By Controlling Transmission, Utilities Corner the Electricity Market — Episode 149 of Local Energy Rules

Ari Peskoe:

I would say one metric that shows that FERC’s efforts have faltered is you look at how much investment has happened in, in regional projects that are sort of large scale projects designed to bring benefits to across the region versus these small scale projects that are really designed to just benefit a single utility. And the numbers are pretty astonishing. In two of the largest of these transmission regions of the country, one of them being MISO and the other one being, uh, PJM and MISO, since these competitive rules went into effect, there’s been essentially no regional investment. So that’s spanning about seven years or so now, meanwhile, it’s billions of dollars a year of these local projects.

John Farrell:

If you’ve heard of transmission lines in the context of clean energy, it’s probably a complaint about not in my backyard or NIMBY opposition to the large steel towers and wires that carry electricity long distances. However, utilities themselves have as much to do with the barriers to expanding the electricity grid. And like with rooftop solar, the exercise of monopoly power has much to do with the problem. Ari Peskoe is the Director of the Electricity Law Initiative at the Harvard Law School, Environmental and Energy Law program, and author of a new paper “Is the utility transmission syndicate forever?” He joined me in December, 2021 to talk about the battle to overcome monopoly utility opposition to making transmission line planning and construction more competitive and more cost effective. I’m John Farrell, Director of the Energy Democracy Initiative at the Institute for Local Self-Reliance and this is Local Energy Rules, a biweekly podcast sharing powerful stories about local, renewable energy. Ari, thank you so much for joining me on Building Local Power.

Ari Peskoe:

Thanks for having me.

John Farrell:

So I feel like this is a really timely conversation with the passage of the federal infrastructure bill, which does include money for high voltage electricity transmission lines. There might be other ordinary folks who would be curious since John Oliver on his show Last Week Tonight, recently did a segment on the power grid and he argued that we need long distance transmission to connect some of the best renewable energy sources, wind, and solar to all parts of the country. So I was hoping to just start with, when we talk about electricity transmission, are we talking about, you know, I can look out my back window. I can see some poles and wires in the alley. If we’re talking about transmission, is that what we mean? Or what is it that we mean when we talk about electricity transmission?

Ari Peskoe:

So the electric power lines that connect to your house are distribution lines. Those deliver power that’s appropriate for household consumption. Transmission lines are interstate in nature. They are just as a physical matter, much taller. They’re typically held up by large steel structures. There’s often rights of way on either side can be 50 feet, even several hundred feet for safety reasons. And the fundamental purpose is to connect large scale power plants, whether generating power with coal or wind or gas or anything else, which, which is where almost all of our electricity comes from, to connect those large-scale power plants to our local utility distribution system. So that’s what we mean when we talk about transmission, it’s the interstate system that moves large amounts of power around the country.

John Farrell:

You recently drafted a journal article that provides really extensive documentation about what I’m calling a monopoly problem in the transmission sector with these high powered high voltage transmission lines. The title is great: Is the utility transmission syndicate forever? I found it fascinating perhaps most of all, because in 15 years of working in the energy sector, I’d always heard that the biggest barrier to expanding electricity transmission was so-called NIMBY, not in my backyard folks who were like, you know, we don’t like how it affects our view. We don’t like that. It’s gonna take up our land, but you really highlight a very different problem, which is the power of the utility companies who own the transmission lines over the planning process to do high voltage transmission lines. I was hoping maybe you could start with a little bit of history here before 1935. So we’re jumping back a hundred years. Utilities really had complete power over their power lines. So it allowed them to prevent competition from other power producers or access from other utilities such as municipal and cooperative utilities. But in response to some of the monopoly abuses of the industry back then, Congress took some action. Can you talk a little bit about what Congress tried to do, you know, a hundred years ago with the first regulations, I guess, or laws about power lines and, and were they successful?

Ari Peskoe:

So prior to 1935 privately owned utilities, which we call investor-owned utilities or IOUs were regulated by state commissions. And there was no federal authority to regulate those companies. Congress in 1935 passed the Public Utility Act. And there were basically two reasons for it. And, and sort of two major regulatory agencies in DC were involved in implementing it. So the first issue was the industry at the time was largely controlled by these corporate structures called holding company. And at the time before the stock market crash of 1929, there were just three holding companies that controlled about half of all power generation in the country. So enormous concentration of economic and political power in these holding companies. And they failed spectacularly amidst the depression. And so one thing that Congress wanted to do was address these corporate structures and what it did was it put the SEC, the securities and exchange commission in charge of regulating utility corporate structures.

And it effectively outlawed non-contiguous utilities. So one company was not allowed to own say utility companies in, in different states. So that was one part of this act. The second part of the act was to put the interstate service and transactions of these IOUs under federal regulation. And then Congress gave the, what was then called the federal power commission. Now it’s called the federal energy regulatory commission or FERC authority to regulate all wholesale sales. So that is the one utility selling to another utility and also regulating transmission service. So utility providing transmission service to another utility and the sort of language that Congress used, which was common to regulatory statues at the time was that, uh, all the regulator, uh, had to ensure that rates terms and conditions are “just and reasonable” and not unduly discriminatory. These are terms of art that clearly give the regulator a wide range of discretion to figure that out.

