Conservatives Should Lead on Electric Transmission Reform
Electric transmission can be rather complex, but done right it boils down to two simple benefits: lower costs and fewer blackouts. Currently, bad regulation results in expensive transmission that fails to address growing reliability threats.
As debt limit negotiations revealed, conservatives are hesitant to welcome electric transmission expansion. It is hard to blame them. Media headlines frame transmission development as synonymous with progressives’ agenda. Ballooning transmission expenses have led to consumers demanding reform. Crucially, proper transmission reform strikes right at the core of the conservative energy message – lower costs and greater reliability – by efficiently expanding the grid.
The problem surrounding transmission is deeply flawed regulation that rewards massive overspending on inefficient projects and deters efficient development. Of the $20-$25 billion spent annually on transmission, over 90% is subject to neither competitive bidding nor a cost-benefit test. Most projects are advanced by local monopoly utilities and rubber-stamped by regulators, and captive customers bear the costs. Republican Commissioner Mark Christie of the Federal Energy Regulatory Commission (FERC) has taken the lead to work with states to fix this.
Meanwhile, FERC has a pending rulemaking to fix regional transmission. Consumers and free market groups paint a clear reform path. FERC needs to strengthen regional planning for economic projects, which are determined by cost-benefit tests and put out for competitive bid, while eliminating exemptions for inefficient monopoly projects.
Regional and local transmission problems can be fixed by regulatory leaders. But they are less equipped to handle the gaping hole in transmission policy: interregional transmission. Fortunately, conservatives like Neil Chatterjee, who served as President Trump’s FERC chairman, offer great insight.
While FERC tries to fix the regional transmission framework, no such framework even exists for interregional transmission. The result is that hardly any interregional transmission has been developed, despite huge cost and reliability advantages compared to small projects. Since the majority of grid reliability events stem from severe weather events, the ability of one region in emergency conditions to import power from a neighbor’s surplus is vital to keep the lights on. Winter Storms Uri and Elliott made this clear. Reliability authorities expect threats to worsen amid “insufficient transmission for large power transfers.”
Conservatives have expressed interest in two approaches to interregional transmission reform. The first is to build transmission like natural gas pipelines. The underappreciated catalyst of the gas revolution last decade was the institution of nationwide competitive reforms. In this model, competitive gas producers and consumers voluntarily contracted for pipeline service with competitive pipeline developers. This signals where, when and how much pipeline expansion is economical. The resulting infrastructure fueled the great energy story of the 2010s.
About one-third of states instituted similar competitive reforms in the electric industry. The downstream segment – competitive retail energy providers – seek reforms to enable them to obtain the benefits of voluntarily contracting for interregional transmission. Competitive transmission developers want similar reforms, such as monetizing the reliability benefit of firm power imports in competitive electricity markets. Such reforms should be prioritized, but they will only work in the minority of the country that embraced electricity competition.
Most of the country clings to vertically-integrated monopoly utilities. Their profits are determined by the amount of capital they spend, which creates a perverse incentive to manage costs. To think monopoly utilities would be willing to pursue low-cost transmission development is a fool’s errand. Instead, they have a pattern of torpedoing cost-efficient large-scale transmission to justify building more expensive local transmission and power plants. For example, Entergy recently undercut a $100 million transmission project to justify a new billion dollar power plant. Mandatory transmission planning requirements are the only option to foster least-cost transmission development in monopoly jurisdictions.
Transmission planning requirements come in different shapes and sizes. Some can be excessive and inefficient, others necessary and prudent. One concept has emerged to establish a floor for prudent transmission investment: minimum interregional transfer requirements. This entered debt limit negotiations in the form of the BIG WIRES Act, which is a thoughtful approach by Democrats seeking bipartisanship. However, it proposes a uniform requirement across all regions.
Conservative thought leaders have been resistant to the idea of Congress imposing an arbitrary requirement on interregional transfer. Their instincts serve them well. Grid economics and reliability conditions vary by region. Some conservatives skeptical of a uniform requirement find a tailored approach more appealing, where transfer levels are determined by region-specific reliability conditions and benefit-cost analysis.
Such an approach would deliver “no regrets” transmission development. Not only are such projects vital to bolster grid reliability, but they often reduce more costs than they create. For example, an interregional transmission line during Winter Storm Uri would have paid for itself in four days.
The status quo is not cutting it. Costs are rising and reliability conditions are worsening. Enabling voluntary capital to flow is the best option, where it is feasible. For the rest, “no regrets” transmission solutions are now a matter of energy security, not political convenience.