Teeing-up Congressional Oversight of the Federal Energy Regulatory Commission
Few government agencies have catapulted from the ranks of public obscurity to prominence like the Federal Energy Regulatory Commission (FERC). FERC rules have the ability to shape trillions of dollars in energy spending in the coming decades and profoundly influence the cost, reliability and environmental effects of the energy transition. FERC is an independent, technocratic body tasked with, among other things, ensuring that the rates and charges for electric energy sales and transmission are “just and reasonable” and not “unduly preferential or discriminatory” under the Federal Power Act. Under this act, Congress delegated extensive energy policy authority to FERC but still plays an essential oversight role. Although FERC officially makes decisions based on a legal record, the commissioners are Senate-approved appointees who often take cues from Congress in shaping FERC’s policy agenda.
The Senate Energy and Natural Resources Committee will hold a FERC oversight hearing on May 4, with the House Energy and Commerce Committee expected to host its own in short order. This is an important opportunity for congressional members to probe FERC’s handling of key policy items. These include two pending rulemakings on power generator interconnection and regional transmission planning, as well as thematic issues like reliability policy, the extent and performance of regional transmission organizations (RTOs), and market oversight and enforcement.
Generator Interconnection Rulemaking
New power plants must receive approval from transmission planners—RTOs in most of the country—to interconnect to the grid. Such generator interconnection (GI) processes are necessary to assess transmission system effects, but in their current form impose excessive costs and massive undue barriers to entry for new generators. Today’s processes are vestiges of the transmission model for constructing conventional power plants. They no longer reconcile with current market conditions, which are dominated by dispersed renewable resources that produce a far higher volume of interconnection requests while shifting the economics of transmission upgrades. This has overwhelmed RTO staff and technological processing methods in most regions. GI requests took under two years to process from 2000-2007. In 2022, they took five years.
Current GI uses an incremental transmission upgrade approach that increases uncertainty and upgrade costs by multiples, adding billions in costs that are largely passed through to consumers. The only RTO without such problems is, notably, the only one not subject to FERC jurisdiction: Texas. The Texas RTO plays an informational rather than gatekeeping role, has minimal interconnection testing requirements and handles network upgrades through regional transmission planning, which is far more cost-effective than using GI for network upgrades.
The good news is that FERC’s proposed rulemaking would reasonably address two key issues: improving the selection process for transmission upgrades and GI process and queue management. The bad news is that it would impose unworkable commercial readiness requirements on new generators and fail to address three critical areas needing reform: GI study approaches, the cost allocation of transmission upgrades and the role of regional transmission planning in lieu of GI to drive network upgrades.
Potential questions for Congress to ask FERC commissioners include:
- How can the Commission’s final rule improve the transparency and accuracy of GI studies by considering a focused interconnection study approach?
- How can the use of process automation and advanced computing slash GI study times?
- What are unintended consequences of the proposed rule’s commercial readiness requirements?
- What is the Commission’s plan to take advantage of the drastic cost savings of addressing network upgrades through regional transmission planning in lieu of GI processes?
Regional Transmission Planning Rulemaking
FERC’s other proposed rulemaking aims to fix flaws in the regulatory framework for regional transmission planning and cost allocation. Under this framework, transmission providers centrally plan transmission needs and allocate expenses of transmission expansion to customers. Current practices plan transmission in a reactive manner, miscount transmission benefits, often exempt monopoly utilities from competitive bidding, exclude some technologies from planning consideration and plan economic and reliability projects in artificial silos. Encouragingly, FERC’s proposal would require proactive planning that better accounts for transmission benefits and advanced technologies. Unfortunately, it retains the division between economic and reliability projects and proposes to undermine competitive bidding applications through a limited federal right of first refusal.
Consumers, independent economists and state utility regulatory leaders agree; the winning formula for FERC is to jettison the anti-competitive provisions while refining beneficial provisions like longer-term planning horizons and incorporating advanced technologies. The reform would do well to integrate reliability benefits into assessments of economic projects, while restricting the overuse of reliability projects. Astoundingly, reliability projects account for over 90 percent of transmission development and are neither subject to competition nor economic regulation, which stokes customer complaints over poor economic discipline. These projects in turn undermine economic project development, whose use of benefit-cost analysis and competitive bidding have secured the buy-in of customers.
