Slate of FERC Orders and Court Decisions Will Impact Grid

 
In Washington’s summer months, when it rains, it pours. There has been a slate of recent activity on the U.S. electric grid, some coming down as official FERC Orders, others coming down as court decisions. Some of these decisions have been positive developments for a U.S. shift towards a cleaner electricity grid, some of have been negative, and the implications of others still are unclear. In this post, we summarize each order and decision, and discuss briefly their impact.
 

FERC Accepts CAISO Energy Imbalance Market
At the June 19 Commission meeting, FERC accepted a California Independent System Operator (CAISO) proposal to implement an Energy Imbalance Market (EIM) in the West. By creating a mechanism which allows excess energy in one balancing area to reduce a shortfall in another, an EIM can reduce costs while bolstering reliability. EIMs are central markets which aggregate and balance generation and load across a wide geographic region, reducing system operation challenges that increasing penetrations of variable generation are expected to bring [1]. In the Western interconnection, the EIM opens the door to a more market-driven, rational, and efficient process for balancing generation and load than is possible at present with 38 separate and largely isolated balancing areas. PacifiCorp of California will be the first company to participate in the EIM, and NV Energy of Nevada has filed with FERC to join the market by October 2015. Participation in the market will be voluntary.
 

FERC Adopts New ROE Methodology for Electric Utilities
Also at the June 19 Commission meeting, FERC came to an important decision regarding the appropriate base rate of return on equity (ROE) for electric utilities building new transmission lines. Pursuant to the Federal Power Act, FERC must ensure that rates charged by transmission providers remain “just and reasonable.” In 2013, a group led by New England public utility commissions, attorney generals , and consumer advocates filed a complaint against utilities owning transmission lines (New England Transmission Owners or NETOs), arguing that the 11.14% return on equity they were receiving was “unjust and unreasonable” in light of the decline in interest rates and other criteria traditionally used to gauge appropriate rates of return for electric utility transmission investments. The hearings involved strong financial and technical arguments on both sides, but the focus of the debate was the methodology used to calculate ROE. In a very significant step, FERC adopted a two-step ROE calculation methodology that accounts for both short and long term growth projections – the same model used for oil and gas pipelines. The new method tempers the impact on ROE of fluctuations in short term growth benchmarks like interest rates by adding in a factor for long term growth linked to GDP. Using this methodology, FERC set the new base ROE at 10.57%. This result is lower than the prior industry-supported ROE, higher than the ROE requested by the complainants, and we believe a good compromise – both methodologically and quantitatively – which should be adequate to attract capital for needed for robust investment in transmission. It’s important to note that finalization of the 10.57% ROE is subject to the outcome of a paper hearing established by FERC to give participants in the case an opportunity to present evidence on the long term growth rate estimates used to calculate it.
 

Supreme Court Declines to Hear Missouri Cost-Recovery Case
In 2011, the Missouri Public Service Commission (MPSC) denied Kansas City Power and Light’s (KCPL) application to recover transmission costs incurred when transmitting power from a gas plant owned by its affiliated generation company in Mississippi to its customers in Missouri. The MPSC concluded that the utility could get the same power at lower cost without incurring the transmission cost. KCPL sought rehearing by the Supreme Court, arguing a violation of the supremacy clause of the U.S. Constitution, which holds that federal law preempts state law on transmission rates, so that a state could not reject a FERC-approved transmission rate. Missouri argued that KCPL was not challenging the transmission rate approved by FERC, but its own utility’s decision to purchase its remotely-generated power that required paying such a transmission rate, rather than cheaper power to which it had easier access. Since the Supreme Court declined to accept the case, the ripple effects of this decision remain unclear. The Edison Electric Institute has expressed concern that the decision could set a precedent for public utility commissions across the country to potentially deny recovery of FERC-approved transmission costs if utilities have a lower-cost supply option. As remote, low cost, utility-scale wind and solar resources displace retiring traditional generator closer to load, interstate transmission may become a proportionately larger cost factor in utility procurement decisions. Nonetheless, this ruling should not disadvantage remote clean energy as long as its net delivered cost – including FERC-approved transmission rates – remains competitive.
 

