The state ROFR wave could hit electric consumers in their pocketbooks

There is an old military saying: once is an accident, twice is a coincidence and three times is enemy action. So it is a bit alarming that three different states (Indiana, Kansas and Mississippi) filed similar bills restricting competition in the building and maintaining of electric transmission. As it turns out, the bills are likely not the result of explicit coordination, but rather are a common reaction by incumbent utilities to the growth of competition in the sector. But that should be little comfort to electric consumers, who will end up paying the price if these bills are enacted.

The three bills follow a general common pattern, granting incumbent utilities what is known in insider lingo as a “right of first refusal” (ROFR). The Kansas bill is typical, stating that an “incumbent electric transmission owner shall have the first right to construct, upgrade, own and maintain an electric transmission line that has been approved for construction” if the line interconnects to its facilities. In plain English, this means that only the incumbent utility would have the right to build, own, operate and maintain new transmission lines within its service territory. Currently when a new electric transmission line is being planned in these states, the project must be put out to bid, and other companies have the ability to win the right to build and own the lines if they produce the best offer.

Eliminating competition is typically a bad deal for consumers, and research shows electric transmission is no exception. When transmission projects are open to competition, the winning bids are 20-30 percent less on average than for projects not open to competition. Even where an incumbent utility ultimately ends up winning the bidding process, the existence of competition encourages it to produce lower price, higher quality bids.

It’s understandable that utilities would be especially eager to eliminate their competition for new transmission projects now. Last year, several key utilities sought to persuade federal regulators to grant an ROFR nationwide. But as that effort appears to be going nowhere, and as the passage of the Inflation Reduction Act means billions in new transmission projects are coming over the next few years, utilities have turned their focus back to state legislatures.

What’s good for the monopoly utility, however, isn’t always good for the consumer. So it also isn’t a surprise that pro-ROFR efforts have increasingly provoked opposition from a wide range of business, consumer, free market and environmental groups.

Perhaps as a result of this opposition, ROFR advocates are beginning to adopt a more subtle approach. Indiana’s proposed ROFR legislation, for example, makes a utility’s ROFR contingent on the utility itself agreeing to use competitive bidding for subcontracting that it does on a transmission project. This requirement could serve to obscure the anti-competitive nature of the legislation. In reality, provisions like this only add insult to injury, saying in effect that competition is great when others have to compete for the utility’s business but not when the utility has to compete for the business of consumers.

The Mississippi bill is also striking, albeit for a different reason. Because state ROFR laws discriminate against out-of-state businesses in favor of incumbents, they have given rise to challenges under longstanding court precedents involving what’s known as the Dormant Commerce Clause of the U.S. Constitution. Last year, Texas’ ROFR law was invalidated by the U.S. Fifth Circuit Court of Appeals on Dormant Commerce Clause grounds. Mississippi is in the Fifth Circuit, and is bound by its decisions. Yet that has not stopped ROFR supporters from attempting to enact ROFR in their state.  

It will be interesting to see how this new wave of state ROFR bills fares in the coming months. Utilities typically hold a lot of sway in state legislatures, but the growing chorus of opposition and the size of the stakes may make states think twice before they impose such a significant cost on their citizens. 

Image credit: Aloshin Evgeniy