Promoting Cost-Effective Grid Modernization: Incumbent utilities are using state-granted rights of first refusal to block, competitors' transmission lines.

• Author: Rossi, Jim

Over the past year, electricity customers have faced unprecedented increases in their monthly bills because of skyrocketing fuel costs. Often overlooked is the cost each customer pays for transmission, the bulk transport of energy from electrical power plants to distribution substations.

The cost of delivering energy comprises as much as 50% of retail energy bills for customers in some states, such as California. Utility spending on electricity delivery costs was 68% higher in 2020 than in 2010 (in constant 2020 dollars), reflecting the replacement costs for aging equipment and incremental investments in reliability, resilience, and grid security. With the growing use of low-carbon power generation, it is inevitable that grid infrastructure costs will rise further.

As regulators address grid modernization, they need to ensure that retail customers have cost-effective and reliable power. State regulators already routinely encourage utilities to select competitive sources of power supply, even where that energy is not produced by the incumbent utility. Similar efforts can play a role in promoting cost-effective new transmission projects.

In 2011 the Federal Energy Regulatory Commission (FERC) issued Order No. 1000 to increase regional transmission development. Since then, more than two dozen competitive transmission projects have been selected by regional grid planners. To date, these non-incumbent projects comprise a mere 3% of total investment in transmission. Nonetheless, competitive transmission projects have produced an estimated cost savings of 20% to 30%, according to a 2019 Brattle Group report. A FERC proposed rule on long-term transmission planning would require a 20-year transmission planning horizon, opening up even more future opportunities for new regional transmission projects.

However, rights of first refusal (ROFRs)--privileges granted by states to incumbent utilities--threaten to obstruct competitive regional transmission projects and keep customers from realizing cost savings. This article discusses the need for new transmission, how new regional lines are selected, and recent state legislative developments that expand the monopoly grip that incumbent utilities in several states hold over the development of new transmission lines, specifically ROFRs over new transmission lines. States can promote cost-effective grid modernization by encouraging processes for the competitive bid selection for new transmission lines by regional planners. States can also preserve or enhance the authority of regulators to balance a broad range of factors in issuing permits and other regulatory approvals for new transmission projects.

THE NEED TO EXPAND THE TRANSMISSION GRID

There is a critical need for new transmission projects in the United States to help promote reliable and low-cost power supply options for customers. According to a 2022 Department of Energy (DOE) report, the United States "faces challenges as its electric grid infrastructure continues to age--studies from the past decade find that 70 percent of the grid's transmission lines and power transformers were over 25 years old." The report notes that the DOE has devoted billions of federal dollars to catalyzing nationwide efforts to upgrade the transmission grid to "enhance grid reliability and resilience and enable the cost-effective integration of clean energy."

The scale of private investment that will be required to meet this infrastructure challenge is daunting. Old power plants are being retired and new energy supply (including significant growth in renewable energy resources) is coming online. Americans are expected to increasingly rely on electricity for transportation. To enable the connections of wind and solar facilities to customer demand, high voltage transmission capacity will need to grow by more than twice 2020 levels, requiring trillions of dollars in new transmission investments by 2050, according to Princeton University's 2021 Net-Zero America report.

In many areas of the country, new transmission lines are required to move electricity across state lines, from generation sources (and promising generation locations) to urban customer demand centers. Wyoming, for example, has some of the most significant potential in the United States to develop wind energy, but without significant expansions in transmission capacity that energy cannot serve customer load in markets such as California and the Midwest.

Midwestern and southern states also face considerable challenges in preserving a reliable transmission grid to serve geographically dispersed customer load while also integrating new energy resources. The Midcontinent Independent System Operator (MISO) manages the grid in 15 states across the Midwest and portions of the southern United States. It decides annually what transmission should be built in its footprint. In 2022 MISO approved 18 new high-voltage transmission lines (concentrated primarily in the Great Lakes area), representing an estimated $10.3 billion investment in the grid. More than 90% of these projects will be built by incumbent utilities, rather than competitively bid, while the costs of new lines will be broadly allocated across the footprint of MISO North.

HOW ARE NEW TRANSMISSION LINES SELECTED?

Historically, state regulators approved new transmission lines by issuing permits for new projects and approving their cost recovery in bundled utility rates. Prior to the rise of regional electric power markets, state regulators focused on approving transmission line investments to encourage reliability in each individual utility's defined service area while minimizing adverse effects on retail customer rates.

Retirement of older, fossil-fueled power plants and increased renewable energy development throughout most of the United States present an urgent need for more new transmission lines. These are not the kinds of lines that were built half a century or more ago to serve that era's regulated, vertically integrated utilities. The organized wholesale power markets that provide energy for more than 60% of U.S. retail customers will require new regional and inter-regional transmission lines spanning multiple states. New transmission lines with a regional footprint magnify the challenges that many states already confront in approving these projects. Despite their many benefits, transmission lines require lateral property easements that span hundreds and sometimes even thousands of miles and remain highly unpopular with landowners. Everyone wants the electric grid to work and the lights to go on, but most people do not want high-voltage transmission lines near their homes and businesses or on...