Federal Appeals Court Rejects FERC’s Handling of Transmission Costs in PJM
In June of 2013, the U.S. Court of Appeals for the Seventh Circuit endorsed FERC’s proposed broad cost-allocation for the multi-value projects planned throughout the MISO area, accepting the premise that the entire area would benefit from the value of the incremental high-voltage transmission needed to bring clean energy to MISO’s millions of electricity customers. One year later, the same court issued a strongly contrasting decision. The court ruled 2-1 that FERC was unable to justify why utilities in the western portion of PJM Interconnection territory should have to pay the costs of transmission lines primarily benefiting the eastern side. At issue was not the “roughly commensurate” principle established in 2009’s landmark Illinois Commerce Commission v. FERC (by the very same court), but rather FERC’s ability to provide enough evidence that costs would indeed be roughly commensurate with benefits. In a strongly worded dissent, Judge Richard Cudahy assailed the court’s call for more exact numbers, saying that a “mathematical solution to this problem…is a complete illusion,” and that the court should defer to FERC’s technical analyses in such cases. Judge Cudahy’s concern that the court is looking for a level of precision that is unattainable by FERC or anyone else seems well-founded. However, if the Commission is able to meet the court’s “roughly commensurate” standard, this now multi-year saga could end as a major positive for investment in clean energy transmission.
 

Appeals Court Throws Out FERC’s Demand-Response Order
Order 745 – issued by FERC in March 2011 – required that demand response (DR) participating in energy markets be compensated on a basis comparable to generators, i.e. at full locational marginal price. FERC reasoned that DR, the power made available to the market by the willingness of a customer not to consume it, was of the same value as that amount of power made available by a generator, and therefore should be priced the same. The order was designed to increase penetration of DR in organized markets, and analyses show that it did, indeed, have the desired effect.. However, in late May, the U.S. Court of Appeals for the District of Columbia vacated Order 745, on the grounds that FERC has no jurisdiction over retail activities, and that DR is fundamentally a retail activity subject to State regulation. The court’s ruling applies only to economic payments for DR, not capacity payments, and importantly, implementation of the ruling has been stayed until all appeals are heard. In the short term, the effects of the decision on the DR industry are likely to be small, especially when one considers that economic DR payments accounted for just about 2% of industry revenue in 2013. Over the longer term, the decision raises more significant questions. Specifically, the court’s finding on jurisdiction will almost certainly be tested in DR capacity markets, the source of most of the industry’s revenue, which could turn regulation of DR into a predominantly or even exclusively state-run affair. States, many of which have trumpeted the benefits of DR programs, will play a pivotal role in determining what impact this decision has on the DR industry. The ruling seems unlikely to significantly affect the environment for high-voltage transmission investments for two reasons. First, DR typically produces a different set of benefits than transmission, and second, DR cannot, even at very high levels of penetration, substitute for certain critical clean energy transmission functions, like accessing remote renewable resources and linking balancing areas. That said, if the ruling results in a sharp curtailment of DR, normally viewed as a “non-transmission alternative,” transmission investments may receive greater attention as a result.
 

[1] For more information on how an EIM works, please see this article.

Letter to WSJ: We Need a Modern Electrical Grid and Must Pay for It

The following is a letter written by former Chairman of FERC and member of Americans for a Clean Energy Grid Jim Hoecker to the Wall Street Journal in response to an article called “The Wind Power Tax.” The letter was published in the WSJ and is cross-posted here.

February 21st, 2013

Your editorial “The Wind Power Tax” (Feb. 11) registers your opposition to modernity and clean-energy development by attacking investment in electric transmission, which is essential to connecting renewables to customers.

You ignore basic facts. Transmission, which is less than 10% of electric bills, is an integrated network that serves multiple societal needs. Major transmission additions are needed to ensure our nation’s electric reliability, replace aging and outdated facilities and reduce the extraordinary costs of congestion on the grid. Only about one-third of the coming grid upgrade must be built to serve remote wind and solar plants. Moreover, federal regulators actually agree with you that the beneficiaries of such new facilities should bear the costs in rates. Those benefits can nevertheless be widespread and powerful, like those of the highway system.

