Testimony to the Kansas Legislature Special Committee on Energy and Utilities Regarding Transmission Reform
Testimony from:
Josiah Neeley, Senior Fellow, Energy, R Street Institute
October 17, 2023
Special Committee on Energy and Utilities
Chair and members of the committee,
My name is Josiah Neeley. I am a senior fellow, in energy policy at the R Street Institute. R Street is a center-right, free market think tank that supports limited effective government in many areas, including the electricity market.
America’s utility grid is about to undergo a major transformation. Changes in technology, in markets, and in the political landscape are going to require substantial expansions and upgrades to the electric transmission system. A disproportionate share of these changes will center on states like Kansas, which connect growing centers of new energy resources with areas of consumer demand.
All this construction is going to cost money. Some projections suggest the U.S. will need to spend $2.1 trillion by 2050 to build-out the transmission grid.[1] Electricity prices are already on the rise, with increasing transmission costs being a key factor. Between 2014 and 2020, transmission costs in RTO regions increased by $74.9 billion or 78.7 percent. Electricity demand, by contrast, remained flat over this period.[2] It is incumbent on states, therefore, to ensure that everything that can be done is done to reduce costs and timelines for the construction of necessary new transmission projects.
What can Kansas do to deal with transmission costs? To begin with, the state should follow the counsel of the ancient Greek physician Hippocrates: First, do no harm. The state should not enact new restrictions or measures that will push up the cost of constructing transmission projects.
A classic example of what not to do can be found in so-called right-of-first-refusal (ROFR) laws. Under the status quo, when an RTO like SPP decides that a new transmission project is necessary, it uses a competitive bidding process to determine who will build, own, and operate the project. Some states, however, have begun to enact legislation prohibiting this form of competition, and requiring instead that new projects be awarded to the local incumbent utility.
ROFR requirements are a surefire way to increase project costs – costs that ultimately will be passed on to consumers. Research conducted by the R Street Institute has found that eliminating competition in building transmission projects could result in billions in increased costs.[3] Likewise, a study by Brattle found that competition resulted in an average cost savings of 20-30 percent.[4]
The Brattle study has received criticism on the grounds that it is based on initial bids, rather than final project costs. It is true that cost overruns can and do occur for all infrastructure projects, whether competitively bid or not. Yet available evidence suggests that the cost savings from competition are not merely a matter of initial bids. For example, a study by Concentric widely cited by critics of competition found that competitive projects had an average cost overrun of 27 percent.[5] Yet the average cost overrun for non-competitively bid projects is 34 percent.[6] Organizations participating in a competitive process can also include projections, such as cost caps, in their bid offer to minimize the risk to consumers from cost overruns.
Thus, research confirms what is just common sense: competition helps to keep costs low. Earlier this year Kansas prudently declined to enact its own ROFR law, and should continue to embrace the cost curbing powers of competition going forward.
Aside from preserving competition, there are other things Kansas can do to improve the transmission development process. One positive step would be to look at opportunities to expand the capabilities of existing transmission by incorporating grid-enhancing technologies (GETs). Technologies like power flow control, topology optimization and dynamic line ratings can save billions by taking fuller advantage of the existing transmission system. Analyses find that adopting these technologies in SPP would double the amount of clean energy deployment while saving $175 million annually in transmission congestion in Kansas and Oklahoma alone[7] Unfortunately, cost-of-service regulation discourages incumbent transmission owners from reducing the capital costs of transmission operations, as this lowers what they can charge in rates. As a result, utilities rarely adopt GETs voluntarily, because they profit more by building expensive new projects. Kansas should lead on pursuing further GETs applications, such as incorporating lessons on how to implement topology optimization based on a pilot in the upper Midwest.[8]
Finally, Kansas should seek to fill the “regulatory gap” in transmission expansion. Economics-based regional transmission planning has been a success at the RTO level, yielding substantial net benefits for consumers.[9]These benefits, however, are reduced because local monopoly utilities continue to route most transmission projects through exemptions to the regional process. This means that small, inefficient projects receive virtually no economic regulatory scrutiny either by FERC or state regulators, which results in increased costs to consumers. FERC and state regulatory leaders have pursued dialogue on fixes.[10]
Kansas should lead by example by ensuring all transmission projects not subject to SPP’s regional economic planning and put out for competitive bid are reviewed by the Kansas Corporation Commission. This will resolve utilities’ strategic behavior to evade regional transmission planning and the cost discipline brought by competitive bidding. For projects legitimately exempt from competition, namely those to meet local needs, utilities should bear an affirmative burden to demonstrate transmission facility prudence in order to receive cost recovery. Better transparency and independent analysis would better inform stricter oversight of local transmission reviews, such as identifying which transmission needs are more cost-effectively met in regional planning.
Sincerely,
Josiah Neeley
Texas Director and Resident Senior Fellow
R Street Institute
[email protected]
[1] NET-ZERO AMERICA: Potential Pathways, Infrastructure, and Impacts, Princeton University,
https://netzeroamerica.princeton.edu/?explorer=year&state=national&table=2020&limit=200
[2] Electricity, U.S. Energy Information Administration, https://www.eia.gov/electricity/
[3] Josiah Neeley, “How ROFR laws increase transmission costs in the Midwest,” R Street Institute, March 7, 2023, available at https://www.rstreet.org/commentary/how-rofr-laws-increase-electric-transmission-costs-in-midwestern-states/
[4] “Cost Savings Offered by Competition in Electric Transmission,” The Brattle Group, April, 2019, available at https://www.brattle.com/wp-content/uploads/2021/05/16726_cost_savings_offered_by_competition_in_electric_transmission.pdf.
[5] “Competitive Transmission Experience-to-date Shows Order 1000 Solicitations Fail to Show Benefits,” Concentric Energy Advisors, August, 2022, available at https://ceadvisors.com/publication/competitive-transmission-experience-to-date-shows-order-no-1000-solicitations-fail-to-show-benefits/
[6] “Cost Savings Offereed by Competition in Electric Transmission,” The Brattle Group, December, 2019, available at https://www.brattle.com/wp-content/uploads/2021/05/17805_cost_savings_offered_by_competition_in_electric_transmission.pdf.
[7] “Unlocking the Queue with Grid-Enhancing Technologies,” The Brattle Group, February 1, 2021, available at https://watt-transmission.org/wp-content/uploads/2021/02/Brattle__Unlocking-the-Queue-with-Grid-Enhancing-Technologies__Final-Report_Public-Version.pdf90.pdf.
[8] “Congestion Mitigation with Topology Optimization,” The Brattle Group, June 1, 2021, available at https://www.brattle.com/wp-content/uploads/2021/08/Congestion-Mitigation-with-Topology-Optimization-Case-Studies-and-a-Path-Toward-Implementation.pdf.
[9] See “Improving Transmission Planning: Benefits, Risk, and Cost Allocation,” The Brattle Group, November 6, 2019, available at https://www.brattle.com/wp-content/uploads/2021/05/17555_improving_transmission_planning_-_benefits_risks_and_cost_allocation.pdf.
[10] See “Reforming Transmission Planning and Cost Management,” R Street Institute, June 22, 2023. https://www.rstreet.org/events/reforming-transmission-planning-and-cost-management/.