02/25/2021 - Electricity Law Initiative - Opinion

To Catalyze Transmission Development, End the Utility Protection Racket

by Ari Peskoe

Note: This appeared in Utility Dive on February 25th, 2021

Interstate transmission development is fragmented by local utility service territories. Parochial interests are impeding large-scale transmission projects, which in turn is slowing wind and solar deployment. The combination of discriminatory state laws and FERC transmission planning rules shields utilities from competition within their local service territories and induces them to focus on developing small-scale local projects. These protectionist policies reinforce an anachronistic utility-by-utility approach to transmission planning that is failing to develop the regional transmission necessary to effectively decarbonize the power sector and mitigate the impacts of extreme weather.

Consider Minnesota, where sixteen utilities own interstate electric transmission lines. A decade ago, the state legislature set that number in stone by granting these sixteen entities exclusive rights to build additions to their respective portions of the interstate power network.  The state recently asked the U.S. Supreme Court not to invalidate that law because allowing a seventeenth entity to own transmission in Minnesota “would inject uncertainty” into the state’s power network and “risk unreliable transmission.” These wholly unsupported claims, that belie the experience of transmission operators around the country, are at the heart of the state’s assertion that its exclusionary law has a legitimate basis and is not intended solely to protect local utilities from competitors.

The Minnesota legislature passed its protectionist law in response to FERC Order No. 1000, which requires regional transmission planners (such as RTOs) to develop transmission projects through competitive processes. Minnesota’s law gifts to each in-state utility the right to build any RTO-planned project that connects to an existing line that it owns, even if another entity offers a better deal and wins the RTO’s solicitation. The case before the Supreme Court is about whether Minnesota’s right-of-first-refusal (ROFR) giveaway violates the U.S. Constitution’s dormant Commerce Clause, which outlaws state policies that protect in-state businesses at the expense of out-of-state competitors. Lower courts upheld the law, rejecting arguments that the ROFR discriminates based on whether the benefitting utility is an “in-state” company, as dormant Commerce Clause cases forbid.

If the Court takes the case and finds Minnesota’s discriminatory scheme unconstitutional, it will overturn a wave of anti-competitive transmission laws.  Texas is currently in federal court defending its own ROFR law. In Iowa, the state legislature gave utilities similar handouts a few months ago, reinforcing the existing protections the state already offers utilities from non-IOU developers. At least six other states granted in-state utilities ROFRs since FERC issued Order No. 1000 in 2011. Meanwhile, the Colorado legislature considered giving in-state utilities ROFRs just last year, and senators in Michigan introduced a ROFR bill earlier this month.

States also employ more subtle means to protect IOUs from competition. In Illinois and Arkansas, for example, antiquated laws written when utilities were the only transmission developers implicitly prevented a non-IOU developer from applying for regulatory permission to build transmission (subsequent legislation in Arkansas made the state’s prohibition on non-IOU projects explicit). Several states reserve eminent domain authority to traditional utilities, providing them with a huge advantage over non-IOU developers. A broad ruling by the Supreme Court could outlaw these discriminatory barriers, although even then states will likely have some legal means for excluding non-IOU transmission developers.

Naturally, IOUs are not lobbying their states to repeal these discriminatory laws. After all, what company wouldn’t want to be legally protected from potential competitors?

At the federal level, IOUs have found shelter from non-IOU competitors by shifting their transmission spending to small-scale projects within their state-protected retail service territories. FERC has separate rules for regional development, which must be competitive and open to non-IOUs, and local planning, which is firmly within IOU control and closed to their competitors. By retreating to non-competitive local development, IOUs have effectively crowded out investment in large-scale projects (IOUs generally have capital spending targets) and relegated regional planning to a gap-filling exercise.

FERC appears to be on the brink of reviewing its transmission planning rules. It will face a conundrum. On the one hand, it might return to the pre-Order No. 1000 status quo, when, as a practical matter, IOUs’ transmission monopolies included rights to build segments of regional projects within their service territories. In that regime, IOUs could split up regional spending among themselves without the pressure of outside competitors. While returning to this model might boost IOU interest in regional projects, abandoning competition would risk dampening the sector’s innovative potential and would mark a departure from FERC’s decades-long agenda of wresting the nation’s transmission networks from IOU control.

On the other hand, FERC could strengthen its commitment to competition by limiting exemptions from competition and revisiting regional planning rules that have failed to stimulate investment. But, if forced to compete, IOUs may again seek protections from states that could undermine FERC’s pro-competition policies.

While regional planning rules may be ripe for reform, FERC should renew its transmission agenda by rooting out wasteful IOU spending. For starters, FERC should respond to states’ ROFR giveaways. When an IOU takes a project development opportunity away from a company that won an RTO solicitation, FERC should require the IOU to adopt whatever rates, terms, and conditions the winning developer offered. If the IOU chooses to exercise its ROFR and develop the project pursuant to the winning offer, it might expose that the IOU is generally overpaid for its non-competitive local projects.

More importantly, FERC should scrutinize IOU spending on local projects. FERC’s long-standing approach has been to presume that all transmission projects are “prudent,” a default position that allows IOUs to profit from these investments with virtually no oversight. Although consumer advocates, state regulators, and other groups can seek to prove that particular projects are imprudent, thus threatening the profitability of those projects,doing so is a nearly impossible task. That FERC rarely finds IOU investments imprudent does not prove that IOU investments are, in fact, prudent. That historical fact simply reflects the difficulty of convincing FERC to overturn its prudence presumption.

FERC should change its policy. Requiring IOUs to prove prudence would threaten their service territory safe harbor. Although FERC has legal authority to require competitive development for all transmission projects, allowing IOUs to maintain monopolies for a limited scope of small-scale projects may be a practical approach. But FERC should subject IOU spending on those projects to heightened scrutiny before allowing IOUs to charge ratepayers.

With the benefit of automatic profitability for projects within their state-granted service territories, IOUs are poised to rebuild the small-scale power networks of the past rather than develop the large-scale transmission needed to meet today’s energy challenges. Local, anti-competitive protections for IOUs should not constrain the evolution of our energy system.