Your jeremiad against the Federal Energy Regulatory Commission’s Order 1000 sides against the market competition among all electricity resources that transmission facilitates, and favors the continued Balkanization of wholesale power markets and an industry model that belongs more to post-World War II America than to the 21st century. The president, the American Society of Civil Engineers and the Bipartisan Policy Center aren’t promoting greater investment in our inadequate electric infrastructure for no reason. They, too, are concerned about the pocketbooks of electricity customers, not just tomorrow but 20 and 30 years from now.

James J. Hoecker

Husch Blackwell LLP

Washington

Mr. Hoecker is a former chairman of FERC and is counsel and adviser to the Working Group for Investment in Reliable and Economic Electric Systems.

Electric power lines and transmission towers in Denver metro area

Call the CDC: Anti-Renewable Fever has the Wall Street Journal Opposing Competitive Markets

Anti-Renewable Fever has the Wall Street Journal Opposing Competitive Markets
by Bill White, February 19, 2013

It’s been a difficult flu season, but even the Centers for Disease Control (CDC) did not see this coming: an anti-renewable energy fever so severe that the editors of the Wall Street Journal (WSJ) are now opposing policies that would create more competitive electricity markets.

A recent diatribe from the fossil fuel-loving editorial board contained all the familiar symptoms: bellyaching about wind power “subsidies”; blurring of federal and state policies; and delirious attempts to make old arguments new. The WSJ’s editors are now so disoriented that they are denying the benefits of free and competitive electricity markets, and opposing efforts to expand them.

Let’s hope some healing facts will prevent this bug from spreading to healthy media outlets.

Transmission lines are the backbone of competitive electric markets, which save consumers and businesses billions of dollars every year. They’re also the smallest part of any customer’s electricity bill – about 7 percent on average. Generation – the cost of power plants and the fuel they use – accounts for about two thirds of the average bill, or almost ten times as much. Transmission is the only way to move power from the best renewable resources – the windiest and sunniest places – to where that electricity is needed. Delivering that cheap power into competitive electricity markets drives prices down for everyone.

The Journal ignored these basic market realities when they chose to dig into a complaint by Interstate Power & Light (IPL), a traditional monopoly utility, related to transmission costs.

Here are the facts:

• The transmission upgrades being contested by IPL, like all high-voltage transmission lines, are open to any electric power generator connected to the grid: coal, natural gas, wind, hydro, oil, or nuclear.

• Midwestern states are promoting transmission investments to allow local clean resources like wind to compete on an equal footing with outdated, inefficient, and dirty power plants owned by monopoly utilities.

• Wind is winning this increasingly fair fight in the marketplace: 42 percent of new electricity generating capacity installed in the U.S. in 2012 was wind, more than natural gas, and more than coal, nuclear, oil, and hydropower combined.

• Governors and state legislatures – not the Obama Administration – have enacted laws requiring more renewable energy on their electric systems. Thirty-seven states, nineteen of which with Republican Governors, have mandatory renewable portfolio standards (RPS) or voluntary goals. There is no federal RPS.

• Iowa got 20 percent of its electricity from wind in 2012 – the most of any state in the country – and has the lowest electricity prices of any state in the Midwest.

Transmission lines have broad bipartisan support across the country for good reason. Twelve states from Montana to Ohio recently approved a plan to share the costs of 17 critical transmission lines which will save ratepayers tens of billions of dollars in power costs by allowing cheap wind energy to displace power from inefficient, expensive, and dirty power plants. Michigan ratepayers, who today face the highest electricity prices in the region, will reap savings on their electric bills equivalent to two to three times the cost of these lines. That’s a welcome rebate made possible by a modern and efficient grid, competition, and cheap clean energy – not a stealth tax.

