In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14‐2153
MISO TRANSMISSION OWNERS, et al.,
Petitioners,
v.
FEDERAL ENERGY REGULATORY COMMISSION, et al.,
Respondent.
_________________________
No. 14‐2533
LSP TRANSMISSION HOLDINGS, LLC, et al.,
Petitioners,
v.
FEDERAL ENERGY REGULATORY COMMISSION, et al.,
Respondents.
___________________________
No. 15‐1316
LSP TRANSMISSION HOLDINGS, LLC, et al.,
Petitioners,
v.
2 Nos. 14‐2153, 14‐2533, 15‐1316
FEDERAL ENERGY REGULATORY COMMISSION, et al.,
Respondents.
__________________________
Petitions for Review of Orders of the
Federal Energy Regulatory Commission.
Nos. ER13‐187‐000, ER13‐187‐001, ER13‐187‐002, ER13‐187‐003, ER13‐
187‐004, ER13‐186‐000, ER13‐186‐001, ER13‐89‐000, ER13‐101‐000, ER13‐
101‐001, ER13‐84‐000, ER13‐95‐000
____________________
ARGUED FEBRUARY 8, 2016 — DECIDED APRIL 6, 2016
____________________
Before POSNER, EASTERBROOK, and HAMILTON, Circuit
Judges.
POSNER, Circuit Judge. We have consolidated for decision
three closely related cases challenging rulings by the Federal
Energy Regulatory Commission. All involve what are called
“rights of first refusal,” which in the present context mean
rights to have a first crack at constructing an electricity
transmission project—that is, having the opportunity to
build it without having to face competition from other firms
that might also like to build it. The electrical companies in‐
volved in these cases are all members or potential members
of the vast Regional Transmission Organization called MI‐
SO, an acronym for Midcontinent Independent System Op‐
erator. MISO monitors and manages the electricity transmis‐
sion grid in its region (which embraces a number of mid‐
western and southern states, plus the Canadian province of
Manitoba, all as shown in the map below), by balancing the
Nos. 14‐2153, 14‐2533, 15‐1316 3
load so that lines don’t carry too much (or too little) power,
making sure that the power can be delivered without trip‐
ping safeguards that block damage to other lines, setting
competitive prices for transmission services, and planning
and supervising the expansion of the electrical transmission
system throughout its vast region. See, e.g., “Midcontinent
Independent System Operator,” https://en.wikipedia.org/
wiki/Midcontinent_Independent_System_Operator (visited
March 31, 2016, as were the other websites cited in this opin‐
ion).
Regional Transmission Organizations, such as MISO,
emerged because transmitting the right amounts of electrici‐
ty to the right places to serve consumers requires coordinat‐
ing transmission throughout a region, and an independent
system operator can coordinate the transmission system in a
way that among other things promotes competition among
the producers of electrical power. Federal Energy Regulatory
Commission, “Energy Primer: A Handbook of Energy Mar‐
ket Basics” 40, 47, 58–61 (November 2015), www.ferc.gov/
market‐oversight/guide/energy‐primer.pdf; Illinois Commerce
4 Nos. 14‐2153, 14‐2533, 15‐1316
Commission v. FERC, 721 F.3d 764, 769–70 (7th Cir. 2013). In
addition to the functions performed by MISO that we’ve al‐
ready mentioned, its control over all network transmission
facilities in its region enables it to provide open‐access
transmission service, allocate transmission revenues, and
maintain system security. Midwest Independent Transmission
System Operator, Inc., 84 FERC ¶ 61231 at p. 62139.
Until 2011, if MISO decided that another transmission fa‐
cility was needed in some part of its domain the MISO
member that served the local area in which the facility
would be built had the first crack at building it. The reason
was that the contract among the MISO transmission owners
contained a right of first refusal. But that year FERC issued
Order No. 1000, requiring transmission providers to partici‐
pate in regional transmission planning intended to identify
worthwhile projects, and to allocate the costs of the projects
to the parts of the region that would benefit the most from
the projects. To facilitate the implementation of such plan‐
ning the order directed the transmission providers “to re‐
move provisions from [FERC] jurisdictional tariffs and
agreements that grant incumbent transmission providers a
federal right of first refusal to construct transmission facili‐
ties selected in a regional transmission plan for purposes of
cost allocation.” Transmission Planning & Cost Allocation by
Transmission Owning & Operating Public Utilities, Order No.
