Josh Webb & Josiah Neeley: Legislation will push cost of utility projects higher

The recent passage of the federal Inflation Reduction Act will spur a transmission building bonanza as billions of dollars are spent connecting power plants and cities across the country.

If a bill recently introduced in the Indiana Legislature becomes law, however, Hoosiers could be paying far more for these projects than necessary.

The legislation would grant electric utilities a “right of first refusal” to build, own and operate new transmission lines in their service area, preventing projects from being competitively bid by other energy companies.

The bill would eliminate a key element of competition from the current transmission planning process and effectively create a monopoly, to the detriment of Indiana consumers.

In the case of transmission lines, competition does not mean multiple sets of wires and poles running alongside one another. Rather, projects can be bid with a variety of companies allowed to compete for the right to build, own and operate the project.

In fact, research shows competition can reduce the cost of new transmission projects 20% to 30%. As an example, consider a group of recently approved transmission projects for the Midcontinent Independent System Operator, which is the regional transmission organization for much of the Midwest, including Indiana.

Hoosiers’ portion of these projects is expected to cost $506 million. With a right of first refusal, however, the same projects would be expected to balloon to $586 million. Even the existence of those rules in other states is expected to increase costs to Indiana by more than $200 million.

Keeping costs low is especially important for electric transmission because of the unusual way the system is paid for. Most businesses have an incentive to keep costs down because they cut into their bottom line.

Utilities, by contrast, operate under a “cost recovery” model, where how much they are allowed to charge is based on their costs plus a set percentage of profit passed through on customer electric bills. This means that the more money a utility spends, the more money it makes.

Additionally, electricity price inflation consistently has outpaced overall inflation since January 2022. While overall inflation is up 6%, electricity costs are up 12.9%.

Right-of-first-refusal laws emerged in a number of states during the past decade after federal regulators expanded the availability of competition for transmission projects. These laws have also provoked a backlash, as a growing coalition of consumer groups, free-market advocates and environmental organizations has highlighted the wasteful spending the laws encourage.

Perhaps with this opposition in mind, Indiana’s right-of-first-refusal bill attempts to mask its anti-competitive intent by mandating utilities use competitive bidding when subcontracting portions of their projects.

Ironically, what this provision admits is that competition is needed—as long as it’s the utility benefiting from it. When it’s the consumer benefiting from subjecting the utility itself to competition, not so much.

Right-of-first-refusal rules might also run afoul of federal law. Last year, a federal appeals court raised grave constitutional concerns about a Texas law on the grounds that it illegally discriminated against out-of-state businesses. In March, the Iowa Supreme Court unanimously issued an injunction against the state’s right-of-first-refusal scheme.

Why Indiana would want to jump into these legally unsettled waters is unclear.

Given the current and harmful rise in inflation, the last thing Hoosiers need is a law boosting crony capitalism and making electric prices more expensive. Indiana lawmakers should be focusing on ways to reduce electricity costs, not making them prohibitive by enacting a monopoly and boosting incumbent utility profits.