Testimony before the Oklahoma Senate Committee on Energy and Telecommunications in Opposition to Right-Of-First Refusal (ROFR) Requirements for Electric Transmission Projects

Testimony from:
Josiah Neeley, Senior Fellow, Energy, R Street Institute

October 23, 2023

Senate Committee on Energy and Telecommunications

Chair and members of the committee,

Thank you for inviting me to speak today. My name is Josiah Neeley. I am a senior fellow, in energy policy at the R Street Institute. R Street is a center-right, free market think tank that supports limited effective government in many areas, including the electricity market.

R Street has conducted research on the cost impacts of so-called right of first refusal (ROFR) laws, as well as its effects on other aspects of the electricity system. A lot of extravagant and/or vague claims are made on behalf of ROFR laws, so it is important to be clear about what these laws do and do not do.

ROFR laws do not give additional authority or oversight to states

Like most of the nation, Oklahoma belongs to a regional transmission organization (RTO). RTOs are independent, largely nonprofit organizations that typically operate over a multi-state region and are responsible for transmission grid reliability, planning and operation within that region. RTOs facilitate the buying and selling of electricity between utilities and other market participants, and monitor the market to prevent market manipulation. The RTO that Oklahoma belongs to, the Southern Power Pool (SPP), contains all or part of most of the states surrounding Oklahoma.

When an RTO, such as SPP, decides to build a new transmission project, it has to decide who should build that project, and own and maintain it after it is completed. Historically, the RTO would give the right to build the project to a local utility in the region where the project would be located. This was known as a right of first refusal (ROFR), because the utility in theory could decline to take on the project.

Prior to 2011, all regional transmission projects were subject to a federal ROFR. However, concerns about increasing project costs and the need to spur transmission growth led the Federal Energy Regulatory Commission (FERC) to issue Order 1000, which repealed federal ROFR requirements. Order 1000, however, applied only to regional projects—local projects, for example, were exempted. In addition, Order 1000 did not prohibit states from enacting their own ROFR requirements.

Since Order 1000, RTOs increasingly select who will build a transmission project through a competitive bidding process. Competitive bidding is used in many areas of contracting and procurement, and is especially useful for large infrastructure projects. Entities, who meet necessary qualifications in terms of technical experience, financing, and other criteria, submit bids for the project, and SPP then awards the right to build and operate the project to the best bid. Cost is, of course, a key factor in determining which bid to select, but RTOs also consider other factors, such as timeliness. However, if a state has enacted its own ROFR requirement, RTOs will defer to this, and forgo competitive bidding for projects in that state.

Regardless of how a project builder is selected, after the project is completed, the cost of the project is then allocated throughout the region based on a formula developed by the RTO. The project would be overseen by the RTO, though some elements, such as siting, remain under state authority. Disputes over cost and other matters are within the jurisdiction of FERC.

Thus, ROFR requirements do not alter the balance of state and federal authority in electric transmission. All elements of the process handled by the RTO or FERC without a ROFR are handled by the RTO or FERC with a ROFR, and the same elements remain under state authority with and without ROFR. ROFR laws merely mean that instead of using competitive bidding to select who can build, operate, and maintain a transmission project, the projects are awarded to a local utility in a no bid contract.

ROFR laws increase costs for consumers

If ROFR does not give additional authority to states, then what does it do? In short, ROFR increases costs. It is common sense that eliminating competition drives up prices. This common sense conclusion is backed up by the best research, which shows that the use of competition in electric transmission projects results in substantial cost savings. Research conducted by the R Street Institute has found that eliminating competition in building transmission projects could result in billions in increased costs.[1] Likewise, a study by Brattle found that competition resulted in an average cost savings of 20-30 percent.[2]

The Brattle study has received criticism on the grounds that it is based on initial bids, rather than final project costs. It is true that cost overruns can and do occur for all infrastructure projects, whether competitively bid or not. Yet available evidence suggests that the cost savings from competition are not merely a matter of initial bids. For example, a study by Concentric widely cited by critics of competition found that competitive projects had an average cost overrun of 27 percent.[3] Yet the average cost overrun for non-competitively bid projects is 34 percent.[4] Organizations participating in a competitive process can also include projections, such as cost caps, in their bid offer to minimize the risk to consumers from cost overruns.