And at the time, investor-owned utilities essentially were the electricity industry. That, that was it in 1935. And, and for, for decades, the federal regulator, we call it FERC even though as I said, it, it was called the power commission for a while. Uh, sort of took that industry structure as given that this was just go, it’s task was just to regulate transactions between these utility companies is, and, and Congress required for, to actually encourage voluntary coordination of IOUs because it was believed at the time, and it still is, that essentially bigger is better in the electricity space. And so if we can encourage utilities to coordinate with each other, that will ultimately be beneficial too. FERC certainly did that. And the way it did that was basically by, in, by approving as just and reasonable ad hoc agreements among utilities for various types of coordination.

So for example, utilities might coordinate how they plan system expansion. They might coordinate how they power when one utility has an emergency situation, they might, for example, coordinate how they dispatch their power plants on a regular basis to ensure that the total costs across their systems are reduced. But I think the, and, and all these things can indeed have consumer benefits, but, you know, if, to keep in mind that these use our, our private companies ultimately with, with shareholders. And so these agreements ultimately were designed for the benefit of the utilities.

And another thing that FERC was, was handling throughout this time period, was fielding complaints from smaller utilities in particular, the non-profit public power utilities and the cooperative utilities who would complain about what they, what they characterize as anti-competitive utility conduct. And the sort of the typical fact pattern was that you would have a small municipal utility that was essentially captive to its local investor utility, and that a small public power entity may not have had the financial resources to generate power itself. And it actually had to buy power at wholesale from its local IOU. And it was complaining about the terms and conditions of those sales. So this was sort of the other part of what FERC had to do was on the one hand, encourage voluntary coordination. On the other hand, ensure that coordination was not sort of burdening these smaller utilities. And that’s basically how the industry, uh, operated for several decades. And just to get to the last part of your question really quickly – was this successful? I think in a lot of ways, the power industry was successful in that the equipment kept getting better, efficiencies kept going up. And for many decades, really through the 1960s in many parts of the country, consumer prices kept going down. So in that sense, the industry was working.

John Farrell:

I think I wanna call attention to a couple things that you said that folks who don’t live in this space might not appreciate one. I just, I thought it was really interesting to talk about that 1935 law and how it outlawed non-contiguous utilities. So as you said, like a utility had to, couldn’t have like a utility in Florida, teamed up with a utility in Michigan, as I understand it, that that’s been since reversed, right? That, that idea that utilities ought to be contiguous, uh, has been cast out. The other thing I wanted to highlight I thought was really interesting is you, you know, you brought up this issue about shareholders in, in regard to these coordination agreements between utilities. And this is an ongoing tension in the entire industry, right? You have these investor utilities that have holders like any corporation, they’re responsible to those shareholders. They wanna make money for those shareholders, but there can often be a tension between the public interest in how these utilities serve them and that private interest. And of course the big difference between these utilities and most other companies in our economy is that these utilities have monopolies, which is say they don’t have competition to them in the same way that we might have other, other in, in other spaces.

Ari Peskoe:

Yeah. And so, you know, back in the time period, we were talking about the, the only competition of these investor owned utilities came from these public power and cooperative entities. You know, there really was no other private investment in the industry. It just wasn’t feasible for, for anyone really to compete with the utility because the utility had the benefit of both the local distribution monopoly, you know, was the only entity allowed to sell power directly to consumers within its state granted territory. So it had that monopoly. And then at the same time, it also had the advantage of state regulated rates, which means that for any dollar of investment the utility made, it could then go to the state regulator and recoup its investment costs through the rates paid by those captive rate payers who have nowhere else to turn to for electricity. It, it made competing investment from the private sector, really just a non-starter back, back in this time period.

John Farrell:

So you’ve outlined, and I think it’s important for people to understand that, you know, despite this market structure that generally speaking, we don’t like in the United States, which is to say monopoly power, that did have big advantages in terms of, we got electric electric service to most places, especially with the help of the federal government in getting rural electric cooperatives to expand service. And it kept getting cheaper that, you know, utilities captured economies of scale. They built bigger power plants. I always think it’s important to have a little caveat here. When I talk about this, like from an overall service electricity service standpoint, yes. Things were better. If you were maybe a minority, you, you, and you had to live next to a power plant, if you were concerned about the environment, we didn’t do a good job on those kinds of things, considering the impacts of, of power generation, but from the, from what the view was at the time we were being very successful.

So let’s, let’s turn the clock forward. Now from the thirties into like the 1970s, Congress started to intervene again in the electricity business around this idea of competitive access specifically for non utility power providers. And so this is the public utilities, regulatory policy act or PURPA. I don’t know that we need to talk too much about that, but the transmission planning process, which is to say, you, I think you call it system expansion, this idea of how do we build the power lines to allow us to accommodate additional growth in electricity use or tapping new energy sources remained in the hands of investor owned utilities under the presumption that as you mentioned, this idea of utility coordination was enough economic efficiency that outweighed the anti-competitive behavior that you might have from that. So even if you had a plan for a transmission line that could reduce cost or provide access to clean energy, the path to approval is still going through investor utilities as of the 1970s and 1980s. Is that right?

Ari Peskoe:

Yeah. And, but I think a, a couple of, um, a couple things I think important to, to clarify about this story, which is one, you have to plan transmission expansion because the system has to work, right? So, so electricity moves pursuant to the laws of physics. And if you’re going to add either a power plant or a new transmission line, you just have to do it through a process, just a planning process that ensures the system is going to stay operating within the physical parameters that, that it needs to. The second thing I would say is that, you know, again, even with that change in law that required utilities to buy power from certain types of competing power plants, it was still an industry dominated, continued to be dominated by these IOUs.

