Is the Utility Transmission Syndicate Forever?

Abstract

Approved by states to act as local monopolists, investor-owned utilities (IOUs) promptly extended their reach by building transmission lines to neighboring utility systems. Transmission links transformed IOUs from state-sanctioned service providers to interstate system operators and wholesalers. With overriding control over transmission in their monopoly service territories, IOUs exploited nearby non-profit utilities and regionalized their dominance through collusive agreements with each other that obstructed competition and cartelized infrastructure development. From 1996 to 2011, FERC issued four orders that aimed to wrest the nation’s high-voltage electric delivery systems from IOU control and open interstate power systems to competition. FERC’s agenda has since stalled. Further action is needed to disconnect transmission expansion from IOUs’ state-granted service territories.

In this article, I explore the history of FERC’s oversight of IOU transmission dominance. I start at the beginning, prior to FERC’s existence, when states granted IOUs local service territories and provided them with dependable revenues through state-run ratemaking processes. With these “unearned advantages,” IOUs built transmission infrastructure that extended their dominance to interstate power systems. In response to the financial collapse of the corporate structures that fueled IOU growth, Congress charged FERC with policing IOUs’ anti-competitive practices while also encouraging their coordination. For decades, FERC generally tolerated IOU-to-IOU transmission coordination agreements that excluded competitors and discriminated against customers, believing that efficiencies gained through voluntary IOU arrangements were impossible to achieve through open competition. Once technological and regulatory changes exposed opportunities for the development of competitive wholesale power markets, FERC changed its approach and sought to restrain IOUs’ transmission dominance in order to facilitate entry into the industry.

This dramatic shift — from emphasizing voluntary IOU coordination under section 202 of the Federal Power Act (FPA) to policing IOU conduct under section 206 — was predicated on FERC’s decision to reclassify long-standing IOU practices as “unduly discriminatory” under the FPA. FERC concluded that anti-competitive IOU behavior was systemic and fashioned remedies, for the first time, on an industry-wide basis. FERC’s reforms to transmission operations and planning have been guided by two key principles: comparability and transparency. FERC’s orders require IOUs to provide their customers and their own power marketing operations with comparable transmission service, and when planning system expansion, to consider the needs of customers on a comparable basis with their own goals. FERC has also attempted to liberate transmission information from utility control by compelling IOUs to share operational and planning data and models. Structural reforms that separate IOUs from transmission operations and planning by placing an “independent” entity between IOUs and decisionmaking aim to improve the effectiveness of FERC’s comparability and transparency requirements and further neutralize IOUs’ incentives to restrain competition.

IOUs often resisted these reforms, responding to FERC’s orders with proposals that failed to meet FERC’s minimum standards. I focus on IOUs’ responses to FERC’s transmission planning directives and in particular their extensive efforts to evade FERC’s mandate that new projects be subject to competitive development processes. FERC has rejected the premise that century-old state laws that effectively provide IOUs with exclusive service territories grant these companies perpetual rights to develop the nation’s interstate electric delivery systems. While FERC has removed certain barriers to entry for non-IOU developers, it has yet to foster a development process that stimulates significant non-IOU projects. Moreover, planning processes have not spurred adoption of new technologies that can obviate the need for local transmission projects or led to the sort of large-scale transmission projects that could efficiently integrate zero-emission renewable resources. While scholars and practitioners have focused on transmission siting challenges to unlocking renewables, I focus on the transmission planning process that selects transmission projects for development through cost-of-service rates. I offer a perspective on IOU transmission ownership that suggests the status quo is incompatible with development of large-scale interregional connections designed to integrate new wind and solar and deployment of advanced technologies that can substitute for local transmission expansion.

IOUs are at the heart of the problem. They are driven to maintain the status quo, in part by capitalizing on FERC’s rules that allow them to build projects within their state-granted territories without competitive pressures and on the backs of their captive retail ratepayers. This local focus is at odds with FERC’s decades-long push for regionalization, and the IOUs’ defensive approach to transmission development has no place in a technologically dynamic industry. Apart from concerns about the topology and technologies of our interstate networks, FERC’s duty to combat anticompetitive behavior compels it to continue chipping away at IOU transmission dominance. These entitlement-claiming century-old companies are frustrating FERC’s efforts to bring competitive discipline to transmission development.

FERC should reclaim its transmission agenda. Rather than intervene directly in IOU-controlled planning processes, I propose that FERC should induce IOUs to accept third-party controlled planning. FERC has exclusive authority to determine whether transmission spending is prudent, and in making that determination it should consider how transmission investment is planned. FERC should issue a new policy on prudence that subjects IOU-controlled spending to scrutiny while maintaining the current presumption that independently planned transmission is prudent. My hope is that under this new approach to transmission rates, IOUs will voluntarily cede control of planning. If IOUs fail to do so, FERC retains broad authority under section 206 to police anti-competitive IOU behavior and should act decisively to separate transmission planning from IOU control.

Keywords: electricity, electricity regulation, energy law, energy regulation, transmission, electric power, federalism, monpoly

JEL Classification: K23, K32, L50, L43, L94, N72