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Show Notes
The Federal Energy Regulatory Commission (FERC) is poised to pass new policy that will expand regional transmission capacity, but how impactful will its new rule be? In this episode, grid policy expert Rob Gramlich gives the lay of the land.
Text transcript:
David Roberts
By now, it’s fairly well understood that the US badly needs more electricity transmission lines to keep up with the changing generation mix and growth in demand that will come with clean electrification. But new lines, especially the much-needed longer-distance regional lines, are being built at a snail’s pace. If the US is to hit its mid-century climate goals, transmission capacity expansion must radically accelerate.
Congress helped a little with money in the infrastructure bill, and the Biden administration helped by establishing a Grid Deployment Office inside the Department of Energy, but arguably the biggest opportunity for progress comes in the form of an upcoming rule by the Federal Energy Regulatory Commission (FERC).
It will beef up the commission’s existing rules on regional transmission planning, but exactly how much it will strengthen them depends on the final rule, expected early next year. Transmission advocates are urging FERC to pass a rule with reel teeth — including Senate Majority Leader Chuck Schumer, who sent the commission a letter with encouragement and suggestions in July.
Nobody knows more about grid policy than Rob Gramlich, founder and president of Grid Strategies, a policy analysis and strategy firm. He is executive director of the WATT Coalition, co-founded and used to run Americans for a Clean Energy Grid, serves as a board advisor to a half-dozen other groups, and has a long history in the industry, including a stint at FERC in the early 2000s.
I talked with Rob about the current state of affairs in transmission policy, the scope of FERC’s authority, and the details that matter in the coming rule. Don’t let the technical-sounding subject scare you off — this was a fun one, and incredibly clarifying.
Okay then, with no further ado, Rob Gramlich. Welcome to Volts. Thank you so much for coming.
Rob Gramlich
Thanks, David. Great to be here.
David Roberts
I am excited to talk about this. I know that perhaps FERC is not at the top of people's mind when they think about excitement and thrills, but I think people will see by the end of this why this is a very good time to tune in to what FERC's doing. So let's start here. I think we can assume for the purposes of this pod that Volts listeners understand the need for more transmission, specifically the need for more long-distance transmission for a bunch of reasons. We know that the resource mix is changing. We care more about renewables now.
They're located in different places. They're located not necessarily next to load. They're remote. We're going to double or triple the amount of electricity we're using in the coming years, because we're electrifying everything. So we need more transmission for that reason. We know that connecting up a wider geographical area makes the whole system more reliable, makes the whole system cheaper. Transmission is the wonder tool of energy. It makes everything better, and yet we are not building it. So back in the late 90s, FERC, the Federal Energy Regulatory Commission, which has jurisdiction over interstate transmission, released a series of orders.
So in the beginning, there were, just across the nation, just dozens and dozens of individual vertically integrated utilities, all of which were building their own transmission, more or less for their own areas. And so back in the late 90s, FERC saw this and many other people saw the need for more interregional transmission and issued a series of orders trying to kind of nudge things in that direction, doing, among other things, they created regional transmission operators and independent system operators, RTOs and ISOs, which were supposed to be regional organizations that did regional transmission planning. And there were others too, I think, going all the way up to 2011, there were other orders, basically like, "please friggin utilities, get together and start doing some planning, do some interregional planning." And yet, despite this series of orders, and despite the existence now of RTOs, we're still not building interregional transmission.
I mean, we're building it at a snail's pace and not necessarily where we need it, and certainly nothing close to the pace we need to be building at. So maybe let's just start here. Why, given the existence of RTOs, which are explicitly supposed to do this, is there still not adequate regional transportation planning? Maybe you could run through the three P's here. That's going to help kind of set us up for what's to come.
Rob Gramlich
Sure. Well, first of all, thanks for your help in communicating all that. So let's stipulate that the need for transmission is understood. And that's great that it is, because a few years ago it wasn't. But you've been helpful.
David Roberts
It does seem like that at least has sunk in, in the wider world.
Rob Gramlich
I think that's right. And of course, in recent years, it's been more sort of the climate-focused policymakers and community who have understood this, which is great, as they should, for the incredible clean energy need for transmission and climate benefit. But just suffice to say, it wasn't always such a democratically tilted issue. But that's a separate conversation we could get into. But, yeah, FERC has been, in the 90s, the early 2000s, had orders trying to beg, plead and borrow the industry to get going on regional transmission. And in fact, it goes even way back. I mean, the 1935 Federal Power Act itself has some language about the voluntary, encouraging the voluntary coordination of the systems.