1000, 136 FERC ¶ 61051 at P 253, 76 Fed. Reg. 49,842, 49,885.
Granting a right of first refusal to build a project makes
sense when the grantee clearly is best suited to build it, so
that it would be a waste of time to invite and conduct com‐
petitive bidding. Apparently that used to be the situation in
what is now MISO’s region, but by 2011 FERC was con‐
Nos. 14‐2153, 14‐2533, 15‐1316 5
vinced that competition among firms for the right to build
transmission facilities would result in lower rates to con‐
sumers of electricity. There would be a low bidder, and the
lower his bid and therefore (in all likelihood) the cost of the
facility he built, the lower would be the rates charged con‐
sumers of the electricity transmitted by the facility. In con‐
trast, when the local firm has a right of first refusal an out‐
sider will have little incentive to explore the need for a new
transmission facility because the local firm would be likely
to say to the outsider (sotto voce) “thank you very much for
identifying, at no cost to me, a lucrative opportunity for me
to exploit,” and thus the outsider would be unable to recoup
the cost of his research into the need for the new facility. See
Order No. 1000, supra, 136 FERC ¶ 61051 at P 257; see also
South Carolina Public Service Authority v. FERC, 762 F.3d 41,
72 (D.C. Cir. 2014).
No one likes to be competed against. A firm blessed with
a right of first refusal can by exercising its option exclude
competition with it, in this instance competition in building
a new transmission facility. So naturally members of MISO
in areas in need of additional facilities oppose Order No.
1000. They want to retain their right of first refusal—they
don’t want to have to bid down the prices at which they will
build new facilities in order to remain competitive. And so
while legal challenges to the order eliminating rights of first
refusal have already failed, see South Carolina Public Service
Authority v. FERC, supra, 762 F.3d at 48–49, 72–82, the MISO
transmission owners are trying to prevent the order from
applying to them by arguing that FERC must presume that
their contractual right of first refusal is reasonable.
6 Nos. 14‐2153, 14‐2533, 15‐1316
But why? The owners have made no effort to show that
the right is in the public interest. Neither in their briefs nor
at oral argument were they able to articulate any benefit that
such a right would (with limited exceptions discussed later
in this opinion) confer on consumers of electricity or on soci‐
ety as a whole under current conditions. Counsel did say at
oral argument that MISO benefits consumers and that the
transmission owners would not have formed it without a
right of first refusal, but didn’t say that MISO is likely to fall
apart as a consequence of the repeal of the right. Although it
originated as a contract right based on arms’‐length negotia‐
tions among the companies that joined MISO and was thus a
right created by contract, contract rights are not sacred, es‐
pecially when they curtail competition. Until Order No. 1000
was promulgated, every member of MISO had a protected
monopoly, created by the right of first refusal, regarding the
construction of new facilities in its service area. That created
a potential for higher rates to consumers of electricity than if
competition to create transmission facilities in transmission
companies’ service areas was allowed, as FERC decreed in
its order.
The MISO transmission owners tell us that granting
rights of first refusal was intended not to curtail competition
but to recognize that “competition in transmission develop‐
ment was not contemplated” and therefore the purpose of
the relevant section was simply to allow MISO to require
transmission owners to build needed facilities in their ser‐
vice areas. But that makes no sense. Had there been no inten‐
tion or expectation of competition, there would have been no
need for a right of first refusal. A market that can support
only one firm because conditions of supply and demand
leave room for no more—what is called a “natural monopo‐
Nos. 14‐2153, 14‐2533, 15‐1316 7
ly”—has no need for a right of first refusal. Such a right im‐
plies a possibility of entry (why otherwise create such a
right?)—in other words room for an additional firm or firms,
yet the right enables the incumbent firm to ward off entry.