Fair and competitive markets are strong medicine for incumbent utilities pampered for decades on a steady diet of rich monopoly profits. Blocking the infrastructure needed to facilitate those markets – like cutting off the internet or closing roads – is not the path to long term economic success for the nation or lower prices for customers. We’re not sure what the CDC would recommend, but our advice to WSJ editorial board is simple: swallow the bitter pill of free market competition, and call us in the morning.

Thoughts from a Post-Rocky Mountain Clean Energy Transmission Summit World

The Rocky Mountain Clean Energy Transmission Summit is behind us and what an event it was! Headlined by an impressive host of public and private sector leaders, journalists, and other energy and transmission experts, over 100 attendees participated in our Denver summit.

Owing to a remarkable array of perspectives and experiences, conversations covered many issues, offering unique solutions to though problems.

But one message seemed to carry over the rest—a message that moderator and Senior Editor at High Country News wrote about later in his article, Transmission: the missing link in the renewables revolution.

In the critical context of climate change and renewable energy, the argument for transmission is as follows: in order to cut carbon to the level we must by 2050, we need 100,000 MW of renewable power. That necessitates at least 25,000 miles of new high voltage transmission. In other words, we need enough transmission to cross the country, going east-west, over 9 times. But those wires are not easy to put up. In fact regulators, nationally, regionally and locally can make putting up transmission a long and difficult process, despite being easier than it has been in years past as a result of FERC Order 1000.

On top of all that, to connect renewables—which often are located in rural areas—to urban centers you need to put up transmission, transmission must be built to cross those rural areas. Often, that means going through the wilderness. And that has turned many environmentalists, who would otherwise support the infrastructure that is needed for renewable power, against it.

And there are many other groups who have their own issues with new transmission.

So this is the task at hand: to find a way to address complex regulation and the concerns of all those affected by new transmission so that we can find a way to build the infrastructure needed to avoid the worst effects of climate change.

As one can see, this is exactly why getting stakeholders in the same room as experts who represent many backgrounds—from government to contractors to environmentalists—is critical to progress.

In that vein, we’d like to extend a massive thank you to our sponsors, speakers, moderators, and attendees who made the Denver event a great one.

We hope that you’ll be able to join us at our next event. Stay tuned.

our_outdated_grid

It’s All Connected – Regional Transmission Planning in the Southeast

Cross-posted from AOL Energy, published 11/13/12.

It’s All Connected – Regional Transmission Planning in the Southeast
by Bill White

More than two weeks have passed since Hurricane Sandy brought the Eastern Seaboard to a standstill. Although life is slowly returning to normal, Sandy joins a long series of painful reminders of how dependent 21st century America is on reliable electricity: it powers nearly every facet of our lives. The potential silver lining in the wake of Sandy’s devastation is the influx of interest in our outdated and inadequate transmission grid, highlighting long ignored issues from the benefits of buried transmission lines to the importance of an integrated, redundant, resilient grid – built to withstand even Sandy’s fury.

A robust and modern electric grid is also essential for taking advantage of America’s unmatched renewable energy resources. Wind and sunlight cannot be delivered to customers from their best sources – mostly remote areas and offshore – using railcars and pipelines like coal, oil, and gas; they need transmission lines. In the Southeast, where wind and solar are relatively scarce, transmission lines are critical for bringing cheap and abundant renewable resources from other regions. The Tennessee Valley Authority (TVA), which provides power to nearly all of Tennessee and other Southeastern areas, is now importing wind power from eight wind farms in the Midwest. Alabama Power, a subsidiary of Atlanta-based Southern Company, last year made one of the largest wind purchases ever from producers in Oklahoma.

Several changes under way promise to accelerate the nascent interregional “trade” in cheap renewable energy. Dozens of outdated and inefficient coal plants across the Southeast will be shutting down over the next several years as new air pollution rules take effect; businesses and consumers are demanding more clean energy; and vehicle electrification is growing rapidly, especially in the Southeast. Nearly three percent of electric vehicles sold in the United States this year were registered in Tennessee. Not coincidentally, almost all of these were Nissan Leafs – soon to be manufactured at a plant in Smyrna. But electric vehicles are only as green as the power plants that charge them, and in the Southeast today, coal generates about half of the electricity. How the region invests in transmission will largely determine whether the power from retiring coal plants will be replaced by renewable resources.

