Competitive electric transmission deserves a second look
There are reasons for this. It would make little economic sense to have two sets of transmission lines running in parallel into every home or business. For this reason, transmission has traditionally been considered a “natural monopoly” and best regulated as such.
But even if full competition for transmission is not realistic, there are still elements of the transmission system (such as the building or ownership of individual lines) that can be open to competitive processes. As with competition generally, this can bring significant cost savings for consumers. One recent study found that winning bidders in competitive projects were 40 percent cheaper than the initial cost estimate for the project, whereas non-competitive projects ended up costing 34 percent more than initial estimates.
There has been a growing recognition in some quarters about the value of competition for transmission. In 2011, the Federal Energy Regulatory Commission (FERC) issued Order 1000, which had sought to reduce costs and increase the development of electric transmission by removing barriers to competition and encouraging states to do the same.
Unfortunately, Order 1000 has had less of an effect than was hoped, as states and regional authorities have found ways to circumvent it. Since the order went into effect, only 3 percent of transmission investment in the United States has been subject to competition. Some states have sought to avoid Order 1000 by passing so-called “Right of First Refusal” (ROFR) laws. Under a ROFR, when a transmission line is to be built, the utility to which that line will connect is given the option of building and owning the line itself. Only if the utility declines would the project be subject to competitive bidding.
Order 1000 permitted explicit competitive blind spots, such as exempting local transmission projects from competitive processes. This has resulted in both unnecessary cost increases and foregone innovation. Consider that competitive suppliers have demonstrated the ability to develop reliability projects with cost savings of 20 percent or more.
Infusing competition into transmission development yields greater benefit where creative solutions matter most. For example, creatively networking dozens of upgrades to existing infrastructure facilities is often more cost effective for addressing grid reliability vulnerabilities than a conventional approach. However, arcane regulation forbids or inhibits competitive suppliers from pursuing unconventional projects, even if they yield benefits far in excess of costs or present a superior alternative to proposals from incumbent transmission owners.
It is time to double-down on the goal of transmission competition by implementing the regulatory framework properly, such as reducing or eliminating competitive “carve outs” and lowering undue barriers to competitive transmission development at the regional and local levels. Doing so will spur cost reductions and innovation for years to come. Finding ways to reduce cost for transmission is vitally important. While the price of producing electricity in Texas has fallen considerably, for example, the costs of transmission have been going up. Between 2003 and 2018, the cost of transmission investments made by Texas utilities went from less than $1 billion a year to over $3 billion a year, far outstripping increases in population or growth in the broader economy. These increases mean that part of the savings generated from the lower cost of making electricity are being eaten up by increases from transmission.
Transmission enables all customers to access the lowest cost generation. Spending money on transmission can lower total costs for everyone. But to ensure the greatest benefits of low cost, clean power for the most people, transmission system expansion should be done as economically as possible. Introducing competition is one way to achieve those benefits.
Note: This post has been corrected due to two factual errors.
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