Will Stars Align for Transmission Policy in 2009?

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.

The Siting Quagmire Persists

There’s been no success yet in getting the second element into position — siting transmission lines that no one wants to see. The struggle between states and the federal government for control of siting led to the compromise in EPAct that provided FERC "backstop" siting authority if the states refused to site critical facilities. This law was all but emasculated by a recent court decision, and only one utility has so far even attempted to initiate the FERC siting process. Even with potential investors on board, siting uncertainties remain a major impediment to getting steel in the ground.

Renewables May Bridge the Political Gap

The events of 2008 changed the political landscape. The oil price shocks and the image of former President Bush begging Saudi Arabia to pump faster seem to have created a broad national consensus, this time with legs, that America must be more energy self-sufficient. At the same time, consensus seems to have reached a tipping point that something significant needs to be done to reduce human impact on the climate. We now have an activist president, with a Congress of the same party, for whom solving both energy and climate issues is a top priority.

A widely recognized solution to both the energy and climate challenges is increased use of renewable energy resources, and enhanced interest in renewables may finally force Congress to resolve the siting dilemma to enable power from regions with abundant wind and solar resources to reach load centers. This issue has led to sightings of strange bedfellows. Republican oil maverick Boone Pickens now cavorts with Nancy Pelosi and Harry Reid to promote transmission line construction, and national trade associations that often disagree on electric issues jointly advocate strengthening the federal government’s role in transmission siting.

So far in 2009, a plethora of new proposals, studies, and reports have been released, and legislation has been introduced, addressing the urgent need to get "green power" lines built. This consensus for action may finally force states to lessen their resistance to a greater federal role in siting.

The Allocation Issue

Still to be answered is the question of who pays for new transmission lines. Spread over the broadest rate base, the cost of the new facilities would not be a significant part of the overall cost of power. However, ratepayers living between the resource and load centers question why they should pay more so that electrons can zip across their state, when they see no benefit. This issue raises the question of whether the costs should be allocated to those who are "responsible" for their incurrence or whether everyone should pay for new lines because they benefit the whole nation. Although important, aligning this element with the others will likely require resolution through compromises, and the resolution may vary by project and region.

Thus, 2009 may finally be the year that prospective transmission builders get the returns and financial flexibility they need to make projects work — as well as clear rules on how to get lines sited and paid for.
—Brian R. Gish ([email protected]) is of counsel in Davis Wright Tremaine’s Energy Practice Group.