FERC Transmission Reform: A New Year’s Resolution?

Nearly two years ago, the U.S. Federal Energy Regulatory Commission proposed a set of regulatory reforms to speed a much-needed expansion of the nation’s network of long distance electric transmission lines. FERC’s final rules, which are likely to arrive this year, are expected to substantially update the framework under which transmission lines are planned and paid for, and pave the way for the growth of clean energy. Yet FERC’s reforms come at a time when the future of the electric grid has become the focus of fierce partisan debate, and legal challenges to FERC’s proposed rules are expected.

Ari Peskoe, Director of Harvard Law School’s Electricity Law Initiative, explores the need for a rapid expansion of the nation’s transmission infrastructure, and why the industry’s existing framework for transmission development has not been able to deliver the necessary pace of development. He discusses FERC’s proposed rules to govern transmission planning and the sharing of transmission costs, and how a final order might endure expected legal challenges.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone.

Electricity demand in the United States is expected to grow dramatically over coming decades, by some estimates tripling by the middle of this century, as everything from cars to home heating move to electric power. Accompanying this demand will be a fundamental shift in how electricity is produced, with renewable energy becoming an ever-larger portion of the generation mix. Both of these trends to more and cleaner power will require simultaneous expansion of our network of long-distance transmission lines to reliably deliver power to consumers. Yet despite clear need, relatively few miles of new transmission have been built in recent years. At the core of the challenge are outdated frameworks for how the grid is planned and paid for. In addition, the future of the electric grid has become the focus of fierce political debate, turning what was once primarily an engineering challenge into a deeply partisan political one.

On today’s podcast, Ari Peskoe, Director of Harvard Law School’s Electricity Law Initiative, will explore the thicket of challenges that the nation’s electric grid regulator, the Federal Energy Regulatory Commission, must navigate as it seeks to update rules governing transmission planning and the sharing of transmission costs. Nearly two years ago, FERC released a draft package of reforms to the transmission development process. Its final rule is likely to be released sometime this year. In our conversation, Peskoe will explore FERC’s proposed transmission reforms and how a final order might be built to endure an expected onslaught of legal challenges.

Ari, welcome back to the podcast.

Ari Peskoe: Thank you for having me.

Stone: So sometime this year, FERC is likely to release a major order updating the framework by which long-distance transmission lines in this country are planned and paid for. This comes in response to fundamental changes that are taking place in the electricity system. To start us out, could you tell us why new transmission lines are so badly needed?

Peskoe: I think the intro summed it up pretty nicely. We have available today technologies like wind and solar that can provide cheap, clean power, if we just build the transmission lines to reach them. We know we’re going to be using more power because industry is demanding more power, because we’re going to be electrifying transportation and other aspects of our economy. The other thing is we know transmission is needed to keep the system reliable and to keep power affordable, regardless of the mix of resources that is powering our economy.

Just over a year ago, last Christmas of 2022, we had a major winter storm that disabled energy infrastructure from North Dakota down to Georgia and actually caused some power outages in the Southeast. Transmission was a big reason why the situation was not a lot worse. When there was a major winter storm in Texas in 2021, that transmission system is isolated from the rest of the country, and there were catastrophic effects for loss of life and for the economy there. So we need transmission for a host of reasons, and we’re just not getting it done right now.

Stone: Over the past decade, the rate of transmission development has really reached pretty much what we consider historic lows in this country, and that reflects a fundamental difficulty in getting transmission built. In sum, why is it so hard to build new transmission lines in the US?

Peskoe: I think you have to start with the electric utility industry. They own most of the transmission in the United States, and they control the processes in many ways for developing new transmission. So the electric utility industry is a funny sector of our economy, in that it is controlled by monopolies, and the monopolies are focused in part on retaining their monopolies. That means making sure that the transmission system is built around their interests, which may or may not correspond with the interests of consumers.

To give you one example, one reason for building new transmission is to access new sources of power like wind or solar that may be far away from existing transmission infrastructure. But when you build that transmission to those new wind and solar areas, you’re potentially opening up opportunities for competitors of utilities to build those facilities. So it may not be in the utilities’ interests to build those lines, unless they know that they are going to be the ones that are building those new power plants. A big reason here for the reforms is to try to push the industry to build forward-thinking projects that are going to meet our long-term needs.

Stone: So in essence what happens is you’ve got these new transmission lines. If they are built, they allow potentially lower-cost electricity from some other part of the country to be brought into an area, introducing competition in the incumbent. You say generation companies don’t really like that. Is that right?

