Taking Open Access Beyond “ËœTyranny of Small Decisions’

by Dan Watkiss, Bracewell & Giuliani

The Federal Energy Regulatory Commission (FERC) on June 17 proposed a rulemaking that if implemented promises to complete the quest the agency began 14 years ago to democratize the interstate electric transmission grid.

The proposed rulemaking would do so by eliminating from all federally regulated transmission tariffs and other transmission agreements provisions conferring on incumbent transmission providers a right of first refusal (RoFR) to construct and own grid additions or upgrades.

Earlier reforms, starting with FERC’s Order No. 888 in 1996, offered for the first time nondiscriminatory, open access to those who sought to interconnect with and to use the grid. That progressed in 2007 to Order No. 890, which expanded customer participation in grid planning and operation. The new rule proposes to allow all power industry participants to contribute equally to the future design, configurations and even ownership of the world’s biggest machine: the grid.

The rulemaking emphasizes that elimination of all federal RoFRs is one component of a package of related planning and cost allocation reforms. The other planning reforms include:

  1. Development of regional planning across individual systems and control areas together with expanded opportunities to participate in planning,
  2. Going beyond operational reliability as the pre-eminent driver of system planning to encompass other state or federal public policies such as integrated resource plans, promotion of renewable power generation sources, or reduction of harmful air emissions, and
  3. A requirement that all public utility transmission providers enter into and file with FERC interregional transmission planning agreements with each of their contiguous neighbors, committing the parties to plan facilities jointly and annually exchange planning information.

And the cost allocation reforms encourage adoption of allocation principles—as an integral part of the regional planning process—that look for payment to customers who cause the need for and who benefit from grid additions while seeking to eliminate free riders. (Traditional allocation has focused primarily on causation only.)

To accommodate equally the grid projects from incumbents and new entrants, FERC proposes to revise transmission provider open-access tariffs to include:

  1. A standard form on which the project sponsor can detail its proposed project for comparative evaluation in the regional planning cycle, and
  2. A description of “how the regional planning ” provides for the sponsor ” to have a right, consistent with state or local laws or regulations, to construct and own” the facility it is proposing. The “consistent with” qualification recognizes that in various jurisdictions only incumbent utilities are authorized under state or local law to construct and own transmission facilities.

To prevent this legal reality from choking off the benefits of eliminating the RoFR from federally authorized tariffs and agreements, FERC must implement procedures for compensating sponsors whose projects are selected in regional planning processes, but who are thwarted by state or local law from constructing or owning their projects. The potential tension between FERC’s rulemaking and state or local laws that effectively confer RoFRs on incumbent transmission providers may be an appropriate issue for Congress to resolve in the energy bills that are working their ways through the Senate.

Some incumbent transmission providers have warned dire consequences will ensue if they lose their RoFRs. Those same voices predicted the sky would fall following the reforms of Order Nos. 888 and 890. But the sky didn’t fall. Because of power industry challenges, it is particularly important that FERC not capitulate.

In the proposed rulemaking, FERC points to the 2009 Department of Energy Report “Keeping the Lights on in a New World” in which the department emphasizes the rapidly increasing needs for upgrading the transmission grid to ensure reliable, economical energy supply from a portfolio that increasingly will comprise renewable generation sources. Add to that dynamic the increasingly urgent demand to lessen greenhouse gas emissions from fossil-fueled generation, and the demand for different grid configurations becomes still more acute.

These growing demands on the world’s biggest machine can be met most effectively and economically when the options are fully explored, presented, understood and compared. That won’t occur if only incumbent utilities are encouraged to answer requests for proposals generated from new regional planning processes. Persisting under the traditional RoFR approach will cabin the grid’s future development to a series of small, localized decisions that can and likely will change the context of later choices, even to the point where desired alternatives are destroyed.

This is what economist Alfred E. Kahn disparaged as the “tyranny of small decisions.” The size and capital requirements of the future grid are too large and complex to be left only to incumbents.

Instead, regional planners should solicit and welcome innovative ideas from all sectors, but that won’t occur under the current RoFR regime.

Author

Dan Watkiss is a partner with Bracewell & Giuliani in Washington, D.C., representing power companies, exploration and production and midmarket companies, natural gas pipelines, power and liquefied natural gas project developers and lenders, as well as government agencies and regulators. Reach him at dan.watkiss@bgllp.com.

 

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