One of the key questions the Federal Energy Regulatory Commission must decide as it considers making sweeping changes to its transmission rules is whether competition will advance transmission development.

The answer to the question could affect utility investments, consumer electric bills and the pace of the renewable energy buildout on the U.S. grid.

U.S. transmission investment grew to $170.1 billion in 2020, up from $95.2 billion in 2014, with only about 3% of transmission projects coming through competitive bidding and about a quarter of the spending occurring in the PJM Interconnection's footprint, the Electricity Transmission Competition Coalition (ETCC) said in an Oct. 13 filing at FERC in response to the commission's advanced notice of proposed rulemaking on transmission (RM21-17). 

Utilities want right of first refusal for planned projects

Utilities and the Edison Electric Institute, a trade group for investor-owned utilities (IOUs), urged FERC to give incumbent utilities the right of first refusal (ROFR) to build regional and inter-regional transmission projects without a bidding process.

The request could upend part of FERC's decade-old Order 1000, a landmark decision governing transmission planning and cost allocation that sought to open transmission construction to competition.

In the order, FERC withdrew the ROFR for incumbent utilities for regional or inter-regional transmission projects that could have their costs shared across the region. However, the utilities were allowed to continue spending on "immediate need" projects and making upgrades to their systems without going through a bidding process. Some states, such as Minnesota and Texas, passed laws reinstating the ROFR for their utilities.

"Rather than resulting in lower rates and increased transmission build, the removal of the federal ROFR has resulted in uncertainty, increased costs and increased delays," EEI told FERC.

Competitive processes for transmission projects stifled cooperation and collaboration between transmission owners and regional planning entities, the trade group said. They also made it more difficult and expensive to plan regional transmission projects, according to EEI.

"Reinstating the federal ROFR will address the inefficiencies caused by the competitive process and help get needed transmission built in a cost-effective, timely manner as it allows the entities with the expertise, the knowledge of the existing system, the relationship with customers and regulatory agencies and the obligation to provide safe reliable service to build the lines selected in the regional process," EEI said.

Being required to hold solicitations for regional projects would "significantly" delay meeting clean energy goals, according to IOUs and cooperative utilities in the Midcontinent Independent System Operator footprint.

Transmission spending supports utility income

Removing the ROFR could also boost utilities' bottom lines. Transmission investments can be an important source of income for utilities, especially ones that don't own power plants, according to Paul Patterson, an equity analyst with Glenrock Associates.

Transmission assets, for example, make up 46% of Public Service Electric & Gas Co.'s $22 billion rate base, according to a recent investor presentation by its parent, Public Enterprise Group (PEG). The Newark, N.J-based utility currently earns a 9.9% return on equity on its transmission assets.

PSE&G plans to spend about $2.5 billion on transmission from 2021 through 2023, about 27% of its overall expected capital expenditures for the period, according to PEG's most recent annual report. The utility has proposed an additional $1 billion in transmission for offshore wind.

More competition in the transmission arena could hurt PEG's earnings, the company warned in its most recent annual report.

"Increased competition for transmission projects could decrease the value of new investments that would be subject to recovery by PSE&G under its rate base, which could have a material adverse impact on our financial condition and results of operations," PEG said.

Consumers seek more competition to cut costs

In contrast, electricity consumers favor competition because they say it can reduce costs that end up in their bills.

Transmission projects that go through competitive processes are roughly a third less expensive than utility-backed proposals, according to the ETCC, which mainly represents large energy users and trade groups such as Ford Motor Co., the PJM Industrial Customer Coalition and the Steel Manufacturers Association.

"ETCC supports the addition of needed transmission capacity at the lowest possible cost, which can be achieved with more competition in transmission planning, design, and construction," the group said.

FERC should pre-empt state ROFR laws, according to ETCC.

"State ROFR laws are quite effective at protecting incumbent transmission owners, nullifying competition, and increasing costs to consumers, not only in the state in which the ROFR law is enacted, but in neighboring states where the new transmission project may be cost-shared," ETCC said.

ETCC urged FERC to require transmission projects in all regions at and above 100 kV to be subject to bidding, with some exceptions.

An independent system planner should oversee bidding processes, according to ETCC. Regional transmission organizations (RTO) and independent system operators (ISO) could fill that role in the areas where they operate, the group said. The West, outside California, and the Southeast are the only regions without an RTO or ISO.

Also, FERC should adopt rules to streamline and speed up the bidding processes, according to ETCC. 

The California Public Utilities Commission (CPUC) called for eliminating carve-outs that shield certain types of transmission projects from competition. Since Order 1000 took effect, in PJM, spending on local projects that don't face competition tripled while the value of regional projects fell by a third, the regulatory body said.

FERC should require local projects to face competition, according to the CPUC.

"This would serve to channel investment into holistic, regional transmission planning processes that benefit from a diverse range of ideas and perspectives — from both incumbent IOUs and non-incumbent developers," the CPUC said.

Competition is 'huge threat' to utilities

Increased competition for transmission investments is a "huge threat" to the utility industry, which typically invests in areas such as local transmission that fall outside FERC's bidding requirements, according to Glenrock's Patterson.

However, so far, competitive bidding processes are complicated and can take a long time, Patterson said.

When thinking about revising its rules, FERC will have to decide how quickly it wants to see transmission projects built and what costs they want ratepayers to incur, he said, noting that when independent companies build transmission facilities they face the financial risks for those projects.

If FERC opts to expand competition for transmission projects, the agency will have to try to remove administrative barriers to quick and efficient bidding processes, Patterson said.

"Transmission planning and development is an administratively burdensome, technically complicated and litigious process," Patterson said.