How Monopoly Energy Utilities Impede Innovation — Episode 146 of Building Local Power

Date: 10 Mar 2022 | posted in: Building Local Power | 0 Facebooktwitterredditmail

On this episode of the Building Local Power Podcast, host Jess Del Fiacco is joined by her colleague John Farrell, director of ILSR’s Energy Democracy Initiative, and guest Ari Peskoe, who is the director of the Energy Law Initiative at Harvard Law School. They discuss the attempts Congress has made to increase competition in electric utilities, the four orders the Federal Energy Regulatory Commission (FERC) ruled between 1996 and 2011, and the how the lack of competitive processes negatively impacts consumers. 

Highlights include: 

  • The reasons why Congress passed the Public Utility Act and its impacts on the concentration of economic and political power. 
  • The FERC recognizing that the single greatest impediment to competition is Investor Owned Utilities. 
  • How the conviction “bigger is better” impacted the electric utility sector for nearly a hundred years.
  • Whether Peskoe’s recommendations to the FERC; independent planning, information transparency, and burden of proof on the utility to show that costs are reasonable will be considered moving forward. 

“I worry about innovation in this space. It is a hallmark of the capitalist system that competition brings innovation. When we have an industry like the transmission sector here that is dominated by the century old incumbents who for decades have been planning among themselves without any competitive pressure I wonder if that is a system that can yield the benefits that I think we get from innovation.”  – Ari Peskoe

“The transmission system is so novel in a way of being so balkanized and so controlled by the incumbents.”  – John Farrell

