Benjamin Dierker is the executive director of the Alliance for Innovation and Infrastructure.
There are two critically dependent energy problems soon coming to a head, and the outcome will define not only the economy but the environment for generations. Those are the increasing demand for electricity, which includes continued movement toward renewables and electrification, and the physical infrastructure needed to bring that power to users. As much as a doubling of transmission infrastructure capacity is necessary within the next 20 years, while the average time to complete only a single high-voltage transmission project can currently take up to a decade.
On top of that, critical actions by the Federal Energy Regulatory Commission and state legislatures may have an outsized impact on whether we move toward increased efficiency in infrastructure building or add further delays to the project timelines. That issue involves debate over the transmission building process, and in particular, who gets to build new infrastructure.
Debate remains over the merits of state-level/federal rights of first refusal, or ROFR, for incumbent transmission utilities or more open competitive bidding, where incumbent and independent transmission developers alike submit dozens of proposals for transmission infrastructure to meet identified needs. While past reform was intended to save money and smooth out cost allocation, it has increased project timelines, and on the whole does not save money. A new Aii report reviews the decade-long stakeholder battle and highlights the criticality of time in assessing infrastructure planning and cost allocation reforms.
Papers from various sources in the past decade have argued for and against a return to ROFR. Proponents of competition have argued that the reforms did not go far enough in embracing competitive markets, while supporters of ROFR have argued that competition has not saved money and has slowed down the transmission process. Ultimately neither of these arguments were determinative for FERC, which recently passed Order No. 1920. The order, issued in May, contains a limited reintroduction of a federal ROFR, but also contains other reforms that may favor competition.
The stakeholder debate over the costs and benefits of competition and ROFR models continues today. While FERC reforms center on planning and cost allocation — exactly which parties pay for the infrastructure and how much of the final costs can be passed to ratepayers — the ultimate project cost may be determined by the process that governs planning and selection of projects. Pro-competition stakeholders argue solicitations can lead to substantial cost savings, although this finding came from a report penned before any of the analyzed projects were completed. Additionally, because of extensive time commitment of a transmission project and the inconsistent availability of data, conducting high-quality analyses from a variety of projects is difficult and easily influenced by outliers.
A critical report by an opposing stakeholder group argued not only that the cost savings dissipated in the face of final project costs years later, but that competitive bidding actually led to cost overruns. While the competition-focused report argued incumbents lead to significant cost escalations themselves, the ROFR literature effectively argues that competition requires more time, and time leads to additional costs. The most recent report emphasizes this point, as the limited data show that within the competitive process, both incumbent and independent developers achieved similar cost and timing performance.
This suggests that incumbents perform as well as independent developers and that without participating in competitive bidding, they could deliver projects more quickly. Moreover, time leads to two particular kinds of costs: direct project costs and indirect regional costs.
The solicitation process is “complex, expensive, and time consuming,” according to an MIT Center for Energy and Environmental Policy Research report, taking over a year on average to complete. That means a need has been identified, but no progress is being made to begin a project, because the project developer hasn’t been selected for over a year. When considering the decade it takes to complete major transmission developments, this added delay has clear economic consequences.
The direct costs are likely to increase for a few key reasons. First, competitive bidding can lead to slimmer proposals to keep costs lower to win bids. These are often revised up throughout the project’s development. Second, outside developers entering a new region may fail to adequately incorporate regional factors that may lead to added time to revise or adjust plans and later cost escalations. Experts note that on this topic, “incumbents may have inherent advantages.” Finally, by taking up to a year to complete the bidding and selection process, market conditions can change. Some of those may be inflation or market demand but could include supply chain disruptions or policy differences by the time the project is selected and building begins. Such changes often result in higher costs not planned for in the winning bid.
Those direct costs are reflected in the final project bill and what ratepayers see incorporated into their utility bills. Even one added year can have a real impact on this cost.
The indirect costs are borne by the wider region or economy and may not be as obvious. They are not necessarily ratepayer issues where cost allocation is primarily focused, but they nevertheless impact ratepayers and others in the region. These costs include unrealized gains and deadweight loss as the awaited power project is not yet in service. As businesses and consumers wait for power to be connected, they are unable to start ventures, make critical investments or access power efficiently. These each alter a region’s economic health.
The process FERC and individual states set through future reforms will be determinative in whether there is added time to an already long transmission development timeline. That time will have a real cost. If policymakers are too narrowly focused on particular types of cost, they may miss how other costs manifest.