And then there were actions in the pre-war and wartime to be able to produce the military assets and airplanes and everything by — we needed to increase the production basically out of the electric industry.
David Roberts
Yeah, it's a bummer. We decided to build this interstate road network basically for security purposes around then, and did not decide at the same time to do the same thing for transmission. It would have been a good move on our part.
Rob Gramlich
That's right. But there were actions by the predecessor to FERC, the Federal Power Commission, during those same years, though, trying to strengthen the connections, but it only went so far. And then it was really when the electric industry tried to restructure to get generation competition in the 90s that it started pushing harder. There was a 1993 regional transmission group RTG policy statement, and then they said, well, that's not enough. And then they had Order 888 for open access transmission. That included a push for voluntary creation of independent system operators. That's where that term really came into practice.
It was encouraged and voluntary. And then the commission tried in 1999 to require participation in the regional transmission organizations (RTOs). That's where that term was sort of defined. But Chairman Hoecker, at that time, couldn't quite get the votes to make that mandatory — so it was voluntary. And then I was part of — my full-time job was standard market design. I'm not embarrassed to say that one never made it to being even a rule because of a political backlash. Again, another story for another day. But that was at least strong encouragement. And then Order 890, when Republican Chairman Joe Kelliher came in, he had been on House Energy and Commerce and in the Bush administration, and he tried to require, well, he did require through Order 890, some strengthened planning requirements.
And then Chairman Jon Wellinghoff issued Order 1000 and the commission, of course, in 2011. And that also sort of went another step further. In this process, some of those orders were challenged in the courts. Then FERC's hand was actually strengthened after all of that because the court challenges upheld FERC's authority and said, "absolutely, you can require transmission planning." So FERC's role here has only been strengthened over the years in terms of the clarity of its legal authority. And yet, as you say, it hasn't really worked yet. So here we are at the end of 2023 with an agency that actually is in charge of this and has quite clearly been claimed by the courts to be the one entity that can really do this in a significant way.
And it's actually kind of exciting now, because look at this, we have this great proposed rule that Chairman Glick and the commission issued a year and a half ago —
David Roberts
Well, before we get to that, though, I want an explanation for why those previous ones didn't work. Like why aren't RTOs building these things?
Rob Gramlich
Yeah, there are probably a few reasons.
David Roberts
Yeah. In like 100 words or less. Because we can't get too bogged down in this, because I know this is a tar pit.
Rob Gramlich
I'll try to just give you a few. Look, I mean, one issue is incumbent generators don't necessarily want to enable new generation to come onto the grid. So we have these RTO entities, incumbent generation owners, whether they're part of a utility or independent, they are usually not the strongest supporters of new transmission. So that's a factor. And then those entities are active in FERC proceedings as well. That's one factor. Another factor: We had all this transmission collaboration happening in 2010 through 2013, and a bunch of transmission got built. We actually got a ton of new renewable energy connected to the grid a decade ago.
From these, I'm sure many of your listeners know about the multivalue projects in the Midwest and Texas competitive renewable energy zones. So there was a little bit of a renaissance then, but then it was very short lived, and it ended like ten years ago, it stopped. Some people say Order 1000 had some unintended consequences that stopped that. I think that's part of it. Also, the cost of solar dropped and the cost of gas dropped, so a lot of that transmission was more wind driven. And when you could do a lot of gas and solar, you didn't need quite as much transmission.
So I think that does factor as well. And then I just sort of think, like, inertia took over. People got used to going to regional transmission planning meetings and making sure nothing actually happened, and they got good at eating muffins and checking the compliance box, but then not actually doing anything. So, I think it's just ripe for a whole reshuffling. And that's what FERC can do.
David Roberts
Okay, so before we get to this FERC opportunity, let's at least give a little shout out to some movement lately, some policy wins. So in the Infrastructure Act, the Bipartisan Infrastructure Act, there's some money for transportation, which I think is nice but inadequate. And then there's this new Grid Development Office. Are those the two biggies, and how sort of like a big of a deal are those, relatively?
Rob Gramlich
Relatively, yeah, potentially over time. The Grid Deployment Office could be huge, and it's off to a great start. I will say the current team there and the current administration and Secretary Granholm are leading, I think, a very productive and promising exercise there.
David Roberts
Was that created by legislation, or was that just created by an executive action?
