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FERC Order 1000: Cost Socialization for ‘Green’ Energy (NRDC, AWEA Rejoice)

“Regular people only need to understand that this is likely the most progressive clean energy action the federal government will take this year.”Center for American Progress

The Federal Energy Regulatory Commission (FERC) is capable of making bold moves under the radar. Last year it imposed a $245 million sanction on a major utility without too much fuss. Beginning this year, as part of a landmark rulemaking called Order No. 1000, FERC will be lending a multi-billion-dollar hand to large wind developers.

Overview

According to FERC, “Order No. 1000 is a Final Rule that reforms the Commission’s electric transmission planning and cost allocation requirements for public utility transmission providers.”

At the risk of oversimplifying a 600+ page document, Order No. 1000 essentially adds a requirement that (1) transmission providers consider new projects driven by state and federal “public policy,” and (2) planning regions do away with “participant funding,” at least at the regional and inter-regional level, which means that transmission costs must be allocated over a broad region. There was also a third major requirement (that transmission providers remove language regarding the “right of first refusal” from their tariffs), but let’s save that for another day.

If the combination of (1) and (2) above sounds like a rent-seeker’s dream, then kudos for seeing through the jargon. To put it differently, regional electricity transmission plans must take state and federal public policies into account, no matter how costly or ineffective they are (think renewable energy mandates).

Then the costs of the transmission lines built according to those plans are socialized. How great is that if you’re a large wind developer? States mandate that their citizens buy your intermittent power, and then a regulatory agency helps you spread one of your biggest costs far and wide, across state lines and to countless unaware consumers.

Buyer Beware

I understand that the term “broad cost allocation” may put some readers to sleep. I humbly suggest that you add it to the list of terms that alert you to a con game. To paraphrase the villain Ellsworth Toohey in Ayn Rand’s novel The Fountainhead: “Just listen to any bureaucrat, and if you hear him speak of ‘broad cost allocation’ — run. Run faster than from a plague.” Toohey was explaining his con game as outright fraud; in contrast, the Center for American Progress has a nicer way of characterizing the cost allocation game:

Cost allocation is complex but the fundamental issue is simple. If a new transmission line costs $1 billion, it would be prohibitively expensive if one person had to bear all of the costs. If 10 million people pay for the project, though, it becomes much more affordable. This is why broad cost allocation can make it easier to build important new lines.

It’s a simple formula: if something is important, socialize the costs and “we” will get it done. But important to whom? In 2011, IHS found that over 50% of the potential transmission-miles in the transmission project pipeline were targeted to “unlock” renewable resources. EEI’s Transmission Projects: At A Glance report from March 2013 found that, of the $51.1 billion of transmission projects they identified, “projects supporting the integration of renewable resources represent approximately $38.7 billion (76 percent).”

Clearly, the importance of these newinvestments” is in the eye of the beholder. Those of us who think renewable energy mandates are costly and wrong-headed see the large transmission projects required by the mandates as also costly, also wrong-headed. Where others praise the “public policy benefits” of mandates, Master Resource has consistently criticized them.

Bootleggers and Baptists Abound

To better highlight the characters involved, let’s examine this issue in the context of the “bootleggers and baptists” theory of regulation. The Natural Resources Defense Council, a leading “baptist,” said about Order No. 1000: “the Commission should be commended for this transformative rule, which puts forth a framework that can move this country’s electric grid towards a clean energy future.”

The American Wind Energy Association, the biggest lobbyist for wind bootleggers, applauded FERC’s leadership and added that “the current system for determining how new power lines are paid for is flawed. The plans too narrowly define who should pay for new projects and stifle investment, resulting in inadequate expansion of the grid.”

So visionary moral crusaders tell us Order No. 1000 will usher in a clean energy future, while savvy pragmatists applaud the transmission investment that will come if we just relax our “flawed” definition of such frivolous things as who should pay for billion-dollar projects. As I have pointed out in the past, this conversation is missing an essential voice — the voice of the consumer.

