Why Congress should think big on energy infrastructure

The November election underscored that America’s energy future is dependent evermore on bipartisanship. Luckily there is some rare common ground on infrastructure in a divided government, and both parties are already making their priorities clear. Democrats seek to advance clean energy reforms that fill in the gaps of the 2021 bipartisan infrastructure law and the partisan Inflation Reduction Act. And Republicans are positioning to combat escalating energy costs, secure energy supplies and enforce fiscal discipline in the face of persistent inflation and soaring debt. One reform arena checks all the boxes for both parties: modernizing electric transmission regulation.

Deeply flawed transmission regulation is inhibiting trillions of dollars in productive investment while skewing capital deployment toward inefficient projects. This harms consumers, grid reliability, innovation and the clean transition. Congress must ensure that the Federal Energy Regulatory Commission (FERC) corrects flaws in local and regional transmission regulation, while prioritizing the development of competitive mechanisms to expand interregional transmission.

These priorities are critical, in part because cost relief cannot come soon enough for energy consumers. One in six American households are currently behind on their utility bills. We can also no longer shift burdens to taxpayers as U.S. debt now exceeds the size of the economy. Disruptions in the natural gas market have increased temporary burdens on consumers, but a sustained driver of cost increases the last two decades is transmission.

In fact, Republican Mark Christie of FERC has observed that transmission capital expenses have nearly tripled between 2012 and 2020, imposing major costs on consumers. And the return on such a large investment has been underwhelming, revealing a dearth of economic discipline. Fixing this requires modernizing regulation to plan transmission proactively, allocating costs fairly and harnessing competitive forces.

FERC’s Democratic majority and Commissioner Christie have rightfully prioritized fixing regional transmission regulation. FERC has a proposed regional transmission rulemaking that takes many positive steps, such as advancing proactive planning and incorporating advanced technologies into the planning process. But its Achilles heel is anti-competitive provisions that attracted the ire of the Department of Justice, became a rallying cry for dozens of consumer groups and met bipartisan resistance in a recent letter by Sens. Martin Heinrich (D-N.M.) and Mike Lee (R-Utah).

Encouragingly, FERC and state leaders have also begun scrutinizing local transmission projects. This is sorely overdue because the runup in avoidable transmission costs is principally the result of monopoly utilities pursuing inefficient small projects. These projects are exempt from competitive bidding requirements yet receive virtually no economic scrutiny from state or federal regulators. Such behavior undercuts the development of more efficient regional transmission.

While states and FERC have their hands full fixing local and regional transmission regulation, Congress should take aim at the glaring blindspot: interregional transmission. Today, there remains no regulatory framework driving interregional transmission development. Unsurprisingly, U.S. interregional transmission development is nearly non-existent, despite it holding major cost and reliability advantages over smaller projects.

Stunted interregional transmission puts the American economy at an unnecessary disadvantage. And our competition is beating us. For example, China has completed over 80 times more interregional transmission than the United States.

Congress should galvanize interregional transmission reform that adheres to sound economic practice. Two success stories from regional transmission should extend to interregional transmission. The first is allocating costs to the beneficiaries of transmission development, which ensures consumers get what they pay for. Second, subjecting new transmission projects to competitive bidding induces 20-55 percent cost reductions, innovation and better risk management. Both policies are favored by economists and, more importantly, the consumers who benefit and pay for transmission.

Current regulation permits coordination between regions but lacks a mechanism to compel investment. Although trade between regions yields cost savings and reliability improvements, regional transmission planning authorities are configured to encourage trade within but not beyond their borders. One option is for Congress to require FERC to establish minimum transfer capabilities between regions based on economic criteria to ensure customer benefits far exceed costs.

This approach will save time, while granting FERC the discretion on implementation details that require expert judgment. More importantly, the strategy should unlock billions in net benefits to consumers by improving the cost-effectiveness of grid expansion and amplifying its resilience, especially to extreme weather events. It also provides the luxury of major emissions reductions in a fiscally responsible manner, by imposing no taxpayer burden and increasing the vitality of the tax base.

Although the fixes may be technical, every American household and business can appreciate that efficient, competitive infrastructure is the backbone of the economy. Congress has the imperative to act accordingly.

via wnd

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