Antitrust Law Daily Wrap Up, ANTITRUST NEWS: AAI commends FERC policy barring electric transmission first refusal agreements, (Jul 12, 2016)

By Edward L. Puzzo, J.D.

The Federal Regulatory Energy Commission (FERC) order barring utility companies from using rights of first refusal in regional transmission organization (RTO) membership agreements as an exclusionary device that restricted competition, recently upheld by the District of Columbia Court of Appeals in Oklahoma Gas & Elec. Co. v. FERC, was consistent with long-running advocacy of the American Antitrust Institute (AAI) seeking to ensure that incumbent utility control does not stifle transmission development, according to Rick Brunell, AAI Vice President and General Counsel.

FERC had been concerned that rights of first refusal that incumbent public utilities had over new transmission facilities in their service areas were discouraging competition within the industry and deterring non-incumbents from proposing much-needed infrastructure reforms for wholesale electricity service. Therefore, FERC ordered utilities to remove rights of first refusal from their existing tariffs and agreements.

Incumbent utilities, including Oklahoma Gas and Electric Company (OG&E) and other members of regional transmission organization Southwest Power Pool (SPP), challenged FERC's mandate to eliminate the right of first refusal as violating the Mobile-Sierra doctrine, which establishes a presumption that a contract rate for wholesale energy is just and reasonable unless contrary to the public interest. On July 1, 2016, the District of Columbia Court of Appeals in Oklahoma Gas & Elec. Co. v. FERC held that the Mobile-Sierra doctrine was not applicable to anticompetitive rights of first refusal, and thus FERC could ban them without having to meet a stringent public-interest standard.

In a commentary, Brunell noted that FERC determined that Mobile-Sierra applied to individualized contract rates, terms, and conditions negotiated freely at arms-length, but not to generally applicable tariff rates, terms, and conditions such as those contained in SPP’s membership agreement. The membership agreement failed the threshold "arms-length" bargaining test, according to FERC, because it is a product of a tariff development process, not contract negotiations between adverse parties. Indeed, FERC noted that the negotiations that led to the right of first refusal provision were among parties with a common interest in protecting themselves from competition in transmission development.

The court in Oklahoma Gas, Brunell noted, agreed with FERC’s bargaining-test analysis, stating "even if the Mobile–Sierra doctrine might apply to [the agreement] generally, FERC did not err in determining that the doctrine does not extend to anti-competitive measures that were not arrived at through arms-length bargaining. In other words, the term must be the product of adversarial negotiations between independent parties pursuing independent interests [for the Mobile-Sierra doctrine to apply]." The court went on to state that just as duress, fraud, and unfair dealing will remove a provision from the ambit of Mobile-Sierra, so will terms arrived at by horizontal competitors with an interest to exclude competition. Such was the case here, where the right of first refusal created an entry barrier for non-incumbent transmission providers.

In short, the court agreed with FERC that the right of first refusal provision of SPP’s membership agreement worked as an exclusionary device that restricted competition. Because the process by which the provision was agreed to was not arms-length bargaining, the court held that the "just and reasonable" presumption under Mobile-Sierra did not apply. By denying the petition for review, opined Brunell, the court’s decision left in place FERC’s authority to order RTOs and utility companies to remove contract clauses mandating that incumbent utilities have the first opportunity to build new transmission facilities in their respective service areas.

Companies: Oklahoma Gas & Electric Co.

News: Antitrust