Unnecessarily adding costs to transmission projects is harmful to electric consumers. According to data from the Energy Information Agency, annual spending on the electric transmission system by major U.S. utilities has grown from $15 billion a year in 2005 to nearly $40 billion annually now, with the majority of these costs coming from new investments. Transmission costs are only going to increase going forward, as the Inflation Reduction Act and other system upgrades lead to substantial expansions of the electric transmission system. Some projections suggest the U.S. will need to spend $2.1 trillion by 2050 to build-out the transmission grid.[5]

Electricity prices are already on the rise, with increasing transmission costs being a key factor. Between 2014 and 2020, transmission costs in RTO regions increased by $74.9 billion or 78.7 percent. Electricity demand, by contrast, remained flat over this period.[6] It is incumbent on states, therefore, to ensure that everything that can be done is done to reduce costs and timelines for the construction of necessary new transmission projects.

ROFR laws increase tensions between states and may be unconstitutional

Increasing cost to consumers is not the only negative consequence of a state ROFR requirement. 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 spurred engagement from the United States Department of Justice, which has made clear that state ROFRs reduce competition and harm consumers.[7]

The ROFR backlash has undermined interstate cooperation in developing regional transmission projects. For example, the state of Illinois began to resist paying for the burdens of other states’ anti-competitive transmission laws over a decade ago.[8] In deterring regional transmission, ROFR has forced states to forgo 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.[9]

ROFR requirements also raise serious constitutional concerns. Under the Dormant Commerce Clause of the U.S. Constitution, states may not enact laws that discriminate against out-of-state businesses. As the U.S. Court of Appeals for the Fifth Circuit recently stated, ROFR requirements discriminate against out-of-state businesses because “Only companies that already have transmission lines can build new lines that connect to the existing lines.”[10] Courts are currently split on this issue; the Eighth Circuit has upheld a Minnesota ROFR law against challenge, while the Fifth Circuit has indicated that Texas’ ROFR statute violates the Dormant Commerce Clause. Ultimately, resolution of this issue will require a decision of the U.S. Supreme Court. Until that happens, any new state ROFR law must be seen as legally questionable at best.

For these reasons, the R Street Institute urges Oklahoma not to enact any new ROFR requirements for the state. Thank you for your time today and I would be happy to take questions.

Sincerely,

Josiah Neeley
Texas Director and Resident Senior Fellow
R Street Institute
[email protected]

[1] Josiah Neeley, “How ROFR laws increase transmission costs in the Midwest,” R Street Institute, March 7, 2023, available at https://www.rstreet.org/commentary/how-rofr-laws-increase-electric-transmission-costs-in-midwestern-states/

[2] “Cost Savings Offered by Competition in Electric Transmission,” The Brattle Group, April, 2019, available at https://www.brattle.com/wp-content/uploads/2021/05/16726_cost_savings_offered_by_competition_in_electric_transmission.pdf.

[3] “Competitive Transmission Experience-to-date Shows Order 1000 Solicitations Fail to Show Benefits,” Concentric Energy Advisors, August, 2022, available at https://ceadvisors.com/publication/competitive-transmission-experience-to-date-shows-order-no-1000-solicitations-fail-to-show-benefits/

[4] “Cost Savings Offereed by Competition in Electric Transmission,” The Brattle Group, December, 2019, available at https://www.brattle.com/wp-content/uploads/2021/05/17805_cost_savings_offered_by_competition_in_electric_transmission.pdf

[5] NET-ZERO AMERICA: Potential Pathways, Infrastructure, and Impacts, Princeton University,
https://netzeroamerica.princeton.edu/?explorer=year&state=national&table=2020&limit=200

[6] Electricity, U.S. Energy Information Administration, https://www.eia.gov/electricity/

[7] “Letter of the U.S. Department of Justice Antitrust Division to the Honorable Travis Clardy,” U.S. Department of Justice, April 19, 2019. https://www.justice.gov/atr/page/file/1155881/download.

[8] Illinois Commerce Commission v. FERC, 576 F.3d 470 (7th Cir. 2009), United States 7th Circuit Court of Appeals, filed April 13, 2009.
https://www.dwt.com/files/uploads/Documents/Advisories/Illinois%20Commerce%20v%20FERC.pdf.

[9] Josiah Neeley, “Right of First Refusal Laws for Electric Transmission are Anti-Competitive in Interstate Commerce,” R Street Institute, June 2021, p. 1. https://www.rstreet.org/wp-content/uploads/2021/06/explainer27-1.pdf.

[10] NextEra v. Lake, No. 20-50160 (5th Cir. 2022). https://www.ca5.uscourts.gov/opinions/pub/20/20-50160-CV0.pdf