The Market Nexus of Transmission Development: Potential Federal Preemption Issues* Zeviel T. Simpser * The views expressed in this presentation are those of the presenter and not of any client of Briggs and Morgan.

Overview Transmission Planning and Siting (Federal and State) State Gatekeeping Functions FERC Transmission Planning Reforms Market Nexus Underlying Federal Authority Market Nexus and State Gatekeeping State Laws Regarding Who Can Participate State Right of First Refusal Laws State Determination of Need

Division Between Regulatory Reach of State and Federal Government States have traditionally held authority over in-state facilities used for the generation of electric energy (FPA 201) Authority derived from states’ traditional police power FERC market authority encroaching on traditional state powers Transmission permitting still state issue

State Gatekeeping Functions Gatekeeping process Exmp: Wisconsin (CoA) Need Process Exmp: Minnesota (CoN); Wisconsin (CPCN); Michigan (CPCN) Routing Process Exmp: Minnesota (“need” and site permit process separate); Wisconsin (“need” and routing combined); Michigan (combined)

FPA Silent on Routing FPA has only backstop authority Leads one to believe that explicit preemption may not exist FPA does not have equivalent of NGA Section 5 Traditionally, FERC has always respected and acknowledged states’ rights with regard to siting and routing stemming from state police power and no concurrent FERC authority

FERC Transmission Planning Reforms Predicated on Market Nexus FERC Order No. 888 Open access to facilitate markets “Today, the Commission issues three final, interrelated rules designed to remove impediments to competition in the wholesale bulk power marketplace . . . . The legal and policy cornerstone of these rules is to remedy undue discrimination in access to the monopoly owned transmission wires that control whether and to whom electricity can be transported in interstate commerce.” FERC Order No. 890 Transmission planning requirements for jurisdictional utilities “The Commission’s focus in this proceeding was and remains the development of competitive wholesale markets through the reduction of barriers to entry created through the control of transmission assets.” FERC Order No. 1000 Elimination of the federal right of first refusal; regional planning process; regional cost allocation mechanism “These reforms are intended to correct deficiencies in transmission planning and cost allocation processes so that the transmission grid can better support wholesale power markets and thereby ensure that Commission-jurisdictional services are provided at rates, terms and conditions that are just and reasonable and not unduly discriminatory or preferential.”

Market Nexus Underpinnings All of FERCs transmission reforms predicated on establishing more efficient wholesale markets Wholesale markets under FERC’s exclusive jurisdiction – broad FPA authority to ensure the efficient operation of markets Does market nexus carry forward to federal preemption of traditional state police power in siting?

Recent SCOTUS Decisions FERC v. Electric Power Supply Association (January 25, 2016) SCOTUS came down in favor of FERC FPA provides FERC with the authority to regulate wholesale market operators’ compensation of demand response bids because the practices at issue directly affect wholesale rates Hughes v. Talen Energy Marketing, LLC (April 19, 2016) State-mandated contracts that attached prices to PJM wholesale market preempted because state program disregards the interstate wholesale rate FERC requires “States may not seek to achieve ends, however legitimate, through regulatory means that intrude on FERC’s authority over interstate wholesale rates.” Secondary Cases Cal. Indep. Sys. Operator Corp. v. FERC, 372 F.3d 395 (D.C. Cir. 2004) Only recent federal court case cabining FERC’s authority to regulate and reform

Do These Points Apply To Siting? Market nexus theory is about “affecting” rates SCOTUS finding all impacts to organized markets may be within exclusive federal jurisdiction, even if impact on retail market (traditional state exclusive authority) Note Scalia Dissent in Electric Power Supply­ - Too far under the FPA? Reliance on FERCs FPA authority to regulate wholesale rates - broadly interpreting authority to regulate any electricity operation “affecting” wholesale marketing and pricing Does this extend to transmission development? If a state says no to a federally-approved project, has the state affected rates?

Theory of Market Nexus Preemption FPA Sections 205 and 206 - “affecting” rates Does recent case law support a federal preemption claim based on the market nexus approach? Do state-law barriers impede on FERC’s exclusive jurisdiction over the regulation of transmission and sale in wholesale markets? Are state-law barriers an obstacle to the accomplishment of FERCs objective to create a competitive and efficient wholesale market? Does a dormant Commerce Clause analysis support the market nexus argument? To the extent a market nexus exists, dormant Commerce Clause challenge to state-law barriers may be supported by FERCs exclusive jurisdiction over wholesale markets.

