Right of First Refusal Laws Benefit Utilities, Not Consumers
The recent passage of the Inflation Reduction Act is expected to lead to a transmission building bonanza as billions of dollars are spent connecting new wind and solar power to cities throughout the country.
But if anticompetitive legislation being debated in half a dozen state legislatures becomes law, residents across the Midwest and Great Plains could find themselves paying far more for these projects than they want or need.
The proposed bills would give electric utilities in these states a “right of first refusal” (ROFR) to build, own, and operate new transmission lines in their service area, preventing new projects from being competitively bid on by other energy companies. These bills would eliminate a key element of competition from the part of electricity grid development known as transmission planning.
Transmission planning is big business, and banning competition is a surefire way to increase costs at the expense of rate payers. In the case of transmission lines, competition does not mean rival networks of wires and poles running alongside each other. Rather, new projects can be put out for bid, enabling several companies to compete for the right to build the project. Research shows that competition can reduce the cost of new transmission projects by 20-30% .
Keeping costs low is especially important for electric transmission because of the unusual way they are paid for. Most businesses have an incentive to keep costs down because they cut into their bottom line.
Utilities, by contrast, operate under a “cost recovery” model, where how much they are allowed to charge is based on their costs, plus a set percentage of profit. Spiraling costs are passed on to customer electric bills at a premium, meaning every additional dollar of costs incurred by the utility bolsters its bottom line. The more money a utility spends the more money it makes.
This creates a strong incentive for utilities to seek out new projects with large price tags, including in markets next to those they already monopolize. And since utilities are not accustomed to competition, their expansion strategies often focus less on the market than the halls of government.
ROFR laws have popped up in a number of states over the past decade, after federal regulators expanded the availability of competition for transmission projects. These laws have also provoked a backlash, as a growing coalition of consumer groups, free market advocates, and environmental organizations have pointed out the wasteful spending that ROFR laws encourage.
Anticipating an onslaught of new transmission projects financed under the IRA, utilities are back on the offensive early in 2023 state legislative sessions. Bills to create right of first refusal have been introduced in Indiana, Missouri, Kansas, Oklahoma, Montana and Mississippi, with several moving swiftly to legislative hearings.
Perhaps with recent opposition in mind, Indiana’s ROFR bill attempts to mask its anti-competitive intent by saying that the utility must itself use competitive bidding when it subcontracts out portions of its projects.
What this provision really says, though, is that competition is great – so long as it’s the utility that benefits from it. When the consumer benefits from subjecting the utility to competition, not so much.
Cost isn’t the only reason a ROFR law would be bad for states. Many transmission lines affect more than one state and costs for the lines are often apportioned between multiple states.
A ROFR law in one state can therefore end up raising what residents in other states must pay for their electricity. This has led to disputes between states and negative fiscal impacts on ROFR states. Illinois has been resisting paying for other states’ anti-competitive transmission projects for over a decade.
ROFR may also run afoul of the Constitution. Last year, a federal appeals court raised the alarm over a Texas ROFR law on the grounds that it illegally discriminates against out of state businesses. The law remains on the books pending additional review by a lower court, but the court of appeals’ strongly worded opinion suggests its days are numbered.
Minnesota’s ROFR law has been upheld against a similar court challenge, and it may take review by the U.S. Supreme Court to settle whether ROFR’s core feature—exclusion of economic outsiders—is a fatal legal flaw. Why any state would want to jump into these unsettled legal waters is unclear.
Given historic rates of inflation, the last thing Americans need is a law that will make electric prices more expensive. Lawmakers across the country should be focusing on ways to reduce electricity costs by unleashing competition, not make them higher by padding incumbent utility profits.
Marc Marie is the policy fellow for regulations at Americans for Prosperity.
Josiah Neeley is resident senior fellow for energy at R Street.