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Few topics in the FERC transmission Order 1920 rulemaking received as much attention as the proposal to reform Order 1000’s treatment of rights of first refusal (ROFR) for transmission projects. Alas, what roared in like a lion, went out like a lamb. The Commission mostly kicked the ROFR can down the road to a further proceeding. While perhaps not unexpected given the contention surrounding the proposal, the problematic nature of FERC’s Order 1000 transmission solicitation scheme is not going away.
Opponents of FERC’s proposed ROFR reforms have based their arguments on two main pillars. First is a general proposition that Order 1000 transmission bidding is “competition,” and competition is good, so the Order 1000 process must be good. Second is the allegation that the real problem with Order 1000 is that it did not go far enough; that utilities are investing only in smaller transmission projects at lower voltages to get around the rule, thereby undercutting its effectiveness.
Let’s take each argument in order. As to the first suggestion, it pays to recall that little in the transmission business resembles free market competition in the classical sense. Order 1000’s bidding solicitation rules merely facilitate the creation of a patchwork of wire monopolies, in which the right to be a regulated monopoly for a portion of the grid is put out for bid, rather than simply being assigned to the existing regulated energy providers with which the project would interconnect.
But isn’t competition supposed to drive down cost? If it’s functioning as it should, the answer would be yes. But despite assertions to the contrary, there is a paucity of data showing that solicited transmission projects are, as delivered, saving customers money as compared to projects assigned to existing transmission operators. The most robust analysis available, which has been sponsored by several WIRES members, shows Order 1000 rules have stymied coordinated transmission planning and buildout and failed to deliver pro-consumer outcomes. If anything, the record demonstrates some eye-popping Order 1000 failures, like, as just one example, the CAISO transmission project that is running hundreds of millions over budget and is being delivered years later than needed.
So why isn’t Order 1000 working? One factor seems to be the flawed nature of the bidding process itself. When utilities are bidding for the right to develop a project under Order 1000, they do not yet have a specific route, they don’t have the detailed design specifications that will be required by the local siting authorities, and they haven’t yet gone through land acquisition and permitting processes. It means that many bids are, if not shots in the dark, then shots in the very early, dim dawn hours of the development process. Developers may have rough ideas of what it could cost to develop and place into service a project, but many don’t really know what will be built and where. It would be like asking for bids from general contractors for the right to build a new four-bedroom home, but without providing the exact location and architectural drawings. Only later would you have a full accounting of the change orders required to get the home built to code and customer preference.
Another factor is the perverse incentive structure that is created by this sort of solicitation process. We have seen that once an Order 1000 project is awarded, despite assurances to the contrary, developers can and do seek rate recovery based on actual costs, not as bid. As noted, these projects are not subject to market pricing discipline, they are placed into service at FERC regulated rates. Thus, the incentive is for developers to offer whatever is needed to win the bid from the RTO, understanding that a separate entity – FERC– will eventually make a determination about cost recovery, which may not hew to the bid itself given the inevitability of project changes.
The second allegation made by ROFR opponents is that the incumbents have undercut Order 1000 by abusing the distinction drawn between the larger projects which are subject to bidding, and local projects which are not. They argue larger transmission projects would be flourishing but for incumbents deliberately finding ways to skirt the bidding rules. I’d suggest other incentives at work.
Local projects and regional projects are not mutually exclusive. The changing grid requires investments at both the local and regional levels. Owing to their smaller size, local projects, often more tied to immediate reliability needs, are easier to permit and faster to be completed. That means the project’s investors will tie-up their capital for a shorter length of time as compared to the massive regional projects that may be subjected to years of regulatory and litigation uncertainty. In short, it’s a logical decision that incumbent energy companies are making.
Nonetheless, for the sake of argument, let’s say that ROFR opponents have a point, and there is an incentive for incumbents to use local investments to undermine regional ones. What is the answer to the problem? There are three alternatives, and only one is viable.
Option A: FERC could take the ROFR opponents up on their suggestion: tighten the screws and impose bidding on all projects, including lower voltages and smaller upgrades. This would be a colossal mistake in my estimation. All the Order 1000 dysfunction, red tape and bureaucracy would be imposed on the many immediate need, smaller transmission projects which are often critical for reliability, and which serve primarily local customers. FERC would be buying itself a briar patch of problems that would likely impede needed grid reliability investments and, based on available evidence to date, produce little to no benefit for customers.
Option B: FERC could do nothing. It could maintain the status quo, not reform Order 1000’s solicitation process and it could hope that past results are not indicative of future performance. Granted, doing the same thing while expecting different outcomes seems a bit folly, but it’s preferable to Option A.
Option C: FERC could adopt reforms again allowing some form of federal ROFR. This would acknowledge the Order 1000 bidding structure has operated as a square peg in a round hole. The most successful transmission efforts, those like MISO’s MVP suite of projects, were the result of regional coordination and occurred outside of the Order 1000 bidding bureaucracy. They happened when planning and collaboration were encouraged and supported by a regulatory framework that included an acceptance of ROFRs and predictable rate regulatory treatment of the transmission asset.
Where FERC goes from here is anyone’s guess. The contentiousness of the issue is not going away, but neither are the problems sowed by the Order 1000’s inherent tension between competition policy and the natural monopoly characteristics of the wires portion of the utility industry. Hopefully, FERC will use the next phase of its rulemaking as a second chance to make the hard, but necessary decision to revisit the Order 1000 transmission solicitation framework.
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