The Good, the Bad and the Winning Formula for FERC’s Regional Transmission Reform Proposal
Last Wednesday, over 200 electric industry stakeholders filed comments on proposed transmission policy reforms that, altogether, may hold more economic and emissions impact than the Inflation Reduction Act. The proposed reforms stem from a notice of proposed rulemaking (NOPR) issued by the Federal Energy Regulatory Commission (FERC) in April to overhaul the agency’s regional transmission planning and cost allocation rules. Overall, the NOPR contains many productive proposed changes, but its anti-competitive provisions are misguided and will undermine beneficial reforms.
The NOPR comes more than a decade after FERC issued Order 1000, which established the framework for regional transmission regulation. The NOPR would require utility transmission providers (TPs) to:
Conduct regional transmission planning on a longer-term basis to incorporate changes in the resource mix and demand;
More fully consider advanced technologies in transmission planning processes;
Seek the agreement of relevant state entities regarding transmission cost allocation method(s);
Let TPs exercise a federal right of first refusal (ROFR) for transmission facilities conditioned on the incumbent TP establishing joint ownership of the facilities with another party;
Adopt requirements to identify opportunities to “right-size” replacement transmission facilities;
Revise existing interregional transmission coordination procedures to reflect the NOPR; and
Remove the construction-work-in-progress (CWIP) incentive for regional transmission facilities.
The NOPR’s direction on regional transmission planning is greatly beneficial. Current planning is reactive and myopic and fails to account for the full range of transmission benefits, resulting in a failure to identify longer-term needs and solutions that maximize net benefits to consumers. The NOPR would expand the scope of regional planning by extending the planning time horizon and number of scenarios to better reflect future supply and demand conditions. Likewise, the NOPR’s “right-sizing” proposal for TPs to submit information on their local in-kind replacement facilities, and for planning regions to evaluate such facilities, may lead to identifying more efficient or cost-effective solutions. Together, these reforms should substantially improve the overall regional transmission planning process and expand the universe of projects subject to competition.
The NOPR’s planning provisions could be strengthened further by:
Merging aspects of generation interconnection into transmission planning for transmission upgrades, which would co-optimize system planning and lower uncertainties, transactions costs and inconsistencies between interconnection and transmission planning;
Requiring a minimum set of benefits for planning evaluation, including economic quantification of reliability benefits;
Requiring that all transmission projects pass a cost-benefit analysis under the purview of an independent transmission planner and/or monitor across all Order 1000 regions; and
Enact complementary near- and long-term planning processes optimized to account for uncertainty.
The NOPR’s proposal for TPs to consider advanced transmission technologies is a step in the right direction. But it will have little effect unless TPs are required to incorporate them into planning. FERC could require the inclusion of topology optimization as well as the inclusion of commercially viable technologies on a rolling basis as informed by a technology expert forum.
There are other potentially beneficial aspects of the NOPR. Its interregional coordination proposal is better than nothing, but the Commission needs to undertake a separate endeavor to build an interregional transmission planning framework. Removing the CWIP incentive would shift project risk back to TPs and away from consumers but involves some financial trade-offs.
The NOPR’s intent to drive state agreement over cost allocation and siting is noble. However, in practice, the proposal poses legal and conflict resolution concerns. It could benefit from schedule discipline and a backstop provision for circumstances in which states cannot agree, while recognizing that state agreement would not reflect the full suite of beneficiaries charged with cost allocation. FERC must also recognize that states lack the jurisdiction and resources to serve an economic oversight role. Thus, state participation is not a substitute for the Commission’s oversight responsibilities or for competitive mechanisms.
The Achilles’ heel of the NOPR is its conditional ROFR provision. Based on incentive structure, utilities would employ a conditional ROFR unconditionally, thus sounding the death knell for transmission competition. Substantively, the justification provided would promote discriminatory “closed access” transmission policy in a manner that contradicts landmark precedent and the Commission’s statutory duty to combat anti-competitive behavior and promote “open access.” Based on competition’s 20 to 40 percent cost savings track record, which some state authorities claim is too conservative, and the potential for trillions of dollars in future transmission expenditures to facilitate the clean energy transition, reinstating federal ROFR could prove to be a $100-billion mistake.
Procedurally, the NOPR largely ignores the evidence of the benefits of competition—and thus the damages that federal ROFR would inflict—and seeks to use an obscure legal tool (Section 309 of the Federal Power Act), which creates massive legal risk that may not be severable from the rule. This liability means the bad in the rule risks undermining the good.
The NOPR justifies the reinstatement of ROFR to address concerns that regional transmission development—which is subject to competition—has suffered underdevelopment in favor of local transmission development, which is not subject to competition or any form of regulatory economic oversight. Yet ample research concludes that such strategic behavior by utilities can be avoided by adopting the proactive planning reforms highlighted above, reducing competitive exemptions under Order 1000, providing economic oversight of local transmission and ensuring that regional planning is conducted independently across all Order 1000 regions. A broad-based coalition of competition supporters, including dozens of consumer groups, filed comments proposing specific, comprehensive fixes in this regard.
This perspective was also echoed in comments filed by the Department of Justice and Federal Trade Commission, who added that FERC should follow President Joe Biden’s Whole of Government Approach to Competition. The agencies specifically noted that:
To the extent that Order No. 1000 may have inadvertently led incumbent utilities to overinvest in local transmission facilities at the expense of more efficient regional facilities, the Agencies point out that this distortion has multiple causes, including ones that the NOPR does not address … The Agencies therefore urge FERC not to displace competition, but instead to consider solutions to utilities’ misaligned incentives that are consistent with and promote competition.
The Winning Formula
Fortunately, FERC has ample time to pursue a winning formula: refine the good and jettison the bad from the NOPR. The anti-competitive pitfalls are bad in their own right and jeopardize the promise of the rest of the NOPR. A sizeable number of commenters agree, including clean energy groups like the Advanced Energy Economy, which endorsed the core aspects of the NOPR and encouraged improvements but asked FERC to strip out the counterproductive ROFR from the final rule.
The quality of the NOPR’s beneficial reforms, as well as the key to effective competition, is highly sensitive to governance quality. This places a premium on transmission planning that is independently administered with enhanced transparency, accountability and stakeholder inclusion.
FERC and its stakeholders are better off solving the incumbent TP evasion of Order 1000’s objectives by expanding competition and strengthening productive NOPR concepts. These include deciding what additional advanced technologies to incorporate, how to break down silos between “economic” and “reliability” project planning and improving stakeholder inclusion. FERC should marry these with the complementary merits of independent planning through a separate proceeding.