TODAY’S STUDY: Numbers Show The Need For New Transmission

Cost Savings Offered by Competition in Electric Transmission; Experience to Date and the Potential for Additional Customer Value

Johannes P. Pfeifenberger, Judy Chang, Akarsh Sheilendranath, J. Michael Hagerty, Simon Levin, Wren Jiang. April 2019 (The Brattle Group)

Summary and Discussion

Numerous studies have presented and discussed the high economic value that regional and interregional transmission investments can provide in the U.S.1 Nevertheless, seven years after FERC Order No. 1000, major regional investments have been limited and interregional projects are almost non-existent. Advancing competition in transmission can help increase the value of the investments and provide more transparency into transmission costs. Doing so would ultimately increase the attractiveness of strengthening the regional and interregional transmission grid to create a more robust and cost-effective electricity system.

The current level of competition in electric transmission has been very limited. We have identified thirty-one competitive solicitations for transmission projects in ISO/RTO regions, of which 16 occurred in PJM and 10 in CAISO. Overall, the transmission projects subject to competition represent 3% of U.S. nationwide transmission investments between 2013 and 2017. The 3% includes all of the projects that have been selected through competitive solicitations, including projects proposed by incumbent utilities. The limited number of competitive projects is explained by restrictive regional planning criteria that have precluded most transmission investments from being subject to competitive processes. Some of these criteria are set out in Order 1000, limiting competitive processes to regionally cost-allocated transmission projects and excluding local projects.

Based on the experience with competitive projects in the U.S. to date, we estimate that the potential cost savings from expanding competitive processes could range from approximately 20% to 30%, consistent with savings achieved with similar competitive transmission processes in Canada, the U.K., and Brazil. At an estimated cost savings of 25%, the potential customer value from expanding competitive processes from 3% to 33% of all planned U.S. transmission investments would be approximately $8 billion over the course of five years. In addition to cost savings, competitive processes for transmission investments stimulate innovation through opportunities for transmission developers to propose: (1) innovative technological and engineering solutions to more cost-effectively address identified transmission needs; and (2) cost containment mechanisms that reduce the extent to which customers are exposed to the risk of cost escalations.

We recommend that federal and state policymakers consider the positive experiences with competitive processes to date and expand the scope of competitive transmission investments to capture more of the innovation and cost reductions benefits achieved through competition. Applying more innovative and cost-effective solutions to both competitively- and traditionallydeveloped transmission projects will support the role that the transmission grid will play in ensuring system reliability, spurring economic development, and integrating renewable generation as the costs of generation and storage technologies continue to decline and the economy transitions to a clean-energy future.

Ultimately, the U.S. will require a more robust transmission infrastructure. Using competitive forces to stimulate innovation and reduce the costs of necessary investments both increases opportunities for transmission developers while providing value to customers.

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Growth in U.S. Transmission Investments Have Primarily Been Reliability-Based and Locally-Developed Projects

Investments in electric transmission facilities have grown significantly over the past 15 years in the U.S. As Figure 1 below shows, U.S. transmission companies are now investing approximately $20 billion/year in transmission infrastructure.

This growth was largely in response to a growing need to meet reliability standards, to costeffectively integrate new generating resources, and to reinforce and replace the aging existing transmission infrastructure—much of which was developed 50–60 years ago during a period of rapid economic expansion and electricity demand growth in the 1960s and 1970s. Regulatory and governmental agencies, such as the Federal Energy Regulatory Commission (FERC) and the U.S. Department of Energy (DOE), have long documented this need to reinforce, replace, and modernize the nation’s aging, inefficient, and heavily-congested transmission infrastructure as critical to meeting the future energy needs of the economy

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A Robust Transmission Grid Provides Benefits to Customers

The electricity industry is in the midst of major transitions due to significant changes in resource mix, environmental policies, electricity uses, and reliability and resiliency standards. While going through such transitions, the transmission grid continues to be the foundation that maintains reliability for all electricity users, integrates new generating resources, and improves the overall cost effectiveness of electricity service. The continued need for regional transmission investments that provide substantial reliability and economic benefits to all electricity users in the region is clear and continues to be better understood.6

