 1000, the Seventh Circuit’s opinion affirms the regulatory groundwork for competition in the provision of transmission services envisioned by Order No. 1000.  The opinion is therefore an important milestone for independent transmission developers.  The Seventh Circuit’s opinion is also an important reminder that the Mobile-Sierra doctrine, which emerged from a regulatory world in which competition was largely foreign, must be carefully applied to new situations as the industry continues to evolve so that it supports, rather than hinders, effective competition and consumer protection.