ROFR in the Midwest: 2023 Legislative After Action Analysis
Earlier this year, I noted the flurry of bills being filed in states to limit the use of competition in constructing new transmission projects. These bills, known as “right of first refusal” (ROFR) laws, were being pushed by utilities to give them exclusive rights over the large number of new transmission projects coming down the pipe in the next few years. Now that the legislative dust has (mostly) settled, I thought it would be good to look at how these bills fared and what that will mean for transmission costs going forward.
Overall, the record has been mixed. Bills to establish ROFR requirements were defeated in Kansas, Montana, Oklahoma and Wisconsin. On the other side of the ledger, ROFR requirements were enacted in Mississippi and Indiana. Meanwhile, as of this writing, the situation in Illinois remains unresolved. While the Illinois Legislature passed a last-minute ROFR bill in May, the law was vetoed by Gov. JB Pritzker in August. It remains to be seen whether the Legislature will be able to override this veto successfully.
But the biggest change came not through a legislature but through the courts. Back in 2020, Iowa enacted a ROFR law in procedurally irregular circumstances. Advocates of competition sued and won a victory in March, when the Supreme Court of Iowa suspended the law pending resolution of the legal challenge. The Court had harsh words for the law, declaring it “quintessentially crony capitalism” and noting that “common sense tells us that competitive bidding will lower the cost of upgrading Iowa’s electric grid and that eliminating competition will enable the incumbent to command higher prices for both construction and maintenance.”
To get a sense of what these changes will mean in practice, we can look to R Street research conducted earlier this year on how competition could affect the cost of some upcoming transmission projects in the Midwest. In 2022, the Midcontinent Independent System Operator (MISO), which manages the electric grid in the Midwestern United States, approved $10 billion in new transmission projects. These projects are the first “tranche,” or portion, of what is expected to be as much as $100 billion in transmission projects needed to maintain grid functioning in the coming years.
Because MISO’s geographic footprint includes all or part of North and South Dakota, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Michigan and Indiana, it is a good test case for how much impact ROFR laws can have in practice. Our analysis found that ROFR laws then in place would increase building costs by $1.25 billion on a 40-year net present value basis. By contrast, the fact that some states in the region allowed competition meant the projects would be $665 million cheaper than if all MISO states had ROFR requirements.
Though the fate of ROFR in Illinois (and Iowa) remains undecided, we can still get a sense of how recent changes will affect costs relative to the status quo at the beginning of the year. Some of these changes are bad news. Indiana’s new ROFR law will increase the cost of MISO’s Tranche 1 projects by $129 million. And if Illinois were to join Indiana as a new ROFR state, project costs would rise by an additional $127 million, for a total increase of $256 million.
But the situation is not all bad. Due to its favorable geographic location, Iowa is poised to reap outsized benefits from competition. Cost savings from eliminating Iowa’s ROFR alone are projected to be $387 million—enough to turn that $256 million increase into a $131 million decrease versus the status quo. And if Illinois ends up not enacting ROFR, that would mean a $258 million decrease as compared to the situation at the beginning of 2023. Thus, the decisions Illinois and Iowa make on ROFR could ultimately result in up to a half a billion dollars’ worth of difference in project costs.
As the saying goes, a million here, a million there, and soon you are talking real money. Illinois should follow Gov. Pritzker’s lead instead of saddling consumers with hundreds of millions in additional electricity costs by eliminating competition through a state ROFR requirement.