State Laws Regarding Transmission Development States have traditionally assumed all jurisdiction over approval or denial of permits for the siting and construction of electric transmission facilities (police power). States can erect barriers to regional transmission development by withholding authority to construct for a disfavored project or developer. State utility commissions also have significant influence over the ability of new entities to construct transmission projects by restricting access to public utility status.

State Laws Regarding Transmission Development Wisconsin: Certificate of Authority Requires that an entity be a public utility and obtain authorization from the Commission to transact business in the state Kentucky (Hybrid Approach): Certificate of Public Convenience and Necessity Utilities: regulated by the Public Service Commission of Kentucky Merchant Operators: regulated by the Kentucky State Board on Electric Generation and Transmission Siting KYPSC construed Kentucky law such that an entity that did not have state-regulated rates could not qualify as a utility within the state and was thus not eligible for a CPCN. Minnesota No gatekeeping barrier – mere act of transmitting electricity gives entity public utility status.

Analysis Market Nexus Federal Preemption Dormant Commerce Clause Can states disagree with FERC-approved planning outcomes or selected developers? Federal Preemption Do state-law barriers intrude on FERC’s exclusive jurisdiction to regulate wholesale electricity transactions and erect obstacles to FERC’s achievement of its regulatory goals in wholesale electricity markets? Dormant Commerce Clause Do state-law barriers place an undue burden on interstate commerce? Are states engaging in economic protectionism or discrimination by giving in-state utilities a distinct advantage? Do statutes allowing for a state to make a determination based on a state’s interest attempt to control activities that occur entirely outside of the state’s jurisdiction?

State Right of First Refusal Laws Order No. 1000 – not “intended to limit, preempt, or otherwise affect state or local laws or regulations with respect to construction of transmission facilities.” Several states enacted ROFR legislation establishing a right for incumbent utilities to build certain transmission lines within the state. Minnesota (Minn. Stat. § 216B.246) An “incumbent electric transmission owner has the right to construct, own, and maintain an electric transmission line that has been approved for construction in a federally registered planning authority transmission plan and connects to facilities owned by that incumbent electric transmission owner.” North Dakota (N.D. Cent. Code § 49-03-02) Prohibits the North Dakota Public Service Commission from issuing a CPCN to a transmission provider to interconnect with an existing public utility if the existing public utility “is willing and able to construct and operate a similar electric transmission line.” South Dakota (S.D. Cod. Laws § 49-32-20) Confers onto the incumbent the right to construct, own, and maintain an electric transmission line that connects to facilities owned by the incumbent and that has been approved for construction in a federally registered planning authority transmission plan.

Analysis Market Nexus Federal Preemption Dormant Commerce Clause Can states disagree with FERC-approved planning outcomes or selected developers? Federal Preemption Do state ROFR laws unduly interfere with FERC’s authority to regulate? Does the refusal to site non-incumbent projects stand as an obstacle to the accomplishment of FERC’s role in ensuring the efficient operation of markets? Dormant Commerce Clause Can state ROFR laws be viewed as providing differential treatment to in-state and out-of-state economic interests? Illinois Commerce Commission v. FERC, 721 F.3d 764 (7th Cir. 2013). Do state ROFR laws unduly burden interstate commerce by not requiring a least restrictive alternative? Do state ROFR laws control activities that occur entirely outside of its jurisdiction?

State “Need” Determinations State authority over siting and permitting of transmission lines State commissions granted authority to review and approve transmission lines based on a determination of whether there is, among other things, “need” for the line. Consideration of regional need versus in-state need

Analysis Market Nexus Can states disagree with FERC-approved planning outcomes or selected developers? Federal Preemption Can the state substitute its view of need for the determinations of the regional planning process under a FERC-filed tariff or is this authority federally preempted? Can a state’s determination of need be viewed as impeding on federal markets and FERC’s exclusive jurisdiction to ensure that the rates, terms, and conditions of jurisdictional services are just and reasonable and not unduly discriminatory or preferential? Dormant Commerce Clause Do state need determinations favor in-state entities over out-of-state entities? Do state need determinations unduly burden interstate commerce by preventing a region from receiving a regionally-needed project? Do state need determinations control activities that occur entirely outside of its jurisdiction?

Conclusion Market nexus theory may be supported by FERC’s exclusive jurisdiction with respect to wholesale markets, but the theory has never been tested. Market nexus theory requires a direct conflict between state action and federal transmission planning. Respects states’ police power in traditional areas, with the exception of need and entities Preserves actual siting and routing (the “where”) Preempts need and entity decisions (the “if” and “who”)

The Market Nexus of Transmission Development: Potential Federal Preemption Issues* Zeviel T. Simpser * The views expressed in this presentation are those of the presenter and not of any client of Briggs and Morgan.