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Home » Stakeholder Soapbox: Three FERC Fixes to Enable Transmission Competition


STAKEHOLDER SOAPBOX: THREE FERC FIXES TO ENABLE TRANSMISSION COMPETITION


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Apr 10, 2022
Stakeholder Soapbox


TRANSMISSION IS THE BACKBONE OF DECARBONIZATION

Paul Segal, LS Power | LS Power

Essential to combating climate change is a significant buildout of transmission.
Achieving critical elements of a “net-zero” economy — including electrified
transportation and power generation that relies heavily on wind and solar
resources — will require a massive investment in our nation’s transmission
infrastructure. A recent study of long-term decarbonization pathways estimates
an investment of $1.3 trillion to $3.6 trillion will be needed through 2050 to
expand the U.S. transmission system by about two to five times[1] to meet
climate goals. 

To grow our current system by this magnitude, we need a regulatory framework
that cost-effectively mobilizes investment into new transmission. Regrettably,
current federal and state regulations fail to harness the power of competition
to accelerate investment and control costs. Instead, regulations cede too much
control over our nation’s grid to the self-interest of incumbent utilities,
which benefit financially from augmenting, rather than controlling, costs. As a
result, historically less than 10% of domestic transmission has been subject to
competitive bidding.

Correcting the flaws within our transmission policy lies within the power of
federal regulators — specifically, FERC. To promote more competitive
transmission procurements, FERC must close unintended loopholes to allow the
already-existing FERC Order 1000 to function as intended by (1) creating a
robust Independent System Planner standard; (2) ensuring that all transmission
over 100 kV is regionally (rather than locally) planned; and (3) mandate minimum
transmission transfer capability between regions.


COMPETITION IS CRUCIAL TO SCALING HIGH-IMPACT TRANSMISSION INVESTMENT

To get to where we need to go, we must utilize the power of competition to
optimize the buildout of America’s transmission system by:

 * Reducing costs: Relative to an incumbent utility operating as an isolated
   monopoly, introducing competition into transmission procurements sharpens the
   focus on efficient designs and cost-containment mechanisms (i.e. fosters
   approaches that shift the risk of cost overruns and inflationary pressures
   onto developers and away from ratepayers). In New Jersey’s recent
   transmission solicitation to support its planned offshore wind buildout, 57
   out of 79 proposals included cost-containment provisions. Such provisions
   range from binding construction cost caps to limits on allowable return on
   equity. None of these ratepayer protections would have been possible were it
   not for a competitive process that rewards developers for controlling costs.
   
   Studies from The Brattle Group and other sources show that competitive
   bidding processes routinely deliver projects at discounts of 30% (or more) to
   initial project cost estimates and incumbent utility offers. Given the
   long-term required transmission investment of about $1 trillion to $4
   trillion, savings of $300 billion to $900 billion are at stake (and are
   particularly significant given today’s inflationary climate). In transmission
   as in other sectors — and as the Biden administration highlights in its
   recent “Executive Order on Promoting Competition in the American
   Economy”[2] — enhanced competition benefits consumers and strengthens
   economic growth.

 * Encouraging innovation: Exposure to competitive pressures spurs innovative
   designs that can transmit more power over the same footprint. Unlike
   incumbent regulated utilities, competitive bidders are rewarded for doing
   more with less. For example, with LS Power’s Silver Run transmission project
   between Delaware and New Jersey (awarded in a PJM competitive solicitation),
   use of a customized underwater cable injector design (the first of its kind
   in the U.S.) yielded 60% cost savings relative to initial estimates, in
   addition to environmental benefits from less overhead wiring and a smaller
   land footprint.  


REGULATORY CHANGE IS ESSENTIAL TO PROMOTE EFFICIENCY 

Prior to 2011, incumbent utilities that owned transmission infrastructure
generally proposed and built transmission projects without any competition or
incentive to contain costs. To protect consumers, FERC Order 1000 was
implemented in 2011 to mandate that utilities allow competition for projects
that are regionally planned and cost-allocated to two or more utilities. Though
successful in creating an initial market for competitive transmission
procurements, unintended loopholes in FERC Order 1000’s implementation mean that
procurements have remained quite limited. For example, between 2013 and 2017,
only 3% of domestic transmission was subject to competition (i.e., $540 million
out of total annual average transmission investment over this period of $18
billion).[3]Even with a recent uptick in competitive awards, this share
currently remains below 10%.  

The reason why transmission competition has been limited is that self-interested
monopoly utilities have devised tactics to restrict the definition of
“regionally planned” (as opposed to “locally planned”) or otherwise subvert the
intent of Order 1000. Examples of such self-serving tactics include:

 * Minimum voltage requirements: Many regions (including PJM, CAISO and MISO)
   restrict competitive projects to those above 200 kV — thereby excluding large
   swaths of the transmission network from competition.[4]   
 * Reliability exemptions: Projects are frequently exempted from competition by
   deeming them necessary for near-term reliability purposes, while short-term
   system planning is utilized to avoid competitive processes.
 * State ROFR laws: Utilities have successfully lobbied state legislatures to
   pass laws giving them a right of first refusal (ROFR) on any transmission
   solicitations — thereby eliminating and harming competitive procurements.
   States that adopted such ROFR laws include Iowa, Minnesota, North Dakota,
   Michigan, South Dakota and Texas.  

Such nefarious tactics have impeded transmission competition throughout the U.S.
at the expense of consumers, particularly in those regions (e.g., the Southeast
and Pacific Northwest) that are outside the purview of a regional transmission
organization (RTO). In the decade since enactment of Order 1000, these non-RTO
regions have held extremely limited competitive transmission procurements.