Jess Del Fiacco: Hello, and welcome to Building Local Power, a podcast dedicated to thought provoking conversations about how we can challenge corporate monopolies and expand the power of people to shape their own future. I’m Jess Del Fiacco, the host of Building Local Power and communications manager here at the Institute for Local Self-Reliance. For more than 45 years, ILSR has worked to build driving equitable communities where power, wealth, and accountability are made in local hands.
Jess Del Fiacco: Welcome to today’s episode. I’m actually going to hand over hosting duties to ILSR’s John Farrell today. John is a co-director of ILSR and he directs our energy democracy work. John is joined by his guest, Ari Peskoe, who is the Director of the Electricity Law Initiative at Harvard Law School. They’re going to talk about how utilities have gained outside market power by owning energy infrastructure and how federal regulators could reintroduce competition through targeted regulation. With that, I’m going to hand things over to John.
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. 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?
John Farrell: 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. Ari, thank you so much for joining me on Building Local Power.
Ari Peskoe: Thanks for having me.
John Farrell: 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.
John Farrell: I was hoping to just start with, when we talk about electricity transmission, are we talking about … 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: 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 is where almost all of our electricity comes from, to connect those large scale power plants to our local utility distribution system. 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 edge 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 had always heard that the biggest barrier to expanding electricity transmission were so called NIMBYs, not in my backyard folks who were like, “We don’t like how it affects our view. We don’t like that it’s going to take up our land.”
John Farrell: 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.
John Farrell: 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 a hundred years ago with the first regulations, I guess, or laws about power lines, and were they successful?
Ari Peskoe: Prior to 1935, privately owned utilities, which we call investor own 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. There were basically two reasons for it and sort of two major regulatory agencies in DC were involved in implementing it. The first issue was the industry at the time was largely controlled by these corporate structures called holding companies.
Ari Peskoe: At the time, before the stock market crash of 1929, there were just three holding companies that controlled about half of all power regeneration in the country. So, enormous concentration of economic and political power in these holding companies, and they failed spectacularly amidst the depression. 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.
Ari Peskoe: One company was not allowed to own, say utility companies in different states. 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. The 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. That is a one utility selling to another utility. And also, regulating transmission service. So, a utility providing transmission service to another utility.
Ari Peskoe: The sort of language that Congress used, which was common to regulatory statues at the time, was that all the regulator had to ensure that rates, terms, and conditions are just in reasonable and not unduly discriminatory. These are terms of art that clearly give the regulator a wide range of discretion to figure that out. At the time, investor owned utilities essentially were the electricity industry. That was it in 1935. For decades, the federal regulator, we’ll call it FERC, even though as I said, it was called the Power Commission for a while, sort of took that industry structure as given.
Ari Peskoe: Its task was just to regulate transactions between these utility companies. And Congress required FERC 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. If we can encourage utilities to coordinate with each other, that will ultimately be beneficial to consumers. FERC certainly did that. The way it did that was basically by approving, as just in reasonable, ad hoc agreements among utilities for various types of coordination. For example, utilities might coordinate how they plan system expansion.
Ari Peskoe: They might coordinate how they share 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 … All these things can indeed have consumer benefits, but keep in mind that these IOUs are private companies ultimately with shareholders. So, these agreements, ultimately were designed for the benefit of the utilities.
Ari Peskoe: Another thing that FERC was handling throughout this time period was fielding complaints from smaller utilities, in particular, the nonprofit public power utilities and the cooperative utilities, who would complain about what they characterize as anti-competitive utility conduct. The sort of the typical fact pattern was that you would have a small municipal utility that was essentially captive to its local investor owned utility.
Ari Peskoe: And that the 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. The other part of what FERC had to do was on the one hand, encourage voluntary coordination. On the other hand, ensured that coordination was not sort of burdening these smaller utilities. That’s basically how the industry operated for several decades.
Ari Peskoe: 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. In that sense, the industry was working.
John Farrell: I think I want to call attention to a couple of things that you said that folks who don’t live in this space might not appreciate. One, I thought it was really interesting to talk about that 1935 law and how it outlawed non-contiguous utilities. As you said, like a utility had to … Couldn’t have a utility in Florida teamed up with a utility in Michigan. As I understand it, that’s been reversed, since reversed, right? That idea that utilities ought to be contiguous has been cast out.
John Farrell: The other thing I wanted to highlight, I thought was really interesting, is you brought up this issue about shareholders in regard to these coordination agreements between utilities. This is an ongoing tension in the entire industry, right? You have these investor-owned utilities that have shareholders. Like any corporation, they’re responsible to those shareholders. They want to 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.
John Farrell: And of course, the big difference between these utilities and most other companies in our economy is that these utilities have monopolies, which is they don’t have competition to discipline them in the same way that we might have in other spaces.
Ari Peskoe: Yeah. Back in the time period we were talking about, the only competition of these investor own utilities came from these public power and cooperative entities. There really was no other private investment in the industry. It just wasn’t feasible for anyone really to compete with the utility because the utility had the benefit of both the local distribution monopoly. It was the only entity allowed to sell power directly to consumers within its state granted territory. So, it had that monopoly.
Ari Peskoe: 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 made competing investment from the private sector, really just a non-starter back in this time period.
John Farrell: You’ve outlined, and I think it’s important for people to understand that, despite this market structure that generally speaking, we don’t like in the United States, which is to say monopoly power, it did have big advantages in terms of, we got electric service to most places, especially with the help of the Federal government in getting, grow electric cooperatives to expand service, and it kept getting cheaper that utilities captured economies of scale. They built bigger power plants.
John Farrell: I always think it’s important to have a little caveat here when I talk about this. From an overall electricity service standpoint, yes, things were better. If you were maybe a minority, 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 power generation, but the view was, at the time, we were being very successful.
