FERC Order 1920 on Transmission: How Big a Deal?

FERC Order 1920 on Transmission: How Big a Deal?

June 25, 2024

A Federal Energy Regulatory Commission order in May to deal with US grid congestion has been called a "watershed moment" by FERC Chairman Willie Phillips. The order took three years to move through FERC. It is 1,363 pages. The commission received more than 30,000 pages of comments and reply comments. It is one of a series of actions the US government has taken to try to ease grid congestion.

Three experts drilled down into what it does with an eye on how much difference it and other recent government actions to ease grid congestion will make for developers waiting to connect new power plants to the grid.

They are Allison Clements, a FERC commissioner since late 2020 whose term comes to an end at the end of this month, Rob Gramlich, president of Grid Strategies, a consultancy, and Caileen Kateri (Kat) Gamache, a partner with Norton Rose Fulbright in Houston. The moderator is Keith Martin with Norton Rose Fulbright in Washington.

Main Points

MR. MARTIN: Allison Clements, I am going to summarize briefly what Order 1920 does. There are four main points. I will stop after each so that you can correct anything I get wrong or might have missed.

The order requires grid operators to plan ahead at least 20 years for where additional capacity will be needed and to revisit their plans at least every five years. True?

MS. CLEMENTS: That's true. The order requires 20-year forward scenario-based planning that takes into account all the kinds of factors that contribute to the uncertainty we face around the future grid. The planning is required every five years. We envision that the planning process will take three years and then there are a couple-of-year breaks before the next one starts.

MR. MARTIN: The next major point is grid operators must take seven factors into account in planning. Is that correct?

MS. CLEMENTS: That's right. There are seven reliability and economic factors, such as avoided or deferred transmission facilities, reduced loss of low probability or reduced planning reserve margin, and production cost savings. These are factors with which grid planners are already very familiar. They provide a way for regions to use apples-to-apples comparisons in their respective regional planning processes.

MR. MARTIN: Point number three is grid operators must consider grid-enhancing technologies that increase the amount of electricity that can be carried on existing lines. To put some context around that, the grid has about 1.25 million megawatts of capacity currently and estimates are that grid-enhancing technologies could boost capacity by another 20,000 to 100,000 megawatts. Is all of that correct?

MS. CLEMENTS: It is correct that the rule requires transmission owners and grid operators to look forward in the long-term planning process and to consider four types of technologies -- dynamic line rating, advanced power flow control devices, advanced conductors and transmission switching -- in the near term as ways to create additional room on the grid.

MR. MARTIN: Finally, the order is expected to lead to more regional sharing of costs of new transmission lines. Is that accurate?

MS. CLEMENTS: The implementation remains to be seen, but that is the goal.

MR. MARTIN: Is there any major point that you think I missed in the list of four?

MS. CLEMENTS: One thing to add is that grid planners do analyses and look at what the cost effective solutions are to grid needs. It is up to the states to decide what gets built and who should pay for it. That is a big piece of the order as well.

MR. MARTIN: Let's dig deeper into the significance of all this. Rob Gramlich, isn't it in the interest of grid operators already to plan ahead? The order requires planning on at least a 20-year time horizon. Why aren't grid operators already doing this if in fact they are not?

MR. GRAMLICH: The order found, as many others have, that this type of planning is generally not being done. There is probably a wide range of views about why that is the case. At this point, I'm not sure it is worth debating. My own view is we just got out of the habit. We lost our muscle memory on planning.

Also, the industry grew out of 3,000 isolated utilities that could build things in their own service territories. We never really developed strong mechanisms to build transmission lines that could cross a dozen or more utility footprints. We are still struggling with that legacy. I think this order moves the agenda very far forward.

MR. MARTIN: Allison Clements, what is the mechanism for enforcing the order? Grid operators are supposed to plan ahead. What if they don't?

MS. CLEMENTS: All of the transmission owner utilities will have to make compliance filings with FERC to tell us how they are going to follow this rule and what changes they will make to their tariffs. Lawyers will suggest language to put in the tariffs driven by stakeholder processes in the RTO regions and also, to some extent, in the non-RTO regions.

Once FERC receives the compliance filings, it will either approve them or reject them in whole or in part. There will be some back and forth with the companies making filings. Once the tariffs are final, then FERC has authority on its own or by request of a stakeholder or the transmission operator to assess whether or not regions are complying with the order. That goes on indefinitely.

Past Lessons

MR. MARTIN: A listener asks the following. Why should we think the new order will have any more impact than Order 1000? His view is Order 1000 had almost no effect. That order was 13 years ago.

MS. CLEMENTS: That's right. We have learned a lot. Hopes were high around Order 1000 and the results were not necessarily as had been hoped or anticipated. We did not stop building transmission. Brattle Group estimates about $20 to $40 billion annually is spent on transmission infrastructure, but what has happened is that the spending has largely been focused on transmission within utility-owned service territories -- local transmission -- not this well-planned future need-based transmission. What we have tried to do is ask why Order 1000 did not work and what has to be done now to ensure that the money being spent is applied in a more cost-effective manner.