Conclusion

In one of his last letters, Frederic Bastiat asked a friend to “treat economic questions always from the consumer’s point of view, for the interest of the consumer is identical with that of mankind.” In that vein, Master Resource was keen to point out a powerful dynamic in the debate over the cronyism-riddled wind production tax credit.

As I’ve shown, the same dynamic applies to renewable energy mandates and socialized transmission costs — the bootleggers and baptists go to Washington to reap concentrated benefits, while the consumer minds his own business but gets fleeced. The dynamic plays out time and again, and the regulations keep coming, against the interest of the consumer and of mankind.

12 comments

1 Tom Tanton { 04.08.13 at 6:57 am }

You’d think/hope that such abysmal decisions would be subject to judicial review. Everybody knew this was the likely result of Order 1000. FERC no longer is acting in ‘public’s interest.’

2 JohnInMA { 04.08.13 at 7:49 am }

I’m not trying to be a deliberate contrarian. Yet, it seems that we have a long history of ‘socializing’ the costs of almost all large projects that typically fall under the label “infrastructure.” I’m certain I’ve paid my small portion for roads that my tires will never touch, for one example. It seems to be the only way the ‘policy makers’ know how to deal with the matters (I really cringe at the word ‘policy’, given its corruption).

I’m on board with the counterarguments. And the intent and language used by those who justify ‘socializing costs’ does sound both ominous and self-serving. Only if you accept their definition of ‘clean energy future’ – perhaps without knowing the details, even – can you begin to rationalize the strategy as proposed.

From my experience, one of the most significant obstacles private industry faces, or where merchant transmission projects tend to fail, is related to this same fundamental issue that drives the ‘socializing’ approach. It is nearly impossible to determine who benefits and to what degree from a specific segment of transmission hardware. Of course, there are many other obstacles tied to regulation and ‘policy’ (yuk), as well. Has anyone developed a more or less foolproof means of transitioning to a profitable way of building and maintaining networks whose costs ONLY burden those who use it or benefit? Are there analogies? I wondered for a while about gas and oil pipelines, but the product delivered is more discrete (isolated) and measurable, no? Surely the solution isn’t to make networks more localized. Already cross-organization agreements allows more efficient balancing and management of peak demand. Is it a matter of improved metering along the grid? It’s a fair question to ask about potential solutions. Otherwise. those who push for “broad cost allocation” can claim there is no better way and offer up history in ‘infrastructure’ building as their proof.

3 Eddie Devere { 04.08.13 at 10:13 am }

JohnInMA,
The solution is simple to the problem of getting people to pay for energy projects that they benefit from: Completely deregulate electricity markets. Why do we need to ‘socialize’ the cost of electricity when electricity is not a public good, like defense or fire protection? In the jargon of economists, electricity is “excludable” and “rivalrous.” A pubic good is one in which the free rider problem is unavoidable (such as paying for the military…everybody benefits regardless of whether they paid for it) and in which the consumption by one person does not take away from the consumption by others. Electricity does not meet either of these criteria for a public good, and therefore, any attempt to ‘socialize’ the cost of electricity is harmful to society.

Now that there are multiple ways for people to generate electricity for their homes and now that we have devices that can easily switch between multiple energy inputs for the home, there is no need for electricity regulation.
For example, we all now have at least three options for electricity: (1) solar PV cells, (2) fuel cells operating on natural gas or propane, and (3) the existing electricity utility. In addition, the consumer could purchase a battery to store electricity. We are not as dependent on the utilities as we might have been in the past.
It seems that we should be able to fight electricity regulations in the court system now that consumers have three options for producing electricity.
The states and the federal government have absolutely no rights given to them in the constitution to tell us what type of electricity we should purchase. I think that we need to focus our efforts on (a) fighting all electricity regulations in courts, and (b) addressing pollution from power plants via taxes on pollution or cap/trade systems (i.e. not through command/control mechanisms in regulated electricity markets.)
As many economists have said, ‘The optimal solution is easy to find. The problem is getting politicians to implement the optimal solution.’ So, let’s take the electricity market out of the control of politicians by completely deregulating it (except for taxing or setting a cap/trade on pollution.)