Peskoe: I think that’s right. One factor at play here is the utility industry wanting to make sure that the system is developed for its own needs, which don’t necessarily align with our broader decarbonization goals or the interests of consumers in having low-cost power. I think that’s the reason why a lot of the development that has been done over the past several years has really just been focused on sort of short-term gap filling. There are reliability standards that the industry does take very seriously, and they have to meet, and so occasionally they have to make minor upgrades to make sure that they are consistent with those reliability standards. But we’ve seen very few long-distance, forward-thinking projects that are going to be designed to move the industry forward.

Stone: So you’ve got all these changes, as you’ve already discussed. You’ve got more renewable energy, more electricity demand. Obviously this reactive approach to transmission planning is no longer going to be sufficient. FERC obviously realizes this, and in April of 2022, getting close to two years ago, FERC released a Notice of Proposed Rulemaking on Transmission, which would reform these transmission development processes. In general, what is FERC trying to achieve through its transmission reform? What are its priorities?

Peskoe: The overall priority is to get the industry to think about these long-term changes in how power is being generated, and the trend for increasing demand for electricity, and to stop just planning for the next 3 to 5 years and think broader, really, about a 20-year time horizon. That’s necessarily speculative. Things can change rapidly in 20 years. Twenty years ago, we didn’t know about shale gas, for example, the natural gas revolution in this country that has dramatically changed the electricity system. We didn’t have low-cost wind and solar 20 years ago, so things can change differently, which is some of the resistance here. But one thing we find with transmission is that when you build these lines, this infrastructure lasts for decades, even as long as a century, and the industry finds ways to make this infrastructure useful. So lines that were often built with one purpose in mind can actually end up serving a different purpose because this is flexible infrastructure. It moves energy in interstate commerce, and it’s indifferent to how that energy is generated or ultimately what it’s going to be used for. The important thing is getting the steel in the ground, and that ultimately tends to bring benefits to the system.

Stone: We’ve got a 20-year planning horizon, which the FERC would require through its NOPR. That’s important because the grid is going to look very different 20 years into the future. You also mentioned something about the benefits of the transmission system. FERC, as I understand it, would require a broader range of benefits to be considered in the planning process. Tell us what the significance of that might be.

Peskoe: You can think about the benefits of transmission very broadly, in three big buckets. One is the ability to lower the cost of power, so for example, by connecting lower-cost sources of energy or by just allowing power to flow more efficiently on the system. Two are the reliability benefits, not just making sure we’re hitting those reliability standards, but making sure that regardless of system stresses, weather events, outages, et cetera, overall the system stays on. And then the third benefit is being able to meet public policy goals, and a lot of those are tied to state and federal clean energy policies.

So those are the three broad benefits, and within those, you can break down various subcategories of benefits. Now this is critical of the whole process of utilities selecting what projects they’re going to build. They want to select projects that are going to provide net benefits over, say, a 20-year time period. But FERC has thus far allowed utilities to ignore whatever benefits they want to ignore and only count those benefits that they feel like counting.

We have wildly different approaches across the country about how we value transmission investments and whether we’re looking at the full suite of all of those three categories of benefits that I mentioned, or whether we’re just looking at a tiny subcategory of those benefits. And that obviously leads to very different results in terms of what utilities actually end up developing. A big issue in this rule-making is whether FERC is going to standardize some set of minimum benefits, or whether it will continue to allow utilities to pick and choose.

Stone: That range of benefits, then, becomes critical to how it is determined who should pay for these lines, right?

Peskoe: Yes, those are very much related. The projects that you pick are based on the benefits, and then we’re primarily interested here in how regional alliances of utilities’ planned projects — it’s called regional planning processes — and the costs of those projects are split among the region’s utilities. The general principle for determining how much each utility pays is that each utility pays in proportion to the benefits it receives. Of course which benefits you are counting will feed into how much each utility is going to pay for each particular project or set of projects.

Stone: One other issue I want to ask you about here is who are actually the different entities that are involved in the planning process? In citing these lines and approving them, you’ve got the states, you’ve got different federal agencies. All of these add to the complexity. I wonder if you could address that?

Peskoe: Yes, this is a great point to distinguish between a single utility, planning small-scale projects within its local footprint, where it has a monopoly, as compared to the regional planning process, where you have these alliances of utilities that are developing larger-scale projects. Those are the ones we are really interested in, and those are the ones that are the subject of the FERC rule-making you mentioned before.