John Farrell: Let’s turn the clock forward now from the ’30s 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. 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, I think you called 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.
John Farrell: 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 owned utilities as of the 1970s and 1980s. Is that right?
Ari Peskoe: Yeah, but I think a couple of things I think are important to clarify about this story, which is one, you have to plan transmission expansion because the system has to work, right? 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 it needs to. The second thing I would say is that, 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.
Ari Peskoe: Again, there was really no thought that anybody would just come along and want to just build a transmission line. You would build a transmission line to connect to a new power plant. That was really what transmission planning was, is that it followed generation expansion. That’s where all the money was, and it continues to be in the industry as in the power plants. So, transmission just sort of followed from that.
Ari Peskoe: To a lesser extent, 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. So, there was some limited transmission development, just to ensure 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. 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. If one of the bikes starts to veer to the right, it starts to pull on the other one, the bikes being the power plants and the, I guess the bungee cords being the transmission lines.
John Farrell: But I’ve always enjoyed that because it gives a sense of the complexity of trying to coordinate a bunch of independent components of the 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. Obviously planning is really important. Let’s get ourselves up to speed here a little bit then. As you’ve said, the investor owned utilities had continued to dominate the system.
John Farrell: 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, we know that they’re fairly dominant in marketplace, but because the coordination that they exercise 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. In your article, the article on the transmission syndicate, you write that the Federal Energy Regulatory Commission finally recognized that “The single greatest impediment to competition is investor owned utilities.”
John Farrell: And following this, “That it’s their market power through the control of transmission.” So that the issue was no longer just in the transmission business, but that because the utilities had market power over the transmission system, they were impeding competition for new power plants. I think you already talked about that. I’m going to try to ask you to 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 describe 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. There were four orders issued from 1996 to 2011. 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 so much more than just the wires that connect power plants to utility distribution systems. Control over transmission is strategic control over the industry. I say that because the fundamental job, I really like your bike analogy, and the fundamental job of the transmission operator is to ensure that supply and demand remain in balance.
Ari Peskoe: 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. Therefore, the job of the transmission operator is to determine, which power plant should be producing power at this moment and how much power they should be producing. Think about the competitive implications of that. If you are the transmission operator, you get to tell which power plants get to turn on. So, if you own the transmission and you own the power plants, well, you’re going to have a natural inclination to prefer your own power plants over power plants owned by your competitors.
Ari Peskoe: 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 prevent the sort of undue discrimination that utilities would prefer their own power plants and disadvantage competing sources of supply. That’s transmission operations, and that’s sort of step one to ensuring that competition is even feasible at all. The second step has to do with transmission expansion. Because there, you get to determine, sort of, if you control all transmission expansion, you get to potentially determine where the next set of power plants are going to be, because ultimately, they’re going need to connect to the system.
Ari Peskoe: If you are a transmission owner that also owns a power plant, why would you want to build transmission that’s going to enable your competitors to connect to the system? What FERC tried to do with its transmission planning rules 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.
Ari Peskoe: 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. I just think we’re spending a second on it to describe it a little bit, that 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 ABC utility in Illinois, ABC utility could say, “Well, we get the first choice about who is going to own that power line. If we want to own it, we get to do that. Whoever propose the power line is sort of out of luck because I have that power.”
John Farrell: 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 need to at least start to open up this system in a way that allows for third parties to come in and propose transmission lines that they could ultimately then own and profit from, not just the utilities.”
Ari Peskoe: Yeah. We might want to distinguish, and this just going to 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 we 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. The idea here was that look, 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.
Ari Peskoe: FERC realized that 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 issues, and have a third party, this regional transmission organization determine which power plans get to operate. There are many parts of the country where we have these organizations and some parts where we don’t.
Ari Peskoe: These regional transmission organizations also run planning processes. So, where you have this organization running the planning process, you could imagine at least that, well, we could have some competitive process to figure out who’s going to build this next line identified by this sort of, let’s imagine an independent and neutral entity. In the parts of the country where the utility still controls, explicitly controls the planning process, it’s a lot harder to imagine how, why the utility would allow any sort of competitor into the transmission development process, and even how to make that feasible.
Ari Peskoe: 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. That’s where FERC stepped in 10 years ago and said, “No, you have to 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 two steps forward, one step back. And it 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. Utilities are like, “Okay, well, we’ll give up operational control, but we’re not going to 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.
John Farrell: Then 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 want to take a moment for people who are still with us, who are not in the transmission and energy field, but to 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 a bunch of different delivery companies like UPS and FedEx and the Postal Service in this like balkanized matter.
John Farrell: And if you wanted to have a delivery, 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 would’ve had discriminatory rates to use it. It would’ve been hard to even 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 going to build that road because we know that it would give you access to the system in order to compete with us.”
John Farrell: I think sometimes we’re so much in the weeds of how this system them developed. It’s hard to appreciate that with other kinds of infrastructure, it’s operated so differently with open access and public control. The transmission system really is very novel in a way in being so balkanized and so controlled by the incumbents.
