Cost Recovery for Non-Transmission Alternatives, No Easy Answers

Last week, I attended a two-day seminar given by Scott Hempling, one of the most knowledgeable experts on the legal aspects of US grid management.  I have been trying to figure out how to work what I learned (and it was a lot) from Mr. Hempling into a post on The Power Line.  Then a friend sent me a link to this post by the great John Farrell, one of the US’s leading experts on decentralized power.  If you want to read a great overview of FERC’s failed transmission policies and the agency’s failed attempt to rectify them in the recent Order 1000, Mr. Farrell has it all in his post.

Readers of The Power Line are very familiar with the fact that in the 2005 Energy Policy Act, Congress and the Cheney Administration created game changing rate payer subsidies for the construction of new high voltage transmission lines.  FERC’s Order 1000 leaves those subsidies in place, despite the fact that electricity demand in the US has remained relatively constant since 2006 and there is no great crisis in bulk transmission infrastructure as a result.

In his post, Mr. Farrell, citing reasoning provided by Mr. Hempling, that it makes no sense to socialize high voltage transmission costs without also allowing regional cost recovery for alternatives that accomplish exactly the same things in terms of grid stability and support for innovation, but a much lower cost.  Of course, these alternatives to transmission, referred to in the lingo as “non-transmission alternatives” or NTAs, involve such techniques as energy efficiency investment and load shaving and demand management.  NTAs also include technologies for achieving efficiency improvement as well as decentralized, self-reliant generation and storage, particularly decentralized solar generation.  Here is Mr. Farrell’s point:

Unlike the rules for transmission lines, there is no regional process for cost recovery of non-transmission alternatives. In other words, the builder of a large and distributed solar project that serves the same needs as a regional transmission line has no certain method for recouping their costs, as they would with power lines.

There’s also no process for fairly allocating the regional costs of a non-transmission project as is done with a transmission line project. Consider this hypothetical example where the benefits of a $10 billion interstate transmission project could be served at half the cost by a $5 billion non-transmission alternative of distributed solar and energy storage. While the total ratepayer cost is $5 billion instead of $10 billion, a lack of regional cost allocation means that Illinois ratepayers would pay more for a project with the same regional benefits. And when that option comes before the Illinois Commerce Commission for “least cost” review, guess which wins?

Mr. Farrell goes on to cite three solutions proposed by Mr. Hempling and adds another one:

At stake is over $164 billion in transmission lines planned or under construction, with electric customers on the hook for that amount plus interest and guaranteed rates of return (with incentives!). How many of these projects were or will be approved without a meaningful look at cost-effective alternatives?

Change is needed. Now.

Utility regulation expert Scott Hempling offers three compelling amendments to existing policy, and I add a fourth:

  1. FERC’s Order 1000 must be amended to require regional transmission organizations (or the companies that make up an unorganized “region”) to examine “all feasible non-transmission alternatives.” This analysis must be done by developing internal staff expertise at the regional level or contracting with an independent entity (not a transmission company or its subsidiary) that is expert in non-transmission alternatives. (Scott discusses a further scenario in his essay, for the very techically minded). This overcomes the “empty room” problem illustrated earlier, where the current order requires only consideration of those proposals submitted in the process (presumably by a third party) and it meets the threshold of prudent transmission planning as required in federal regulation.
  2. FERC must reject any transmission company proposal for cost recovery without a reasonable investigation of alternatives. And “reasonable” should mean “an objective, regulator-reviewed process that identified and considered all plausible alternatives, and emerged from that process with the best benefit-cost ratio.”This is the key enforcement element.If FERC continues to approve cost recovery for transmission projects without proof of a robust and independent alternatives analysis, they are likely in violation of their charge to ensure reasonable and product costs.
  3. FERC must develop (potentially via an amendment to the Federal Power Act) a regional cost-allocation process that puts non-transmission projects on cost recovery parity with transmission.As illustrated above with the Midwestern comparison, lower cost non-transmission alternatives will lose to expensive transmission projects in state regulatory proceedings simply because they lack access to the same regional cost recovery option.
  4. State utility commissions should similarly reject any transmission line proposal, interstate or intrastate, that does not offer proof of a robust and independent alternatives analysis, and should build internal expertise to conduct such analysis. Citizens groups funded on $5 donations are often the only advocates for non-transmission proposals that can save electric customers billions of dollars over the financing life of power lines, up against entrenched monopolies with a shareholder interest in stringing wires. Public Utilities Commissions have a legal and moral obligation to stand up for cost-effective energy investments.