Potential questions for Congress to ask FERC commissioners include:
- Utilities building local reliability transmission projects are exempt from competition and usually receive no economic scrutiny from regulators. How will you fix this?
- All reliability projects have economic benefits and all economic projects have reliability benefits. How do you plan to integrate economic and reliability criteria in transmission planning?
- Transmission competition has yielded 20-55 percent cost savings, yet it is rarely used. How do you propose to fix regulatory flaws so competition applies more broadly?
RTO Value and Performance
The last two decades have seen a consistent expansion of RTOs, which span nearly all the contiguous states except the Southeast and parts of the West. RTOs have a handful of core functions, which include independently operating the transmission system, administering organized wholesale electricity markets and planning transmission. RTOs are a prerequisite for restructured states, who adopted competitive markets for wholesale and retail supply. Restructuring has yielded cost savings and innovation, while improving risk management, reliability and environmental quality. RTOs also provide a strong value proposition for states that retained traditional utility regulation, as evidenced by ex-ante and ex-post studies. Such is the case with the Midcontinent Independent System Operator, which estimates $36 billion in benefits since 2007 and expects its benefit-to-cost ratio to grow from 11:1 today to 26:1 by 2040. Western states are migrating toward a similar hybrid model of RTOs with traditional utility regulation.
This leaves the Southeast. The new Southeast Energy Exchange Market is not a true market. During Winter Storm Elliott, buying opportunities on this “market” evaporated, the region suffered reliability risks that an RTO would have reduced and neighboring regions in RTOs sent power to the Southeast that limited the extent of rolling outages. A new assessment last week found that South Carolina alone would receive $115-$362 million in net benefits annually by forming or joining an existing RTO.
Potential questions for Congress to ask FERC commissioners include:
- Why are RTOs not ubiquitous across the lower 48 states, given the overwhelming evidence of their economic and reliability advantages?
- Some RTOs have had chronic governance challenges. How do you plan to make RTOs more transparent and hold their leadership accountable?
Market Oversight and Enforcement
Unusual economics make electricity markets especially vulnerable to market power and manipulation, which warrants a FERC oversight and enforcement function. However, some Office of Enforcement practices have undermined competitive markets, with former enforcement staff calling such practices procedural quagmires that deter economic behavior. Deterring market participation decreases liquidity, which ironically makes manipulation more likely and consequential. In particular, it suppresses financial trading that is becoming more important with renewables growth to manage risks like transmission congestion and generator curtailment.
Potential questions for Congress to ask FERC commissioners include:
- How do you define market manipulation and ensure that enforcement only targets bad behavior?
- How would you correct FERC’s opaque enforcement processes to comport with due process?
- Would you support reforms to advance an economic efficiency-based, anti-manipulation framework and to make enforcement processes transparent with clear rules and safe harbors?
Reliability Policy
Reliability policy needs fresh thinking. The norm of reliability assessments and standards set by the North American Electric Reliability Corporation (NERC) and approved by FERC fail to address many reliability threats adequately. That is, they tend to evaluate and require engineering practices of power facilities and overlook the institutional defects that are contributing to chronic reliability risks. As the generation mix evolves, it places added reliability value on natural gas systems to firm supplies, the ability to transfer power within and between regions and to enable flexible demand, where consumption is based on consumer preferences and mirrors supply availability. For example, during Winter Storm Uri, inadequacies in the natural gas system, inflexible demand management and a lack of interregional import capability contributed to extended outages with billions in economic costs and over 200 deaths. FERC must look beyond conventional reliability standards to protect electric reliability.
Potential questions for Congress to ask FERC commissioners include:
- Outdated reliability standards, substandard market rules and incongruent state policies inhibit demand flexibility, which unnecessarily makes involuntary load shedding far more likely. Would you support a FERC initiative to work with states and NERC to ensure robust demand flexibility?
- The natural gas system, including upstream production, pipelines and power plants, plays an increasingly pivotal role in maintaining grid reliability. How do we ensure gas infrastructure and services are sufficient, especially during extreme cold events?
- Studies show that interregional transmission has large and growing reliability value, yet development has been nearly nonexistent. How do you plan to fix this?
Although far from comprehensive, this list provides congressional members with context and ideas to inquire on current FERC priorities or, in some cases, issues that should be FERC priorities.
