On Tuesday, the Electricity Law Initiative (ELI) filed comments in a Federal Energy Regulatory Commission (FERC) investigation of reforms to rules governing transmission expansion and interconnection. FERC opened the proceeding in July, seeking public feedback on numerous transmission topics. In October, ELI filed an initial comment that argued FERC has legal authority to 1) issue new rules that mitigate transmission owners’ incentives to act anti-competitively when they plan system expansion and 2) scrutinize whether utility-planned transmission investments are “prudent” and therefore recoverable from ratepayers.
In its reply comment filed this week, ELI urged FERC not to abandon competitive transmission development, as numerous utilities requested in their initial filings. While the benefits of competition are widely recognized in virtually every sector of the economy, transmission has historically been developed exclusively by utilities, with each utility building all transmission within its state-granted retail service territory. Ten years ago, FERC attempted to pry open transmission development processes and facilitate non-utility investment. Utilities resisted, and in this proceeding they have asked FERC to again wall off transmission development from competitive pressures. ELI suggests that competition can foster innovative transmission projects and new methods for financing network expansion.
In addition, competition can ultimately ease the transition to transmission rates that align utility conduct with cost-effective reliability. Currently, transmission rates tie profits to capital spending and not operational performance. Rates incentivize utilities to deploy capital, and lead them to discount cost-effective operational and low-cost capital solutions that could enhance reliability. Moreover, by leading utilities to spend considerable time, effort, and resources on financing and constructing major infrastructure projects, rates split a utility’s focus between capital spending and reliability. Rates are rooted in a nineteenth century financing model that met twentieth century needs. As we increasingly relies on electricity, FERC must adapt its rates to ensure that they appropriately incentivize operational excellence. Future rate structures might separately compensate capital deployment and system operation, recognizing that infrastructure can be developed competitively but certain reliability functions may be most effectively handled by a single entity.