Opposition to Anti-Competitive Right of First Refusal (ROFR) Laws for Electric Transmission
Testimony in opposition to Senate Bill 838 from:
Josiah Neeley, Texas Director, R Street Institute
February 4, 2022
Senate Committee on Utilities, Technology and Telecommunications
Chair Bradley and members of the committee,
My name is Josiah Neeley. I am a senior fellow with the R Street Institute, a center-right, free market think tank that supports limited effective government in many areas, including the electricity market. This is why Senate Bill 838, which would grant incumbent transmission utilities the right of first refusal (ROFR) to build and operate new transmission projects, is of special interest to us. There are several points I wish to emphasize with respect to this legislation.
First, Senate Bill 838 is anti-competitive and bad for consumers. The bill would give an incumbent utility the authority to insulate itself from competition for transmission projects. These state-sanctioned monopoly utilities operate under cost-of-service regulation, meaning that the more capital they spend, the more profit they make under government-guaranteed rates of return. Historically, the absence of transmission competition has resulted in a severe lack of economic discipline—leading to cost overruns, with captive consumers footing the bill.
We all know that competition can help keep costs down and spur better service. When it comes to building electric transmission, the cost savings from competition can be substantial. For example, the Brattle Group recently studied how competitive transmission projects fared compared to their non-competitive counterparts. For electric transmission projects open to competition, the winning bid averaged 40 percent less than the initial cost estimate for the project, while non-competitive projects historically cost 34 percent more than initial estimates. [1] Transmission costs are already a growing fraction of the price of delivering electricity to consumers throughout the country, and up to $100 billion in new transmission projects are expected in the region in the coming years. [2] Wisconsin’s electric rates are already above the national average and have been above the average for Midwest state for almost 20 years. [3] Legislation should aim to help alleviate these costs, not add to them.
Second, ROFR requirements can delay needed transmission projects and provoke conflicts with other states. Where incumbent utilities have secured ROFR laws in other states, they have left a wake of deleterious economic results and lawsuits. The concerns even evoked engagement from the United States Department of Justice, which has made clear that state ROFRs reduce competition and harm consumers. [4]
The ROFR backlash has undermined interstate cooperation in developing regional transmission projects, especially in the Midwest. For example, the state of Illinois began to resist paying for the burdens of other states’ anti-competitive transmission laws over a decade ago. [5] In deterring regional transmission, ROFR has forced states to forego reliability and economic development benefits. Utilities often circumvent efficient regional projects by breaking up the project into smaller, balkanized and costlier pieces in order to comply with a ROFR law. [6]
Third, Senate Bill 838 will not affect federal action on competitive transmission requirements. This legislation is being considered during a larger national discussion about the benefits of competition for electric transmission. In 2011, the Federal Energy Regulatory Commission (FERC) unanimously issued its Order 1000, which removed federal ROFR requirements in order to promote greater competition and encourage transmission investment at the lowest cost. [7] FERC is currently considering updating its transmission regulations, and may expand Order 1000 to allow competitive bidding for a greater number of transmission projects. For the purposes of this hearing, it is important to note that nothing in Senate Bill 838 would or could prevent FERC from acting in this area. It has been an established principle of American law for over 200 years that where state law conflicts with federal laws or regulations, it is the federal law that governs. [8] Indeed, the passage of similar ROFR laws in other states is part of what has motivated FERC to take up consideration of this matter again.
For these reasons, the R Street Institute opposes Senate Bill 838. Thank you for your time today and I would be happy to take questions.
Sincerely,
Josiah Neeley
Senior Fellow
R Street Institute
[email protected]
[1] Johannes P. Pfeifenberger et al., “Cost Savings Offered by Competition in Electric Transmission,” The Brattle Group, April 2019, pp. 29, 40. https://www.brattle.com/insights-events/publications/report-by-brattle-economists-discusses-the-benefits-of-competitive-transmission.
[2] Chris Hubbuch, “With billions at stake, Wisconsin lawmakers seek to block power line transmission,” Wisconsin State Journal, Jan. 22, 2022. https://madison.com/wsj/news/local/govt-and-politics/with-billions-at-stake-wisconsin-lawmakers-seek-to-block-power-line-competition/article_f971b23a-c652-5e3e-bbb7-6b54deaa2139.html.
[3] “Wisconsin’s Regulated Electricity Rates Highest in the Midwest,” Electricity Choice, last accessed Feb. 4, 2022. https://www.electricchoice.com/blog/wisconsins-regulated-electricity-rates-highest/#:~:text=Wisconsin’s%20Current%20Electricity%20Rates&text=Wisconsin’s%20average%20rate%20is%2010.97,at%208.65%20cents%20per%20kWh.
[4] Daniel E Harr, “Letter of the U.S. Department of Justice Antitrust Division to the Honorable Travis Clardy,” Department of Justice, April 19, 2019. https://www.justice.gov/atr/page/file/1155881/download.
[5] Illinois Commerce Commission v. FERC, 576 F.3d 470, 476 (7th Cir.2009), filed April 13, 2009. https://www.dwt.com/files/uploads/Documents/Advisories/Illinois%20Commerce%20v%20FERC.pdf.
[6] Josiah Neeley, “Right of First Refusal Laws for Electric Transmission are Anti-Competitive in Interstate Commerce,” The R Street Institute, June 2021, p. 1. https://www.rstreet.org/wp-content/uploads/2021/06/explainer27-1.pdf.
[7] Order No. 1000- Transmission Planning and Cost Allocation, Federal Energy Regulatory Commission, last accessed Feb. 4, 2022. https://www.ferc.gov/electric-transmission/order-no-1000-transmission-planning-and-cost-allocation.
[8] McCulloch v. Maryland, 17 U.S. 316 (1819). https://supreme.justia.com/cases/federal/us/17/316.
