Author:Powers, Melissa
  1. INTRODUCTION 886 II. THE TRANSITION TO A DYNAMIC AND DECARBONIZED ENERGY SYSTEM 892 A. Zero-Carbon Energy 893 B. Multi-Scalar, Dynamic Energy Systems 896 III. THE LONG AND WINDING ROAD TOWARDS COMPETITIVE ENERGY 897 A. Natural Monopoly Regulation 898 B. Competitive Generation: Progress and Backlash 900 C. Open Transmission: A Slow Work in Progress 903 1. Open-Access Transmission Tariffs and Independent 905 Transmission Operators 2. Interconnection Orders 907 a. Orders Designed to Improve Transmission Access for 908 Large Generators: Order Nos. 2003 and 845 i. Order No. 2003 908 ii. Order No. 845 910 3. Transmission Planning and the Right of First Refusal 911 Under Order No. 1000 4. The Right-of-First Refusal in the Courts 912 IV. THE DORMANT COMMERCE CLAUSE AND COMPETITIVE TRANSMISSION 915 DEVELOPMENT A. The Dormant Commerce Clause and the "Public Utility" 915 Exception 1. The Dormant Commerce Clause Tests 916 2. The "Public Utilities Exception" 918 B. LSP Transmission Holdings, LLC v. Lange 921 V. IMPLICATIONS OF LSP FOR COMPETITIVE TRANSMISSION DEVELOPMENT, 926 ACCESS, AND THE ENERGY TRANSITION VI. CONCLUSION 929 I. INTRODUCTION

    The U.S. electricity sector is undergoing a profound transformation. In 2019, for the first time, power generation from renewable resources surpassed the amount of electricity produced from coal (1)--a remarkable feat, considering coal had comprised nearly fifty percent of U.S. electricity generation only a decade earlier (2)--and 2019 economic analyses showed that most renewables had become cost-competitive with, if not significantly cheaper than, coal, nuclear, and natural gas. (3) Technological innovations in batteries, storage, metering, and grid operations have opened the electricity system to new participants and spurred a re-envisioning of the electricity grid of the future. (4) More and more, experts have begun to envision an electricity system that is highly dynamic, multi-scalar, and powered primarily by renewable resources. (5) Realizing this vision will enable the United States to decarbonize the broader energy system, as studies show that a dynamic zero-carbon electricity system can power the transportation and heating sectors. (6) The energy system of the future will thus integrate rooftop solar, distributed storage, smart meters, electric vehicles, heat pumps, interactive appliances, and a host of other new assets of various sizes. (7) The future energy system will also embrace new market designs, so that demand response, energy efficiency, storage, and other grid services are compensated equivalently to power production, and so that various producers, consumers, and "prosumers" can become market players. (8) Even as these changes take place, however, the United States will continue to depend upon large facilities--including wind farms, utility-scale solar, and hydroelectric plants--delivering electricity along high-voltage transmission lines. (9)

    For nearly a century, economic theory and regulatory policy treated electricity as a natural monopoly incapable of sustaining competition. (10) Over time, however, generation and retail electricity services became increasingly competitive, and legal structures changed to promote diverse ownership and competitive energy markets. (11) And yet, conventional wisdom treated the "wires" components of the electricity system as inherently monopolistic. (12) Regulators thus focused their efforts on ensuring open access to transmission lines owned by incumbent monopolists. (13) Yet, despite these efforts, discrimination and inefficient transmission access persist, threatening the swift transition to renewables. (14) And, while market conditions have changed so that competitive transmission development has become economically viable, unnatural monopolies and states protecting them have undermined the development of essential and independent transmission infrastructure. (15) In part to address these concerns, in 2011, the Federal Energy Regulatory Commission (FERC) issued Order No. 1000, (16) a potentially game-changing rule aimed at improving regional electricity transmission planning and furthering FERC's longstanding mission to make the U.S. electricity system more competitive. (17) Order No. 1000 included three main requirements. First, it required transmission line owners and operators to engage in regional and interregional planning to ensure that transmission lines are developed and operated to effectuate state and federal policy goals, including the transition from fossil fuels to renewable resources. (18) Second, Order No. 1000 mandated changes to cost allocation practices so the costs of new transmission lines would be shared among all beneficiaries and not assigned to new generators (particularly renewable facilities) or others in a discriminatory manner. (19) Third, Order No. 1000 revoked the federal "right of first refusal" (ROFR), a policy that had given incumbent utilities preferential rights to build and profit from new regional and interregional transmission infrastructure. (20) FERC justified the revocation of the ROFR on the basis that it created unjust and unreasonable tariffs and rates by excluding non-incumbent transmission line owners, who were increasingly able to compete on price and service with the incumbents, from effective participation in the planning and development process. (21) As a whole, Order No. 1000 reflected FERC's belief that transmission and distribution--components of the electricity system that were long considered to be natural monopolies--should be subject to at least some of the same competitive forces as other parts of the electricity system.