Rob Gramlich
Technically just an executive action by Secretary Granholm. She can set up offices, if she so chooses —
David Roberts
As an office within DOE.
Rob Gramlich
That's right, which — put this on your list of future policies. Let's actually formalize that in legislation. It would be nice to do that, but there was actually an attempt. But that's a longer story. But that office has financing tools, it has permitting tools, it has capabilities. They've been hiring like crazy, really good people, and that could really be a very helpful enabler of transmission, private sector investment. There's no shortage of capital that wants to invest in this sector, but it's just a morass trying to get projects done. So DOE has important tools. Many of them are now kind of all being consolidated in this Grid Deployment Office to enable transmission.
David Roberts
And what's the money in the Bipartisan Infrastructure Act?
Rob Gramlich
Right. Well, very little, unfortunately. I mean, there's like one really great provision called the Transmission Facilitation Program. Senator Cantwell introduced that, but it's a $2.5 billion program, and it's not technically a loan, but it's sort of like a loan. It does have to be paid back, and so it's not really that much money. It's intended to be a revolving fund, but $2.5 billion in the scheme of an industry that spends that every couple of months is not transformative.
David Roberts
And there was, at one point in the Build Back Better saga, a pretty hefty tax credit for transmission, which got stripped out at some point. That would have been serious money, right?
Rob Gramlich
That could have been serious money. It's scored at 13 billion. But who knows? The way tax credits work is if the industry really gets excited, it's uncapped. And more could have been done, so that could have been great. And it's so hard to figure out who pays for how much. Just starting to evolve into the three P's, planning, permitting and paying that paying part is, I think, the hardest, because it's a public good and everybody benefits some, so nobody wants to pay for it. And so that tax credit could have at least made that whole problem 30% easier by covering 30% of the investment cost.
David Roberts
Right. So then you're having to allocate 70% rather than having to allocate 100%. And we'll get into that cost allocation in a bit. So we've had some movement, but inadequate, and there is some legislative stuff that would be relatively easy and high impact. And maybe when we get through this FERC stuff, we can touch on that before we're done. But now, in terms of the tools Biden has to use here, well, not even Biden, really, since it's supposed to be independent. But in terms of federal tools, basically we're dealing with FERC. So before we jump into the proposed rule, let's just talk for a second about FERC.
As I understand it, there are supposed to be five commissioners, ideally. There are, in fact, four, and we're heading to three. So, make some sense of all that for us. Where are we with FERC in terms of the balance of commissioners?
Rob Gramlich
Yeah, that's right. There's supposed to be five, no more than three from one party. So over the years, it's typically been three-two, one direction or the other.
David Roberts
Right.
Rob Gramlich
And Chairman Glick, his term expired, and so he is off. And that seat is open. Commissioner Danly, his term ends, well, technically, June 30.
David Roberts
So, wait, Glick is gone, which left a two-two Republican-Democrat split. That's the current state of affairs?
Rob Gramlich
That's the current state of affairs, as we said. Yes, for, I guess, the entire year of 2023, it'll be two-two.
David Roberts
Right. And then Danly, who is a Republican, is stepping down when?
Rob Gramlich
That's right. So, yes, every year one seat opens because they're staggered five-year terms. So he will need to leave by the end of 2023 in a month or two.
David Roberts
Got it. Which will leave a two to one Democratic majority on FERC and those other two — we don't have to get into this, but what the hell is going on? Why is it taking so long to get new commissioners? Is it Joe Manchin? I'm just going to throw it out there. I'm just guessing. Is it Joe Manchin?
Rob Gramlich
Well, I mean, certainly he's the chair of the committee and he has strong preferences that he expressed both on existing commissioners and potential new commissioners. And the White House technically gets to — you know, the two of them have to agree, the president and Senator Manchin, but also the history and the tradition — the practice is sort of often one party will pair with the other party, so you'll do two together, and there's just been just a lack of activity. I'm not actually sure either party. I'm not sure the president or McConnell or Barrasso or Manchin. I'm not sure any of them are like, hustling or feel a need to hustle to get a lot done right away.
I think they all recognize, like in 2024, when you're down to three, then you really can start having problems. Like, you might not have a quorum just to get business done. Somebody might have a cousin who, one commissioner might have a cousin who works for a company, and they get recused from the case and you can't vote the order out, and it gets dicey like that. So just when situations like that arise, the Senate Energy Committee, knowing it's their responsibility to make sure business can get done at FERC, they'll get more active. So I do expect in early 2024 they will get active.
