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Illinois Landowners Alliance, NFP v. Illinois Commerce Commission

Supreme Court of Illinois

September 21, 2017

ILLINOIS LANDOWNERS ALLIANCE, NFP, et al., Appellees,
v.
ILLINOIS COMMERCE COMMISSION et al., Appellants.

          CHIEF JUSTICE KARMEIER delivered the judgment of the court, with opinion. Justices Freeman, Thomas, Kilbride, Garman, Burke, and Theis concurred in the judgment and opinion.

          OPINION

          KARMEIER CHIEF JUSTICE

         ¶ 1 This matter is before the court on administrative review of an order by the Illinois Commerce Commission (Commission) granting a certificate of public convenience and necessity to Rock Island Clean Line, LLC (Rock Island), for construction of a high voltage electric transmission line between O'Brien County, Iowa, and a converter station adjacent to a Commonwealth Edison Company (ComEd) substation in Grundy County, Illinois. The appellate court reversed the Commission's order on the grounds that the Commission had no authority under the Public Utilities Act (Act) (220 ILCS 5/1-101 et seq. (West 2012)) to consider Rock Island's application for a certificate of public convenience and necessity because the company did not qualify as a public utility under Illinois law. The Commission and various entities involved in the Commission proceedings sought further review by our court through separate petitions for leave to appeal (Ill. S.Ct. R. 315 (eff. Mar. 15, 2016)). We granted those petitions and consolidated the proceedings for briefing, argument, and disposition. For the reasons that follow, we agree with the appellate court that the Commission's order must be reversed.

         ¶ 2 BACKGROUND

         ¶ 3 Rock Island is a Delaware limited liability company with its principal offices in Houston, Texas. It is a wholly owned subsidiary of Rock Island Wind Line, LLC, which is, in turn, a wholly owned subsidiary of Clean Line Energy Partners, LLC (Clean Line). Clean Line is owned in part by Grid America Holdings, Inc. Grid America is a subsidiary of National Grid USA, a business that owns and operates more than 8600 miles of high voltage transmission facilities in the United States.

         ¶ 4 Rock Island plans to construct and manage a high voltage direct current (DC) electric transmission line running from an alternating current (AC)-to-DC current converter station in O'Brien County, Iowa, to a planned DC-to-AC current converter station in Grundy County, Illinois. An additional four-mile segment of AC lines would run from the planned converter station to ComEd's existing transmission system at or near its Collins substation, which is also in Grundy County.

         ¶ 5 The purpose of the proposed transmission line is to connect wind generation facilities in northwest Iowa, South Dakota, Nebraska, and Minnesota with electrical markets that utilize an electrical grid operated by PJM Interconnection, LLC (PJM), the regional transmission organization (RTO) responsible for coordinating the movement of wholesale electricity to markets in Illinois, Indiana, Michigan, Ohio, Kentucky, the District of Columbia, and eight states in the Northeast. Once completed, the line will extend for a total of 500 miles. Less than one-fourth of that distance, 121 miles, will be in Illinois. The remainder will be in Iowa.

         ¶ 6 Rock Island has never constructed a high voltage transmission line and does not yet own, control, operate, or manage any plants, equipment, or property in Illinois or elsewhere used or to be used in the transmission of electricity or for any other purpose related to utilities. Rather, it has an option to purchase certain real property in Grundy County. The property subject to the option is the proposed site for the DC-to-AC converter station at which the transmission line would terminate.

         ¶ 7 Witnesses for Rock Island testified that the project will cost approximately $1.8 billion to construct, operate, and maintain. As of December 2013, shareholders had committed approximately $95 million of equity to Clean Line, one of Rock Island's parent companies. Only about $21.6 million of this sum, however, was specifically invested in the Rock Island project.

         ¶ 8 Under the system currently in place in the United States, new transmission lines are typically constructed after an RTO such as PJM has conducted a transmission study and concluded the new line is necessary for the reliability of the system or to relieve transmission congestion. When the necessity for the new line has been established by the RTO, the developer who constructs the line is entitled to recoup its costs and receive a regulated rate of return on its investment through cost-based rates billed to the customers who benefit from the improved service. Rock Island, however, is not a member of PJM or any RTO, and its proposed project is outside the RTO approval process. Because of that, it will not be eligible to recover any of its construction costs through cost-based electrical rates paid by ratepayers in Illinois. Rather, this is to be a "merchant transmission" project. See Transmission Planning & Cost Allocation by Transmission Owning & Operating Public Utilities, 76 Fed. Reg. 49, 842 (Aug. 11, 2011).

         ¶ 9 Merchant transmission projects are a relatively new development in the electricity transmission business and have arisen with the development of wind and other variable energy resources. In contrast to traditional public utilities, which are allowed to recover a regulated, cost-based rate of return from electricity customers on transmission line projects and other investments, merchant transmission developers obtain revenue to cover the costs of constructing and operating transmission facilities exclusively from power-generating customers who purchase transmission capacity and utilize the transmission service pursuant to negotiated contracts. Alexandra B. Klass & Jim Rossi, Reconstituting the Federalism Battle in Energy Transportation, 41 Harv. Envtl. L. Rev. 423, 440 n.73 (2017). Merchant transmission providers also differ from traditional public utilities in that they assume all of a project's market risks. Alexandra B. Klass, Takings and Transmission, 91 N.C. L. Rev. 1079, 1096 n.99 (2013). They have no obligation to undertake transmission projects and will do so only when such projects are financially viable. Heidi Werntz, Let's Make a Deal: Negotiated Rates for Merchant Transmission, 28 Pace Envtl. L. Rev. 421, 425 (2010).

