Overview
Thirty-six states have enacted laws requiring electric utilities to supply between 10% and 33% of their electric energy from renewable or alternative energy sources (variously defined). Congress is considering a law requiring that 15% of all electric energy be supplied from renewable sources (with higher state requirements permitted). These "renewable portfolio standard" (RPS) statutes are already responsible for billions of dollars of investment in alternative energy, primarily electricity from wind. Yet the country is nowhere near even the low end of the range required by these laws, and will be unable to achieve the levels of renewable power use they contemplate without significant investments in the interstate transmission grid.
For two decades, electric industry experts have been warning that the industry is not investing sufficiently in new transmission assets to keep up with growing demand and to accommodate new uses of the bulk power system in a competitive market. As a result, Congress enacted provisions in the 2005 Energy Policy Act giving the Federal Energy Regulatory Commission additional authority to site transmission lines within national interest electric transmission corridors designated by the Department of Energy, and directing the FERC to promulgate rules offering rate incentives to public utilities that invest in new transmission facilities. See Energy Policy Act of 2005, Pub. L. No. 109-58, § 368(c), 119 Stat. 727-28 (2005), codified at 42 U.S.C. 15926(c) (2006) and 16 U.S.C. 824s (2006); Promoting Transmission Investment Through Pricing Reform, Order No. 679, 71 Fed. Reg. 43,294 (July 31, 2006), FERC Stats. & Regs. ¶ 31,222 (2006); order on reh'g, Order No. 679-A, 72 Fed. Reg. 1152 (Jan. 10, 2007), FERC Stats. & Regs. ¶ 31,236 (2006); reh'g denied, 119 FERC ¶ 61,062 (2007), appeal dismissed sub nom., American Pub. Power Ass'n v. FERC, No. 07-1050 (D.C. Cir. May 14, 2007).
Investment in new transmission facilities has increased substantially since 2005. However, even those industry experts who were calling for greater transmission investment around the turn of the century, as well as Congress in 2005, did not recognize the enormous additional investment that would be required for the country to replace a significant portion of its fossil fuel-fired electric generation fleet with electricity generated from renewable sources. Wind and other renewable sources are typically sited in remote locations, and their output must be delivered to distant load centers. They are also more widely dispersed than existing central-station electric-generating plants, requiring the construction of "collector" systems to bring power to high-capacity trunk lines. The dispatch of large amounts of wind and solar generation also causes changes in the flow of power on the electric grid (causing new stresses on the system) and creates new reliability issues for system operators because the output is variable and therefore less secure than the output of nuclear and fossil fuel-fired generating facilities.
Consequently, delivery of the output of renewable resources to load under a 15% RPS would require a massive ($100 billion or more) investment in new transmission facilities, and the required investment increases (not necessarily proportionally) with the level of the RPS requirement. Someone must pay for all this transmission, and the debate over responsibility for these costs has been raging for several years. The FERC, which has jurisdiction over most interstate transmission facilities, is the agency responsible for making these decisions. New York v. FERC, 535 U.S. 1 (2002).
The FERC generally has favored spreading the costs of large interstate transmission facilities evenly across broad geographic areas (known as cost socialization) to reduce the impact of recovering this investment on individual rates. The FERC reasons that a stronger transmission network benefits all electric consumers because it supports public policy goals like renewable development and enhances overall system reliability. It further argues that, while a particular line may benefit one set of customers more than another, the primary beneficiaries of later lines will be different, and over time the costs and benefits will roughly balance out. The FERC also believes that the beneficiaries of each transmission project may not be readily identifiable, are very difficult to quantify and will change over time.
The FERC is therefore concerned that cost-allocation rules that depend on identifying beneficiaries and then quantifying the relative benefits will necessarily be difficult to administer and likely produce substantial litigation, making it difficult to approve transmission projects and potentially bringing the entire policy enterprise to a standstill. The FERC's critics claim that, regardless of these concerns, electric consumers should not be required to bear the cost of transmission lines constructed to benefit others. They point to long-standing precedents endorsing "beneficiary pays" principles in setting regulated electric rates.
Whether or not the FERC's viewpoint is correct, the courts have made it difficult for the FERC to proceed in its preferred manner. In Illinois Commerce Comm'n v. FERC, 576 F.3d 470 (7th Cir. 2009), the U.S. Court of Appeals for the 7th Circuit, in a decision written by Judge Richard Posner, held that the FERC cannot simply spread the costs of major transmission lines across regions without evidence showing that the costs assigned to various entities are at least "roughly commensurate" with the benefits that those entities will receive. Although the decision gives the FERC the flexibility to adopt "rough justice" cost-allocation rules, it appears to prohibit the FERC from relying solely on the policy justifications described above for socializing the costs of transmission.