A new planning framework unveiled last year by the Federal Energy Regulatory Commission, Order 1000, asks utility transmission planners to work together to solve the transmission challenge across large regions by avoiding duplication and building only those upgrades needed to strengthen the grid, improve reliability, increase efficiency, and integrate large amounts of renewable energy.

Additionally, Swiss engineering firm ABB Group announced a technological breakthrough last week that could solve the problem of transmission losses over very long distances. ABB’s new circuit breaker for high-voltage DC lines – far more efficient than AC lines over long distances – will allow large amounts of renewable electricity to be delivered over thousands of miles, for instance, from Iowa to Tennessee.

Americans have always responded to crises by replacing what was lost with something better, stronger, and smarter: building an even stronger foundation for future growth and prosperity. Let’s not wait for the next Sandy to modernize our electric grid – our most important infrastructure investment for the future of the Southeast – and the nation.

Bill White is a Senior Vice President at David Gardiner & Associates, with more than fifteen years of managing public-private partnerships advancing action on energy and climate change.

The Southeast Clean Energy Transmission Summit: Bringing the Fight to The Volunteer State

For its latest event, Americans for a Clean Energy grid brought the battle for a domestic clean energy build-out into contentious territory: coal country. ACEG hosted the Southeast Clean Energy Transmission Summit in Nashville, Tennessee on November 14th along with co-hosts Vanderbilt University, Clean Line Energy, ITC Holdings, and WIRES—each of whom supplied a panelist of their own. The summit brought together several booming voices in the energy industry: Federal Energy Regulatory Commission (FERC) Commissioner John R. Norris, PJM Interconnection President & CEO Terry Boston, and Nashville Mayor Karl Dean, among others, to speak about the benefits of clean energy transmission. Discussion touched on the shifting dynamics of the energy industry, the Southeast’s lag in clean energy build-out, and the challenges behind planning, siting, and allocating costs for new transmission wires. If one point resonated above all, however, it’s that in order to have the clean energy future that the United States wants to see, there must be transmission wires spanning the country to support it. If power plants are our heart and distribution lines our nerves, then transmission is our backbone.

Commissioner Norris offered an even more compelling analogy in reference to the need for regions to cooperate in their planning:

I’m an Iowa farm kid. We raised hogs on my farm growing up, and the neighbors raised cattle. When we needed to put a new fence in for the hogs, we didn’t just go put a hog fence in right next to the cattle fence, that didn’t make a lot of sense. It made a lot more sense to talk to that cattle farmer and see if we could share poles, and we could pay for the woven wire on the bottom and he could pay for the barbed wire on the top. It just kinda made sense to me that we increased communication across regions so we could figure out how to make our neighboring systems cooperate and share resources.”

Overall, the day was chock-full with quotables:

“The Southeast lags the rest of the country in renewable energy development. Not a single Southeastern state is in the top 25.” – Jim Rossi, Professor of Energy & Administrative Law at Vanderbilt University

“Power engineering is not rocket science…it’s much more important.” – Terry Boston, President & CEO of PJM Interconnection

“Grid manufacturing and construction alone will create 150,000 to 200,000 permanent, high quality jobs nationwide for the next 20 years.” – Jim Hoecker, Counsel, WIRES Group

“Multiple benefits to us [of transmission] are obvious, but there’s an equally strong opposing opinion that needs to hear the story.” – David Till, General Manager for Transmission Strategies, Tennessee Valley Authority

“Wind is truly a home-grown, American industry.” – Christy Omohundro, Regional Representative, American Wind Energy Association

“It was hard to give up my Mustang, but the power in a Nissan Leaf is fantastic.” –Mayor Karl Dean, City of Nashville

The event drew in local stakeholders ranging from media outlets to electrical wire workers to students to environmental groups. Other panelists and moderators included representatives from AOL Energy, Natural Resources Defense Council, Nashville Public Radio, Southern Company, Southern Environmental Law Center, GLWN, Oak Ridge National Lab, The Tennessean, Nashville Public Radio, Nissan, and the Tennessee Valley Public Power Association.