Given the amount of transmission investments that are and will be needed across the country, we examine the possibility of advancing competitive processes in developing and constructing new transmission. This report analyzes the potential cost savings offered by competitive processes based on the experience to date and discusses how expanding those experiences could increase the benefits of having a robust transmission system to electricity users. To conduct our analysis, we undertook an extensive effort in collecting data and analyzed the costs of transmission projects to estimate the impacts of competitive processes across the U.S. We also reviewed international experiences with competitive transmission development in the Canadian provinces of Ontario and Alberta, the U.K., and Brazil.

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Seven Years after Order No. 1000 Mandated Competition in Transmission Planning, 97% of U.S. Transmission Investments Occur Outside the Competitive Processes

In 2011, FERC Order No. 1000 sought to promote “more efficient or cost-effective transmission development” by requiring “opportunities for non-incumbent transmission developers to propose and develop regional transmission facilities through competitive transmission planning processes.” 7 Despite the Commission’s order and the efforts of FERC-jurisdictional regional transmission planning entities to modify their planning processes and tariff structure around cost allocation, only 3% of U.S. transmission investments approved between 2013 and 2017 have been subject to competitive processes that were open to non-incumbents. 8 The 2013-2017 share of competitive projects for individual regions range from none in ISO-NE 9 to 5.1% of total transmission investments in PJM, 6.8% in CAISO, and 7.0% in NYISO. FERC staff’s recent assessment of transmission investment metrics shows that there is significant interest from and participation by many transmission developers in competing for the available opportunities. 10

For the period from 2013 through 2017, competitively-developed projects account for about $540 million of average annual transmission investment, compared to the approximately $20 billion in average annual transmission investments made during the same period across the country.

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Transmission Project Eligibility Criteria for Competitive Processes are Restrictive, Reducing the Scope of Competition

The tariffs that specify the rules for transmission planning for each region currently exclude the large majority of transmission investments from competitive processes. We do not see compelling policy reasons for broad limits or having significant differences in criteria used in various regions that directly or indirectly exclude transmission projects from the competitive processes. In addition, limiting competition only to projects that are regionally cost allocated (as specified by FERC Order 1000) creates barriers to realizing the benefits of competition for those transmission projects whose costs are paid for solely by the local transmission users. By building on the full set of experience with competition from across regions, we recommend that federal and state policymakers consider expanding the scope of competitive transmission investments.

Subjecting more transmission investments to competition would stimulate innovation, increase the cost-effectiveness of the investments, and provide greater overall benefits to customers. For example, through its competitive process, MISO was able to increase the estimated benefit-to-cost ratio of its Hartburg-Sabine Junction project in Texas from 1.35 to 2.20. 13 At lower costs, transmission will more frequently provide cost effective solutions to the benefit of both customers and transmission developers. For the local transmission owners that must respond to cost pressures from regulators, applying innovations from competitive processes to reduce the costs of traditionally-developed projects also increases the companies’ ability to invest in other valuable technologies to help meet customers’ needs.

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Significant Investments in Transmission Are Made Without Full ISO/RTO and Stakeholder Engagement in the Planning and Approval of Projects

Our analysis of the available transmission investment data for years 2013 to 2017 shows that about one-half of the approximately $70 billion of aggregate transmission investments by FERCjurisdictional transmission owners in ISO/RTO regions are approved outside the regional planning processes or with limited ISO/RTO and stakeholder engagement. 14 Instead, they are based solely on local planning processes of the existing transmission owners with only cursory reviews by the ISO/RTO planners. 15 Since locally-planned projects are not subject to competitive planning requirements under Order 1000, shifting transmission investment away from regional processes reduces the extent to which competitive processes can enhance the overall cost-effectiveness of transmission investments.