An amicus curiae brief filed by three electrical‐
transmission companies in support of FERC’s abrogation of
the right of first refusal asserts without contradiction that
competition unless blocked by the right is feasible under
current industry conditions. MISO counters weakly that the
parties to the 1998 contract were “sophisticated.” No
doubt—sophisticated enough to understand the benefits of a
contract that would give each party protection against com‐
petition in the creation of new facilities. Their sophistication
could be counted on to lead them to protect their own inter‐
ests, not those of potential new entrants.
MISO explains that the right of first refusal was “negoti‐
ated to ensure that Transmission Owners [belonging to MI‐
SO] were obligated to construct transmission facilities identi‐
fied by the MISO planning process.” But now that there is
competition to construct such facilities, MISO has only to de‐
cide where the new facilities should be built, for the trans‐
mission companies will be quick to compete to be selected to
build them. As FERC said in its March 22, 2013, Order on
Compliance Filings and Tariff Revisions, “the negotiation
that led to the provisions at issue here [was] among parties
with the same interest, namely, protecting themselves from
competition in transmission development.” Midwest Independent
Transmission System Operator, Inc., et al., 142 FERC ¶ 61,215 at
P 183 (emphasis added).
Not that competition is an unmixed blessing. It can result
in costly duplication, and in politicking aimed at courting
8 Nos. 14‐2153, 14‐2533, 15‐1316
favor with MISO or FERC or for that matter Congress. But if
there are indeed good things to be said about the rights of
first refusal claimed by the petitioners, they are not said in
any of the voluminous filings in this case. Instead the peti‐
tioners fall back on precedent, specifically the Supreme
Court’s companion decisions in United Gas Pipe Line Co. v.
Mobile Gas Service Corp., 350 U.S. 332 (1956), and Federal Pow‐
er Commission v. Sierra Pacific Power Co., 350 U.S 348 (1956).
Only the second involves electricity, however, and since ana‐
lytically the two cases are Siamese twins (joint creators of
what is called the “Mobile‐Sierra doctrine”) we can limit our
attention to the electricity case, Sierra.
A public utility that had made a contract to supply elec‐
tric power to a company that would distribute it to consum‐
ers later filed a new, higher tariff rate with the Federal Pow‐
er Commission (the predecessor to FERC) without the dis‐
tributor’s consent. The Commission found the new rate rea‐
sonable and therefore accepted it, remarking that the old rate
had been too low to give the utility a fair return and was
therefore “unreasonably low” within the meaning of section
206 of the Federal Power Act. The Supreme Court reversed,
holding that while the Commission couldn’t require a public
utility to charge a rate that would produce less than a fair
return, “it does not follow that the public utility may not it‐
self agree by contract to a rate affording less than a fair re‐
turn or that, if it does so, it is entitled to be relieved of its
improvident bargain. In such circumstances the sole concern
of the Commission would seem to be whether the rate is so
low as to adversely affect the public interest—as where it
might impair the financial ability of the public utility to con‐
tinue its service, cast upon other consumers an excessive
burden, or be unduly discriminatory.” 350 U.S. at 355 (cita‐
Nos. 14‐2153, 14‐2533, 15‐1316 9
tion omitted); see also Morgan Stanley Capital Group Inc. v.
Public Utility District No. 1 of Snohomish County, 554 U.S. 527,
545–46 (2008).
In other words, if a power company makes a contract
that turns out to be disadvantageous to it but does no harm
to the broader public, a regulatory commission has no busi‐
ness bailing the company out. It’s a big boy; it took a risk;
the risk materialized; but the adverse consequences are con‐
tained, they do not ramify, so there is no occasion for regula‐
tory intervention. That was Sierra, interpreting the Federal
Power Act in a case in which the parties brought adverse in‐
terests to the table and their contract could be assumed to
have split the difference. That’s different from a contract in
which the parties are seeking to protect themselves from
competition from third parties (cartels are the classic exam‐
ple of such contracts). In summary, FERC’s abrogation of the
right of first refusal in the MISO Transmission Owners
Agreement was lawful.
