FERC Hath Spoken Transmission

On Monday, the Federal Energy Regulatory Commission (FERC) announced twin rules reforming interstate transmission permitting and siting (Order 1977) and regional transmission planning and cost allocation (Order 1920). This is a serious economic issue. Reforms to enhance interstate transmission policy can create over $100 billion in benefits, including multiple billions in annual consumer savings in some states. Order 1977 was unanimously approved, echoing bipartisan sentiment in other permitting reform venues. But Order 1920 was approved 2-1 with a blistering dissent from FERC’s sole Republican, Commissioner Mark Christie. He was particularly incensed that, in his view, the rule promotes a renewables agenda and will harm consumers. However, the nature of reforms indicates far more potential gains than losses for consumers, with much dependent on implementation quality, litigation outcomes, and complementary reforms.

Before examining the merits of Order 1920, it is critical to understand the status quo. Last year, a coalition of consumer groups and R Street articulated that current policy eroded billions of dollars in net benefits to consumers and suppressed lower-cost generation and transmission development. In an era of flat load growth, consumers were paying $20-$25 billion annually for transmission, with over 90 percent built without economic justification like cost-benefit analysis. With the advent of load growth, the fundamental problem of overbuilding inefficient transmission and underbuilding efficient transmission worsens the country’s energy cost and reliability outlook. Consider that transport and heating electrification will add $3-$7 billion per year of transmission needs, not to mention what the data center and manufacturing surge will require.

The consumer coalition noted the “severe lack of economic discipline” in transmission development resulted from a “regulatory system that is outdated and structurally flawed.” A core culprit was exemptions to regional economic planning under Order 1000. In areas with regional transmission organizations (RTOs), incumbent utilities took advantage of exemptions to build the vast majority of transmission as local and supplemental projects. These projects, contrary to economic projects, exclude economic criteria, legitimate cost-of-service oversight, and competitive solicitations. The overbuilt local projects undermined development of regional projects with superior economies of scale. The economic projects under Order 1000 had an impressive benefit-cost track record; the problem was that inferior projects often crowded them out.

Regional economic planning was also undermined by its short-term planning horizon and by excluding reliability benefits from consideration. Rather than optimize economic and reliability benefits, which all transmission projects provide, they were planned in silos with reliability projects exempt from economic considerations. Outside RTOs the situation was even worse, as no basic form of independent regional transmission planning exists.

Such uneconomic practices have persisted because they have an influential advocate: vertically integrated utilities. R Street recently wrote about how, in red states no less, local utilities suppress regional transmission expansion to justify their uneconomic generation and overcapitalized local transmission. Such grid protectionism comes at consumers’ expense. Clearly, the case for reform was robust.

Prospective Merits of Order 1920

Most categorical reforms in Order 1920 should benefit consumers, although experts need weeks to fully process the rule’s merits. The rule contains key provisions R Street and consumer groups requested on the FERC record, though it contradicts some. Encouragingly, the rule’s thesis is consistent with a national consumer group convening R Street performed in 2022. As FERC staff correctly stated in presenting the rule, forward and comprehensive planning is not regularly occurring, resulting in inefficient piecemeal transmission expansion to meet only near-term needs while foregoing projects with better net benefits.

For starters, the rule requires a 20-year planning horizon. This is a no-brainer for infrastructure with a half century lifespan, which the old practice planned rather reactively. The rule applies seven specific planning benefits categories: reduced transmission congestion; reduced transmission energy losses; avoided capacity costs; production cost savings; avoided costs from alternative or deferred transmission facilities; mitigating effects of extreme weather and unexpected conditions; and reduced loss-of-load reliability or planning reserve margin criteria. Although the merits depend on details, this appears to better integrate economic and reliability criteria and drive consistency in transmission benefits methodology. R Street supported this in rulemaking comments and recently explained how clarifying consistent benefits categories ultimately improves net benefits to consumers.

