The recent landmark ruling on transmission planning cost allocation, known as “Order 1000,” and issued by the U.S. Federal Energy Regulatory Commission in late July 2011, could well produce an...
Busting the Transmission Trusts
Creative destruction is coming, and it can’t be stopped.
Over the next 20 years, the shape of our power grid will change—radically, in fact, as current indications suggest that federal regulatory reforms soon will give broader and clearer authority to state governments to influence what gets built.
And this restructuring will matter greatly, affecting both resources and risk.
On the resource side, over the last 100 years, we built a grid that enabled coal to generate half of our electricity—more than that in the heartland, less in the West Coast and Northeast regions. Likewise, the grid pattern of tomorrow will decide whether and how we get power from oil, coal, gas, hydro, nuclear, wind, or solar energy sources.
But the risk-reward equation will change even more. The reforms now planned will make the transmission industry much more competitive—though still regulated. But more important, the changes ahead will allow a much broader set of investors to participate in the opportunity to earn regulated, but attractive financial returns—the sort of revenue stream that hitherto has been largely reserved for the utility sector. In spite of all the resistance—and thanks largely to federal regulators—the United States is engaged in the kind of creative destruction of an oligarchical business that has been the hallmark of its long-term economic vitality.
Welcome to the Machine
The U.S. power grid is a complex machine, and it can be changed only via an intense and obscure political and regulatory process.
Up to about 1990, the grid was essentially run by regional oligarchies of large and small utilities, some overseen by state regulators, others co-opting state regulators. Since 1990, the federal government has tried to open the grid up to new participants: independent transmission companies. Then, starting in 2010, the federal regulators opened the grid further by taking away some of the ROFRs (rights of first refusal) to build transmission that the incumbent utilities have had for decades. This reform was aimed at encouraging not just small independents, but also large utilities—who could now move out from their native-load regions to compete with incumbent utilities in other regions in the difficult business of developing and building new transmission.
These changes are profound, and they will affect the pattern of electricity production in the United States. Natural gas plants will displace much of the old coal-fired system, and, in the states that care about climate change, renewable energy—wind and solar—will complement natural gas as the base sources of power. These are good changes: gas is cheap, it pollutes less than coal; and renewables are becoming cheaper, and they’re emission-free. The transformation of the U.S. power sector, enabled by transmission reform, will add to economic growth and vitality, and will lay the foundation for a higher-tech, 21st-century grid.
Many of the changes in