Brief Right of First Refusal for Electric Transmission

Background

Transmission lines are critical energy infrastructure as they deliver the power generated at power plants to the distribution network and provide a resilient backbone to share power between regions in times of extreme weather or grid stress. Most of the transmission lines in the U.S. are owned and operated by utilities. Each of these utilities operates within a specific service territory. In the context of ROFR, utilities are typically the incumbent developers that are offered the ROFR when a project is within their own service territory.

While most transmission projects are constructed, owned and operated by utilities, some projects may also be developed by independent transmission companies. These companies are standalone for-profit companies that construct, own and operate electric transmission facilities in a region. They are under the jurisdiction of Regional Transmission Organizations.

State ROFR laws first began to emerge after Order 1000 was issued in 2011 by the Federal Energy Regulatory Commission. Prior to Order 1000, a federal ROFR was in place for incumbent utilities' transmission projects. The FERC order required regional transmission projects to be subjected to competitive bidding. The bidding process is typically overseen by the grid operator which is a regional transmission organization or independent system operator in most of the US. This competitive requirement only applies to transmission facilities selected in a regional transmission plan for cost allocation, meaning the project benefits the region beyond the utility's service territory. The FERC maintained the federal ROFRs for other transmission projects, such as projects located exclusively in the utility's service territory.

Despite the repealed federal ROFR requirements, Order 1000 allowed states to enact their own ROFR requirements. Since 2011, a number of states have introduced and enacted legislation to establish state ROFR systems for transmission projects.

Current Landscape

Currently 12 states have enacted ROFR laws for transmission development—Alabama, Indiana, Iowa, Michigan, Minnesota, Mississippi, Montana, Nebraska, North Dakota, Oklahoma, South Dakota and Texas. In 2023, seven states considered ROFR legislation with both Indiana and Mississippi enacting new requirements. Previously, Indiana allowed ROFR for utilities to build, own and operate transmission lines in their own service area. HB 1420 expanded these rights to interregional transmission lines as well. Mississippi passed SB 2341 to become the most recent state to allow ROFR. The Illinois General Assembly also passed a bill to grant ROFR for incumbent utilities, but the bill was vetoed by the governor.

State ROFR laws only grant ROFR to incumbent utilities when the proposed transmission line interconnects to facilities owned by the utility. In the case that a transmission line will connect to facilities owned by two or more incumbent utilities, the right to construct, own and operate the line belongs proportionately to each utility unless there is a formal agreement made by the utilities. Incumbent utilities are typically given a window, 90 to 120 days, to indicate an intent to construct the line. If the window passes, then the utility surrenders its ROFR, and the project will be subject to a competitive bidding process.

Support for ROFR

The recent interest in ROFR laws is largely due to the emerging need for transmission expansion across the country. According to the Department of Energy's National Transmission Needs Study, existing transmission capacity may need to double or even triple by 2050. New clean energy projects are being proposed and need to be connected to the grid. Most states with ROFR laws are in the Midwest, the predominate region of the country for wind energy production, and significant transmission expansion is necessary to connect the wind sources to the grid.

Despite the need for grid expansion, the planning and construction of transmission infrastructure can be a long and tedious process. Many believe that ROFR laws speed up transmission development by removing the bidding process. The length of the bidding process can vary depending on the project with some bidding processes taking more than a year. Utilities and developers end up spending considerable time and money to ensure a successful bid. An additional concern is that some developers may make initial lowball or best-case-scenario bids to win contracts that ultimately lead to delays and cost increases when the expectations can't be met.

ROFR proponents also suggest that incumbent utilities are most familiar with the local areas and thus are better suited for projects. Incumbent utilities may have a better understanding of the needs and challenges of a transmission project in the area, so they could have a more realistic proposal for the project. Additionally, incumbent utilities already have preestablished relationships with stakeholders in the area.

Opposition for ROFR

On the other hand, ROFR laws have also been strongly criticized as anti-competition. Competitive markets are often cited for leading to lower costs and increased innovation. By participating in a competitive bidding process, developers will be more inclined to reduce their costs to win the project contract.

Critics propose that the lack of competition from ROFR laws can cause more significant delays for projects. It is believed that a competitive process forces developers to more strictly adhere to project timelines, making it more likely for projects to be completed on time. Projects with less strict timelines are considered more likely to face delays that lead to higher utility bills for customers. Additionally, although ROFR laws may save time by removing the bidding process, the overall time saved can be relatively insignificant compared to the total development timeline for transmission infrastructure which can take years or even decades to be completed.

The growing need for larger interregional transmission projects is also raising concerns about ROFR laws. As new clean energy projects are being developed in certain regions, new long distance transmission lines are needed to connect the generation plants to population centers. These extensive transmission projects often cross state lines and different utility areas, which may trigger a ROFR law on certain sections of the project. This potential for segmentation would prevent a single developer from building the entire line and would make interregional transmission projects more complicated to plan and build.

Conclusion

Since the issuance of Order 1000 policymakers have debated the benefits and disadvantages of ROFR laws. This debate has surged recently due to the heightened need for new transmission infrastructure across the country. Although Order 1000 was issued over a decade ago, transmission development is an exceptionally long and gradual process. Therefore, despite strong opinions on both sides, many consider it still to be too soon to judge the effects of Order 1000 and state ROFRs.