Anti-competitive electric grid rules could raise prices
Do you want to pay more for electricity, or less? It sounds like a simple question, but some in the Michigan legislature seem to be having trouble finding the right answer.
On Wednesday, the Michigan House passed SB 103. The legislation, which will now go to the governor to sign or veto, deals with a subject that is arcane but will have real-world impact for the state’s electric consumers: who gets to build transmission lines in Michigan?
Currently, new transmission projects in Michigan can be put up for competitive bid, and a variety of companies can compete to build, operate and maintain electric transmission facilities. SB 103 would change this, granting incumbent utilities something known as a “right of first refusal” (ROFR) on transmission projects within their service territory. This means that monopoly utilities will have the right to prevent other companies from competing against them for transmission projects.
Throughout the country, transmission costs represent a growing fraction of the price of delivering electricity to consumers. The importance of transmission for the grid is likely to grow even more in coming years. Renewable energy is becoming a hot commodity on the energy market as falling prices and concerns over climate change have increased their prevalence on the grid. But the windiest and sunniest places are often far away from major population centers that represent most electricity demand. Matching up this new supply with demand will require more significant new transmission build outs. Transmission projects can also be an important way to maintain grid reliability in a changing market.
While needed transmission build outs will improve the functioning of the grid, these upgrades won’t be free. To keep Michigan consumers from feeling the pocketbook pinch from this buildout, the state has to do all it can to make sure new projects are built and operated as cheaply and efficiently as possible.
A proven way to do this is through the use of competitive bidding. From sports to business, we know that competition provides an incentive for people to get more for less and find better ways to do things. Competition tends to drive costs down as each bidder has strong incentives to keep costs down, reduce risk and find new, innovative ways to deliver products cheaply and more efficiently. Recent research by the Brattle Group has found that for electric transmission projects open to competition, the winning bid averaged 40 percent less than the initial cost estimate for the project. By contrast, non-competitive projects historically have ended up costing 34 percent more than initial estimates.
Keeping costs low is especially important when it comes to electric transmission, given the atypical way that transmission projects are paid for. Unlike a regular business, that charges what the market will bear and tries to keep costs down to make a larger profit, transmission costs receive guaranteed cost recovery through surcharges to customer electric bills. Since the cost of building approved transmission projects is automatically added to consumer bills, any wasteful overspending in the completion of transmission projects ultimately falls on the back of consumers.
The potential of competition to reduce transmission costs is increasingly being recognized. In 2011, the Federal Energy Regulatory Commission (FERC) issued Order 1000, which eliminated federal requirements that prevented competition for transmission projects. FERC hoped that its actions would help spur a competitive revolution in transmission throughout the country.
But not everyone likes competition. In particular, those competed against tend to hate it. So along with the moves toward competition, there have been increasing pushes at the state level to block competition for electric transmission by enacting ROFR laws. A number of states have passed ROFR requirements, and with SB 103, Michigan stands poised to join them. Advocates of the bill say it is necessary to avoid a “patchwork system” of transmission operators. But consumers and businesses, including the Michigan Chemistry Council, have sounded the alarm about what such anti-competitive measures would do to consumers’ bottom line.
ROFR laws are not only costly to consumers. They can also end up provoking conflict between states, delaying the completion of needed projects. The costs of many transmission projects are allocated over more than one state, meaning that consumers in one state often have to help pay for other states’ transmission projects. Unsurprisingly, some states dislike this. For over a decade, Illinois has resisted paying for other states’ transmission projects due to what it sees as unreasonable cost overruns. If Michigan were to join in this scrum, both consumers and the state itself would suffer.
There is still a chance for Gov. Gretchen Whitmer to save the state a black eye on this issue. For Michigan to be a leader in the coming clean energy revolution, it needs to be taking full advantage of what competition in electric transmission can offer; it can’t afford to regress into electric regulatory stagnation.
Image credit: pabrady63
