On April 8, 2016, the U.S. Court of Appeals for the Seventh Circuit (“Seventh Circuit”) denied petitions for review from the Midcontinent Independent System Operator, Inc. (“MISO”) and the MISO transmission owners (“TOs”) regarding FERC’s Order No. 1000 requirement that transmission providers remove from their tariffs and agreements provisions granting incumbent transmission owners a right of first refusal (“ROFR”) to construct transmission facilities selected in a regional transmission plan. In addition, the Seventh Circuit also upheld FERC’s classification of baseline reliability projects as local projects. 

In 2011, FERC issued Order No. 1000, which included requirements that transmission providers participate in regional transmission planning processes and that the costs of the projects are allocated to areas of the region that would most benefit from the project. In doing so, FERC also required transmission providers to remove provisions from their tariffs and agreements that grant incumbent transmission owners a ROFR to construct transmission facilities selected in a regional transmission plan for purposes of cost allocation. However, FERC separately classified baseline reliability projects as local, rather than regional, and thus allowed transmission owners to retain a ROFR for those baseline reliability projects.

In response to Order No. 1000, MISO and the MISO TOs appealed the ROFR removal requirement. MISO and the MISO TOs made the argument that under the Mobile-Sierra doctrine, FERC must presume that MISO’s ROFR for transmission projects is just and reasonable because the ROFR was negotiated by sophisticated parties to ensure that TOs were obligated to construct transmission facilities identified by the MISO planning process. Further, the MISO TOs argued that the ROFR was intended not to curtail competition, but to allow MISO to require TOs to build needed facilities in their service areas.

In the opinion, the Seventh Circuit dismissed MISO’s and the MISO TOs’ arguments regarding the Mobile-Sierra doctrine, stating that “contract rights are not sacred, especially when they curtail competition.” Instead, the Seventh Circuit held that the TOs failed to show why retaining the ROFR provisions would be in the public interest. The Seventh Circuit also rejected arguments that the ROFR was not intended to curtail competition, concluding that if such were the case, there would be no need for the ROFR in the first place.

The Seventh Circuit also addressed separate challenges raised by LSP Transmission Holdings, LLC – a non-incumbent transmission provider in MISO – regarding certain other rulings made by FERC in Order No. 1000. Each of these challenges to Order No. 1000 was also rejected. Notably, the Seventh Circuit upheld FERC’s determination that baseline reliability projects should retain the ROFR provisions based on their “local” classification. In doing so, the Seventh Circuit (1) noted the need for a quick resolution to an identified reliability issue, instead of holding a lengthy competitive bidding process for such baseline reliability projects; and (2) concluded that the local allocation of costs associated with such transmission projects was roughly commensurate with the allocation of related benefits. Finally, the Seventh Circuit held that both FERC’s approval of MISO’s provisions honoring ROFRs under state law and FERC’s treatment of the Entergy Corp. footprint as local were appropriate.

A copy of the order is available here.