There seems to be a name that Manchin and the White House agree on. There could be a pairing. There could be somebody that McConnell and or Barrasso recommend from the Republican side. But I think everybody's kind of holding their cards close right now. There's not a lot of —
David Roberts
And that could take a while. So what's relevant for us here, I think, is if this rule is, the rule that we're about to talk about is advanced expeditiously, it could be voted on by a three-commissioner FERC, with a two to one Democratic majority, meaning it could be made good and strong and get through with Democratic votes.
Rob Gramlich
That's right. I mean, the order seems close to ready. They wanted to do interconnection first. We could talk about that, but that was a major undertaking, one of the biggest orders ever. And so Chairman Phillips had to sequence things one way or another. Couldn't do them all at once. So that happened first. They seem to be getting close to ready on this big planning rule. And so I think early in 2024 they'd be ready to do that. It will be a two to one at that point. But everybody in FERC world likes to not talk about it in partisan terms.
David Roberts
Of course, or pretending.
Rob Gramlich
Well, the proposal did issue as a unanimous bipartisan proposal. So the hope is that it would be a three to zero and it could be.
David Roberts
I mean, let's just say there's no obvious reason that this should be partisan at all. It's literally good for everyone, except maybe some utilities. It's good for society. Name your entity. Bipartisan would be nice. But should that fail, it could still get through. So tell us a little bit about this planning rule. It dates back to 2021. It was a Glick joint originally.
Rob Gramlich
That's right, yeah, so Chairman Glick and his team really led the development of it. The other commissioners were there, Commissioner Clements is the other Democrat on the commission who I don't think we mentioned yet, and she's very supportive of the rule. And then they had this extensive process with the states. That's part of why it's taken a lot of time, which is, I think, great and very helpful. But there's this incredibly extensive record of discussion with states on how this works through this joint federal-state task force. So it has been out there for now 18 months. And again, we had commissioners transition and a chair transition and other big orders that the commission had to get out, but I feel like it's ripe now and good and close to ready.
David Roberts
One other preface question. So I saw that Chuck Schumer, Senate Majority leader, wrote a letter to FERC recently acknowledging the importance of this rule and giving some recommendations for strengthening it, recommendations that, as far as I can tell, were lifted more or less straight from this report you wrote last year with recommendations, and we're going to go through some of those recommendations. But is it the case that the current order, as it currently exists does none of these things and that's why you're recommending all these things? Or so it's unclear on how strong the extant order is and how much of these recommendations — you know what I mean? Where is it now?
Rob Gramlich
Yeah. So many things are great about the order. It has all the right analysis, I think, and record evidence and support from a really vast majority of the industry, including utilities and consumer advocates and the whole range of stakeholders who care about these things. And the proposed rule is generally, I think, excellent. And I think Chairman Glick is going to be commended or should be commended for that, as well as the other commissioners. But there were a few things that somehow ended up a little bit weak in the proposal, and I don't think, accomplished what the commission thought it was trying to accomplish.
Now, there's a lot of cooks in that kitchen, and the commissioners don't talk about internal deliberations. So one can only on the outside kind of guess what happens on the inside. Where I used to be there walking up and down the hall trying to negotiate orders like this. But sometimes you can guess because the commissioners make public statements about what they like or dislike or what they would want to see in the final rule. But I thought that letter you mentioned from Senator Schumer did an excellent job of saying, "hey, here's a few things you really need to fix to make this thing do what you say it does."
David Roberts
Yes, let's walk through some of those. So there's sort of three buckets here of recommendations. One is about planning what to require in terms of interregional planning. There's some stuff about cost allocation, paying the planning and the paying — permitting, I think is separate and will have to be dealt with separately. And then there's stuff on basically making sure the process is cost-effective with a little bit more FERC oversight. So we're going to walk through all those. So in terms of interregional planning, there are four specific recommendations about what to require of the planning process. So let's walk through those.
The first is just maybe do your planning based on what you actually think is going to happen to the electricity system, forward looking rather than backward looking. Just tell us a little bit about that.
Rob Gramlich
Yeah, that's right. And by the way, the rule really is more intra-regional than interregional. They're going to do, hopefully, they'll do interregional separate, but they bit off the intra-regional.
David Roberts
Oh, so this is planning within regions.
