A Regulatory Framework for Investments in Electricity Transmission Infrastructure
By Mark A. de Figueiredo
INTRODUCTION
An important issue facing the U.S. electricity sector is that investments in transmission infrastructure have not kept pace with growth in electricity generation. The U.S. Energy Information Administration (EIA) reports that from 1990 to 2002, high-voltage transmission circuit miles increased at an annual compound rate of 0.6 percent, while electricity generation increased at an annual compound rate of two percent during the same period. The lack of infrastructure development has led to congestion of the transmission grid and suboptimal dispatch of generation capacity.
One reason for the growing gap is the decentralized regulatory system for electricity transmission siting. The past decade has seen wholesale electricity generation transition from a state-regulated enterprise to a largely competitive market with economic regulation by the U.S. Federal Energy Regulatory Commission (FERC). However, the licensing and siting of electricity transmission generally remains under the authority of state public utility commissions (PUCs) and sometimes local governments. Because the development of new capacity is a function of the configuration of the electricity transmission network, one commentator describes this situation as a regulatory schizophrenia that threatens the reliability of electricity delivery and the effectiveness of competition in the industry.
Congress attempted to address the under-investment in electricity transmission infrastructure in the Energy Policy Act of 2005 (EPAct). Section 1221 of EPAct amends the Federal Power Act by granting the U.S. Secretary of Energy authority to conduct a nationwide study of electric transmission congestion and designate “national interest electric transmission corridors” for areas experiencing capacity constraints or congestion. FERC is provided authority to issue permits for the construction or modification of transmission in the corridors, including the ability to authorize eminent domain proceedings. The U.S. Department of Energy (DOE) has issued two national interest electric transmission corridor designations to date. The DOE argues that these corridors are necessary because of transmission constraints that adversely affect consumers, reliability considerations, energy independence, and homeland security. However, some state officials, residents, and members of the environmental community criticize the designations for usurping state authority, discouraging investments in energy efficiency and conservation, adversely impacting historical properties, and degrading the environment of humans and protected species.
This Note examines the regulation of investments in electricity transmission infrastructure and argues that the fragmented regulatory system should be corrected through a coordinated planning approach for transmission projects. Although the regulatory framework for natural gas pipeline infrastructure is cited by some as a template for electricity infrastructure, an entirely FERC-based approach is politically untenable given the way that electricity transmission has historically been regulated. Section 1221 of the EPAct attempts to strike a balance by placing siting authority with FERC only under certain circumstances, but has several deficiencies in its current form. The Section 1221 framework should be retained, but aspects of the process should be amended to take into account externalities related to the environment, historical preservation, and state rights.
Part II of this Note investigates the historical regulatory environment for investments in electricity transmission infrastructure. Part III examines the EPAct Section 1221 regulatory regime, which is intended to address some of the shortcomings of the historical system. Part IV considers the regulatory framework for the siting of natural gas pipelines, which takes a federally oriented approach and was used as a basis for some aspects of the FERC implementation of Section 1221. Finally, Part V sets forth a recommendation for an amended Section 1221 framework.
An important issue facing the U.S. electricity sector is that investments in transmission infrastructure have not kept pace with growth in electricity generation. The U.S. Energy Information Administration (EIA) reports that from 1990 to 2002, high-voltage transmission circuit miles increased at an annual compound rate of 0.6 percent, while electricity generation increased at an annual compound rate of two percent during the same period. The lack of infrastructure development has led to congestion of the transmission grid and suboptimal dispatch of generation capacity.
One reason for the growing gap is the decentralized regulatory system for electricity transmission siting. The past decade has seen wholesale electricity generation transition from a state-regulated enterprise to a largely competitive market with economic regulation by the U.S. Federal Energy Regulatory Commission (FERC). However, the licensing and siting of electricity transmission generally remains under the authority of state public utility commissions (PUCs) and sometimes local governments. Because the development of new capacity is a function of the configuration of the electricity transmission network, one commentator describes this situation as a regulatory schizophrenia that threatens the reliability of electricity delivery and the effectiveness of competition in the industry.
Congress attempted to address the under-investment in electricity transmission infrastructure in the Energy Policy Act of 2005 (EPAct). Section 1221 of EPAct amends the Federal Power Act by granting the U.S. Secretary of Energy authority to conduct a nationwide study of electric transmission congestion and designate “national interest electric transmission corridors” for areas experiencing capacity constraints or congestion. FERC is provided authority to issue permits for the construction or modification of transmission in the corridors, including the ability to authorize eminent domain proceedings. The U.S. Department of Energy (DOE) has issued two national interest electric transmission corridor designations to date. The DOE argues that these corridors are necessary because of transmission constraints that adversely affect consumers, reliability considerations, energy independence, and homeland security. However, some state officials, residents, and members of the environmental community criticize the designations for usurping state authority, discouraging investments in energy efficiency and conservation, adversely impacting historical properties, and degrading the environment of humans and protected species.
This Note examines the regulation of investments in electricity transmission infrastructure and argues that the fragmented regulatory system should be corrected through a coordinated planning approach for transmission projects. Although the regulatory framework for natural gas pipeline infrastructure is cited by some as a template for electricity infrastructure, an entirely FERC-based approach is politically untenable given the way that electricity transmission has historically been regulated. Section 1221 of the EPAct attempts to strike a balance by placing siting authority with FERC only under certain circumstances, but has several deficiencies in its current form. The Section 1221 framework should be retained, but aspects of the process should be amended to take into account externalities related to the environment, historical preservation, and state rights.
Part II of this Note investigates the historical regulatory environment for investments in electricity transmission infrastructure. Part III examines the EPAct Section 1221 regulatory regime, which is intended to address some of the shortcomings of the historical system. Part IV considers the regulatory framework for the siting of natural gas pipelines, which takes a federally oriented approach and was used as a basis for some aspects of the FERC implementation of Section 1221. Finally, Part V sets forth a recommendation for an amended Section 1221 framework.
