Without question, if fully implemented, the Federal Energy Regulatory Commission’s new “watershed” rule, Order 1920, will transform transmission development. But stakeholders’ agreement stops there. Discord has emerged, largely over the perceived role of states and consumer impact.

Overall, Order 1920 is an economic upgrade over the status quo. Consumers benefit from having independent economic planning displace uneconomic monopoly utility planning. It is true, however, that efficient interstate planning and cost allocation may involve trade-offs with state autonomy. Furthermore, the rule is not flawless. It established an anticompetitive “right-sizing” right-of-first-refusal and failed to remove an inequitable construction work in progress incentive.

Now that the deadline for seeking rehearing of Order 1920 has passed, two things are important to keep in mind. First, consider the marginal economic effect, especially how more efficient transmission projects would displace the inefficient projects that dominate transmission spending today. Second, consider how to maximize efficient interstate policy while balancing state autonomy.

An unacceptable status quo

Since consumers pay for nearly all transmission, their perspective takes precedence. It is difficult to overstate how dissatisfied consumers are with the current state of transmission. With rising retail rates, in part because of transmission expenditures, customers are questioning the costs behind their bill increases.

State regulators do not have many convincing answers. Most utilities recover transmission expenses through FERC formula rates, where challengers, not utilities, have the burden of proof regarding whether costs are reasonable. And where there is no economic regulation of monopolies, there is rarely competition. Over 90% of transmission investment has been made in the absence of competition and without the use of economic criteria, such as cost-benefit analysis. The dominance of inefficient, monopoly utility-led development resulted in transmission spending ballooning from $9 billion to $40 billion last decade.

Rare transmission success stories resulted from economic planning, which uses cost-benefit analysis and competitive bidding. This yielded an impressive track record. The problem is this was the exception, not the rule.

Consumers’ pain and pushback will only grow under the status quo. Continuing changes in the generation mix, along with resurgent demand growth, imply far greater transmission needs than last decade. Without the imposition of economic discipline, achieved via competition or strict economic regulation, the outlook deteriorates for consumers.

Economic merits

Rather than wait to be pummeled by more inefficient transmission expenses, consumers are taking a stand. According to a convening of transmission customers, the keys to successful reform are better economic planning, optimizing the existing system, effective competition and governance improvements. By this yardstick, Order 1920 made modest improvements to optimize the existing system by requiring transmission providers to consider grid-enhancing technologies. Order 1920 also made modest governance improvements by requiring better transparency of local monopoly projects, which constitute half of transmission spending, do not employ economic criteria and lack any oversight. However, the establishment of a “right-sizing” ROFR was a step backward for competition. The extent it can be contained, as consumers requested on rehearing, will have significant bearing on the rule’s impact.

That leaves the main thrust of Order 1920: economic planning. On this, the rule delivers. Order 1920 will drive planning over an appropriate time horizon, require scenario analysis to mitigate risk, and use higher-quality cost-benefit analysis as its basis. In short, Order 1920’s core thesis was spot on; reactive, piecemeal planning without economic process is resulting in far more expensive transmission expansion than proactive, comprehensive planning using economic methods.

FERC Commissioner Mark Christie, the sole dissenter on Order 1920, correctly identifies much of the status quo problem. He appreciates the problem statement; monopoly transmission development with no economic discipline is harming consumers. He has called for reform alongside us, even in the same forum. Christie’s dissent implies that he agrees with much of the rule, but he stated that changes from the proposed rule regarding state authority caused him to oppose it. State authority is no doubt a key question, but we cannot lose sight of two things. First, the most expensive option is the status quo. Second, FERC is the only regulatory authority able to remedy this interstate problem.

Reconciling state autonomy with least-cost planning

Consistent with Commissioner Christie’s concern, states have a duty-bound obligation to protect their consumers. Prioritizing merchant transmission development with voluntary cost allocation by offtakers is the least cost-and-risk option. This suffices for pipelines, but electricity has tricky network effects. This model cannot capture and monetize all consumer benefits, causing chronic underdevelopment. Further, most transmission offtakers are monopoly utilities, who have a perverse financial incentive to resist efficient transmission development. Thus, mandatory transmission planning and cost allocation is an arduous necessity to minimize system costs.