Rob Gramlich
Right. As a first step. But honestly, everything in here could equally be applied. You could just a year later come through with a redline — global search and replace intra with inter. And it's all the same, things would work. But let's focus on the regional. And these are wide regions of the country, you know, the whole Midwest, the whole mid-Atlantic. The west is in three areas, but could be one merged together. There's discussion about that. But at any rate, yeah, the planning requirements. And again, the courts have said, FERC, you've got very strong authority to require planning practices, whether you can actually direct the outcome, like plan for this or that outcome.
That's sort of untested. But in terms of planning methodologies, absolutely FERC, go for it. So they issued these planning methodologies and the first one, as you say, is essentially plan for the anticipated future resource mix. If you're going to plan —
David Roberts
I had to read this section a couple of times. I'm like, "they're not doing that?!" What else would you do?
Rob Gramlich
You would think that if there are these organizations around the country with regional planning in the name of the organization and in their charter of what they're supposed to do, as well as departments called regional planning and people with regional transmission planning in their title, you would think you would be forgiven if you thought, "oh, these people plan," which by any definition means like preparing for the anticipated future.
David Roberts
Right, right.
Rob Gramlich
Well, that is not actually what happens. So in most of the country, they really don't do any kind of long term, they don't do an estimate of what the future resource mix is going to be. And I'm talking about load and generation and retirements and additions and all these sort of macro categories of the things that change on a transmission system. And by the way, it's not like saying, "oh well, the president wants to decarbonize the system by such and such amount, by such and such a date, therefore everybody do that." No, it's not even saying that.
It's just saying "regional planner, you and your region anticipate these changes, these additions, these subtractions, these load changes, and then plan for that."
David Roberts
So the critique is not even that your forecasts are inadequate or that your forecasts and modeling are flawed in some way, but just that they're literally just not —
Rob Gramlich
ONot doing it.
David Roberts
doing at all. Right, that's a little crazy. Seems like an entirely reasonable request that when you're planning, you anticipate what's to come. And especially, I think this is implied, but let's just state it, because we're in a period of incredibly large scale rapid change in that very system, in what sources are coming online and retirements are accelerating all this growing load because of electrification, et cetera, et cetera.
So it's just crazy that your regional planning involves no regional planning.
Rob Gramlich
Exactly right. And that's a striking thing about the official record evidence in this case of like so many, I mean, scores of utilities in states came in and say, "yeah, we basically think all these changes are happening and we need to plan for them." And those entities, states and utilities and others come from a variety of political perspectives about whether they want those changes to be happening faster or slower. But they all kind of acknowledge some baseline. And of course I'm sure in the details their estimates are different, but they're all pretty much in the ballpark and directionally all entirely consistent, that, for example, there's just going to be dramatic wind and solar and storage growth in every region, and that's when it's in the interconnection queue and every other evidence of what the changes are going to be.
So there was a remarkable alignment in the record about the changes happening that need to be planned for. And so, yes, first and foremost, if your listeners have to shut off the podcast now, please don't. But that's the number one, just very basic thing that this rule would require.
David Roberts
Number one requirement for planning process involve planning.
Rob Gramlich
Right. Plan for the future, right. It seems radical, but yeah. Planning for the past — no, no, don't plan for the past — we're planning for the future. Radical idea.
David Roberts
So then number two is consider all the benefits holistically. To say a little bit about sort of like what current practice is and what that would mean.
Rob Gramlich
Transmission has multiple benefits. There's reliability, resilience. It reduces congestion on the grid, which is sort of the day to day cost that consumers have to pay when you have to ramp up expensive generators because of transmission constraints —
David Roberts
Or curtail solar.
Rob Gramlich
Or curtail wind and solar, absolutely. And it's very hard to often separate out all these benefits. I mean, you build transmission for one purpose and it has all these other benefits for other purposes. Well, this is where the proposed rule got kind of weak. It sort of, here's all these benefits. But then it kind of goes back through and says, "well, those are sort of optional.
You can look at this one or that one. It's sort of up to you." Well, the problem with that is that's not a regulatory requirement. That's just giving — based on the power structure of a region. If they choose not to do any of this stuff, it's giving them a get-out-of-jail-free card to not do this, to say, "well, we're just going to pick and choose our benefits." And what happens is it's like if you think of a really basic benefit cost analysis, if you're allowed to say, "well, I'm only going to consider one of the four or five or more types of benefits compared to all of the costs," you're almost guaranteed to not have the transmission lines pencil out.
David Roberts
Right.
Rob Gramlich
It's sort of like if you bought your car only for the basis of its benefit to drive to the grocery store, but not all the other reasons you use a car, you're probably not going to buy a car because it's not worth it just for that.