And so again, there, there was really no thought that anybody would just come along and wanna just build a transmission line. You would build a transmission line to connect to a new power plant. That was really what transmission you planning was, is that it, it followed generation expansion. That’s where all the money was and it continues to be in the industry is in the power plants. And so transmission just sort of followed from that. To a lesser extent you, the industry was building transmission just to enhance the reliability of the system. There had been some major blackout in the 1960s and IOUs had coalesced around a voluntary approach to sort of reliability standards that they had all sort of agreed to. And so there was some limited transmission development just to ensure that the, that the system was meeting those reliability standards, but for the most part, building transmission followed the development of new generation.

John Farrell:

I’m so glad you mentioned sort of the technical challenge here. I, in a class I had in graduate school, on the energy system, we had a guest speaker who described the electricity system as like a fleet of bicycles connected by bungee cords that all have to remain in coordination with one another. And, you know, so if one of the bikes starts to veer to the right, it starts to pull on the other one, you know, the bikes being the power plants and the, uh, I guess the bungee cords being the, the transmission lines. But I I’ve always enjoyed that because it gives a sense of the complexity of trying to coordinate a bunch of independent components, a system in a way that all have to work together. And if they don’t, you stretch it too far and all of a sudden things go wrong. So obviously planning is really important.

So let’s, let’s get ourselves up to speed here a little bit. Then, you know, as you’ve said, the investor utilities had continued to dominate the system. They were the ones who built the power plants. They built the transmission lines to follow that for the most part, the federal energy regulatory commission had continued to say, okay, well, you know, we know that they’re fairly dominant in the marketplace, but because the coordination that they, uh, exercise is, is helpful to consumers, or at least not harmful to consumers, it’s fine to go ahead and let that continue. But something kind of changed in the 1990s. So in your article, the, the article on the transmission syndicate, you write that the federal energy regulatory commission finally recognized, uh, that quote, “the single greatest impediment to competition is investor owned utilities.” And, and following this quote, that it’s their market power through the control of transmission. So that the issue is no longer just in the transmission business, but that because the had market power over the transmission system, they were impeding competition for new power plants. And I think you kind of already talked about that.

I’m gonna try to ask you to like, get in the weeds without getting too much in the weeds here, I guess, but there were four major orders from the federal energy regulatory commission that you described in your piece, starting in the late 1990s. What were those federal regulators trying to accomplish to address this issue around competition?

Ari Peskoe:

Yeah. So there were four orders issued from 1996 to 2011. And as you said, FERC wanted to bring competition first to the development of new power plants. And then to the development of new transmission lines. Transmission is, is so much more than just the wires that connect power plants to utility distribution systems. Control over transmission is strategic control over the industry. And I say that because the, the fundamental job, I really like your bike analogy and the fundamental job of the transmission operator is to, or that supply and demand remain in balance so that the amount of power being generated at these power plants roughly equals the amount of power that consumers are demanding at that moment in time. So therefore the job of the transmission operator is to determine which power plants should be producing power at this moment and how much power they should be producing.

So you think about the competitive implications of that. If, if you are the transmission operator, you get to tell which power plants get turned on. And so if you own the transmission and you own the power plants, well, you’re gonna have a natural inclination to prefer your own power plants over power plants owned by your competitors. So the first set of things that FERC tried to do was ensure that the transmission owners provided comparable service to every power plant owner. So to, to prevent the sort of undue discrimination that that utilities would, uh, prefer their own power plants and disadvantage competing sources of supply. So that was, that’s transmission operations. And that sort of step one to ensuring that competition is even feasible at all.

And the step that has to do with transmission expansion, because there you get to determine if sort of, if you control transmission expansion, you get to potentially determine where the next set of power plants are going to be, uh, because ultimately they’re going need to connect to the system. And if you’re a transmission owner that also owns a power plant, why would you wanna build transmission that’s gonna enable your competitors to connect to the system? So what FERC tried to do with its transmission planning rules was, was really first just to bring some transparency to the planning process. This was historically, as we said, sort of just controlled by utilities as to where the new transmission lines would be built. So the idea was to try to bring more voices into that process. I think you unfortunately only get so far with transparency. So the next step that FERC took was actually requiring that certain transmission projects be developed through competitive processes, basically eliminating what was called the right of first refusal for the utility to build any new project that happened to overlap with its traditional retail service territory. So those are the two main areas was transmission operations and transmission planning, with the goal of bringing competition into the industry.

John Farrell:

I think it’s so interesting too, that right of first refusal. Chris Villarreal, who I’ve also interviewed for the podcast, mentioned this as well. And I just think it’s worth spending a second on it to describe it a little bit, but the idea there was that if there was an identified need for a new transmission line to be built, and it went through the service territory of some utility in Illinois, ABC utility could say, well, we get the first choice about who was gonna own that power line. If we wanna own it, we get to do that. And whoever proposed the power line is sort of out of luck because I have that power. So FERC comes in and says, okay, no, actually, it’s pretty much impossible to have meaningful competition if utilities always get the first choice about whether or not they want to own a power line and that we, we need to at least start to open up this system in a way that allows for third parties to come in and as transmission lines that they could ultimately then own and profit from not just the utilities.

Ari Peskoe:

Yeah. And we might wanna distinguish, and this is just gonna add another layer of complexity, but I do think it’s worth trying to get there, which is as part of these four orders that just talked about, FERC encouraged utilities to give up operational control of their transmission lines to a third party. The third party is called a regional transmission organization. And the idea here was that look, you know, despite the rules that FERC put in place to try to require utilities to provide the same service to every power plant, regardless of its owner, it was tough to police. Those rules and utilities still had subtle ways of preferring their own power plants over their competitors’ power plants. And so the sort of one remedy to this problem is to have a sort of neutral entity, at least with respect to these power plant ownership issues, a third party to actually be in charge of these short term operational use and have a third party, this regional transmission organization, determine which power plans get to operate.

