Electricity policy can often be complicated and technical, but the broader themes are easy to understand. Most people, for example, understand the idea of “gaming the system,” or using the rules in a way they were not intended (or not officially intended) to give themselves an unfair advantage. A case of playing such games can be seen when it comes to incumbent attempts to avoid competition in electric transmission.
The Federal Energy Regulatory Commission (FERC)’s attempt to interject competition was primarily focused on bidding out the construction of new regional facilities. As we’ve discussed previously , the FERC’s Order 1000 recognizes the importance of transmission as an enabler of markets, requiring regional transmission planning and cost allocation, while also enabling competition for regional transmission projects. But while competition for regional projects has improved moderately due to Order 1000, incumbent opposition to competition from new entrants is stronger than ever. By unfairly restricting cost recovery for any such buildout in its zone, an incumbent can effectively insulate itself from the threat posed by new entrants. This also allows them, as the retail service provider, to skew load growth and new generation interconnections to their system (including renewables), which just compounds the chronic competitive disadvantage facing these under-served communities.
Are new entrants cutting corners, or not building to the same standards as the incumbent regulated utility (transmission provider)? Absolutely not. The North American Electric Reliability Corporation and associated regional standards apply to all entities, regardless of their business structure.
Ironically, incumbent utilities operating in the absence of competition are notorious for letting transmission reliability problems that only impact their wholesale transmission customers (non-native or retail load) go unaddressed—customer service quality doesn’t resonate when your customers don’t have any alternatives. Enabling non-incumbent transmission developers helps cost-effectively fill in “holes” in regional grids, especially in areas served by rural cooperatives and municipalities. These areas sometimes lack comparable service reliability and the opportunity to construct cost-effective solutions as areas served by incumbent utilities. And yet these transmission-dependent entities rely on a transmission system that incumbents insist is their exclusive domain. These entities would benefit by having an option other than the incumbent. At a minimum, it forces the incumbent to come to the negotiating table.
As shown time and again, competition breeds efficiency. Whether it’s accepting a rate of return capital lower than current generous regulatory allowance or developing more innovative ways to manage costs, independent transmission companies are motivated to perform at lower cost. The same incentive does not exist for incumbent utilities when insulated from competition. This has resulted in cases where competitive suppliers develop local projects at 20 percent lower costs . New competitive developers are finding ways to customize transmission solutions to prudently address customers’ reliability concerns expeditiously, and often at a discount to what an incumbent would provide. It isn’t just cost that is important, but the fact that an incumbent may ignore a transmission-dependent entity’s issue until an alternative developer proposes a solution for the entity. This value can only be realized if the rules are fair for new entrants.
Clearly incumbent providers are motivated to add as much investment as they can in order to earn a regulated rate of return on as big a rate base as possible. But absent competition they also lack the incentive to build projects whose benefits are focused on more than just their retail load and only have financial motive to respond to customers’ reliability concerns if regulators force them.
Just as with Order 1000, incumbents are pushing equally anti-competitive policies at the FERC that unfairly restrict or prevent non-incumbent load and/or networked local transmission facilities owned or developed by others from being included in the regional transmission system under the same rules that applied when their facilities were integrated. Incumbents also try to discredit the viability of their competitors’ business models, leveraging their advantage in regional stakeholder processes to thwart local projects from competitive suppliers from qualifying to provide regional reliability benefits.
It’s time for the FERC to end the game playing. The answer is to lower undue barriers to local transmission development by non-incumbents. This will close reliability “holes” in regional grids, while promoting comparable reliability and rates for all customers, regardless of who delivers their power.
Image credit: Pand P Studio
- “As we’ve discussed previously”: https://www.rstreet.org/2020/12/07/competitive-electric-transmission-deserves-a-second-look/
- “20 percent lower costs”: https://texaspublicutilitylaw.org/wp-content/uploads/2018/08/Emery-PPT.pdf