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Legal Update

Developers and Sponsors of Merchant Transmission Facing Regulatory “Catch 22" in Many US Jurisdictions

31 January 2011
Mayer Brown Legal Update

Non-utility developers and sponsors of merchant transmission are finding themselves caught in a “Catch 22” under the laws of several states as they seek to develop new projects in competition with incumbent utilities. In some states, laws permit only a “public utility” to obtain a certificate of public convenience and necessity (CPCN) for the construction or operation of transmission property. As result, a new entrant cannot obtain a certificate because it is not currently a public utility and cannot become a public utility unless it owns or manages utility property and is providing a public service.

This issue was recently stated succinctly by the Arkansas Public Utility Commission (ArPSC) in its order denying without prejudice an application by Clean Line Energy for a CPCN its proposed Plains & Eastern Clean Line transmission project:

The difficulty the Commission now faces is that the law governing public utilities was not drafted to comprehend changes in the utility industry such as this one—where a non-utility, private enterprise endeavors to fill a void in the transmission of renewable power that is much needed but for which the Commission is unable to afford any regulatory oversight.

The ArPSC then elaborated:

Recognizing, as Clean Line pointed out, there is some circularity involved in the fact that Clean Line cannot own or operate regulated major utility facilities pursuant to Arkansas law in this state without first being declared a public utility, in isolation, this portion of the statute is not determinative of Clean Line’s utility status. However, read in tandem with the facts that the transmission of the power must also be “to or for the public for compensation’’ when Clean Line, to date, has no contracts for public utility service with any utility, including Arkansas utilities, and there also can be no transmission of power at this time, the Commission is not prepared to approve Clean Line’s CCN Application.

The ArPSC attempted to mollify this apparently harsh result by noting:

As an initial matter, the Commission wholly supports the development of transmission infrastructure in the state of Arkansas as well as the development of opportunities to use and transmit renewable power for the benefit of Arkansas utilities and their ratepayers. In addition, the Commission notes with appreciation the extensiveness of Clean Line’s presentation of the policy considerations supporting its CCN Application. Clean Line’s efforts are laudable and its work is to be commended.… The Commission’s denial of Clean Line’s CCN Application is without prejudice and if, and when, Clean Line can provide additional information with more concrete plans satisfying the Commission’s concerns as expressed herein, the Commission is willing to revisit this matter in a new docket at that time.

The ArPSC then concluded:

In sum, the Commission is not opposed to independent transmission construction and, in fact, strongly supports the improvement of the transmission system in this state as a means to lower energy costs for Arkansas ratepayers. As the Parties all acknowledge, the issue of certification of a transmission-only public utility is one of first impression in this State. Thus, the Commission’s decision is based on that fact that it cannot grant public utility status to Clean Line based on the information about its current business plan and present lack of plans to serve customers in Arkansas.

Of course, this issue has previously been faced by other transmission developers and sponsors, including PATH Allegheny Transmission Company (PATH), whose application for a CPCN was denied by the Maryland Public Service Commission (MdPSC) on the similar basis that the applicant was not an “electric company” as required under applicable Maryland law. The MdPSC further held that this defect was not cured by the application having been made by Potomac Electric Company (PEC), on behalf of PATH, since PEC would neither own nor operate the proposed transmission line.

In fact, many jurisdictions have this same issue. One important consequence is that, as was the effect of the MdPSC denial of PATH’s CPCN application, there is no proper application that begins the “clock” for possible federal preemptive siting under the Energy Policy Act of 2005, resulting in a possible double-Catch 22.

In the few cases to date that have faced this issue, often the public utility commission will leave open the door (as the ArPSC did for Clean Line Energy) and encourage the applicant to re-petition when its plans are further developed; however, without explicit guidance regarding what minimum details are required for a successful application, the developer or sponsor still faces the risk of denial of its application or of further substantial delay as it iteratively explores these requirements.

Unfortunately for Clean Line Energy, this risk has surfaced in its application to the Illinois Commerce Commission (ILCC) to become a public utility (significantly, Clean Line Energy, subsequent to its initial application, expressly separated its request for a CPCN from its petition for public utility status) and faces objection by the ILCC Staff who have moved to dismiss Clean Line Energy’s application for such status without prejudice (i.e., leaving the door open to re-petition), claiming that the application is premature and that the applicant does not own or manage utility property or have a “concrete” plan. The Illinois Catch 22 is particularly striking since the prohibition in Section 8-406(a) of the Public Utilities Act (220 ILCS 5/8-406(a)) is severe—an entity is prohibiting from “transacting any business” in the state without a CPCN.

These state Catch-22’s could conflict directly with the proposal by the Federal Energy Regulatory Commission that incumbent utilities not have preemptive rights to construct new transmission projects, including those projects initially proposed by others. They also could prevent, or at the very least materially hinder, the development of merchant transmission lines designed to connect renewable generation to markets.

For more information about the topics raised in this Legal Update, please contact at +1 202 263 3204 or at +1 312 701 7366.

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Authors

  • David I. Bloom
    T +1 202 263 3204
  • J. Paul Forrester
    T +1 312 701 7366

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