         ¶ 10 Rock Island's project is currently still at the developmental stage, and its prospects are uncertain. As part of its initial planning, the company secured three interconnection queue positions with PJM to allow it to deliver 3500 megawatts of power to the grid PJM operates. The assignment of queue positions ensures that the existing grid system is capable of accepting the additional power, and obtaining a queue position is necessary before an entity may connect to PJM's grid. Since first obtaining its three queue positions, however, Rock Island has surrendered two of the positions and reduced the capacity it would add under the third to 1600 megawatts. It did so because it was unwilling or unable at this stage of the process to under take the additional engineering and design work necessary before an interconnection agreement with PJM could be executed. The surrender of the positions does not foreclose Rock Island from requesting additional queue positions in the future.

         ¶ 11 Testimony established that the company cannot and will not move forward with the project unless and until a sufficient number of customers contract for power transmitted by the line to enable the company to attract the requisite financing. At the present time, no potential customers have obtained rights to buy service on the transmission line. Indeed, the wind generators that might use the transmission line and that serve as the basis for Rock Island's energy and financial simulation models do not yet exist.

         ¶ 12 Although there are not yet any customers for Rock Island's planned transmission service, the company plans to offer that service to any "eligible customers" under an open access transmission tariff (OATT) pursuant to Federal Energy Regulatory Commission (FERC) regulations. The FERC defines "eligible customers" broadly to include any buyer of transmission service, subject only to limitations contained in section 824k of the Federal Power Act (16 U.S.C. § 824k(h) (2012)).

         ¶ 13 The FERC has approved a proposal from Rock Island to "pre-subscribe" up to 75% of the proposed line's transmission capacity to anchor customers. Those customers will consist largely, if not entirely, of yet-to-be-built wind generators in the resource area of northwest Iowa, South Dakota, Nebraska, and Minnesota who seek to deliver the power they generate to the PJM grid. The remaining 25% of capacity will be sold at auction through a process known as "open season bidding." The FERC has not mandated that Illinois entities participate in the bidding process, and the project does not designate any part of the energy transmitted along the proposed line for public use in Illinois.

         ¶ 14 If any transmission capacity remains available after the open season bidding process concludes, any eligible customer may request service under the OATT. In handling such requests, Rock Island must comply with the FERC's open access requirements. The company will be prohibited from discriminating or showing undue preference in selling its transmission service.

         ¶ 15 The reason that the FERC is involved in the project is that under the Federal Power Act (16 U.S.C. § 791a et seq. (2012)), the FERC has exclusive authority to regulate "the sale of electric energy at wholesale in interstate commerce." 16 U.S.C. § 824(b) (2012). Hughes v. Talen Energy Marketing, LLC, __U.S.__, __, 136 S.Ct. 1288, 1292 (2016). The FERC's jurisdiction also extends to all facilities for transmission of electric energy in interstate commerce, authority that is not limited to the wholesale market. 16 U.S.C. § 824(b) (2012); New York v. Federal Energy Regulatory Comm'n, 535 U.S. 1, 17 (2002) (New York v. FERC).

         ¶ 16 Although Rock Island's proposed transmission services are subject to the FERC's jurisdiction, the existence of FERC jurisdiction does not mean that state regulatory authorities have no say in the project. To the contrary, the Federal Power Act makes federal and state powers "complementary" and "comprehensive, " so that there will be "no 'gaps' for private interests to subvert the public welfare." (Internal quotation marks omitted.) Federal Energy Regulatory Comm'n v. Electric Power Supply Ass'n, __U.S.__, __, 136 S.Ct. 760, 780 (2016) (quoting Federal Power Comm'n v. Louisiana Power & Light Co., 406 U.S. 621, 631 (1972)). Identifying the precise contours of state and local authority under such collaborative programs can be difficult and delicate. See Allco Finance Ltd. v. Klee, 861 F.3d 82, 101-02 (2nd Cir. 2017). Controlling federal precedent makes clear, however, that the siting of new transmission lines is generally not a matter within the jurisdiction of the FERC. James J. Hoecker & Douglas W. Smith, Regulatory Federalism and Development of Electric Transmission: A Brewing Storm?, 35 Energy L.J. 71, 82 (2014). Rather, Congress left to the states significant authority to regulate the siting of transmission lines. New York v. FERC, 535 U.S. at 24. Accordingly, any company wishing to construct an interstate transmission line must normally obtain siting permission and eminent domain authority from every state through which the line will pass, in accordance with the states' permitting processes and standards. Klass, Takings and Transmission, supra, at 1101.[1]

         ¶ 17 As noted earlier, the bulk of Rock Island's proposed transmission line will be located in the state of Iowa. In November 2014, Rock Island filed with the Iowa State Department of Commerce Utilities Board 16 petitions for electric transmission line franchises for the 16 different Iowa counties through which the proposed line would run. The Iowa Utilities Board established a procedural schedule to govern that state's regulatory review of the project. Under that schedule, Rock Island was required to file certain documents beginning in January 2017. On December 22, 2016, however, Rock Island asked the Iowa Utilities Board for leave to withdraw all 16 petitions it had filed in connection with the project. The Iowa Utilities Board granted that request the following day. Although Rock Island advised Iowa authorities that it might submit new filings in that state depending on how judicial review of the regulatory proceedings in our state was ...


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