FERC FIXES: INDEPENDENT SYSTEM PLANNER, LOWER VOLTAGE LIMITS, MINIMUM TRANSFER
CAPABILITY

To address these challenges and promote cost-effective and innovative
transmission processes, FERC should increase its enforcement of existing rules
and further promulgate new policies that bolster competitive transmission
procurements.

LS Power respectfully proposes three policies that would extend transmission
competition to non-RTO regions, reduce “gaming of the system” via minimum
voltage thresholds for regional planning and competition, and catalyze new
interregional transmission projects:

Recommendation #1: Level the playing field for enforcement. If FERC is unwilling
to mandate RTOs nationally, then FERC should apply an enhanced Independent
System Planner (ISP) standard and planning scope to each of the 14 Order 1000
regions.       

Put simply, an ISP accountable to FERC will exercise planning authority for all
regional and interregional planning on transmission facilities over 100
kV[5] (and under 100 kV, in certain instances) and will administer competitive
solicitations to select transmission expansion/upgrade projects (including
qualification and selection of the most efficient or cost-effective
solutions).[6]Providing a nationally consistent ISP framework will (1) ensure
that all regions — including those outside of an RTO — will be subject to
minimum transmission planning and independence standards and (2) further
discourage utilities from leaving an existing RTO.[7]


Recommendation #2: Fix the FERC 1000 “monopoly loophole.” Require that all
transmission over 100 kV be regionally planned (consistent with the new ISP
standard) and that transmission above 69 kV should also be regionally planned if
it is determined to facilitate regional benefits.

Incumbent utilities have undermined the intent of Order 1000 by exaggerating the
share of their transmission projects that deliver only local benefits (and are
therefore not subject to regional cost planning and competitive procurements).
Drawing a clear line in the sand that all transmission over 100 kV should be
regionally planned, in line with FERC precedent,[8] would reduce the scope for
such gamesmanship. A standardized planning regime will extend the architecture
for competitive transmission procurements nationwide and remedy the recent
deficit in regional transmission investment for non-RTO regions.

Recommendation #3: Stabilize and secure our grid. Establish minimum
interregional transfer capability between Order No. 1000 regions.

This will improve grid reliability during adverse weather, reduce costs by
allowing low-cost generation to access load centers, and support increased
integration of variable renewable resources (in line with a net-zero
trajectory). The devastating effects of Winter Storm Uri in Texas underscore the
risks of insufficient interconnection capacity between regions. Given there is
only 1.3 GW of transmission interconnections between the three grids that cover
the U.S. (the Western Interconnection, the Eastern Interconnection and ERCOT) —
versus more than 750 GW of combined load across these regions — mandatory
minimum interregional transfer capability will be a well-deserved boon to the
construction of new (competitively procured) transmission. While the required
minimum amount of transfer capability can be debated, we propose 40% of peak
load between regions as a starting point that can materially improve grid
reliability and renewable energy deployment.

Decarbonizing America’s economy involves trillions of dollars of investment in
new transmission. Maximizing bang-for-the-buck on such investment requires a
framework that promotes competition, rather than one that defers to incumbent
utilities at the expense of cost savings and innovation. More than a decade
after Order 1000, it is time for FERC to tackle the more than 90% of
transmission investment that has historically been insulated from competition.
Adopting a new ISP standard, requiring that all transmission over 100 kV be
regionally planned (consistent with an ISP standard and scope), and mandating
minimum interregional transfer capabilities are three concrete ways for FERC to
revitalize transmission competition and accelerate our progress toward net zero.
 

Paul Segal is the CEO of LS Power. 

--------------------------------------------------------------------------------

[1] Net-Zero America: Potential Pathways, Infrastructure, and Impacts, Princeton
University. Oct. 29, 2021. Pp. 27-29. Cost estimate includes new lines and
replacement of end-of-life lines, while two to five times refers to capacity of
transmission system (measured in GW-km).  For reference, current U.S. annual
average transmission investment is about $20 billion.  

[2] The White House, “Fact Sheet: Executive Order on Promoting Competition in
the American Economy,” July 9, 2021

[3] "Cost Savings Offered by Competition in Electric Transmission," The Brattle
Group. April 2019. pp. 5, 9.

[4] For reference, of the  about 600,000 miles of transmission lines in the
U.S., about 360,000 are below 230 kV.

[5] 100 kV being consistent with NERC’s definition of the bulk power system.  

[6] For more detail on how an ISP would function, see “Comments of LS Power
Grid, LLC in Response to the Commission’s Advanced Notice of Proposed
Rulemaking,” FERC Docket No. RM21-17, pp. 79-85.

[7] As part of enacting an ISP standard, FERC should also foreclose utility
exits from their selected Order 1000 region for 10 years, unless the exit was
found to both comply with FERC’s “just and reasonable” standard and to be in the
public interest. LS Power believes that joining an RTO could be in the public
interest.    

[8] Revision to Electric Reliability Organization Definition of Bulk Electric
System, Order No. 743, 133 FERC ¶ 61,150 at P 73 (2010)



Resources / Special Reports & Commentary / Transmission / FERC & Federal /
Reliability
KEYWORDS Federal Energy Regulatory Commission (FERC) grid resilience Order 1000
right of first refusal (ROFR) transmission


Stakeholder Soapbox


STAKEHOLDER SOAPBOX: MIDWEST LESSONS ON THE VALUE OF TRANSMISSION INDEPENDENCE
AND COMPETITION

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