These policy changes don’t advantage distributed renewable energy or conservation or energy efficiency, but merely put it on a level playing field with profitable power line investments by transmission companies. They may give (modest) comfort to landowners that when utilities exercise eminent domain to use their land for new power lines, it’s only after robust and analysis of all cost-effective alternatives. Most importantly, they ensure that when we’re constructing a grid for the 21st century, for a majority clean energy system, that we’re doing it in the most cost-effective and prudent manner.

Oh, and it removes the decision over building power lines from the companies that make money doing it.

The last sentence refers to the problem I have pointed to many times in the past on The Power Line:

Who chooses whether a transmission or non-transmission proposal is best in the regional transmission plan? The regional transmission organization, made up of power line companies. How do they make their money? Building power lines. But there are several layers to this problem:

  1. Most transmission companies aren’t in the business of the transmission alternatives. In other words, to choose against transmission is to lose business.
  2. Even if they had capacity to build a non-transmission project, FERC incents transmission over alternatives by providing bonuses to a transmission provider’s rate of return for building power lines (2005 Energy Policy Act, FERC Order 679).

We only need to look at the name of PJM Interconnection’s committee that recommends new transmission projects to see this conflict of interest in action.  The committee could be called the Transmission Improvement Advisory Committee, if it truly considered cost/benefit and all alternatives available.  But that’s not the committee’s name.  PJM’s transmission committee is called the Transmission Expansion Advisory Committee, and it is made up primarily of voting members that are engaged in the bulk transmission business, including financial traders who stand the benefit the most from coast to coast energy trading.

As much as I admire Mr. Hempling’s work, and the power of his analysis of NTAs, I disagree with the first three solutions based on his work proposed in Mr. Farrell’s post.  I do not see expansion of regional cost recovery for NTAs as a solution.  It is a next step away from the kind of decentralized power that Mr. Farrell advocates for so brilliantly.  Mr. Farrell’s fourth solution is good, but it only works if a particularly PSC decides to do its job.

The fact is that the US had a decentralized regulatory regime until the power companies and energy traders blew it up by federalizing regulation in the 1990s under the guise of “deregulation.”  What happened was not deregulation at all.  We now have a haphazardly managed electric grid that is designed primarily to suit the business needs of modern day versions of electricity holding companies that almost destroyed the US electrical system in the 1930s.  This industry-driven deregulation has also substituted an expensive and opaque bureaucracy of RTOs full of lawyers, engineers, speculators, and other hangers on, for the system of state regulation which allowed for a measure of transparency and planning for local needs that served the US well for 60 years.

The old system based on state regulation was not perfect, and it should have been significantly transformed.  Efficiencies and markets could have been integrated into the state-base regulatory regime without doing significant damage to state regulation.  Regional cooperation could have been encouraged to grow from the bottom up instead of being imposed by FERC and Congress.

The fact is, as I know Mr. Hempling would agree, that US electricity policy is a total mess.  Some states are regulated, some aren’t.  RTOs don’t even have control of significant amounts of US geography.  FERC issues orders which are contested and voided by some federal circuit courts.  The new electricity holding company structure is adapting to this patchwork, as electric companies are fleeing the “free markets” they had screamed for in the 1990s to regulated states and the federal transmission programs that guarantee them bonus profits.

So, I disagree with Mr. Hempling and Mr. Farrell.  I can’t argue with the immediate logic of including non-transmission alternatives into regional cost recovery, if we are stuck with the current regime.  Real solutions to our current transmission mess lie elsewhere, however – by rebuilding our regulatory system from the bottom up, not by adding more FERC mandated cost recovery for non-transmission alternatives.  If we are really about decentralizing power and creating more self-reliant states, we need to vest state authorities with real power to make their own decisions.  It won’t be pretty, but it will be better than the current chaos that only serves to strengthen corporate control of our electrical system.

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