Our second case concerns what are called “baseline relia‐
bility projects.” These are projects the sole purpose of which
is to solve problems of reliability in electrical transmission.
FERC has allowed the transmission companies that MISO
has authorized to build such projects in their respective ser‐
vice areas to retain a right of first refusal because the costs of
such a project to consumers are limited to the service area of
the company that builds the project rather than allocated
across an entire region. Baseline reliability projects differ
from multi‐value projects, which are larger, have a regional
focus, and benefit from regional cost sharing.
The petitioner in this second case, LSP, is a transmission
company that would like to compete with the incumbent
10 Nos. 14‐2153, 14‐2533, 15‐1316
transmission companies to build baseline reliability projects.
It can’t do so if an incumbent has a right of first refusal un‐
less the incumbent decides it’s not interested in building a
particular such project. LSP argues that FERC’s decision to
allow this right of first refusal violates Order No. 1000.
FERC’s justification for this departure from the order‘s
emphasis on promoting competition is the benefit, which is
surely very considerable, of a quick resolution of reliability
problems. Delays will be inevitable if companies outside the
service area are permitted to bid for the project, since com‐
petitive bidding takes time and may get bogged down in lit‐
igation.
LSP argues that by classifying baseline reliability projects
as “local” FERC has exempted an entire type of transmission
facility from regional cost sharing and the accompanying
prohibition on rights of first refusal, and that this violates
Order No. 1000. It’s true that FERC is not allowed to exempt
all reliability projects from cost sharing, Order No. 1000, su‐
pra, 136 FERC ¶ 61051 at P 690, but it can exempt some as
long as other types of transmission projects that yield relia‐
bility benefits, such as multi‐value projects, can be included
in a regional plan for purposes of cost allocation.
LSP admits that Order No. 1000 does not prohibit the
grant of rights of first refusal to transmission facilities “lo‐
cated solely within a public utility transmission provider’s
… territory … that [are] not selected in the regional trans‐
mission plan for the purposes of cost allocation.” 136 FERC
¶ 61051 at P 63. But it objects when a baseline reliability pro‐
ject will span two or more pricing zones. It argues that such
a project must be considered regional and that Order No.
1000 forbids allowing rights of first refusal for such projects.
Nos. 14‐2153, 14‐2533, 15‐1316 11
But a transmission facility is not regional for purposes of
cost allocation if all its costs are allocated to the pricing zone
in which it is located. A right of first refusal would be prob‐
lematic therefore only if the benefits of a baseline reliability
project were largely or entirely realized in pricing zones oth‐
er than the one in which the project was to be built. “FERC is
not authorized to approve a pricing scheme that requires a
group of utilities to pay for facilities from which its members
derive no benefits, or benefits that are trivial in relation to
the costs sought to be shifted to its members.” Illinois Com‐
merce Commission v. FERC, 576 F.3d 470, 476 (7th Cir. 2009).
But FERC’s calculations suggest that the spillover of benefits
to other zones is modest enough to make the local allocation
of costs “roughly commensurate” with the allocation of ben‐
efits. Id. at 477.
We come to our third and final case, also brought by LSP,
which wants to expand its operations in the MISO region. It
challenges three obstacles erected by FERC. The first is the
commission’s approval of MISO’s refusal to base authoriza‐
tion of new projects exclusively or primarily on estimates of
the cost of building transmission facilities—estimates that
tend to be uncertain because of the complexity of such pro‐
jects. In deciding which company to authorize to build such
a project, MISO with FERC’s consent considers a variety of
factors that include the project’s design, the quality of its
management, and management’s ability to complete the pro‐
ject within a reasonable time and with proper provision for
dealing with future outages and other problems that beset
electrical transmission systems. Cost estimates are consid‐
ered too but are not necessarily the primary factors. The
broader criteria employed by MISO with FERC’s approval
relate directly to efficiency, cost‐effectiveness, and reliability,
12 Nos. 14‐2153, 14‐2533, 15‐1316
all of which translate into lower rates for consumers. See 16
U.S.C. §§ 824d(e), 824e(a). And there is no indication that
any of MISO’s criteria favor incumbent developers over non‐
incumbent ones who have demonstrated an equal ability to
execute a project effectively.
