WE NEED FERC TRANSMISSON INCENTIVE POLICIES THAT EXIST TODAY
By Nina Plaushin
ITC Vice President of Regulatory and Federal Affairs
The Federal Energy Regulatory Commission’s (FERC) transmission incentives policy has been a success story of grid modernization and societal advancement. Deployed in response to the inadequate transmission system of the late 1990s and early 2000s, FERC’s toolbox of incentives has produced tangible benefits for consumers in more efficient markets, reduced congestion, decreased service interruptions, and provided access to newer and cleaner forms of generation.
Our nation’s energy landscape continues to undergo a fundamental transition to zero-emission renewable generation due to customer demands, market forces, and state policies. The time has come for FERC to forcefully reiterate to the power sector that investments in transmission infrastructure are a national priority.
Unfortunately, whether intentional or not, recent actions from the Commission suggest the contrary. FERC is wading into dangerous waters on transmission incentives that may have unintended and potentially dire consequences for meeting our energy needs as climate change and associated violent weather intensifies.
We know these incentives work because we have seen the results. In 2003, after decades of under-investment, the Northeast blackout opened our eyes to the antiquated and neglected reality of our nation’s transmission system. Investor capital and utility investment were directed away from needed transmission investment as a result of the era’s market signals and regulatory policies. This lack of investment was a significant factor in the 2003 grid collapse.
Given the long lead time for transmission development and the inherent risk profile of the investment, utilities typically focused on faster earned and less risky investments, such as distribution upgrades. In fact, between 1975 and 1998, investment in transmission declined significantly.
While transmission investment increased between 1998 and 2003, investment was still below 1975 levels in real dollars. During this period, electricity demand more than doubled and the formation of wholesale energy markets increased system demands. The grid was just stretched too thin.
Congress addressed the lack of transmission investment by passing the Energy Policy Act of 2005. The law added section 219 to the Federal Power Act, which requires FERC to establish incentives to spur new transmission infrastructure development. Congress explicitly acknowledged that utilities were underinvesting in transmission infrastructure, burdening consumers with higher costs, and providing inefficient and unreliable service.
FERC proceeded to implement the Congressional directive in 2006 through Order No. 679, which offered numerous financial incentives to increase the economic returns of transmission projects and enhance regulatory certainty. After fifteen years of data, there is no disputing Order No. 679 resulted in record transmission investment growth — a public policy triumph.
Two transmission incentives — the return on equity adders to incent formation of transco and transmission owners’ participation in RTOs — empowered a boom in transmission infrastructure investment five-to-six times pre-2000 levels.
ITC, an independent transco, responded to these incentives and invested approximately 10.1 billion dollars through its operating subsidiaries in existing and new transmission infrastructure. Many utilities, including ITC, joined RTO/ISOs to the benefit of customers. Continuing the RTO incentive is essential to supporting regional and interregional transmission planning that maximizes net benefits to customers.
Multi-state RTOs geographically expand and provide nearly ten billion dollars of annual benefits to customers in MISO, PJM, and SPP alone. RTO participation is more important than ever in light of the shift to non-fossil generation.
RTOs provide a broader operational footprint for regional balancing of intermittent resources enabling higher renewable energy integration levels. In addition, strong transmission connections within and between planning regions allow operators to leverage geographic and resource diversity when responding to more frequent and extreme conditions.
There is a broad consensus that United States’ transmission capacity must double or triple to achieve net-zero emissions targets; however, the upward trend in transmission investment has subsided materially in recent years. Transmission owners have encountered regulatory headwinds, declining returns, and increased pushback on the cost of transmission projects.
Recognizing this shift, FERC issued a Notice of Proposed Rulemaking (NOPR) proposing to double the RTO-participation incentive in March 2020. The proposed reforms aim to stimulate investment in infrastructure needed to support the nation’s evolving generation resource mix. Enhancing the existing incentives policies recognize the wide range of customer benefits provided by RTOs and ISOs, such as increased reliability and resilience.
Unfortunately, in an act of regulatory whiplash, FERC supplemented the NOPR in April and now proposes eliminating the incentive altogether after three years of RTO/ISO membership. FERC justifies its sudden reversal by arguing that downward pressure on transmission incentives will save customers money. The opposite is true.
The cost of an RTO-participation incentive and transmission incentives broadly pale in comparison to the lower cost of total delivered energy and benefits realized by consumers from new transmission investment.
Transmission development stimulated by the incentive enables consumers access to cheaper resources in the market, nullifies the need for additional fossil fuel generation resources, and negates more expensive, piecemeal upgrades to the distribution system.
A recent study from the University of California, Berkeley, and GridLab indicates that achieving a ninety percent clean-powered grid by 2035 could deliver wholesale electricity costs thirteen percent lower than today, after about a hundred billion dollar in transmission expansion investment.
History repeats itself. To the extent FERC moves forward with reducing or eliminating transmission incentives, it would be impossible to maintain needed levels of transmission investment. While FERC has taken a positive step to promote beneficial investment with the Advance NOPR on transmission planning and other issues, policymakers must recognize that robust RTOs will underpin the success, or failure, of all of these policies.
FERC’s nearsighted view of transmission incentive policy is concerning. Risk-averse investors steer away from uncertain regulatory environments and utilities can internally allocate their capital elsewhere.
Without a strong regulatory framework for electric transmission, our nation’s ability to realize President Biden’s goal of a carbon-free power sector by 2035 will be eviscerated. The appearance of reducing customer costs comes at the expense of grid reliability, resiliency, deep decarbonization, and economy-wide benefits. FERC collectively, and individual commissioners, repeatedly speak to the need for transmission expansion and investment.
The ANOPR has regulatory changes that will improve key processes. But FERC must stop the rapid decline in transmission returns (base ROE plus incentives) if it wants to drive capital into the sector.
Customers want renewable power, market prices make renewables the generation of choice, and developers have countless projects waiting to connect to the system. The main impediment to a clean energy future is FERC’s unwillingness to support needed investment by continuing policies that have a proven record of success.