4 JohnInMA { 04.08.13 at 11:13 am }

Eddie Devere: Thanks for the direct post. My initial thought – is it really as cut and dry as you describe that electricity is essentially an endless commodity that isn’t mandatory for living? One example that pops into my head is the establishment of a large lumber mill within an existing grid. Without prior planning, certainly that demand will negatively impact existing users, suggesting a supply constraint. And should that disruption impact a the ability to heat a home in the winter for the duration, then it seems the supply is not entirely “excludable”. We no longer live in a era when it’s normal to burn logs when there is no electricity to utilize for heat, among other things. I’m not nitpicking, but rather just highlighting that it seems more like a grey area, a hybrid if you will. So each side’s arguments perhaps take advantage of that.

But my original quest was to find out if there are fair solutions for merchant supply that takes into account all demand cost factors – meaning associated appropriately to cost influencers. In your a, b, c example, how would a fully deregulated system correctly price option c) when option a) failed for an afternoon, a day, or a month, for example? Most people would not opt for a fully off-grid configuration, would they?

I’m not arguing that ‘socializing’ is the only solution or even the better solution. It just doesn’t seem obvious how a fully deregulated, free market system would work, even though it might be intuitive. In an offline discussion with someone, an analogy came up. Many organizations control the flow of some tributaries and rivers for a variety of reasons (flood control, hydropower, water supply, etc.). Imagine there were 6 dams along 5 tributaries feeding a massive river. How do you make sure the ‘costs’ of the actions of the dam operators are properly assigned to some user (e.g. domestic water supply) somewhere not far from the mouth of the river? The idea is that the water allowed or curtailed at each dam has flowed through a long distance and to a wide range of uses/users before arriving at the user in question. Sure, the water isn’t created. But the supply management comes at a cost.

5 Donald Hertzmark { 04.08.13 at 3:56 pm }

The analogies to private decisions made for consumption or production do not apply to Federal Tx mandates for renewables. There is is simply no public benefit at any stage of the “investment” process. Wind and solar plants are, in the context of the U.S. grid, costly and unreliable. Yet these RE generators still require production subsidies.

They reduce grid stability and require ancillary services from other generators, which are also generally “socialized”, i.e., charged to all users, not just Ben and Jerry’s.

At the Tx stage the system must be overbuilt by a factor of 3-4 to handle the peak potential production that accompanies average plant factors in the 20-30% range. Therefore, this network investment, which is socialized to encourage a generation investment that is not productive wastes still more funds.

Not an express road to riches except for those receiving the subsidies.

6 Kent Hawkins { 04.08.13 at 5:41 pm }

JohnInMA

The issue of whether or not to socialize the additional transmission and distribution costs as a result of adding wind and solar PV to the electricity system is simple. In the case of the existing grid, it is designed primarily to provide electricity from generation plants to users. In effect the grid is provided to service users. It makes sense to socialize these costs because the deciding who needs which ones and how much is not easy as you point out.

The costs of integrating wind and solar PV plants in the grid are primarily there to serve the wind and solar plants. This falls into three general categories. The first is the need to collect the dispersed energy source and electricity production for feeding into the grid, which is extensive and intrusive. The second is the increase grid requirements to transmit this over long distances from generation to users (e.g. the mid-west to coasts), which includes new circuits and upgraded existing to handle the sometime occurring peak loads.

Finally the distribution networks need upgrading as well to enable demand management of user needs in response to the vagaries of wind and solar production. This is one of the main justifications for the implementation of smart meters now. Such meters will probably quickly become stranded costs when we work through the architecture and engineering of the grid improvements we really need in the future.

Take away wind and solar and the need for these additional grid requirements goes away. Therefore they should not be socialized. Otherwise this is a huge subsidy, for an energy source which provides little electricity none of which is reliable or grid friendly. Estimates for these grid “enhancements” are in the order of a $trillion for Europe and the EU each. Neither can afford them.

Please let’s not now get all tangled up now in all the hype about the wonders that smart meters are going to provide us.

7 Power Engineer { 04.08.13 at 8:45 pm }

Of course wide socialization of transmission costs will now apply to behind the meter solar PV which makes large use of the grid but doesn’t presently pay for any T&D costs if net zero.