Ari Peskoe: Yeah. Then there’s this issue of vertical market power, where you have the owners of this essential delivery infrastructure also, in many parts of the country, producing the power, and so have this incentive to keep competition out. 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 going to expand to in the future is a way of sort of influencing the future resource mix and influencing who’s going to own those resources.
Jess Del Fiacco: I’m so sorry to interrupt. We’re going to be back to this conversation after a very short break. Thanks for listening to our show. If you’re enjoying this episode, I hope you consider heading over to ilsr.org/donate to help support our work. And if you want to learn even more about our energy work, you should check out another ILSR podcast, Local Energy Rules. On that show, you can hear John Farrell every other week with guests around the country who share stories of successful local renewable energy projects. Once again, please consider heading over to ilsr.org and making a donation today. Any amount is sincerely appreciated. Now, let’s return to our conversation between ILSR’s John Farrell, and Ari Peskoe of the Electricity Law Initiative at Harvard Law School.
John Farrell: 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 on competitive prices, which are two hallmarks of the exercise of market power. I just think it’s so interesting 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.
John Farrell: Can you explain a few ways, few other ways that utilities can, despite the new rules for transparency, for independent operation, still can 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. Remember, the Federal law here requires that rates be just in reasonable and not unduly discriminatory. When FERC started down this reform path in the late ’90s, it decided that those broad standards allowed it to counteract utility market power. Market power is a term used by economists and two of the hallmarks you just mentioned, the ability to exclude competition or to charge prices that are not competitive. That’s really what DERC 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 anti-competitively.
Ari Peskoe: When it entered into this area 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 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.
Ari Peskoe: One of the problems here is that, as I said, we sort of have two systems across the country. 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 have more explicitly in control of both short-term operations and long-term planning. The issue here is that utilities can sort of toggle between these two situations. Now, there’s some regulatory hurdles, 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 want to leave.
Ari Peskoe: 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 going to, 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 development of that infrastructure.
Ari Peskoe: 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. The utilities continues to be able to build smaller scale projects within in its state granted service territory without any competition and with very little oversight. That gives it an incentive to prefer those small scale projects over larger projects that may be subject to competition.
John Farrell: I think there’s a couple of interesting examples of this. One was not in your paper, but I came across independently was that 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, if I understood this correctly, there’s about one or two transmission lines that connect them to that broader system.
John Farrell: 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 strategic 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 know that they have a minimal connection.
Ari Peskoe: Yeah. The background to the Entergy story is that, before they joined a MISO, they were under investigation by the US Department of Justice for possible antitrust violations to the anti-competitive way they operated their transmission system. They were using various, allegedly using various subtle means of locking competition, or the extent there was competition, basically neutralizing it by the way they ran the transmissions system.
Ari Peskoe: So, they were basically faced a choice between MISO and the Southwest Power Pool, or SPP. And the allegation 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, and it worked, but they’re not really fully integrated into the interstate market the way most utilities are, and I would add that obviously they’d dispute 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, just to the issue about utilities, being able to build the smaller local transmission lines without FERC oversight it, and then therefore the resulting rules about competition. I think it was in the Northeast that you talked about that 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. One example of this playing out is in the New England region, where 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 way in order to effectively create these emergencies that then have to be solved without competition or the planning process is just broken.
Ari Peskoe: 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 finally.
John Farrell: We’ve kind of talked about this already, but maybe can get a little bit more better understanding of the impact. FREC’s efforts, 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, how might it have impacted, 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 across the region versus these small scale projects that are really designed to just benefit a single utility. 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.
Ari Peskoe: MISO, since these competitive rules went into effect, there’s been essentially no regional investment. That’s spanning about seven years or so now. Meanwhile, it’s billions of dollars a year of these local projects. The theory is, again, this goes back to the industry’s earliest days, bigger is better. Bigger projects are in general, thought to be more efficient than just adding up a bunch of smaller scale projects.
Ari Peskoe: The other thing that I think we’re missing is new entry into the industry. 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. 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. There’s a lot land, a lot of good resources, but the system just can’t handle it without significant transmission expansion.
Ari Peskoe: By not having regional projects, we’re missing out on that potential for economic new wind and solar resources. 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 brings innovation. When we have an industry like the transmission sector here that’s dominated by these 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 yield the sort of benefits that we think we get from innovation.
Ari Peskoe: I think innovation is particularly important these days because we have a whole new set of technologies that are capable of generating power, like wind and solar. We also have storage. There’s all sorts of other software technologies that can help make the system more 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: 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 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: In general, states have authority to siting transmission lines, right? The states have to provide permitting authority to the transmission developer. That gives the states some measure of control over who can build transmission within their boundaries. 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. For example, in Minnesota, in 2012, I think it was, the legislature passed a law that said, any new trans mission line that’s planned by MISO in Minnesota will be built essentially by the utility that owns the connecting infrastructure to that new line.
Ari Peskoe: That’s a right of first refusal provided by the state. A number of other states have followed suit, effectively overturning FERC’s mandate for competition. That’s one set of things that a number of states have done. In fact, Michigan just passed a law the other day, right of first refusal law. The other thing that they’ve done is, so there’s another type of transmission development we haven’t really mentioned, which is called merchant transmission development. That is where just a project development company comes in and decides it’s going to raise the money on its own to build some new transmission project.
