On June 7th, 2013, the U.S. Court of Appeals for the Seventh Circuit issued an opinion that could have significant impacts on transmission and renewable energy policies across the country. The decision, issued by Judge Richard Posner, one of the most influential legal scholars in the country, considers the propriety of two orders of the Federal Energy Regulatory Commission (“FERC”) pertaining to the allocation of the costs of new transmission projects that bring renewable energy (primarily wind) from remote locations in the Midwest to population centers.
As a brief overview, transmission projects in the United States are largely controlled by Regional Transmission Organizations (“RTOs”), which are regional non-profit organizations tasked with operating transmission facilities in an efficient and non-discriminatory manner. The activities of the RTOs by law, involving the cost of constructing and operating these transmission projects must be “just and reasonable” and must be apportioned to individual customers based, to some degree, on the customer’s role in creating such costs.
In 2010, the Midwest (now Midcontinent) Independent System Operator (“MISO”), one of the RTOs, sought FERC’s approval to implement a tariff allocating the cost of construction of new “multi-value projects” among its members. MISO proposed allocating the cost of these projects, consisting of a series of transmission lines designed primarily to bring wind power in the Midwest to market, among the various utilities based upon each utility’s share of the total power consumption. In effect, this places the majority of the costs of these new transmission lines on the urban population centers that consume the energy, rather than on the typically rural areas where the energy is generated.
FERC approved MISO’s proposed allocation in 2011, and the issue was brought before the Seventh Circuit Court of Appeals for review. In its June 7th, 2013 opinion, the U.S. Court of Appeals upheld FERC’s orders, thus approving MISO’s proposed allocation. Though the issues could be further appealed to the U.S. Supreme Court, for the time being the Court of Appeals’ decision will be controlling.
This decision could have several significant impacts for public utilities, transmission operators, renewable project developers, and retail customers throughout the region, but perhaps the two most pressing results are as follows:
Impact on State RPS Policies
In reaching its conclusion, the Court of Appeals considered the propriety of Michigan’s renewable portfolio standard, which requires Michigan utilities to obtain at least 10 percent of their generation from renewable sources by 2015 and mandates that, with certain exceptions, the renewable energy must come from projects located within the state. Because the law restricts the use of out-of-state renewable energy, Michigan argued that they would receive less benefit from the proposed multi-value projects, and thus should pay a lesser portion of the costs. Rejecting this argument, the Court of Appeals held that “Michigan cannot, without violating the commerce clause of Article I of the Constitution, discriminate against out-of-state renewable energy.” Most states in the U.S. have “geographic sourcing” requirements in their renewable energy standards (“RES”) or renewable portfolio standards (“RPS”) that favor in-state generation, and this precedent could encourage a surge of legal challenges to those provisions in the coming months. If successful, such challenges could open up numerous new markets for comparatively inexpensive Midwestern wind generation.
Impact on the Development of Transmission Projects
By approving MISO’s cost allocation methodology, this decision should help drive the continued development of transmission lines that bring remote renewable generation to market. Allocating the costs of constructing these lines based upon the total consumption of energy rather than by local region, MISO’s previous allocation method, effectively increases the economic viability of the lines for the transmission developers and Midwestern utilities that would construct the projects.
If you have any questions about the Court of Appeals decision or the impact of transmission projects generally, please contact myself or another member of the Polsinelli Energy Group. In addition to its established group of energy attorneys, Polsinelli is proud to have recently been joined by Kevin Gunn, the immediate past Chairman of the Missouri Public Service Commission (“MPSC”), who bring unique insights to these issues through his work with the MPSC, his service on the board of directors of the national Association of Regulatory Utilities Commissions, and his participation on the executive committee of the Eastern Interconnection States’ Planning Council.