And so that there are many parts of the country where we have these organizations and, and some parts where we don’t. And these regional transmission organizations also run planning processes. And so where you have this organization running the planning process, you can imagine at least that, well, we could have some competitive process to figure out who’s gonna build this next line identified by this sort of, let’s imagine an independent and neutral entity. But where in the parts of the country where the utility still controls explicitly controls the planning process. It it’s, it’s a lot harder to imagine how, why the utility would allow any sort of competitor into the, into the transmission development process and even how to make that feasible. And so where there was this independent administration, there was an agreement between the utilities and this independent entity that the utilities would have this right of first refusal. And that’s where FERC stepped in 10 years ago and said, no, you have to eliminate these rights of first refusal that had been put in place when these organizations were formed.

John Farrell:

It’s really interesting. People often describe this kind of process as, you know, two steps forward, one step back. And it’s seems like that really does define, FERC takes a step forward and sort of saying, here’s how we want more transparent competition. And this right of first refusal, you know, utilities are like, okay, well, we’ll give up operational control, but we’re not gonna give up our ability to own the transmission that gets built, even though the planning is supposedly going to be more independent forecast to act again, to change that. And then, you know, we’ll get more in the weeds here, but as your article describes, there are still other ways that utilities continue to exert that market power. I think it’s also really interesting. I just wanna take a, a moment for people who are still with us who are not in the transmission and energy for field, but to, to kind of explain how different this is from some of our other public infrastructure.

I mean, imagine the interstate highway system being built originally, or being managed by like a bunch of different delivery companies like UPS and FedEx and the postal service in this like, balkanized matter. And if you wanted to have your own delivery company, and you wanted to get into this space, like maybe Amazon, right, they’re doing a bunch of delivery. Now you would have no way to get into this system. You, you would’ve had a discriminatory rates to use it. It would’ve been hard to even like, get your trucks onto the existing roads. If you wanted roads built to your new distribution centers, DHL or UPS could be like, no, we’re not gonna build that road because we know that it would give you access to the system in order to compete with us. So it’s just, I think sometimes we’re so much in the weeds of how the system developed. It’s hard to appreciate that with other kinds of infrastructure it’s operated so differently with open access and public control that the transmission system really is very novel in a way in being so monopolized and, and so controlled by the incumbents.

Ari Peskoe:

Yeah. And then there’s this issue of, you know, vertical market power, where you have the owners of this essential delivery infrastructure also in, in many parts of the country producing the power. And so have this incentive to keep competition out. And so, you know, it, it’s not just that utilities want the exclusive ability to build new transmission because they get paid and can profit from building that transmission. It comes back to this issue of strategic control, where figuring out where the system’s gonna expand to in the future is a way of sort of influencing the future resource mix and influencing who’s gonna own those resources.

John Farrell:

So let’s get back to your piece on the transmission syndicates, you wrote that FERC, the federal energy regulatory commission concluded that investor owned utility control over transmission allowed them to exclude potential competitors and charge uncompetitive prices, which are two hallmarks of the exercise of market power. I, I just think it’s so interesting to, to note that the regulators recognize this broader problem themselves, but as you say, the planning rules for transmission that the federal regulators have adopted don’t really address the issue of market power. So can you explain a few of the ways that utilities can just, despite the new rules for transparency for independent operation, still prevent competitive access to transmission expansion through their influence either with the regional planning process or the operational agencies or with like loopholes in the rules?

Ari Peskoe:

Yeah. So remember the, the federal law here requires that rates be just and reasonable and not unduly discriminatory. So when FERC started down this reform path in, in the late nineties, it decided that those broad standards allowed it to counteract utility market power. And so market power, as a term used by economists, you just mentioned the ability to exclude competition or to charge prices that are not competitive. And that’s really what FERC was addressing initially, but it’s taken its role a little bit farther in that what it’s trying to do is counteract the incentives and abilities of utilities to act uncompetitively. And so when it entered into this area of, of regulating planning, the sort of status quo situation where the utilities were in charge of the planning process and could determine where new lines would go without any transparency and could do so for their own benefit, didn’t quite meet the as sort of economic standards for market power.

But FERC nevertheless recognized there was a lot of anti-competitive conduct going on. And so it decided it had to take action. One of the problems here is that, you know, as I said, we sort of have two systems across the country and in some parts of the country, utilities have decided to join these independent regional transmission organizations. And in other parts of the country, they have not. And so they are more explicitly in control of both short-term operations and long-term planning ones. The issue here is that utilities can sort of toggle between these two situations. Now there’s some regulatory hurdle, but for the most part, if they decide they don’t like the situation where there’s an independent entity in control, they can simply decide they wanna leave. And so that gives them a measure of leverage over the management of these organizations. Where the independent entity may have all the tools it needs to plan system expansion that’s gonna, for example, bring a whole lot of new cheap wind and solar, allow those resources to connect to the network, but if those new resources undermine the generation of the utility, well, the utility may have some subtle means through the various planning processes to push back against the develop of that infrastructure. Um, so that’s, that’s certainly a factor at play in these planning processes.

The other issue is that the FERC only required competition for a limited set of regional lines and regional lines are typically lines that span multiple utility service territories. So the utilities continues to be able to build smaller scale projects within its state granted service territory without any competition and with very little oversight. And so, you know, that gives it an incentive to prefer those small scale projects over larger projects that may be subject to competition.