David Roberts
And also, let's just say there was nothing in place preventing them from considering these benefits. So telling them voluntarily, you may consider these benefits like, yeah, they could have been considering these benefits and they aren't. So clearly there's a reason they aren't, so clearly they need to be pushed to do it, not just allowed.
Rob Gramlich
Exactly. Right. So what's the point of a federal rule if it's just an encouragement to do what you're able to do before?
David Roberts
Right. So this would be a requirement that in those cost benefit analyses run on a particular transmission project, that all the benefits of the transmission project, including resilience, emission reductions, reliability, cost, et cetera, all be put on the benefit side of the ledger.
Rob Gramlich
Yes, that's right. Now, in the details, there are some issues. FERC didn't even go into a carbon benefit or any number of benefits you could get to that are sort of a little bit outside of normal FERC Federal Power Act jurisdiction. And without going too far into this, there's a little bit more that FERC can sort of allow and accept from regions as opposed to what it would require if it's doing a nationwide rule. So again, what I'm suggesting and what a lot of different clean energy and environmental groups suggested is very modest in terms of just doing the basics within traditional FERC regulatory domain about reliability, resilience, and congestion cost, traditional economic regulatory things that couldn't be misconstrued as making FERC be an environmental regulator for the country.
David Roberts
Right. So, require the basics and then maybe allow extras like emission reduction. So that's number two, consider all the benefits. Number one, plan. Number two, consider all benefits. Number three is when you are looking for solutions to congestion, etc., consider all the possible solutions. So a new transmission line is not the only possible solution to the problems solved by transmission lines. So, explain that one just a little bit.
Rob Gramlich
So, there are different technology options that are available today, which is great. There are grid enhancing technologies, and I know you had a recent podcast on that.
David Roberts
Volts listeners are familiar with these ways of getting more throughput from existing transmission.
Rob Gramlich
So, I recommend going there. And so those technologies were recommended. A little bit of back and forth about the exact list. Hopefully, that turns out in a good place to consider all those technologies. So that's kind of the category of like squeezing more out of the existing wires. And then another category is new wires. There's new types of conductors, high-performance conductors, I call them.
David Roberts
That's called reconductoring existing lines. That's what that's about?
Rob Gramlich
Yeah, that's one way to do it where you can just put a different wire on an existing tower, or you can take the towers out and put a different type of maybe bigger, heavier cables. You can have superconductors, you could have composite core. There are different opportunities for that. So there's conductors as well, and then more broadly, there are just other technology options. And so FERC proposed these, and I think various parties are just trying to make sure that the commission requires full consideration of these technologies, in part because, look, nobody wants to have to go to new rights of way when you don't need to.
David Roberts
You say maybe like from a social perspective, we don't necessarily want to do new rights of way because they're difficult and they take a long time. But it's worth saying here that the utilities, the reason this needs to be made mandatory is that the utilities make money by spending money. Right. This is something I come back to over and over again. Like from a utilities perspective, they get a big rate of return if they build a brand new transmission line, whereas some of these other technologies, I think, fall under kind of maintenance costs that they don't get a rate of return on.
So this is one of those areas where utilities probably prefer building more hardware when there are alternative solutions that could avoid the need to build that. Is that accurate?
Rob Gramlich
That is an issue. There are a lot of utilities that are doing a lot of great stuff on their system, but it's also true that this is a regulated monopoly industry. There's a reason we have economic regulators, and their job is to ensure that we get reliable service at affordable, just, and reasonable rates. And the reason we have this whole regulatory system is because the incentives are not aligned with consumers' interests if left unregulated. And so that's just sort of what regulators are supposed to be doing. And they're supposed to make sure, and they do this at the state level and the federal level, they're supposed to make sure that the right technology is deployed and it makes sense to get that reliable service at a reasonable rate.
So consumer interests are very persuasive and important at FERC on this. They want to make sure, particularly because a lot of these are very low-cost technologies. They want to make sure that these technologies are deployed in the right way at the right time. I think a lot of the folks communicating with FERC feel the same way. And again, from those who are concerned about land use have the same type of concern. They don't want to disturb previously undisturbed land with new rights of way if they don't have to. So this is where these technologies can really come in and help maximize what we get out of existing rights of way and existing transmission assets.
