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FERC Order 1000: Five Things You Need to Know

April 13, 2017
How it has changed the electric transmission business.

In July 2011, the Federal Energy Regulatory Commission (FERC) issued order 1000. The stated purpose was to increase regional transmission development by eliminating long-standing monopolies and create competition and incentives for innovative, cost-effective projects.

In FERC’s words: “Order 1000 will remove barriers to the development of transmission, promoting cost-effective planning and the fair allocation of costs for new transmission facilities. This enhanced transmission planning will provide a strong foundation for updating the grid to provide reliable transmission service as well as an opportunity to achieve goals that states and local authorities have set for lower emissions, demand-side resources and renewable energy.”

No question that the existing transmission infrastructure needs to be expanded to meet growing load and operational requirements. It also needs a facelift, or maybe major surgery. And many of the existing (incumbent) owners and operators have few incentives to take the first steps to major change. The power industry has a reputation (often justifiable) of resisting, or going it alone when it comes to system design and operation that can more readily incorporate renewable energy sources, load management and other progressive industry trends. We can all remember that initially most utilities resisted connections to any non-utility generation.  Over the last decade or so, industry stubbornness has started to disappear and many legacy transmission owners and operators have incorporated surprisingly innovative practices. Some of these changes, no doubt, are due to the nudge by earlier FERC actions. Certainly, a number were in progress before order 1000 was passed. In any case, in 2012, FERC was convinced that even more participants and competition were needed to optimize regional and interregional transmission capabilities.

And so, FERC 1000 was born. With the expected, awkward legalese generated by countless drafts in countless meetings, it’s no surprise that order 1000 has generated a little more heat than light. It’s still not clear, after half a decade, how exactly the order will impact the industry.

On one hand, few of the industry’s concerns about the order have failed to materialize. On the other hand, it’s not all that clear that FERC 1000 has directly accomplished much either. But the order provides a road to where the industry generally has conceded it needs to go. And, as even more motivation to keep moving, there’s the continuing reminder that FERC can step in with more legislation should the industry not move fast enough in the ‘right’ direction.

Here are five FERC 1000 factoids and points to hold onto:

1. FERC 1000 was needed: Seventy percent of electric transmission lines in the US are over 25 years These lines were primarily intended to connect state load centers to major state generation. Usually the generation-transmission network was planned, built and operated by one or several utilities which received the operational and monetary benefits.

However, the legacy system isn’t designed to meet many new demands, such as greater adoption of renewable and other low/no inertial generation sources, growing numbers of distributed generation resources, and the need for greater resilience. New transmission needs to be built and old ones refurbished. FERC 1000 intends to make it happen.

2. FERC 1000 increases participation in regional transmission planning: The order requires transmission planning on a regional and interregional basis. Each transmission provider must participate in a regional process based on regional transmission needs, rather than just those of an individual company.

For example, a regional transmission operator (RTO) may be planning a major transmission upgrade to increase capacity and reliability. There may be other regional entities, such as a wind developer, who would benefit from the added capacity by using it to wheel wind farm power to spot markets. Or a load consolidator might have an alternative using commercial customer load management to defer building extra transmission capacity. The developer and the consolidator could require their requirements and alternatives to be evaluated prior to any expansion of the transmission capacity.

FERC 1000 also requires coordination and joint planning for projects which interconnect one region to another. And regional projects which provide interregional benefits are to be considered for joint evaluation.

3. Right of First Refusal is eliminated– Under FERC 1000 regulation, no utility, Regional Transmission Organization (RTO), Independent System Operator (ISO) or other entity solely “owns” the right to construct and/or operate transmission facilities. Any qualified entity, private or public, can bid on construction and/or services.

As predicted, this was the most controversial provision of the order. What constitutes l qualified bidder? Are they going to even be around for the 20, 30, or even 40-year life of the project? Will we have “two people and a laptop”, heavily leveraged entrepreneurs who most likely won’t stay the course? After all, the transmission system isn’t suitable for Silicon Valley type investment (although some ask “Why not?”).

In our example above, just about any entity which meets the qualifications (as specified in the regional plan approved by FERC) could bid on the transmission expansion project (or any alternatives). A private construction company, a regional investor owned utility. Even an RTO from another region.

4. Pay to play – Those who benefit help pay the costs. FERC 1000 requires that a regional planning process be established that allocates transmission construction costs to regional entities roughly proportional to the benefit.

In the example, the wind developer would be required to pay some part of the construction costs and possibly some of the ongoing maintenance and operation costs. It’s certainly not clear what costs the load consolidator would occur. Obviously, the devil’s in the details and that’s why FERC requires each region to have a cost allocation plan in place.

5. New Opportunities – Because regional transmission is no longer a “natural monopoly” by incumbent owners and operators, RTOs from other regions may have opportunities to come in and bid against regional entities. After all, their qualifications and stability are well established.

What have been the impacts of FERC 1000 on the electric power industry? So far there have been no projects built and operated under the order. A 2016 FERC staff report on progress of transmission metrics and initial results of FERC 1000 stated “It is difficult to assess whether the industry is investing in sufficient transmission infrastructure to meet the nation’s needs and whether the investments made are more efficient or cost-effective.”

The positive side is that it’s only been five years since the order was created and there is a slowly growing number of successful competitive bids, particularly in California.

It’s just too early to tell whether the order will meet the goals it was born to accomplish. After all, electric transmission has been considered a natural monopoly, the antithesis of competition, for over 100 years.  

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