John Farrell:

I, I think there’s a couple of interesting examples of this. One was not in your paper, but I came across independently, was at Entergy, the utility serving New Orleans and much of Louisiana, which recently had a fairly significant outage due to a hurricane, is part of a regional transmission organization. But as I understand, it deliberately joined one with which it has minimum connection, the Midwest Independent System Operator. I think they, I think if I understood this correctly, there’s about like one or two transmission lines that connect them to that broader system. Whereas if they had joined either ERCOT or the Southern Power Pool, another regional operator, there might have been as many as 14 different interconnections so that they, what it sounded like is that they sort of strategically chose let’s get ourselves into a regional organization, but let’s do it with one that won’t have a significant operational control over the kinds of stuff that we do because we’re, we know that they have a minimal connection.

Ari Peskoe:

Yeah. The background to the Entergy story is that before they joined MISO, they were under investigation by the U.S. Department of Justice for possible antitrust violations to the anti-competitive way they operated their transmission system. They were, you know, using various, allegedly using various subtle means of locking competition or, you know, the extent there was competition basically neutralizing it by the way they ran the transmission system. And so they were basically faced a choice between MISO and the Southwest Power Pool or SPP. And the analysis is that they joined MISO because they would essentially be an island within MISO. And so technically would be a member and they did that to get DOJ off their backs. Um, and it worked, but they’re not really fully integrated into the interstate market the way most utilities are. And I would add, obviously they dispute <laugh> many aspects of the story we’ve just said.

John Farrell:

Fair enough. The other example I thought might be interesting to surface was from your article, uh, the, just to the issue about utilities being able to build the smaller local transmission lines without FERC oversight, and then therefore the resulting rules about competition. I think it was in the Northeast that you talked about it, there was an exception, or maybe in the Mid-Atlantic, there was an exception for power lines that were sort of urgently needed for reliability. And that all of a sudden there’s been this big spike in the need to build reliability related, smaller-scale transmission because of that being a loophole.

Ari Peskoe:

Yeah. So, you know, one example of this playing out is in the New England region, once this FERC rule went into effect requiring competition, one of the carve outs was for projects that the system administrator, the system operator decided were needed quickly and all 31 projects developed in the timeframe, I think from 2014 to 2019, were these immediate needs projects, which tells you one of two things, either the utilities are withholding information in a strategic way in order to effectively create these emergencies that then have to be solved without competition. Or the planning process is just broken, because the hallmark of an effective planning process should be you’re avoiding emergencies, not constantly running into them. And then finally in 2020, they held their, the New England transmission operator held its first competitive process.

John Farrell:

We’re going to take a short break. When we come back, we talk about how the feds have come up short in their efforts to facilitate competition, how it might impact potential investments in so-called non-wires alternatives, and we look at several recommendations that Ari has for how FERC can better corral utility power over the transmission planning process. You’re listening to a Local Energy Rules interview with Ari Peskoe, Director of the Electricity Law Initiative at the Harvard Law School, environmental and energy law program, and author of “Is the utility transmission syndicate forever?”

MIDWAY PITCH

John Farrell:

So we’ve kind of talked about this already, but maybe can get a little bit more better understanding of the impact. So FERC’s efforts at, as we just talked about in these two examples, have faltered somewhat with utilities being able to evade competitive processes. What do you see as the cost to consumers of this failure, for example, like how might it have impacted, you know, whether it’s economic cost, the cost on our power bills, or how might it have impacted the opportunity to expand clean energy like wind and solar?

Ari Peskoe:

Yeah, I mean, I would say one metric that shows that FERC’s efforts have faltered is you look at how much investment has happened in regional projects, that are sort of large scale projects designed to bring benefits to across the region, versus these small scale projects that are really designed to just benefit a single utility. And the numbers are pretty astonishing. In two of the largest of these transmission regions of the country, one of them being MISO and the other one being PJM. In MISO since these competitive rules went into effect, there’s been essentially no regional investment. So that’s spanning about seven years or so now, meanwhile, it’s billions of dollars a year of these local projects. And so, you know, the theory is, again, this goes back to industry’s earliest days, bigger is better. Bigger projects are, are in general thought to be more efficient than, you know, just adding up a bunch of smaller scale projects.

The other thing that I think we’re missing is new entry into the industry, and that’s particularly relevant to clean energy resources, where we know that in some parts of the country, there’s economic wind and solar there that can be harvested, but we know there’s just no transmission capacity to get that energy onto the system. And so one example here is actually in the Western part of the MISO region, where there’s tremendous interest from wind and solar developers to build projects, there’s a lot of land, a lot of good resources, but the system just can’t handle it without significant transmission expansion. So by not having regional projects, we’re missing out on that potential for economic new wind and solar resources.

And then the thing that I worry about is also just innovation in this space. It’s sort of a hallmark of the capitalist system that competition, uh, brings innovation. And when we have an industry like the transmission sector here that’s dominated by the century-old incumbents, who for decades have just been planning among themselves without any competitive pressure, I wonder if that’s a system that can give us, you know, that can yield the sort of benefits that we think we get from innovation. And I think innovation is particularly important these days. Cause we have a whole new set of technologies that are capable of generating power, like wind and solar. And we also have storage, there’s all sorts of other software technologies that can help make the system are efficient, sensors in the system that can help bring efficiencies as well. So there’s enormous potential to incorporate new technologies, to build the system differently because we have new sets of resources that can provide power. But to the extent we’re just leaving it up to the same companies to do it, I’m concerned that we might be missing out on the sector’s innovative potential.