States play a critical role in ensuring transmission prudence, even with mandatory regional planning. Prudence requires acknowledging that interstate lines leverage major economies of scale, while local projects should only be used to fill in the gaps for energy delivery. Prudence also requires risk mitigation. Accordingly, states should emphasize robust implementation of Order 1920’s scenarios to ensure “least regrets” development across a range of future conditions.

Uniformity of benefits measures is necessary for least-cost planning, which Order 1920 provides. Ideally, states would play a commanding role in approving the benefits methodology that regional planners use and encourage the integration of economic and reliability benefits. In fact, more consistent benefits methodology across regions can empower states to exercise more effective oversight. Specifically, it enables apples-to-apples evaluation of cost alternatives in cases where utility generation and transmission are substitutes. A prime example are load pockets, where utilities prefer to rate base inefficient generation at much higher cost than efficient transmission that enables cheap imports.

Streamlined approaches to linear interstate infrastructure have a superior track record compared to disjointed state-by-state planning. For example, streamlined interstate natural gas pipelines have been developed in a more efficient, economical fashion than state-by-state oil pipelines. Differences in state policies clearly alter regional infrastructure needs, but resorting to fragmented state-by-state planning removes the least cost options. The most cost-effective way to meet state requirements altogether is to treat state policy goals exogenously in planning criteria. Proper beneficiary-pays cost-allocation methods remedy cross-subsidy concerns between states.

It is understandable that some states would be concerned with seemingly losing control of their energy future. However, control doesn’t equate to cost-effectiveness. Settling for state-specific transmission development due to concerns about interstate cost leakage misses the bigger picture of minimizing cost. Planning infrastructure on a state-by-state basis ensures states only pay for their own needs, but it costs each state far more on balance. Imagine a thrifty family-style meal compared to marked-up individual meals.

In practice, state control is often an illusion. Even in vertically integrated states, state commissions minimally exert input or direction into utility transmission planning. Transmission is rarely integrated into utility integrated resource plans; many states removed transmission when they modernized IRP rules. Even where state commissions pre-approve transmission investments, regulators’ insight into screening criteria for needs and alternatives is murky at best. Said more plainly, state commissions are often not presented with the most economic choices, which are often interstate projects that extend beyond their jurisdictions.

A number of Order 1920’s detractors, namely state interests, claim the rule goes beyond FERC’s jurisdiction and invades upon states’ authority. Although the rule may have specific forms of litigation risk, FERC’s broad authority is not in question. There is no doubt that FERC has authority over interstate transmission planning. Legal experts have already explained why Order 1920 does not trigger the major questions doctrine, the primary tagline of state resistance in the proceeding.

Rather than expend resources on symbolic legal fights to maintain fallacious control, states should seize the opportunity in Order 1920 to execute their duty-bound obligation. This means embracing more efficient transmission planning and cost allocation schemes. Such a coordinated effort by states of all stripes will ensure least cost, least regrets planning. That benefits states exclusively focused on costs and reliability. It also helps those “public policy” states get their needed transmission built, while paying their fair share. 

Conclusion

Order 1920, like broader transmission policy, has become unnecessarily politicized. Concerns over a renewables side-agenda and harm to states’ rights and consumers have ignited inaccurate controversy. But new generation and consumers are not in a zero sum game. Both benefit from more economical approaches to transmission. Unsurprisingly, renewables groups headlined by the American Clean Power Association and consumer groups headlined by the Electricity Consumers Resource Council and Electricity Customer Alliance have praised the rule.

On the merits, perspectives on Order 1920 need not fall along party lines. In fact, multiple former conservative appointees to FERC, including President Trump’s FERC chairman, have said they would have voted to support Order 1920. Again, Commissioner Christie’s dissent acknowledges that he would have supported the rule if state authority was expanded from the role proposed.

States, for their part, have the opportunity to embrace Order 1920’s core provisions that will benefit their consumers. They should exercise their autonomy to ensure the best implementation of the rule. States must lead on scenario development, determining cost allocation regimes, and on how to consider benefits. They should also prioritize containing the ROFR and pursuing complementary reforms, such as reducing the voltage exemption to 100 kV, to drive more capital into economic processes and deter uneconomic overbuilds.

Overall, proper implementation of Order 1920 and enacting complementary reforms are the keys to benefiting consumers. And states play a crucial role in realizing this vision. Their customers are depending on it.