Energy Grid Rule Sparks Inflation, Competitive Bidding Concerns

The Federal Energy Regulatory Commission is under pressure from a bipartisan group of lawmakers, trade associations, and other Biden administration officials to nix a proposed barrier to competitive bidding in building regional transmission lines.

A variety of groups applauded the commission’s effort in April to overhaul regional planning and cost allocation of transmission projects. But the part of the rule that allows incumbent electric utilities to avoid competitive processes has been a key source of backlash that threatens to upend the entire rule.

In August, the Justice Department and Federal Trade Commission sharply criticized the competitive barrier. In a letter posted last month, bipartisan members of the Senate Energy and Natural Resources Committee, Sen. Martin Heinrich (D-N.M.) and Sen. Mike Lee (R-Utah), pressed the commission to change course as it works toward a final rule.

“A missing link to achieving America’s full potential as a clean energy producer—and the current limiting factor standing in the way of making this vision a reality—is our need to build more transmission lines,” Heinrich said in a statement to Bloomberg Law.

And on Monday, a coalition of competition proponents wrote to President Joe Biden, arguing FERC’s proposed rule rejects “a proven anti-inflation policy.” If the competitive barriers stand, they will lead to “increasing electricity prices and further eroding public support for the transition to cleaner energy,” the Electricity Transmission Competition Coalition wrote.

FERC Should Take ‘Very Seriously’

Given the bipartisan pressure, “if I was FERC, I would take this very seriously,” said Neil Chatterjee, a Republican who served as commission chair in 2017 and again from 2018 to 2020. “I would like to see the commission fully embrace competition.”

The rare move by the DOJ and FTC to criticize FERC “adds unprecedented legal risk” to the entire transmission rule, said Chatterjee, currently a senior adviser at Hogan Lovells LLP.

FERC hasn’t publicly responded to the comments, and a commission spokesperson didn’t immediately respond to a request for comment. FERC hasn’t said when a final rule would be unveiled.

In May, FERC Chair Richard Glick defended the proposal, saying regional competition created a “perverse incentive” for electric utilities to focus on smaller transmission upgrades, where they aren’t subject to competition.

The Justice Department didn’t respond to a request for comment for this story. A spokesman for the Federal Trade Commission declined to comment.

Building More Transmission

The debate over who can most efficiently build out the country’s transmission is intensifying as energy experts say more wires are needed to connect renewable energy to the grid.

FERC’s transmission rule, proposed in April by a 4-1 vote, would require regional transmission planners to consider at least 20-year impacts, including the changing power-and-demand mix and extreme weather events. Utilities and planners will also be required to seek agreement from states in each region to allocate costs of projects.

The proposed competitive barrier—called the federal right of first refusal—allows incumbent utilities to avoid competitive processes if they partner with a non-affiliated developer on a regional project. The commission’s 2011 update to transmission rules had removed that barrier.

Incumbent owners argue they have the expertise and the necessary oversight from state utility commissions to make the upgrades.

The commission has legal authority under the Federal Power Act to reinstate the barrier, the Edison Electric Institute, a trade association of investor-owned utilities, wrote in comments. Reinstating the barrier “is in the public interest and will help get transmission built in an efficient and timely manner,” the group wrote.

Competitive companies say they can do it for lower prices while promoting innovation.

Competing Studies

Heinrich and Lee cited a 2019 study prepared for non-incumbent transmission company LSP Transmission Holdings that found competitive bidding yields a 40% reduction in the cost of transmission projects nationwide.

“These proposals shield the incumbent electric utility from competition and deprive consumers of the previously recognized, and indeed, indisputable benefits of competition,” Heinrich and Lee wrote in a letter dated Sept. 30 and posted in the transmission rule docket late last month.

New Jersey customers will save $900 million after the state commission competitively selected a transmission project to help connect offshore wind, an analysis by the Electricity Transmission Competition Coalition found this month. Maine customers saved more than $1 billion after that state competitively selected two projects, according to the coalition, a group of 86 industrial consumers and public interest groups.

“Every time that competition is allowed to work, it reduces costs, it increases innovation, and it works every time,” Paul Cicio, who chairs the coalition founded last year when FERC launched the transmission rulemaking, told Bloomberg Law. “Unfortunately, the FERC [proposed rule] takes a big step back on that.”

Administrative Burdens

Meanwhile, incumbent transmission owners argue it creates administrative burdens that delay projects and hasn’t provided cost savings.

An August study prepared for a group of seven utilities shows completed and active competitive transmission projects awarded to non-incumbent developers experienced an average of 12 months in schedule delays and 27% in cost increases.

The data give FERC “the opportunity to recognize (competition) certainly hasn’t resulted in more transmission—it’s resulted in less,” said Krista Tanner, senior vice president and chief business officer for ITC Holdings Corp., the largest US independent transmission company.

“FERC is headed in the right direction,” Tanner said. “Maybe it’s time to call this experiment done.”