David Roberts
And so then the fourth, and this, I think, is a little bit more to wrap your head around. The fourth is that these organizations should select, rather than doing these cost-benefit analyses one at a time on proposed projects, FERC should require them to work on a portfolio and to do the cost-benefit analysis basically on the portfolio. So instead of choosing an individual project to maximize benefits, you're choosing the portfolio that maximizes net benefits. Is that accurate?
Rob Gramlich
Yeah, that's right. There are a lot of efficiencies there that can be uncovered when you look at all the transmission options and configurations together and find the right portfolio or the right suite of upgrades. There could be just a substation expansion or upgrade that solves a problem more efficiently than a new line would. Or when you put some technologies along with a substation here and reconductoring over there and a new line over there, the portfolio has a lot of efficiencies because it is a network. The whole thing is an integrated network. So treat it as a network, plan it as a network.
And so that's kind of another sort of best practice transmission planning feature that historically — I mean, if you ask the planning engineers from 50 years ago, when we actually planned big transmission before, they would say, "of course, we do that. How could you do it any other way?"
David Roberts
This is another thing that, like, "duh" —
Rob Gramlich
Right.
David Roberts
Okay, so to just summarize here in the planning portion of these recommendations of this upcoming rule number one, plan for the future actually forecast what's going to happen and plan for that. Number two, consider all the benefits, not just singular benefits, not just the benefits you pick and choose three, consider all possible solutions, not just new lines, but also new ways of getting more of existing lines. And then four, apply all this to portfolios rather than individual projects. So you want considering all benefits and all solutions to different portfolios so that you can maximize the aggregate benefits of this.
All of those, as you say, seem like things that are obvious and that anything going by the term regional planning would already be doing, but it is not happening. And so, FERC has an opportunity here to basically require RTOs to do this. So that's the big planning section. And that, I think, is the main event here. Those four alone, I think, would be transformative. But then we come to the second knot of the planning-paying-permitting Troika, which is cost allocation, which is a kind of unnecessarily technical term for just if you're going to build a regional transmission line that crosses boundaries from one utility to the next, from one state to the next, that crosses over all these lines, it is not obvious how to pay for it, or rather, who should pay for it.
Who should pay for these lines? Is it the people building them? The people who will benefit from them? And right now, the loose rule is roughly people should pay according to the amount of benefits they get from it. But this is not, like the rest of the process, working very well. So tell us a little bit about how FERC should be trying to tweak cost allocation to work better? And is part of this just by having a formula or some sort of cost allocation formula that can be applied to every project rather than kind of like a bespoke process for every line?
So just talk a little bit about cost allocation and how FERC's trying to solve it.
Rob Gramlich
The basic problem is, as you say, it's essentially a public good. Everybody benefits to some extent. And like with other public goods, classic public goods, like national defense or bridges and roads and public transportation, everybody would rather have the other guy pay for it and get to use it. And that's just natural. And that's why we have usually public financing right through our taxes, all of those things. Now, the electric industry is different, and it's generally a private industry, not public. And FERC isn't about to completely change that, nor is there really reason to. But we just have to figure out a way to allocate the costs in a fair way, just to make sure that sufficient infrastructure gets paid for so that it can be built.
So that's why we have this challenge called cost allocation and one of the three Ps, the paying part of the three P's. So FERC's main need here and proposal here is to make sure that a decision gets made. Okay. It sets up like a process at the regional basis where the states get a chance to weigh in and figure out a solution. And hopefully that leads to agreement on how to allocate the cost of a transmission plan. Maybe they'll decide to have one formula that stays in place for all time, or maybe they'll review it based on each plan every couple of years when it comes through.
But the risk now, if FERC doesn't clarify this in the final rule, is that if they don't agree, it just gets stuck. Well, that obviously doesn't solve the problem or get infrastructure built. So at the end of the day, there has to be a way to resolve a disagreement between states. And so that's pretty much all it is, just recognizing that, "look, this can be hard, it's never easy, but at the end of the day, a decision has to be made."
David Roberts
Well, can FERC say in this rule, you must make a decision?
Rob Gramlich
Yes, yeah. And that's essentially what hopefully they will say.
David Roberts
This is, you know, continuing a theme from the previous section. But also I noticed the recommendations are that they should be assessing costs also based on portfolios, portfolios of projects maybe, rather than like who's paying for this individual project? This individual project considering a portfolio and then sort of the aggregate costs —
Rob Gramlich
That's right.
David Roberts
Doing cost allocation based on that.
