May 1, 2009

Will Stars Align for Transmission Policy in 2009?

Brian R. Gish

In the 1990s, alarm bells were sounded because the construction of electric transmission infrastructure was not keeping pace with the United States’ rapidly increasing electric demand. More than 10 years later, despite considerable debate and the passage of new legislation, we continue to search for ways to get transmission built. However, it now looks as if 2009 may the year in which the stars finally align to fix the transmission system.

Three elements need to be aligned: finding investors who can see sufficient financial reward for undertaking the long and painful process of obtaining siting permits; fixing the long and painful siting process itself; and deciding who is ultimately going to pay for the new multi-billion-dollar facilities.

Investors Are Stepping Up

Congress attempted to resolve some of the transmission issues in the Energy Policy Act of 2005 (EPAct). One provision focused on investment by instructing the Federal Energy Regulatory Commission (FERC) to offer financial incentives for investments in needed transmission. Since 2006, FERC has been issuing orders under this provision, guaranteeing transmission investors higher returns on equity as well as recovery of sunk costs if a transmission project could not be completed.

These orders have authorized incentives for more than two dozen projects encompassing thousands of miles of new lines. And now, the financial market meltdown of 2008 makes regulated returns of 12% look respectable. Even without guaranteed returns, some entities are proposing to build under a merchant approach, recently made more flexible by FERC, where the investor accepts all the risk of building in the hopes of even higher market returns. Investor interest is evidenced by the number of proposals under consideration, including 3,000 miles of lines between the Dakotas and Chicago, a pair of 1,000-mile lines between Montana/Wyoming and Las Vegas, a 1,000-mile line between British Columbia and California, a 230-mile line between Virginia and New Jersey, and hundreds of miles of other lines throughout the country.