John Farrell:

So one of the things that’s been sort of disappointing in reading your piece, and I know you didn’t set out to disappoint people, but really to just give people a sense of the situation was that so, you know, the federal energy regulatory commission has really taken a lot of action in the past 20 years to try to encourage more competition through regionalization, through third party control of the system. On the other hand, most utilities are regulated at the state level and it turns out that states have unfortunately been rather complicit in helping investor owned utilities avoid competition, despite the federal authority over transmission. Can you explain some of the way the states are continuing to shield utilities from transmission competition, even when FERC is encouraging the market to go the other way?

Ari Peskoe:

So in general, states have authority to site transmission lines, right? The states have to provide permitting authority to the transmission developer. So that gives the state some measure of control over who can build transmission within boundaries. So when FERC 10 years ago eliminated these rights of first refusal from the rules that it regulates, a number of states actually granted utilities rights of first refusal through state laws. So for example, in Minnesota in 2012, I think it was, the legislature passed a law that said any new transmission line that’s planned by MISO in Minnesota, what will be built essentially by the utility that owns the connecting infrastructure to that new line. So that’s a right of first refusal provided by the state. And a number of other states have followed suit, effectively overturning for mandate for competition. So that’s one set of things that a number of states have done. In fact, Michigan just passed a law the other day, a right of first refusal law.

The other thing that they’ve done is so there’s, there’s another type of transmission development we haven’t really mentioned, which is called merchant transmission development. And that is where just a, a project development company comes in and decides it’s going to raise the money on its own to build some new transmission project. Um, and there have been a number of these proposals over the years, specifically designed to move renewable energy across state lines. And a couple of states have actually passed laws making it either more difficult or in fact, impossible for these sorts of transmission developers to build within their states. So effectively saying, well, we actually like the utility monopoly model for building transmission, and that’s the only entity that’s gonna be able to build transmission in our state.

And then I would say the last piece of it is that again, since they control the siting process, even without these sort of special new laws, the state regulators that make these siting decisions can, you know, prefer utility projects. And sometimes this can be not necessarily, you know, they don’t, regulators don’t necessarily have anti-competitive motivations. They just might be used to reviewing a particular type of project proposed by a utility. And when some new entity comes in and proposes a project, it may just sort of be difficult for the regulator to analyze this new type of project based on the precedent that that regulator uses to evaluate these siting applications. So really, I think the utility has a lot of both explicit and implicit advantages sometimes in some state citing processes.

John Farrell:

I think it’s worth pointing out too, that research from the Energy and Policy Institute and others and stuff, that’s certainly something the Institute for Local Self-Reliance has paid attention to, is that utilities exercise a lot of political power within states. They’re often, utilities are often the largest contributor to legislative campaigns of any entity at the state level. They’ve got a lot of lobbyists, uh, a lot of technical expertise. It’s hard, you know, there’s sort of an asymmetry of information when it comes to how the grid works, the utilities can often talk about reliability in a way a legislator simply won’t understand, or even a, a utility commissioner. We found so often is the case that utility commissioners might come out of some part of the industry or background, but not really understand some of the technical nature. So it’s, uh, really a challenging problem when utilities are able to exercise that how at the state level and, and in a way that can circumvent the regulations at the federal level.

Ari Peskoe:

Yeah, there’s a quote that I really like that I heard from Representative Phil Sharp, who was a long-term Congressman who was very important in energy issues in the seventies and eighties and nineties, he had a utility executive come meet with him one day and tell him “reliability is the last refuge of scoundrels.” And that was getting at the idea that if a utility doesn’t like some regulatory proposal that’s gonna enable competition, it says, oh, no, we can’t do it because it’s gonna jeopardize reliability. And utilities have gone a long way with that argument in reducing competition. It’s now clear that competition in power generation is not a reliability threat. We’re well past that in this country. We understand that, you know, third party non-utilities can, can develop power plants and it’s perfectly reliable. And we’re now at that point in that, in, in with transmission development as well. But nonetheless utilities will wield these reliability arguments in state legislatures, uh, in particular to get some of these anti-competitive laws passed.

John Farrell:

Remind me, someday, we can talk about distributed solar and its threat to reliability, according to utilities, but let’s not go there now. I wanted to ask you one other thing. This actually comes back a little bit to the, uh, the conversation we had earlier. We were talking about this example from MISO about, you know, you have these low cost wind and solar resources say for example, like North Dakota, South Dakota, Southwestern Minnesota, really phenomenal wind resource transmission capacity. And you have not too far away in, you know, Minneapolis in Chicago and Milwaukee, these large population centers, and in states that have fairly ambitious clean energy goals as well. So there’s this strong interest in making that connection. You don’t really touch on this in the article so much, which is, you know, very understandable cuz you’re delving into an enormous complex issue. I’m curious though, if you have a sense about how the sort of broken transition planning process impacts consideration of what are called non wires alternatives? So for example, we’re like using batteries and solar to meet the needs of the electricity system instead of new high voltage power lines.

Just for some context on this question, you know, recent studies by the grid modeling outfit Vibrant Clean Energy are suggesting that there are substantially lower costs to build a clean energy grid system by including more local energy production. They actually had a Minnesota model that they did before some of their national studies. And when they looked at getting 50% of the electricity for the state from distributed, clean energy resources, you know, things like rooftop solar, it was among the most cost-effective strategies for a cleaner electricity system. So one of my questions is like, you know, how much transmission do we actually need? And, and are we able to answer that question given the state of our current transmission planning process?