YouTube links for the event will be provided shortly.

The next Americans for a Clean Energy Grid’s event is being planned for January in Denver, Colorado.

transmission blue sky single

Investing in the Grid: When the Going Gets Tough, the Tough get… Creative

This article originally appeared on ThirdWay.org on August 2, 2012.

The unexpected storms that knocked out power to millions in the Midwest and Mid-Atlantic earlier this month highlighted how fragile America’s electric grid is. But while front page photos of fallen trees and utility repair trucks capture people’s attention, there’s a much more grave and fundamental threat to our electric grid.

The U.S. grid system was born in the 1920s, and has seen few major upgrades since the 1960s. With America’s growing population and exploding demand—bigger houses, A/C units, TVs, iThings—we have serious congestion and inadequate capacity on our nation’s power lines. This has led to more frequent power outages, which cost the American economy well over $100 billion each year. The inefficiency of our old-fashioned grid also leads to enormous waste through “line loss.” In 2010, 6.6% of the electricity generated in the U.S. simply disappeared before it could reach consumers. That’s $25.7 billion worth of electrons, lost into thin air.

Investing in grid modernization would clearly save American consumers tremendous amounts of energy and money. So why aren’t we doing more of it?

One reason is that these projects are just plain difficult to carry out. Siting and constructing power lines usually requires a utility to go through environmental regulators and public utilities commissions for each state they cross, as well as federal regulators and local governments. These regulations are intended to provide important benefits or protections for ratepayers, communities, public safety, and the environment. But they rarely line up well with one another and are, at times, contradictory.

An equally complicated barrier to grid modernization is figuring out exactly who should pay for it. The power grid is owned and operated by about 500 individual utilities, some large, some small, some private, some public. And the grid is totally interconnected, so if one utility does work to improve its segment, the benefits often flow to utilities and consumers somewhere else. It’s the standard “freeloader” problem.

Despite these challenges, one particularly creative transmission project appears to be threading the regulatory needle—and could possibly serve as a model for other desperately needed grid improvements. If it receives final approval by state and federal agencies, the Champlain Hudson Power Express (CHPE) will connect up to 1,000 MW of wind and hydro power from Canada and upstate New York to energy-hungry New York City. This renewable energy, when added to the clean nuclear and natural gas plants that already power the city, will reduce congestion and other strains on the grid—improving service for families and businesses in this service area. In addition to creating 2,000 jobs in New York State, this project is expected to reduce acid rain pollutants by hundreds of tons and lower New York’s annual carbon dioxide emissions by 9%. And perhaps most importantly, CHPE will directly benefit consumers, saving ratepayers a whopping $600 million each year.

All of the costs of developing the CHPE will be paid by third-party investors who will be repaid by power generators that utilize the lines once the project is finished. This financing method avoids the stalemate that often results when utilities are left to cover costs and seek reimbursement through politically complicated rate increases. Knowing the “not in my backyard” resistance generated by giant transmission towers normally used for such projects, CHPE’s owners chose less-intrusive infrastructure to smooth its regulatory path. Their system will consist of two power lines roughly the diameter of coffee cans running 333 miles—mostly buried in Lake Champlain, the Hudson River, and along railroad tracks—using construction techniques that garnered the approval of local environmental organizations. So by planning ahead and collaborating with major stakeholders over a period of four years, CHPE’s investors have found a way to streamline compliance with multiple regulations, expedite permitting, and ultimately save money.

The U.S. needs to resolve the state and federal regulatory issues that make siting power lines and recovering the cost of grid investments prohibitively difficult. Our interconnected grid system can no longer be regulated as it was a century ago, when each utility operated its own power lines. To manage a regional system, we’re going to need regional coordination and authority that, in limited situations, supersedes that of the states. Until this type of legislative fix is made, let’s hope that CHPE and other equally creative projects are able to thread that needle.