So the planning process is the first stage of the development process. It’s the process by which the utility selects projects that will be developed. This used to just be an internal utility function. Regulators, consumers, and other industry participants really only found out about new projects once the utility would go to a state regulator and ask for a construction permit. But about 15 years ago, FERC recognized that utilities might be expanding transmission for their own interests, to the detriment of consumers. So what FERC required, and what this rule-making is all about is really sort of a public process by which utilities disclose their transmission expansion plans and accept input from interested parties. And those interested parties can be state regulators. They can certainly be federal agencies. They can be consumer advocates. They can be power plant developers, competing transmission developers and other industry participants, but the more parties you bring into these processes, potentially the more complicated it can be, and the more negotiations that have to happen to try to make sure everybody is getting something as part of this process.

Stone: So along those lines, I understand one of the components of NOPR is to bring the states into the planning and cost allocation process as soon as possible. Is that right?

Peskoe: Yes, that’s a key reform that FERC has proposed. Ultimately, states are typically the entities that are issuing construction permits for these projects. At some point in the process, you typically need state regulators to approve of the projects. FERC’s theory here is, “Let’s bring in the states at the beginning of the process, to make sure that we don’t go through this whole planning and cost allocation process, and then ultimately get rejected in a permit process regulated by the state. Let’s make sure the states are brought in at the beginning, and they are effectively signing off on these projects before we get to the formal permitting phase.”

I think the other potential benefit here of bringing the states into the process early is to provide a check on the utilities, to try to make sure that these projects are not just being designed by the utilities for the utilities, but there is some other player here, the state regulators, that are very familiar with the utilities’ operations, very familiar with utility rates, how much consumers are paying for energy, very familiar with the state policy goals that have to be met and are trying to push the planning process to select projects that are going to ultimately benefit consumers.

Stone: So transmission development has become highly politicized, and in response to the NOPR, 17 Republican state attorneys general wrote a letter to the FERC opposing the NOPR. Could you talk about the basis of their opposition?

Peskoe: Yes, I think one reason why Congress has only made minimal progress on transmission development is because it is partisan, and it is now divided along Democratic/Republican lines. That certainly didn’t used to be the case. We used to have more bipartisan support for transmission development. We also used to have more utility industry support for more transmission development. I think the utilities have been blocking significant reforms in Congress, as well. This letter from 17 Republican attorneys general basically telegraphs that they are going to litigate FERC’s planning rule, and we know that some utilities will, as well.

There are basically two lines of attack here. One is that they’re just going to argue that FERC simply does not have authority to issue transmission rules at all. This is going to be a really broad attack against FERC. It’s pretty well established over the past 25 years that FERC does have this authority to issue rules that apply to the entire utility industry, but we now have a different Supreme Court than we did 25 years ago, and so I think they’re going to try again to see if this Supreme Court might take that issue up and really hamstring FERC in the long run, in how it regulates all aspects of the industry.

The other challenge that they’re going to argue is that what FERC is really trying to do here with transmission planning is bring about a change in the mix of resources powering the country, and that this transmission planning rule is really a back door to getting more renewables on the system, and that’s simply not FERC’s role. This challenge echoes the challenge that the Supreme Court heard to EPA’s — the Environmental Protection Agency’s Clean Power Plan, which was a greenhouse gas emission rule issued by the Obama administration. Ultimately, the Supreme Court struck it down, basically saying that the EPA simply does not have authority to be the decider over how we generate electricity in the country, and that’s ultimately what the Clean Power Plan was. So they are going to copy and paste that decision from the Supreme Court a couple of years ago about an EPA rule and argue that FERC is trying to do the same thing here.

Stone: It’s interesting, the FERC itself has been quite polarized on this, right? Actually, when the NOPR came out in 2022, of the five FERC commissioners at that time, four voted in favor. One, James Danly, was strongly opposed. As you said, one of his arguments against the NOPR is that it’s picking winners, it’s enabling more renewable energy. So that whole tension extends to the FERC itself.

Peskoe: Yes, and I think FERC is at its best when it is responding to industry trends, and I think that’s what FERC is doing with this proposal. FERC has not created the momentum behind renewable energy. The technologies are available. They are less expensive than many other forms of energy, and the fact is they need transmission to be effective and make the system reliable. So I think this rule is really just responding to industry demands and industry trends, and I think that’s, as I said, that’s when FERC is at its best, when it is making sure the industry is moving in a consistent direction, and I think that is what FERC is trying to do here.

Stone: So Ari, where is FERC right now in the process of developing its final order?