Ari Peskoe: There have been a number of these proposals over the years, specifically designed to move renewable energy across state lines. 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. Effectively saying, “Well, we actually like the utility monopoly model for building transmission and that’s the only entity that’s going to be able to build transmission in our state.” 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 prefer utility projects.
Ari Peskoe: Sometimes this can be not necessarily … 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. Really, I think the utility has a lot of both explicit and implicit advantages sometimes in some state siting 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. Utilities are often the largest contributor to legislative campaigns of any entity at the state level. They’ve got a lot of lobbyists, a lot of technical expertise. It’s hard. There’s sort of an asymmetry of information when it comes to how the grid works.
John Farrell: The utilities can often talk about reliability in a way a legislator simply won’t understand, or even a utility commissioner, as we’ve 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 really a challenging problem when utilities are able to exercise that power at the state level and in a way that can circumvent the regulations at the federal level.
John Farrell: 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, because 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 that could lower costs. I’m going to do my best to cover them. If I do a bad job, you feel free to correct me. One is this issue of independent planning, but making sure that it’s entities other than utilities are ones controlled by utilities that are doing the planning.
John Farrell: 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. The independent planning was one. Information transparency was the second one you mentioned, that utilities really need to share all the planning information. We touched on this a little bit when we mentioned, that was 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.
John Farrell: Then the third thing you mentioned was that presuming that any expense for transmission that is not done in a competitive process, and to use this technical term, would be imprudent. So that, in other words, we’d put the burden of proof on the utility to show that costs are reasonable for these non-competitive transmission lines instead of presuming that they are reasonable as is done today. You note that FERC, they have this monopoly power analysis to support these actions. They have, with the recent appointment, the full five member commission ready to go. Maybe this is the continuation of what some nerds on energy Twitter were talking about as the hot FERC summer. Maybe it’s the hot FERC winter. is FERC likely to do this? Do you think they’ll take your recommendations?
Ari Peskoe: I mentioned there’s 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 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 exclude exclusively utilities that make decisions at the interstate bulk power level is probably the most important thing, the most important development in the electricity industry, maybe in a hundred years, and just sort of how the system is regulated and how it operates.
Ari Peskoe: I think it would be great if these independent regional transmission organizations were both actually truly independent of their members and also cover the entire country. FERC tried to expand their reach in 2002, but it faced such political pushback that it had to kill its own initiative. So, maybe it could try again. I think that would be sort of the optimal solution is require utilities to join these organizations. 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.
Ari Peskoe: Transparency is important. I think that only gets you so far. 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. What folks have proposed right now before FERC is that FERC should scrutinize transmission investments that are planned by the utility itself. Those are those small scale local projects the utilities are planning and building with very little oversight.
Ari Peskoe: Let’s try to bring more scrutiny to those projects. That additional scrutiny might encourage utilities to basically look again at these larger scale regional projects that they have shied away from over the past decade or so. I don’t know where FERC is going to go with this. There’s a lot of issues on the table, including one we haven’t mentioned at all, which there are specifics 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. A lot of balls in the air. I’m not sure how this is going to play out. This is a multi-year process at FERC right now.
John Farrell: Ari, my conclusion from reading your piece is that distributed energy advocates and utility scale clean energy advocates, 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.
John Farrell: Do you think that’s a fair statement? This is my conclusion reading your piece. 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 in terms 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 want to deploy it at the pace and scale that will benefit them. So, at the distribution level, when we talk about distributed energy resources, the utility clearly owns and controls its local distribution system, subject to state regulation.
Ari Peskoe: 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. I do think that it’s important to keep the focus on utility control. I think, if there were political will and political courage to take on that issue head on, I think we could really 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, 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 politic … 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 are some bills being elevated in the Senate. If there were recognition, if folks realize that there is this market power that’s being exercised in industry that is not 10 or 20 years old, but that is a hundred years old, 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: Congress would have to address the electricity industry, I think, separately from these tech platform issues. I think there may very well be some analogies in that the distribution and transmission infrastructure 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 can provide all sorts of energy and services, but they have to be able to compete on a level playing field.
Ari Peskoe: I would say just one important distinction though, and again, I sort of brought this up mockingly before, but reliability is a serious issue. Part of this issue of utilities wanting to maintain the status quo is rooted in the importance of reliability. There’s almost a healthy push and pull here between wanting radical 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. Ari, 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.
Jess Del Fiacco: Thank for tuning in to this episode of the Building Local Power Podcast from the Institute for Local Self-Reliance. You can find links to everything discussed today by going to ilsr.org and click on the show page for this episode. That’s islr.org. While you’re there, you can sign up for one of our many newsletters and connect with us on social media. And hope you’ll also take the opportunity to help us out with a gift that helps produce this very podcast and supports the research and resources we make available for free on our website.
Jess Del Fiacco: Finally, at least let us know how we’re doing with a rating, or review on Apple Podcasts, or wherever you listen to your podcasts. This show was produced by me, Jess Del Fiacco, and edited by Drew [Boshbach 00:51:14]. Our theme music is Funky Delude by [Dysfunctionale 00:51:17]. For the Institute for Local Self-Reliance, I’m Jess Del Fiacco, and I hope you’ll join us again in two weeks for the next episode of Building Local Power.

 

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Luke Gannon

Luke recently received a BA in journalism, creative writing, and ethnography from Hampshire College. She wrote, designed, and edited a magazine titled The Politics of Land in Teton Valley, ID that analyzed the environmental, economic, and social patterns of the region amidst Covid-19.