Although Congress in the 2005 Energy Policy Act tried to end the balkanization of authority over the nation’s high-voltage interstate transmission system, and attract new investment in it, that attempt has failed. Now, two new reports from the conservative Manhattan Institute have proposed strengthening the federal government’s authority to site transmission, while rejecting the notion that the government should finance transmission projects.

Siting New Transmission Lines

Examining “Regulatory Barriers to a National Electricity Grid,” University of Texas business law educator Drew Thornley notes that the nation’s three independent power networks—the Eastern Interconnection, the Western Interconnection, and the Electric Reliability Council of Texas—constitute “a sprawling and every-growing network of technology that has developed organically, in bits and pieces, over decades.” After the U.S. highway system, the transmission and distribution grid “is the largest physical structure in the United States.”

Rationalizing and expanding the grid to serve the national load, which includes increasing amounts of power from remote renewable generating sources, says Thornley, faces serious obstacles. Failure to overcome them means that “new generating capacity, for which there is no shortage of investment capital, will not be developed if the generators cannot efficiently ship their power to the marketplace.”

The obstacles, in Thornley’s formulation, are not a result of a lack of technology. “Rather,” he argues, “the obstacle is regulatory—both the actual regulations governing the planning, siting, and financing of infrastructure, and the highly fragmented nature of the regulatory regime.” Congress tried to address this in the 2005 law, notes Thornley, giving the Federal Energy Regulatory Commission (FERC) “back-stop” authority to site interstate transmission lines in Department of Energy (DOE)–designated “National Interest Electric Transmission Corridors” if states fail to act on the lines.

That hasn’t worked. The DOE has designed only two corridors in five years. In January 2010, the federal courts, including the U.S. Supreme Court, adopted a limited scope for FERC, ruling that state rejection of a power line trumps the federal interest. What to do? Thornley advocates that Congress come back to the issue and make it clear that FERC reigns supreme. He points to failed 2009 legislation offered by Sen. Jeff Bingaman (D, N.M.), the American Clean Energy Leadership Act, which “would preclude wrong-headed guessing by the courts.” At the same time, said Thornley, the law should protect “local interests.” Failing to do so, he said, “is, politically speaking, a nonstarter,” demonstrated by the lack of congressional interest in Bingaman’s bill.

As part of a new national policy concerning the siting of interstate transmission lines, Thornley says policy should not favor one generating technology over another, but should be neutral. “Devoting new transmission solely to certain energy sources—such as wind—would leave expensive new transmission lines underutilized and discourage the building of other forms of power generation that are indispensable elements of the overall energy equation. By the same token, the wide disparities in the tax treatment of investments in various energy sources should be narrowed.”

Paying for New Transmission Lines

In a second Manhattan Institute paper, Gilbert Metcalf of Tufts University looks at “Financing a National Transmission Grid: What Are the Issues?” In a technically dense argument, the issues that economist Metcalf identifies are largely conceptual: “anticipatory network builds” and the ever-vexing question of cost allocation. "Anticipatory network builds" refers to a discontinuity between the staged development of generation and the economies of scale in extending transmission networks. New wind capacity, for example, likely will take place in stages in particular areas. But the most efficient way to build transmission is all at once, not incrementally, to match the developing capacity. “Who bears the costs of the network expansion in the years before full generation build-out occurs?” he asks. That’s not an easy question to answer.

"Cost allocation" refers to the long-standing question of who pays for new or upgraded transmission, those who specifically benefit or everybody on the network. Electric industry factions have been warring over cost allocation for years, while needed transmission projects fail to make the transmission from drafting paper to digging dirt.

On the issue of network build, Metcalf notes that some advocate federal financing of transmission to cut through the complexity. If Uncle Sam pays, the investment conundrum is moot. The Western Governors Association in 2009 proposed a federal financing scheme to bring large amounts of, no surprise here, western renewable energy to more populous markets. Metcalf argues that “the focus on federal funding for grid improvements is misplaced. There is no evidence that the private sector is incapable of raising the funds needed for critical investment, provided a rationalized regulatory structure is put into place.” By a rational regulatory structure, Metcalf means largely what Thornley advocates: much stronger federal preemption in transmission siting disputes. “Federal preemption of siting,” Metcalf writes, “may be necessary to prevent state-level holdups, but it must be done in a way that respects the federal nature of the U.S. political system.”

As for cost allocation, Metcalf is agnostic. “The debate over the relative merits of allocating costs to beneficiaries as against socializing them is, in large measure, counterproductive. The sums involved are simply not great enough in the overall scheme. Moreover, it is seldom possible to establish a bright line between cases where beneficiary-pays principles should apply and those where cost-socialization rules should.” Whichever approach applies, he argues, “It is important, however, to design cost-allocation rules that do not place merchant transmission lines at a competitive disadvantage in cases where those lines may be cost-effective.”

—Kennedy Maize is MANAGING POWER’s executive editor.