Figure 2 below summarizes for 2013–2017: (1) the estimated share of transmission investments placed in-service within various U.S. ISO/RTOs over a five-year historical period that were subject to the full ISO/RTO stakeholder-based regional transmission planning processes; and (2) the share of those investments that have been subject to competitive regional planning processes. As the figure shows, transmission investments not subject to the full regional planning process range from 29% in ISO-NE to 54% in PJM.

In our review of ISO/RTO transmission project cost estimation and cost tracking data, we found substantial differences in the amount of information available across regions. While some re*gions have implemented transparent project cost tracking mechanisms, some provide very limited cost information. Given that the great variance of project cost reporting and tracking standards makes it difficult to compare cost trends within and across the various planning regions, we recommend that FERC and the ISOs/RTOs consider implementing consistent minimum requirements for project cost reporting and tracking.

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The Experience to Date Indicates that Competitively-Developed Transmission Offers Significant Innovation and Cost Savings for Customers

Of the competitively-developed transmission projects awarded to date, we were able to analyze sixteen transmission projects subject to competition in which cost data is available. On average across the sixteen projects, the selected proposals were priced significantly below the initial project cost estimates prepared by the ISO/RTOs or incumbent transmission owners prior to receiving proposals through the competitive process. The low costs of some of the proposals are consistent with the significant interest and participation in competitive processes by numerous market participants as documented by FERC staff.16 In addition to the low costs, the selected project proposals generally have included cost caps or cost-control measures, which are expected to reduce the risks to ratepayers of cost escalations as the projects are developed and constructed in the coming years.

Since the competitively-developed projects are not yet constructed, we assume they will likely incur at least some level of cost escalations as they advance through the development and construction phases of the projects. We thus analyze a range of potential cost escalations for the competitively-developed projects: (1) projects completed as proposed with no escalation, (2) cost escalation equal to 5-years of inflation, and (3) cost escalation similar to historical average cost escalations for transmission projects.17 Figure 3 below shows for two regions, CAISO and MISO, the estimated cost range of competitively–developed projects (dark green bars) under these three cost escalation assumptions compared to our estimate of the final costs of the same project if it had been traditionally developed (blue bar) and incurred typical historical escalations from the initial project cost estimates. 18

If the projects subject to competition could be developed and constructed without any cost increases, the estimated average cost savings could be as high as 28% in MISO and 50% in CAISO relative to the likely costs of these projects if they had been traditionally developed. Actual cost savings are expected to be smaller given the potential for at least some level of cost escalations. We estimate that overall cost savings of 15% for MISO and 29% for CAISO would result from the competitive processes even if the competitively-developed projects were to experience percentage cost escalations similar to the historical experience with major transmission projects in these regions

The range of potential savings in MISO and CAISO assuming some level of cost escalation is consistent with the estimated cost savings from competitive processes in other parts of North America—such as 22% savings in NYISO, 21% in Alberta, and 16% in Ontario—and the already realized cost savings in international markets, which include savings of 23% to 34% in the U.K. and about 25% in Brazil. Based on these experiences with competition to date, we estimate that competitive transmission development processes can be expected to yield cost savings ranging from 20% to 30% on average.

Based on our experience and discussion with industry participants, the cost savings reflected in the selected competitive proposals can be attributed to a wide range of innovative approaches to transmission development. They include innovative project designs, such as using new technologies for conductors, tower type, materials, and foundations; optimized routing to reduce permitting costs; innovative contracting; cost-control mechanisms (such as improved risk sharing with and incentives for the engineering and construction contractors); and innovative partnerships and financial structures, including public-private partnerships to streamline project permitting.

In regions with “solution-based” competitive procurement processes, such as NYISO and PJM, competition can foster significant additional benefits from innovative project design and risk mitigation to address the identified need. For example, in the solicitation process for PJM’s Artificial Island Project, many developers proposed a wide range of solutions to meet the identified transmission need. Some developers also proposed innovative lower-voltage design options that addressed all the needs identified by PJM at substantially lower costs and reduced constructability risk. In contrast, other developers offered to include significantly longer circuit-miles and only 500 kV options at significantly higher costs. In NYISO, the solutions-based competitive processes similarly attracted multiple design innovations that yielded lower costs and higher customer benefits.