LSP also complains about FERC’s having decided to al‐
low MISO to include in its tariff a provision that allows it to
honor rights of first refusal created by state and local law.
Order No. 1000 terminated only federal rights of first refusal;
it did not “limit, preempt, or otherwise affect state or local
laws or regulations with respect to construction of transmis‐
sion facilities.” Order No. 1000, supra, 136 FERC ¶ 61051 at
P 227. FERC wanted “to avoid intrusion on the traditional
role of the States” in regulating the siting and construction of
transmission facilities. South Carolina Public Service Authority
v. FERC, supra, 762 F.3d at 76.
That was a proper goal even though LSP has cited state
laws that might interfere with regional transmission devel‐
opment. In Minnesota, for example, “an incumbent electric
transmission owner has the right to construct, own, and
maintain an electric transmission line that has been ap‐
proved for construction in a federally registered planning
authority transmission plan and connects to facilities owned
by that incumbent electric transmission owner.” Minn. Stat.
§ 216B.246. When a regional transmission line connects to a
Minnesota transmission owner’s facilities, therefore, outsid‐
ers are not allowed to compete to build that line if the Min‐
nesota transmission owner chooses to build it.
LSP further complains that even if one grants that FERC
can allow a state law to give an incumbent transmission
company a right of first refusal, MISO should not be permit‐
Nos. 14‐2153, 14‐2533, 15‐1316 13
ted to exclude outsiders from competing. But it would be a
waste of time for MISO to conduct a protracted competitive
bidding and evaluation process when the incumbent trans‐
mission company has a right of first refusal conferred by
state law.
Closely related to state rights of first refusal are state em‐
inent‐domain laws, which are germane to the construction of
electrical transmission facilities because transmission lines
require easements in order to be permitted to be built. FERC
has decided that “it would be an impermissible barrier to
entry to require, as part of the qualification criteria [for de‐
termining an entity’s eligibility to propose a transmission
project for inclusion in the regional transmission plan], that a
transmission developer demonstrate that it either has, or can
obtain, state approvals necessary to operate in a state, in‐
cluding … [conferral of] public utility status and the right to
eminent domain.” Transmission Planning & Cost Allocation by
Transmission Owning & Operating Public Utilities, Order No.
1000‐A, 139 FERC ¶ 61132 at P 441, 77 Fed. Reg. 32,184,
32,254. Thus FERC has not given MISO unlimited discretion
to invoke state law when determining whether a non‐
incumbent is entitled to propose a project.
LSP’s final complaint concerns FERC’s decision to treat
the combined retail distribution service areas of the electrical
company Entergy Corp. as a single market (or “footprint,” in
the language of Order No. 1000‐A, supra, 139 FERC ¶ 61132
at P 429) for purposes of determining whether proposed
transmission projects in Entergy’s market should be consid‐
ered local rather than regional, even though Entergy does
business in Texas, Arkansas, Louisiana, and Mississippi and
does so through separate operating companies in each state.
14 Nos. 14‐2153, 14‐2533, 15‐1316
Order No. 1000 eliminated federal rights of first refusal only
for regional projects, not for local ones, as we know, yet the
vast region covered by Entergy’s multiple operating compa‐
nies hardly complies with the usual understanding of “lo‐
cal.” But “local” need not retain its usual understanding
when used to designate the service area of a giant electrical
transmission entity. It is a relative term; New York City is a
huge city yet as a matter of scale is “local” relative to New
York State, or to the Northeast. Entergy’s retail distribution
service territories can be said to be “local” for a different rea‐
son: the separate operating companies actually operate as
one and have so operated for more than fifty years. See Loui‐
siana Public Service Commission v. FERC, 522 F.3d 378, 383
(D.C. Cir. 2008).
To conclude, the petitions for review are
DENIED.