Peskoe: We’re expecting a final rule in the next few months, early 2024. I think there are a couple of key issues to look out for. One of them we already mentioned, which is whether FERC is going to standardize the benefits of transmission that utilities have to consider when they pick new projects and figure out who pays for those projects. The proposal did not include any minimum set of benefits, so utilities were free to pick and choose whatever benefits they want to count or not count, and that would allow a lot of utilities to continue to under-develop the system.

The other key issue is going to be the role that competition plays in transmission development. About ten years ago, FERC required that development processes be open to non-utility companies that can propose projects and develop those projects and ultimately profit from their construction. Of course the utility industry has pushed back and continues to push back very strongly on anybody but themselves building transmission, so the proposal had sort of a modified version of competition, where the utilities can continue to have their regional transmission cartels under certain conditions. And so we’ll see where FERC lands on the issue of transmission competition.

Stone: And that would be the right of first refusal that was taken away with Order 1000, and it may be coming back now. That’s what we’re looking at, right?

Peskoe: Yes, that’s right. This right of first refusal is essentially the utilities get to have cartels, and they get to determine what projects get built, and they are the ones that build them. Sometimes utility interests align with consumers, and other times, they do not align with consumers, and they certainly do not align with utility competitors. I think there are a lot of advantages to bringing other parties to the table, as we figure out what projects need to be built. I think the one counter to that would be if state regulators have a robust role in picking those projects, maybe that can be somewhat of a counterweight to utility control, even in the absence of competition.

Stone: I want to talk about the state politics here for just a moment. We talked a few minutes ago about getting the states in early on the planning process for new transmission lines. Obviously states can say yes or no to a transmission project, based upon whether they view it’s in their own best interests or not. One of the interesting things, though, is that some states may be opposed to the bulk of new transmission that’s based on public policy in other states that are really pushing forward aggressively on renewable energy. I’m thinking about the market PJM, which is the largest and arguably the most diverse market in this country in terms of the politics of the states that are in that market and how they relate to fossil fuels and renewables.

The argument of the states that are fossil fuel-based is, “We’re not going to pay for any of this because we don’t think this is necessary because we don’t see the need for renewables.” Can you tell us, how can an agreement be reached, even if states are brought in early in the process, when they are fundamentally opposed to a greening of the grid, for example?

Peskoe: Yes, so for a hundred years, there has been pretty broad agreement that bigger is better, in terms of the scope of our transmission networks. The more resources and consumers you can connect, the more efficient, more reliable the system is. And there has always been some effort to try to make sure that everybody is paying their fair share. It’s never perfect, but we believe that the efficiencies we get through scale are ultimately worth some of this imprecision in allocating these costs. Now what you’re describing is this sort of new dynamic in cost allocation, where we’re going to look particularly at how the costs of renewable energy projects and transmission projects are paid for and largely overlooked, a lot of the imprecision with how the rest of the system is paid for. And it’s really hard to isolate a lot of these costs, but again I think there are serious efforts to try to make sure that everyone is paying their fair share. I hope people don’t get too overly focused on nickel and diming some of these policy projects, because again, the fact is we all benefit from scale. I think these objections focused on paying for particular state policies are losing that key message.

Stone: Well, it’s interesting because PJM, in its comments on the NOPR, included a comment or a request to the FERC that it allow “for regional flexibility with respect to the categories of benefits that transmission providers must analyze.” That sounds like PJM is trying to deal with this political issue and who views what benefits as positive, or maybe not necessary.

Peskoe: An overwhelming theme from industry, from the utilities, as well as from the regional transmission organizations like PJM is flexibility. “We want flexibility. We’ve been doing this for 20, 30 years. We want to make sure we can continue to do it the way we want to do it.” And I think the problem with that is that we’ve seen mixed results over the past decade or so, with some regions really lagging behind in developing these forward-looking, long-term projects that FERC is trying to spur.

And so flexibility, of course, can be helpful. There are differences in different regions of the country, but it can also be an excuse for continued inaction, and that’s one thing that FERC has to balance here — how much to standardize, and how much is it feasible for it to standardize, without getting in the way of meaningful regional differences?

Stone: So if the states can’t agree on something, on allocation for a new line, there theoretically would be some sort of backstop process for the allocation.

Peskoe: Yes, one thing that FERC has proposed here is to allow the state regulators to figure out how to share these costs, instead of leaving it to the utilities to figure that out. But FERC can’t force state regulators to agree, so if state regulators don’t come to an agreement, FERC will have to have some sort of process for ultimately figuring out how to pay for projects. And it could just be the situation right now where if the states can’t figure it out, utilities are in charge of figuring that out, and ultimately FERC has authority to impose its own cost allocation, if it doesn’t like what the utilities come up with. But it has historically been very reluctant to do that.