Ari Peskoe:

Yeah. So I, I hesitate to, to dive into a non-legal question, but I’ll say a few things anyway. I think, I think decarbonizing our electricity system is gonna require an enormous amount of investment. So we’re at the point right now, I think we’re, in general, we need all of it still. And you know, we are in a world of, I suppose, limited, limited resources. So we do have to make choices, but I, I sort of don’t want to pit clean, distributed resources versus large scale clean resources against each other.

But getting back to the issue of sort of, how do non-wires alternatives play into the planning process? FERC does require that transmission planners consider these non-wires alternatives to solving whatever, if it’s a reliability challenge or whatever the issue might be in the planning process that that really has not been successful to this point. Part of it may just be sort of institutional competence and bias, right? If you’re asking a bunch of transmission planners to solve a problem, they’re gonna come up with a transmission solution. But you know, the technology is changing here rapidly. As I mentioned, it’s not rooftop solar and batteries that can solve some of these problems. We also have, as I said, you know, sensors and softwares that can optimize the system more effectively and potentially obviate the need for new lines. And FERC has a process right now to figure out: how do we align the incentives with deployment of these low cost solutions? So it’s a regulatory challenge on multiple levels. And FERC has a couple of balls in the air, several balls in the air right now with regard to transmission planning, with regard to these non-wires alternatives, with regard to incentives for deploying them to try to figure this out, but it is certainly a challenge. And even if it does figure it out, even if we do figure out a planning regime where these technologies can play a bigger role, I think we’re still gonna need large scale transmission to connect this sort of massive wind and solar potential that is out there in parts of the country that don’t have a lot of people that hopefully we can figure out how to tap into.

John Farrell:

I think it’s interesting that you talk about this issue of expertise at the federal energy regulatory commission around non-wires, things, you know, non-transmission solutions. It reminds me, I went to my doctor recently with a knee injury that I had been getting physical therapy for. And he’s like, well, we could do an MRI and you could go talk to a surgeon, but I’m gonna tell you this, that a knee surgeon is gonna tell you that you’re gonna need surgery. And he’s like, maybe you should just give it a while and see how things pan out <laugh> and I think it is, it is so interesting that issue of expertise.

I actually, one of my first forays into transmission and stuff was an article I think I wrote back in 2010 or 2011, about some of the bonus incentives they were offering for transmission. And I ended up speaking with a commissioner at FERC who reached out to me on a cold call. And I remember him saying that the issue was that they were sort of relying on nonprofit organizations like mine to come and bring some of that expertise into the planning space that you know, that he recognized that FERC had set the rules to help it happen, but that, that expertise wasn’t necessarily there. And I just, I was frankly appalled that the idea that us on a nonprofit budget would be relied upon to come bring that into that conversation. So it obviously is an issue. It also strikes me that you have a problem and I don’t wanna dwell on this too much, but you know, if a utility makes a healthy return on investment for building a transmission line and there are these cheaper ways to do things, the problem is that, how do they get paid then, right? I can totally understand as this utility executive, if I can build a billion dollar transmission line and my 10% return on equity gives me a hundred million dollars for shareholders, I don’t know if I’m gonna wanna to solve the same problem and only have to spend 200 million bucks, even if it’s better for everybody else.

Ari Peskoe:

I mean, I think you’re, you’re articulating why I think it’s so important to have competitive processes here rather than just utility control because, you know, yeah, they, they shouldn’t rely on just nonprofit entities to come in and offer solutions. If we had a competitive process, then for-profit developers that work on DER projects, work on small scale distributed energy resource projects, would have an incentive to participate fully in these planning processes and figure out what the most economical solution is. I mean, hopefully the one that brings more benefits to consumers, not necessarily utility shareholders.

John Farrell:

So in your piece on the utility transmission syndicate, you offer three ways – I tried to summarize it as three ways. Maybe I didn’t count them accurately here, cuz you cover a lot of ground, but three ways that you see that the federal energy regulatory commission could change transmission planning rules to ensure more competition could lower costs. I’m gonna do my best to cover ’em. If I do a bad job, you feel free to correct me. You know, one is this issue of independent planning, but making sure that it’s entities other than utilities or ones controlled by utilities that are doing the planning. So maybe it’s not these regional transmission authorities over which the utilities can still exert so much influence. Maybe it’s a third party entirely. So transmission planning was one.

Information transparency was the second one you mentioned, that utilities really need to share all the planning information. And we touched on this a little bit when we mentioned that with reliability projects in New England, that everything seems to be urgent and a reliability concern, and that maybe utilities aren’t being fully transparent to inform the planning process so that not everything has to be done urgently.

And then the third thing you mentioned was that presuming that any expense for transmission that is not done in a competitive process to use the, uh, and to use this technical term would be PRNT. So that in other words, we’d put the burden of proof on the utility to show that cost are reasonable for these non-competitive transmission lines, instead of presuming that they are reasonable as is done today. You note that FERC, you know, they have this monopoly power analysis to support these actions they have, with a recent appointment, that if the full five member commission ready to go, maybe this is the continuation of what some nerds on energy Twitter we’re talking about is the hot FERC summer. Maybe it’s the hot FERC winter. Is Fe likely to do this.? Do you think they’ll take your recommendations?

