For Grid Expansion, Think “Subregionally”

There are two extremes in how new lines can be planned and paid for. One extreme would be to use federal authority to plan transmission for very large regions, such as the entire eastern and western part of the country, and recover costs from all electricity customers in these regions.

This approach is often supported by groups emphasizing that large but distant renewable power projects should be integrated into the grid quickly through large transmission lines that span half of the nation. The other extreme is that planning and cost recovery should begin at the level of individual states or utilities and that the cost of each new line should be allocated either directly to those who trigger the need for the new line, such as renewable generators, or be recovered from electric customers solely in proportion to “measurable” benefits.

In our view, the best approach is a compromise between these extremes. Like the highway system, the transmission grid is a public good that provides many benefits to many people over broad areas and long timeframes. While proper cost recovery should always be based on a reasonable link between allocated costs and benefits received, strict formulaic approaches are counter-productive. The benefits of many transmission projects are broad in scope (i.e., ranging from fuel cost savings to regional reliability to economic development), wide-spread geographically, diverse in their effects on individual market participants, and occur over a long period of time (i.e., several decades). Given the interstate nature of the grid and its importance to achieving policy goals such as reducing carbon emissions and promoting energy independence, attempts to quantify these benefits within any one state or specific groups of customers can be sufficiently uncertain so as to be of little practical value for use in a cost allocation formula.

At the same time, we agree that the most effective locus for both planning and cost allocation efforts is not a region as large as half the country. Rather, we believe planning and cost allocation needs to start within multi-state areas that tend to have similar energy resources, power systems and regulatory policies. These “subregions,” each spanning about five to ten states, are roughly the size of the portion of the grid that power system engineers analyze routinely for reliability purposes. They are also the appropriate size for carefully examining the role of energy efficiency, distributed generation and nearby power plants as alternatives to building new transmission. These subregions are politically manageable groups of states that can reach agreements on a reasonable timetable and that can strike agreements with adjacent subregions. As we see today, New England might make a deal with Eastern Canada, while California may agree on a line and cost allocations with its neighbors in the Pacific Northwest.

In our view, new federal policies should require subregional planning groups to produce plans that meet all applicable state and national goals, objectives and rules—including any future climate change limits and energy efficiency goals. They also should be required to cooperate with adjacent subregions. To make this work, federal laws and regulations need to nudge groups of states to band together and plan the grid in their areas, work with adjacent groups of states, and decide how to allocate the costs of grid expansion in their area. These groups of states would be required to produce a plan, but as long as it preserves reliability and meets state and federal laws and policies, the federal regulators should accept it.

We think that planning that starts at this subregional level is less controversial, and far more likely to succeed in getting the right amount of transmission built, than “top down” planning on a nationwide or large regional basis. When the benefits of inter-regional lines are strong, we believe they will become part of these sub-regional plans, as we have seen in the West already.

There should be no requirement that costs be allocated formulaically in proportion to benefits, nor do we favor requiring a strict “measurability” standard. However, good public policy does demand that a transmission plan and cost allocation adhere to three common-sense principles. First, it is important to compare costs against the overall benefits of transmission investments—some of which may only be judged qualitatively. The benefits of local economic development, improved national security, greater energy efficiency and environmental benefits, increased competition and higher reliability are all difficult to measure, yet very important. Other benefits can, and should, be quantified carefully.

Second, both the costs and benefits of added transmission and associated generation should be weighed against feasible alternatives. Transmission is only a part of the electric system; its costs and benefits can only be considered in the overall context. Finally, after the best set of projects is selected by the subregions, it is essential that the costs be allocated fairly. When the full range of transmission-related benefits are properly considered for a complete set of transmission plans, a fair allocation of costs will naturally follow the profile of the broad range of benefits transmission provides.

The good news is that building the transmission we need to meet our economic, reliability and climate goals is an eminently achievable goal. Both existing and new market participants stand ready to finance these investments. To get there, we need subregional and regional planning processes that consider the full range of transmission benefits and alternatives in context, with careful subregional evaluation and compromise in place of a strict reliance on benefits that can be precisely measured and allocated.

—The authors are economists with The Brattle Group. This commentary was originally published in The Energy Daily, a sister publication of COAL POWER.