Can Interstate Compacts Overcome the ROFR Challenge?  

In recent years, repeated controversies have erupted over how to select who can build transmission projects. Some states allow for competition in the selection of project builders and operators. Under this system, different companies can submit bids for the project, with the winning bidder getting to build, own, and operate the project. Other states give a right of first refusal (ROFR) to incumbent utilities to build, own, and operate transmission projects within their service territories.

Because ROFR laws restrict competition, they lead to higher costs for consumers. Research indicates that competition provides a 20 to 30 percent cost savings for transmission projects. Competitive bidding gives companies a strong incentive to find ways to reduce inefficiencies and lower costs to consumers, encouraging the use of innovations like cost caps or lower profit rates in bids. Last year, R Street analyzed a set of projects approved by the Midcontinent Independent System Operator (MISO), which manages grid operations in Midwestern states. We found that the existence of ROFR laws in some states would lead to these projects costing $1.3 billion more than if competitive bidding were allowed in all MISO states.   

State ROFR laws do not simply impact consumers in states with a ROFR requirement. Many regional transmission projects benefit residents in more than one state. In such cases, project costs are allocated to electric consumers in those states. This can lead to a perverse situation where some of the added costs from a state’s ROFR law are passed to residents of other states who had no say in the enactment of the law. For example, residents of Wisconsin, which has no ROFR law, can expect to pay $197 million more for the MISO projects described above due to the presence of ROFR laws in nearby states.

This can put states in a tricky spot. A state that enacts a ROFR benefits its utilities at the expense of consumers in their state as well as in neighboring states. But a state without a ROFR may still face increased costs, and transmission companies from their state are prohibited from bidding on projects.

This dynamic has led to conflicts between states and to lawsuits challenging the constitutionality of ROFR requirements. But there may be another way to cut through the dilemma states face on ROFR: an interstate compact.

Interstate compacts are agreements between multiple states. Explicitly authorized by the U.S. Constitution, states have used interstate compacts to coordinate mutually beneficial policies in areas ranging from water rights to energy to taxes.

Interstate compacts are a possible solution to states’ ROFR dilemma. While the details of such a compact would need to be worked out, the basic concept would be for states to agree to repeal (or not enact) a ROFR law for their state in exchange for a similar promise from other states. Such a compact might even be contingent, going into effect only once a certain number of states have joined. A ROFR compact could appeal to states that currently have no ROFR but are looking to deal with the negative consequences of ROFR laws in nearby states. And in some states that already have a ROFR requirement, joining a compact could be an easier political lift than a straight ROFR repeal. As of now, this idea remains theoretical; no state has proposed such a compact. But it could provide an option for states to reach a mutually beneficial outcome (cheaper electricity) without falling into a “beggar-thy-neighbor” approach to transmission.