    Reaction to Order No. 1000 was swift and negative by those who have long eschewed competition in the electricity system. (22) Utilities and regulators in "traditionally regulated states"--those states that have yet to unbundle their electricity systems and expose incumbents to competition--challenged Order No. 1000 on the grounds that it intruded too far into traditional state regulatory authority. (23) Although they lost this direct challenge, (24) they successfully lobbied state lawmakers to enact new state ROFR, which may negate the impacts of FERC's elimination of the federal ROFR. (25) FERC acquiesced to these state laws, (26) exhibiting a longstanding reticence to assert its full statutory authority over the transmission system, (27) and courts have upheld FERC's submission. While the D.C. and Seventh Circuits upheld Order No. 1000 as a permissible exercise of federal authority, (28) courts also approved the retention of existing and creation of new state ROFR. (29) The resulting state ROFR have produced regulatory loopholes that incumbent utilities and pro-incumbent legislators and regulators have maximized, (30) at the expense of a cleaner, more dynamic, well-regulated energy system. (31)

    In response, non-incumbent transmission developers have looked beyond the Federal Power Act and FERC's inconsistent transmission rules to secure the right to build new infrastructure. In LSP Transmission Holdings, L.L.C. v. Lange, (32) (LSP), a non-incumbent transmission developer invoked the Dormant Commerce Clause to open the doors to competitive transmission development. (33) LSP alleged that a newly established Minnesota ROFR, which the state legislature passed to negate the impacts of Order No. 1000's abolishment of the federal ROFR, discriminated against developers that did not have an existing footprint in the state. (34) Although the district court rejected this argument, the case is on appeal, (35) and two developments make the appeal particularly interesting. First, the U.S. Department of Justice's Antitrust Division participated in the case on behalf of the developer, (36) raising the prospect that another federal agency could help advance competitive transmission development even if FERC does not. Second, the case tests the extent of a 2019 Supreme Court decision reaffirming that the Dormant Commerce Clause prohibits state laws that limit market participation to in-state residents. (37) LSP argues the Minnesota ROFR should be struck down because it preferences in-state residents, (38) but Minnesota disputes the law is discriminatory. Minnesota also contends, even if the law is held to be discriminatory, states are allowed to give preference to incumbent in-state utilities under the so-called "public utilities exception" to the Dormant Commerce Clause. (39) The outcome of the LSP appeal will indicate whether the Dormant Commerce Clause will serve as an instrument promoting or barrier preventing competitive transmission development.

    A ruling against LSP may embolden other states to develop their own strict ROFR, impeding regional transmission planning that is necessary for renewable energy development. On the other hand, if the Eighth Circuit rules in favor of LSP, this could both limit the creation of new ROFR and compel FERC to develop clearer standards for and oversight over competitive transmission development and transmission access. FERC may even welcome this outcome, as FERC's regulations indicate the agency is committed to open access, streamlined interconnection of independent generators, integration of new technology, and a transition to competitive and decarbonized energy markets. (40) But in practice, FERC frequently succumbs to pushback by incumbent utilities and states (41) or strategically avoids addressing thorny legal questions regarding transmission when it can decide disputes on other grounds. (42) If the Eighth Circuit in LSP sets aside Minnesota's ROFR and the protections it provides in-state incumbent utilities, FERC may be compelled to establish more thorough regulations and engage in deeper oversight over the transmission system.

    More broadly, LSP could affect energy decarbonization efforts throughout the country. While competitive transmission development is a relatively new issue facing the courts...

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