Ari Peskoe:

So I mentioned there’s, uh, you know, several transmission related proceedings, investigations, rule making proceedings open at FERC right now. And all three of these proposals are on the table and supported by a number of entities. I should start on these. So these, these regional transmission organizations, they are imperfect for the reasons we’ve already discussed and that utilities can exert a lot of influence over them. But the fact that these entities exist, that it’s no longer exclusively utilities that make decisions at the interstate bulk power level, is probably the most important development in the electricity industry, maybe in a hundred years and just sort of how the system is regulated and how, how it, how it operates. And I think it would be great if, if, if these independent regional transmission organizations were both actually truly independent of their members and also cover the entire country. And FERC tried to expand their reach in 2002, but it faced such political pushback that it had to kill its own initiative. Um, so maybe it could try again, I think that would be sort of the optimal solution as require utilities to join these organizations. And that might give the organization itself a measure of distance from the utility. If the utility sort of had to be at the table there. I don’t know if there’s any political will to take that on, but we’ll see.

Transparency is important. I think that only gets you so far. And then there’s the third piece, is let’s scrutinize certain types of transmission investments in a way that might disincentivize those investments or at least encourage utilities to make alternative investments. So, you know, what, what folks have proposed right now before FERC is that FERC should scrutinize transmission investments that are planned by the utility itself. So those are those small scale, low projects the utilities are planning and building with very little oversight. Let’s try to bring more scrutiny to those projects and that additional scrutiny might encourage utilities to basically look again at these larger scale regional projects that they have, uh, shied away from over the past decade or so. So I, I, I don’t know where FERC is gonna go with this. There’s a lot of issues on the table, including one we haven’t mentioned at all, which there are a specific set of rules to connect new resources to the utility owned system. Those are interconnection rules, which are also really important for getting new clean resources online. So a lot of balls in the air, and I’m not sure how this is gonna play out. This is a multiyear process at FERC right now.

John Farrell:

So, right. My conclusion from reading your piece is that distributed energy advocates and utility scale clean energy advocates, you know, which have sometimes been at odds as you acknowledge, actually have a common enemy in utility market power that in the same way that you see this save solar campaign playing out in California right now. And I guess now in Florida as well, a fight over compensation for rooftop solar. We also have this problem with utility market power at the transmission level that if we want to get clean energy to market, if we want to get that South Dakota wind power to Chicago, if we want to get those resources to the places we need them, that utility market power is a problem. Do you think that’s a fair statement? You know, this is my conclusion reading your piece. And, and I was wondering if that orientation around utility market power, if it was recognized by both sets of advocates, would help us lower the costs and get more of the economic benefits of the move toward clean energy.

Ari Peskoe:

I agree. I think the problem is utility control and utility interest in maintaining the status quo. Utilities are, I don’t think for the most part are inherently against clean energy, but they wanna deploy that the pace and scale that will benefit them. And so the distribution level, when we talk about distributed energy resources, the utility clearly owns and controls its local distribution system, you know, subject to state regulation at the bulk power system, the utility continues to own for the most part the transmission system. And there are various FERC rules in place that are designed to attempt to bring competition to that space, but I think we’ve had some mixed success there. Um, and I do think that it’s important to keep the focus on utility control. And I think, you know, if, if there were political will and political courage to take on that issue, head on, I think we could really make, make significant progress on clean energy because as long as utilities can still tilt things in their favor, they will continue to do so.

John Farrell:

I wonder it, and to just ask you this as a wrap up, and maybe it’s me trying to get too expansive here, if there is a connection between the kind of market power thinking that you’ve been bringing into the utility transmission space and some of the political will, you know, to answer this political will question some of the action that Congress has been taking around the power of tech platforms. You’ve seen them with this bill to break up Amazon that passed the house. There’s some bills being in the Senate. If there were recognition, if folks realize that there is this market power that’s being exercised in the industry that is not 10 or 20 years old, but that is a hundred years old. Are, is there enough of a connection, of a legal footing for people to wrap their head around that the two kind of concepts could be rolled together?

Ari Peskoe:

You know, I think you’d have to address, Congress would have to address the electricity industry separately from these tech platform issues. I think there may very well be some analogies in that the distribution and transmission infrastructure is, is akin to a platform because it’s the fundamental infrastructure that allows various devices to connect to. And those devices can be provided by third parties and provide all sorts of energy and services, but they have to be able to compete on a level playing field. I would say just one important distinction though, and again, you know, I, we, I sort of brought this up mockingly before, but reliability is a serious issue. And so, you know, part of this issue of utilities wanting to maintain the status quo is rooted in the importance of reliability. And so there’s almost a healthy push and pull here between wanting innovation on the one hand. And on the other hand, wanting conservative approaches to ensure that the system still does work because society really does fundamentally rely on electricity working.

John Farrell:

I think that’s a very astute way to put it. All right. Thank you so much for taking the time to educate me both with your original article, which was an incredible read for someone who has not been as much focused on the transmission space, but also for joining me today to explain it more fully and the connections to our advocacy work to advance clean energy.

Ari Peskoe:

Well, thank you so much for having me and I appreciate your interest in the article.

John Farrell:

Thank you so much for listening to this episode of Local Energy Rules discussing transmission syndicates with Ari Peskoe, director of the Electricity Law Initiative at the Harvard Law School, Environmental and Energy Law Program. On the show page, look for links to Ari’s paper on utility transmission syndicates, and for more research on the exercise of monopoly power in the utility sector from the Institute for Local Self-Reliance, including our April 2021 report. Local Energy Rules is produced by myself and Maria McCoy with editing provided by Audio Engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear more powerful stories of communities taking on concentrated power to transform the energy system. Until next time, keep your energy local and thanks for listening.