Eliminating Competition for Electric Transmission Would be a Costly Mistake for Iowa

The question of who should build needed electric transmission projects has been the source of much controversy in recent years. In some states, a competitive bidding process can be used to determine which organizations get to build, own, and maintain certain new transmission projects. Other states operate under a so-called “right of first refusal” (ROFR) system, in which local utilities have the exclusive right to build, own, and maintain the projects.

ROFR is a bad deal for consumers. Research indicates that the use of competitive bidding results in a 20-30 percent cost savings for new transmission projects, as compared to non-competitively bid projects. Despite this, utilities have pushed hard for the enactment of ROFR laws in recent years in a number of Midwest states, with mixed results.

Iowa is one of the chief battlegrounds over ROFR. In 2020, Iowa enacted a ROFR law during the height of the pandemic. Just last year, the Iowa Supreme Court found that the way the law had been enacted violated the Iowa Constitution. While the decision was based on procedural deficiencies in the law’s passage, the Iowa Supreme Court criticized the substance of ROFR, calling it “quintessentially crony capitalism” and noting that “[c]ommon sense tells us that competitive bidding will lower the cost of upgrading Iowa’s electric grid and that eliminating competition will enable the incumbent to command higher prices for both construction and maintenance.”

Now, Iowa legislators are considering whether to reenact a ROFR requirement for their state. This would be a mistake. A ROFR requirement would substantially raise costs for consumers without achieving any benefit in terms of reliability or other factors.

Further, R Street’s research on the impact of ROFR laws in the Midwest provides a glimpse of just how costly this would be for Iowa. Last year, we looked at a series of projects approved in 2022 by the Midcontinent Independent System Operator, which manages the electric grid in the Midwestern United States. These projects are anticipated to cost $10 billion and represent the first “tranche,” or portion, of what may be as much as $100 billion in transmission projects built in the region in the coming years.

Were Iowa to reenact a ROFR, the cost of these projects alone would increase by $387 million on a 40-year net present value basis, with $46 million in additional costs for Iowa residents alone. Prices have been rising throughout the economy and electricity price increases have outpaced even the overall rate of inflation in recent months. If Iowa eliminates the check on wasteful spending that competition provides, consumers would suffer increased costs.