In a recent notice of proposed rule-making, the FERC has proposed that those responsible for transmission planning in each region should present their preferred cost-allocation options, leaving for itself the role of backstop arbitrator if stakeholders are unable to reach agreement on their own cost-allocation rules. Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities, Notice of Proposed Rulemaking, 131 FERC ¶ 61,253 (2010). The same debate over responsibility for transmission investment costs has played out in Congress in connection with proposed bills that would grant the FERC broader authority to oversee expansion of the interstate transmission system. Peter Behr, "Battle Lines Harden Over New Transmission Policy for Renewables," N.Y. Times, Feb. 26, 2010; Joel Kirkland & Tom Tiernan, "Corker Amendment on Transmission Cost Allocation Throws Wrench into Senate Bill," Inside FERC, May 18, 2009.
REGIONAL DIFFERENCES
Significant regional differences also exist regarding the appropriate size and configuration of the required transmission buildout for renewable power. These disputes center around whether individual states or subregions can rely primarily on local sources of renewable power as opposed to supporting investments in high-capacity, long-haul transmission lines designed to bring large quantities of power from regions rich in wind and solar resources. No serious studies have been performed comparing the total cost of meeting RPS requirements based on these alternative scenarios, and any such studies are likely to be highly controversial.
Many states view the development of renewable power within their boundaries as an important source of local jobs (as well as pride). They are therefore averse to supporting investments in transmission lines in other states to bring remotely produced renewable power into their states, in lieu of exploiting all of the renewable energy potential that is close to home (and that might reduce but not eliminate the need for new transmission). Some states' RPS laws have directed that RPS requirements be met wholly or in large part by in-state resources, a feature of these laws that appears to be susceptible to challenge under the commerce clause.
The FERC's recent notice of proposed rule-making on transmission planning and cost allocation represents an effort by the FERC to grapple with this issue. The FERC proposes to require each region to engage in regional transmission planning, producing annual plans for the expansion of the transmission system to meet reliability requirements, improve the efficiency of electric power production and meet public policy goals (which include satisfying RPS requirements). The FERC would further require all regions to engage in "interregional" transmission planning with their neighboring regions to move development of the interstate grid beyond the balkanized planning process that exists today. The rule would make the FERC the arbiter of disputes over these plans.
The FERC's proposal represents a creative approach to resolving a thorny problem that, like many energy policy issues, pits different regions of the country against each other. However, the scope of the FERC's authority over transmission planning is uncertain. The Federal Power Act, from which the FERC derives its authority, does not expressly give the FERC authority over transmission planning, and the courts have not addressed this issue. The states have traditionally taken the lead in this area; for example, "integrated resource planning" that weighs the trade-offs among investments in new generation, demand reductions and investments in new transmission is a common feature of many states' regulatory programs.
From the standpoint of those who support a buildout of the interstate grid, the FERC's authority over the siting of transmission facilities is clearly deficient. As noted above, the FERC was recently granted limited "backstop" authority to site transmission lines within national interest electric transmission corridors established by the Department of Energy. The 4th Circuit, however, recently held that this authority does not apply in circumstances in which state siting authorities have rejected a transmission proposal. Piedmont Envtl. Council v. FERC, 558 F.3d 304 (4th Cir. 2009), cert. denied, 130 S. Ct. 1138 (2010). This decision, baffling to many, has virtually emasculated the limited siting authority granted to the FERC in 2005, and proposals to override the court's decision are pending in Congress.
The uncertain allocation of transmission authority between the FERC and the states is a vestige of a federal regulatory regime that was created during the 1930s, when the supply of electric power was predominantly a local matter and the interstate electric system was in its early development. Although amendments to federal law in this area have expanded federal authority to some degree since that time, the statutory scheme arguably has not kept pace with all of the changes in technology that have produced a fully integrated interstate electric system. In some instances, Congress has been unable to establish federal authority in areas that appear ripe for common supervision because of regional policy differences. Federal law that would expand the FERC's authority in the transmission arena is bottled up in Congress, and it remains to be seen whether the FERC will be able to exert sufficient authority under existing law to accomplish the major expansion of the interstate grid that is required to efficiently integrate renewable power to the extent required by existing state RPS laws.
The bottom line is that potential investors in transmission assets face considerable legal and regulatory uncertainty, and the ability to navigate these legal vagaries is essential to getting projects built. Many investors have successfully navigated these waters by developing projects that have broad appeal and by creating cost-recovery models that accommodate both federal and state interests. It remains to be seen, however, whether existing law is sufficient to accomplish the goals of those who support RPS requirements at the levels indicated by most existing RPS statutes.
This article was originally published in the October 25, 2010 issue of National Law Journal.