Stone: So ultimately how vulnerable might a final order be in the courts? And what considerations or actions does FERC need to take to, I guess, in a sense, bulletproof its final order against expected legal attacks?

Peskoe: Yes, I think it’s important to start out with that FERC has issued rules about transmission planning before. The key rule that you mentioned was called Order No. 1000. It was litigated in a federal appeals court, and it was upheld by the court. The rule-making is step one in the process. Step two is each regional transmission organization or group of utilities figure out how they are going to comply with FERC’s rule, and that’s stage two. And then FERC has to approve those compliance plans, and those can also get litigated.

FERC’s record in the courts on those compliance plans is also very strong, so a lot of these issues have already been litigated. I think what’s going to be new here is the industry and those Republican states trying to echo the challenge that was brought to EPA’s Clean Power Plan several years ago, and argue that all of this is FERC trying to sort of secretly change the mix of resources on the system, and that through its transmission planning authority — and that is beyond FERC’s capability. But again, I think that challenge will fail also because a lot of the aspects of this proposal are really just standardizing things that FERC has already been doing for well over a decade.

The key reform here that we’ve been talking about is long-term planning. Well, a lot of these RTOs and utilities already have planning processes that at least consider the long-term in some respects, and they’ve been fully vetted and approved by FERC. All FERC is doing here is standardizing long-term planning approaches across the industry, so it’s really nothing that FERC hasn’t already done before. There’s not a lot that’s totally new here. It’s really just a matter of making sure the industry is moving consistently across the country.

So I think the industry is going to try very hard, along with the states, to paint this as something new and novel. We have a different Supreme Court these days, so it’s possible if the Supreme Court does ultimately take this case, that they may be sympathetic to these arguments. But I think they’re ultimately really a stretch.

Stone: When do you think we’ll actually see that order?

Peskoe: I think the first half of 2024 would be my guess. Hopefully the first quarter of 2024, we’ll have a rule. It will be litigated probably in 2025. We’ll have a decision from a federal appeals court by the middle of the year, and then we’ll see if the Supreme Court wants to take the case. But as I mentioned, in the meantime, we’re going to have this second phase of the rule-making happen, where each RTO or utility tells FERC how it plans to comply with the rule, and that probably won’t conclude until the end of ’25, maybe even early ’26, so this is a long-term process. The goal here is long-term planning, so hopefully we can get something solid, legally defensible in place and implemented, and we’ll start hopefully developing projects — it sounds far away — but probably by 2030.

Stone: A final question for you here. So Congress has been involved in seeking its own transmission-related legislation. Where does that stand?

Peskoe: We’ve been talking about regional transmission planning, that is how these alliances of utilities plan projects in their own regions. There is a separate challenge, which is connecting across regions. So how do we connect the PJM region to New England, for example, and MISO to PJM, and all these various utility alliances, making sure that they’re better connected across the country? That’s really important for reliability, for consumer costs, and ultimately for integrating clean energy in the system. The industry has really been lagging behind on those sorts of projects. The most interesting proposal to come from Congress is called the BIG WIRES Act, and what it would do is require the industry to have a certain minimum amount of connectivity between regions. I think that’s a really important proposal. FERC itself might take this up at some point in 2024, as well, but that’s a whole separate challenge, to really improve the connectivity between these regional alliances.

The other challenge that gets brought up is permitting reform. How do we make sure that once we do plan these projects and decide who is paying for them, make sure we get them permitted faster? A lot of this happens at the state level, and there really has not been a big appetite in Congress to federalize transmission siting. So I think we’re still going to see states taking a lead role, and what Congress is really going to be looking at is are there ways to speed up the federal environmental permitting processes, when those actually are needed? And because there is so much federally-owned land in the Western half of the country, I think those efforts are particularly relevant for projects out West.

Stone: Ari, thank you very much for talking.

Peskoe: Sure. I always like talking about transmission. Thanks so much for having me.

Stone: Today’s guest has been Ari Peskoe, Director of Harvard Law School’s Electricity Law Initiative.

Visit the Kleinman Center’s website for our searchable archive of over 150 episodes of Energy Policy Now, as well as the latest research and events from the Center. To keep up with the Center, sign up for our monthly newsletter on our home page. Our address is KleinmanEnergy.upenn.edu. Thanks for listening to Energy Policy Now, and have a good day.