Replacing the Utility Transmission Syndicate's Control

Abstract

Technological progress can topple industry titans. But in the electricity industry, entrenched power can stymie disruptive change by setting rules that block competition and reinforce the status quo. In this paper, I chronicle how regional power sector governance — the decisionmaking processes and structures used to change industry rules — is impeding innovation that could challenge incumbent firms, business models, and technologies. I limit my inquiry to control over electric transmission, the channels of interstate commerce essential for keeping the lights on.

Twenty-five years ago, amidst a seismic industry shift to competition, federal utility regulators (FERC) empowered new entities to coordinate the industry through interstate markets and integrated planning. To receive regulatory approval, these new Regional Transmission Organizations (RTOs) had to demonstrate that their governance was free from industry control. FERC believed that RTO “independence” was necessary to foster confidence in the fairness of RTO transmission service and attract investment to RTO-run markets. The RTO model of procuring reliable power through markets spread quickly. While RTOs have since rewritten industry rules and invented new markets, their governance is unchanged.

I argue that RTO governance is now holding the industry back for the benefit of last century’s power players. The industry is in the early phase of a technological revolution, but the commercial interests and individual entities that held formal power and informal influence in regional decisionmaking processes are largely the same today as they were twenty-five years ago. As a result, regional rules tend to cater to incumbents’ interests, to the detriment of competition, consumers, and innovation. I explain why RTO governance stagnated, detail how the power industry changes its the rules, and outline a path for FERC reforms. Despite the drawbacks of RTOs, I contend that independent control over transmission operations and planning is indispensable for moving the industry forward.

Keywords: electricity, electricity regulation, energy law, energy regulation, transmission, electric power, governance, monopoly

JEL Classification: K23, K32, L50, L1, L16, L43, L94, N72