We see significant value in such “sponsorship” or “solutions-based” approaches to the competitive process because developers are also competing on broader design ideas, which can yield significant additional cost benefits when innovative solutions can more cost-effectively meet identified system needs. While we document significant cost savings for project-based competitive processes, the potential savings are likely to be less because developers are purchasing materials and services from the same market and must meet the project-specific criteria. Thus, to maximize the value of competitive transmission development processes, we recommend moving toward more sponsorship or solutions-based approaches.

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The Cost of Competitive Processes

The costs of administering and participating in competitive processes are not trivial, but are relatively small compared to the costs of the transmission projects and the potential cost savings from developing and implementing the competitive processes. Administrative costs associated with the evaluation process are typically assigned to the project developers participating in the competitive processes.

For example, SPP’s cost of administering its first competitive process was approximately $500,000—requiring the recovery of $47,000 from each of the eleven respondents and accounting for approximately 3% of the project’s $17 million cost estimate, none of which was directly passed through to transmission customers.19 During 2016 and 2017, PJM spent $1.7 million administering five solicitation windows, 97% of which were recovered from the project proponents through fees. 20 The U.K. regulator Ofgem estimated that approximately 4% of large competitive transmission projects’ total costs are associated with conducting and participating in the competitive bidding process—with developer costs estimated at 2% of total project cost, the cost of conducting the solicitation at 1%, and the rest incurred by the network owners and system operators. 21

Developers’ costs (including the ISO/RTO administrative charges imposed on them) will ultimately have to be recovered and would thus need to be reflected in the costs of competitively-developed proposals—even if not every developer includes these costs in every proposal and every round of competitive solicitations. As a result, these costs likely are included in competitive project costs and thus already accounted for in the above estimates of cost savings. For individual developers who have gained experience in the processes, we anticipate that their costs will decrease over time as they improve and streamline assembling a competitive proposal. The lessons learned from each process will carry forward and improve the industry’s ability to explore innovative techniques in developing transmission projects.

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Expanding the Scope of Competitive Processes Could Yield Significant Cost Saving Increasing the share of transmission investments developed through competitive transmission planning processes is likely to yield significant customer savings. Based on the experience with competitively-developed transmission in the U.S. and other countries, competitive processes are more likely to be adopted for higher voltage and higher cost projects. Of all the recent RTOplanned transmission investment in PJM and MISO (excluding supplemental and transmission owner-initiated projects), about half of all MISO-planned projects and 77% of PJM-planned projects cost more than $25 million.22 Based on voltage, about half of the investments planned by MISO and PJM have involved voltage levels above 300kV and about 66% have been above 150kV.

Based on these statistics, and recognizing that a substantial portion of transmission development cannot be open to competition because it involves refurbishment or upgrades to aging existing facilities, it should be possible to expand the scope of competition to cover approximately one quarter to one third of total transmission investments—particularly if the current barriers to the development of cost-effective regional and interregional transmission projects to address market efficiency and public policy needs can be reduced. If competition can reduce costs by 25% on average, the cost savings from competition on one third of the planned U.S. transmission investments would be approximately $8 billion over five years. Figure 4 below shows that these potential cost savings to customers range from a five-year total of $4.4 billion at the low end (if only 25% of U.S.-wide investment was subjected to competition and competitively-developed projects yielded 20% cost savings) to $9.0 billion at the high end (if 33% of total transmission investments were developed competitively and achieved 30% cost savings).

To conclude, the experience with competitive transmission processes to date demonstrates that they can attract significant interest from a wide range of transmission developers and have been able to deliver significant innovations and cost savings. Expanding these competitive processes to a larger portion of total transmission investments would magnify the net benefits of the investments and meaningfully reduce customer costs. Developing a larger portion of transmission projects through competitive processes would also benefit transmission owners by reducing rate pressure and increasing the attractiveness of transmission investments as a solution to the challenges of a rapidly-changing energy economy.

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