8 Power Engineer { 04.08.13 at 8:54 pm }

I wonder who made the argument that costs should not be socialized and how hard they pressed the case? Not the LDC who wants to build transmission as its their primary growth opportunity especially in deregulated states where generation was sold off. My experience is that no one is representing the consumer even in states that have electric consumer advocates. The system is broken in favor of the rent seekers.

9 Deb Stowe { 05.03.13 at 3:26 am }

Industrial wind turbines only produce 1.58% of the total energy in the U.S and there are thousands and thousands of these monstrosities destroying forest and displacing wildlife and killing many of our Eagles. These IWT are as tall as a 45 story skyscrape. All in the name of Green Energy.

I definitely do not want to pay for the transmission lines and further destroy the beauty of this country. 5 to 10 acres of deforestation for one and they want to put 40 in one area . What would be left after transmission lines were put in along with these Huge Industrial Wind Turbines. Google pics of this?

10 tfisher { 05.06.13 at 10:38 pm }

I really appreciate the big-picture comments, and I apologize for taking so long to respond. I’m glad this post generated some good discussion.

Tom, apparently the D.C. Circuit will hear the petitions for review. Looks like the Order No. 1000 cases are under South Carolina Public Service Authority, et al. v. FERC No. 12-1232, et al. Link to all pending cases is here: http://www.ferc.gov/legal/court-cases/pend-case.asp. And I wish I had the subscription to read this article in its entirety: http://www.electricitypolicy.com/articles/4721-a-sequential-assessment-of-order-1000,-a-mysteriously-disappearing-dissent,-and-prospects-on-appeal

JohnInMA, I agree with your push to outline a better way of doing things. I can’t speak to a direct analogy of the first-best solution (free markets) because, as far as I know, all bulk electricity grids in history have come under some kind of regulatory scheme without much time to let a free-market experiment play itself out. The 1990s push for “de-regulation” of vertically integrated utilities was just re-regulation by forcing an open-access model on the transmission grid and essentially removing vertical integration (forcibly separating the generation, transmission, and distribution functions). On this point I’m reading about a more open-ended approach to the electricity market structure as outlined in this book: http://store.cato.org/books/whats-yours-mine-open-access-rise-infrastructure-socialism-paperback. If you know of a more in-depth treatment of these issues from the Austrian school perspective, please let me know.

Eddie, I think your comment gets to something important, specifically that utilities would have competition in different forms if it weren’t for their legal monopoly status. To be a little more precise, we don’t know what kind of competition utilities would have had if they’d never been granted single-seller status and regulated returns a century ago. But telling that story and convincing people (esp. politicians) that natural monopolies don’t last long without legal protection — that’s tough. More here: http://mises.org/daily/5266/

Don and Kent, I think you nailed it. A huge part of the new “investment” that’s going on right now is only needed to deliver distant, intermittent, subsidized power, which is separate from the investment necessary just to meet demand with reliable, dispatchable supply.

Power Engineer, I agree that the rent-seekers seem to have their way sometimes. In this case, some groups like the Coalition for Fair Transmission Policy (http://www.thecftp.org/) did file comments, and their petitions for review will be heard. But like I’ve mentioned before, the court gives FERC “remedies” a lot of latitude.

Deb, you are my target audience for this piece. I wanted to show the anti-wind crowd that there was something going on in electricity transmission policy that you should know about, something at best misguided and at worst deceptive. Add it to the list of the hidden costs of the green obsession.

11 FERC’s Regulatory Mission Creep | Institute for Energy Research { 09.12.13 at 11:20 am }

[...] multi-billion-dollar transmission projects to get windpower from nowhere to somewhere. The 620-page FERC Order 1000, specifically, has been a boon/boondoggle for getting uneconomic wind generation over the [...]

12 FERC Is Already Anti-Coal and Ron Binz Would Tip the Scales | Institute for Energy Research { 09.18.13 at 2:32 pm }

[...] like wind, at the expense of easy-to-site and reliable sources like coal. FERC accomplished that by socializing the transmission costs of power projects mandated by “public policy,” by which FERC means the [...]

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