The most economical way to approach state policies is to treat them as exogenous conditions in transmission planning criteria. This is neither a validation nor dismissal of those policies’ merits. It is simply the most accurate way to account for the future generation fleet, which is necessary in transmission planning to minimize system costs. To remedy concerns about one state paying for another’s public policy—a core concern of Commissioner Christie and Republican officials—the  additional costs caused by projects to meet state policies that would otherwise fail a cost-benefit test could be allocated to the state(s) responsible. The merits of Order 1920’s cost allocation will take longer to unpack, but a new mechanism for states and interconnection customers to voluntarily fund all or a portion of transmission facilities is commendable.

Fortunately, Order 1920 scrapped an anti-competitive conditional right-of-first-refusal (ROFR) provision contained in the proposed rule, which was detested by consumers and the Department of Justice, and opposed most recently in a coalition letter R Street signed, led by The Niskanen Center. However, it retained a “right-sizing” ROFR for upgrades on existing lines. This will likely be limited to local upgrades that were not otherwise competitive, thus limiting any cost increase from eliminating competition. The rule punted on a proposal to remove the construction-work-in-progress (CWIP) incentive, the removal of which would have saved consumers a needless expense. While that was a missed opportunity, the rule incorporated transparency requirements and stakeholder engagement for local transmission planning, which is a necessary component of overhauling problematic local transmission processes.

Key Developments Remain

The ultimate impact of the rule will hinge on several outstanding developments:

• Implementation quality. Recall, the quality of regional transmission planning today varies substantially by region because FERC permitted considerable discretion to regional stakeholders on how to implement Order 1000. Order 1920 also provides significant discretion to regions. This will boil down to what regional stakeholder processes devise for compliance and how strict FERC is in reviewing and approving compliance filings. Complicating this is the fact that the majority of FERC commissioners reviewing compliance filings will be different than those who wrote and approved Order 1920.
• Litigation landmines. Removing the conditional ROFR and limiting the right-sizing ROFR may dissuade consumers and competitive suppliers from targeted litigation. Prospects for full litigation will likely come from those opposed to the beneficial reforms. This may seem counterintuitive, but the political economy of efficient regional transmission development rewards consumers and efficient suppliers while often disfavoring incumbent utilities who prefer to suppress regional trade to retain their competitive moat. Expect the utilities most insulated from competitive pressures today to eye sophisticated litigation arguments. Meanwhile, the politics of the grid had already become sharply partisan, and Commissioner Christie’s impassioned dissent throws fuel on the fire. Republican state attorney generals showed their expected litigation card in a letter to FERC saying FERC lacks authority, citing the major questions doctrine. Their concern: FERC is trying to favor renewable energy and spread the related transmission costs to states uninterested in renewables. It will be important for consumer and conservative groups to explain why FERC has clear authority, how sound cost allocation would address their cross-state subsidy concern, and that regional economic planning lowers total costs and boosts reliability, especially with load growth expectations revised upward. Transmission angst is better redirected toward fixing local overbuilds.
• Complementary transmission reforms. Even with proactive and more comprehensive regional planning, regional transmission will remain undermined by utilities’ preference for local and supplemental projects. These will likely remain the default form of transmission development inside RTOs without remedying the Order 1000 exemptions. Order 1920 also does nothing to resolve the fundamental lack of independent planning outside RTOs. Consumers and state utility regulators began losing their patience last year, with complaint filings starting to roll in. Expect more soon. A common theme among complainants is seeking relief in the form of closing regional planning exemptions (e.g., reducing voltage threshold exemption), the creation of an independent transmission planner outside RTOs and tighter requirements for formula rate treatment. Curiously, this would not only complement Order 1920, but address many frustrations with the status quo shared by state regulators and Commissioner Christie at an R Street forum.

Consumer buy-in will shape much of the narrative moving forward. This includes influencing the Republican response tethered to Commissioner Christie’s claim that the rule harms consumers. Although retaining one ROFR and punting on CWIP contradict consumer interests, the core provisions of Order 1920—proactive and holistic benefits planning—should swing the rule into clear net positive territory for consumers. If Republicans wish to make good on their goals to lower energy costs and strengthen reliability, augmenting economic regional transmission is the way to go. Grid politics aside, consumers and proponents of sound policy would be better off prioritizing quality implementation and pursuing complementary reforms in lieu of broad litigation.

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