Rob Gramlich
Yeah. And that helps with the cost allocation challenge. If you do all the assets and upgrades together, then the chances are greater that everybody benefits a little bit, as opposed to when you just kind of come in and say, "hey, I got a line from here to here." Well, guess what? The people in all the other places on the region say, "well, I don't want to pay a dollar."
David Roberts
You end up with a mire there because it's like, where to draw the line around those benefits, as you say, mostly will be on either side of that line. But also in some second order way, a regional benefit, also in some second order way, a national benefit, I mean, benefit to humanity, to where you draw that line is somewhat arbitrary. So I think it's helpful to take at least a bigger unit of analysis.
Rob Gramlich
There's no magic bullet here where could say, "here's the best formula, now everybody do it." Because some regions, when I go, and I don't know, I was in the Pacific Northwest and they're like, "yeah, we could really put together something, but we need flexibility to — everybody needs to poke and prod at the benefits evaluation and come to the table and support it. In other words, get to a bespoke cost allocation agreement among parties," whereas other regions are like, "oh, man, if we had to go back and relitigate the benefits and cost allocation with every regional plan, we'd never get anything done."
So there is this tension that FERC is going to have to balance between the bespoke and the formulaic approach here. And there's not a good answer that works well in every region. You know, I think they can provide very helpful guidance. They can narrow down the funnel of the things that people can agree or disagree about and get to much greater alignment about how to measure the benefits. So those types of things, as well as the process with the states, I think could be helpful.
David Roberts
And as you say, just requiring a decision, "you can't leave the dinner table until your plate is clear," type of thing.
Rob Gramlich
Way to give it a really bad taste in people's mouths. Now everybody's thinking about the bad brussels sprouts, but, yeah, no, you got to have a decision at the end of the day.
David Roberts
All right, so that's planning and cost allocation, planning and paying. So then the third section of recommendations, I think are really interesting. And my instinct, and maybe tell me if I'm wrong, is that this might be the most uncomfortable for FERC, or maybe you might find the most resistance within FERC. Tell me if I'm wrong about this, but this is just a section about FERC oversight. Basically, the recommendation is like FERC needs to take a more active hand here in ensuring that this regional planning process is being done well. It's being done in a cost-effective way, which is just going to be a little bit more active governance, a little bit more active oversight.
And quoting from the report, "eliminate the multi-stage process that currently prevents inter-regional projects from being constructed." So tell us a little bit about what role you envision for FERC here, what these recommendations are about, greater oversight and sort of like what the political valence is of those recommendations.
Rob Gramlich
Right. Well, again, FERC is the transmission regulator of the nation, and the courts have clarified that over recent years. And so I think the main thing here is to put these planning approaches out there, put it into regulations, require them nationwide. Sure, there's going to be regional flexibility and each region has a different set of institutions that will come into play and be used. I think FERC can sell this whole rule as providing plenty of regional variation and flexibility. But at the end of the day, you've got to do these planning practices and FERC has to oversee that they happen.
So with any nationwide rule from a regulator, there's always the risk of you put it out, you require compliance filings, and then you kind of loosen things up on compliance and then over time they get away with things. And the regulator isn't making sure that the rule was followed.
David Roberts
Right. The rule only matters if there's some stick, some element of enforcement.
Rob Gramlich
Right. And the industry does follow it. I mean, look, there were plenty of opponents of open access in the mid 90s. Now they all have open access tariffs and they follow them like they're contracts. And anybody can bring a case to FERC enforcement if the tariff is not being followed, the tariff being like the public contract. And so the same would be the case here. And so just one hopes that FERC would follow through in implementation and make sure that all these practices are followed.
David Roberts
Well, what can FERC do, though, if I'm an RTO and I'm not following these practices and someone brings a case before FERC saying "this, such and such RTO isn't doing what you said." What sticks does FERC have in its backpack?
Rob Gramlich
Well, in some cases they do have enforcement authority and financial penalties. That's more in the market manipulation realm, but with the regional transmission organizations, and I should also say the planning entities that are not in the RTOs. Right, because we've got the Southeast and the West where there is no RTO, but they would also be subject to this rule. FERC just simply has to tell them — it's not a great answer to your question, but they set the rules and they are the regulator of these entities and FERC enforcement can get involved if they don't comply.
David Roberts
So if it comes to it, then FERC can penalize them financially. That's basically what it's got in its.
Rob Gramlich
I don't know the extent of that on something like a transmission planning practice, but they do have some penalty authority that came up in the interconnection context. So there may be some of that.
David Roberts
Another