MR. MARTIN: What was the major lesson that was taken away from Order 1000?

MS. CLEMENTS: Regional cooperation and the competition to be the developer of needed transmission was new and challenging and utilities chose the easier option to improve, upgrade and add to their own individual systems rather than engage around a bigger, regional platform.

MR. MARTIN: If anyone else has a view, speak up. There are seven factors on which the order directs grid operators to focus. How are they different from what grid operators are already considering?

MR. GRAMLICH: There were a number of things in Order 1000 that were optional. It was consider this, consider that. This order is more prescriptive on the planning methods while giving plenty of flexibility in other areas.

I think we have learned a lot from experiences in different regions, such as there are lots of benefits to consumers and the whole industry to multi-purpose planning. This order reflects that. You have to assess whether a line is needed solely for reliability or for public policy or economic reasons, which was a key aspect of Order 1000 that I think was fundamentally flawed from the start.

This order is more about holistic integrated planning. If anyone has seen a line that had only benefits in one of those categories, I would like to see it. This order recognizes that there are benefits across the categories. One should plan for all of them and then allocate the costs on a "beneficiary pays" basis.

MS. GAMACHE: One thing that I found interesting about the seven factors is the requirement for corporate commitments to be considered when determining transmission goals. FERC historically has been resource neutral, but some factors suggest a recognition that there are corporate commitments to green energy that should be reflected in planning.

MR. MARTIN: So the fact that corporations need to receive renewable power they purchase should be taken into account as one of the seven factors.

MS. CLEMENTS: I'm glad Kat raised the question about corporate goals. There are some confusing terms that are important to clarify.

When we think about scenario planning, we need inputs into those scenarios. One of the inputs the order requires to be considered is corporate and utility goals. However, the order allows for discounting of those goals because they do not have to be taken at face value across the scenario. Other things such as avoided or deferred liability transmission facilities and production cost savings should also be considered in the evaluation of potential solutions to grid needs.

Corporate goals are one of the many things that influence how the grid will look 10 and 20 years from now.

Grid Enhancements

MR. MARTIN: Some people argue that the incentive currently is for utilities to build new lines rather than install grid-enhancing technologies since the latter do not add much to rate base. Utilities grow only by adding to rate base. What did FERC do that will alter the existing calculus for utilities on grid-enhancing technologies?

MS. CLEMENTS: When it comes to grid-enhancing technologies, you are exactly right. There are financial barriers to deployment for the reasons you described.

There are also operational barriers to deployment because, even though many of these technologies are common around the world, they have not been deployed in the US. The engineers on utility staffs are responsible for running reliable systems. It is not easy to layer on a new set of hardware and software across a system.

There are also corporate barriers because utility executives are not incentivized to make more room on the grid.

The reality is that this order will take years to bear fruit, but what can happen now to increase space on the grid is for any transmission provider in a state that wants economic development and wants to encourage construction of new advanced manufacturing facilities to adopt these hardware and software technologies.

Cost Sharing

MR. MARTIN: Rob Gramlich, how does regional cost sharing work currently, and how will it change as a result of this order?

MR. GRAMLICH: The general policy of FERC Order 1000 and various court decisions is that the beneficiary pays. There are seven potential benefits listed in the order. They are all economic and reliability benefits.

There was some flexibility for each region to come up with its own plan on cost sharing. Allison mentioned consultation with states as a key part of that, but the overall approach is not really a change from long-standing policy.

However, there is an important difference from how things have been operating since Order 1000 and what the new order prescribes. There was a lot more focus over the last 13 years on allocating costs differently for public policy, reliability or economic benefits. This order takes us back to a more holistic, multi-value type of approach. Look at all of the factors driving the need, and then allocate the cost according to the benefits.

Despite some of the public rhetoric, the order does not say that if somebody receives only a public policy benefit, somebody else should pay. It is beneficiary pays, and the benefits are economic and reliability benefits. FERC has left some flexibility, but any applicant would have to justify its approach based on long-standing beneficiary-pay rules. The extreme examples of somebody paying for somebody else's public policy could have been done before, and somebody could try that in the future, but it would have to be justified, and there is nothing in the order that makes it a more likely outcome in the future than it has been to date.

MR. MARTIN: Jon Wellinghoff, the former FERC chairman, used to analogize our current approach to cost sharing to telling the driver of a car entering the interstate highway that he has to pay the full cost of a new lane to accommodate his car. That's what happens when the owner of a new power plants applies to connect to the grid. Is that still the policy after this new order?

MR. GRAMLICH: Commissioner Clements can explain what is in the order and why, but I want to arm wrestle with Jon Wellinghoff about who used that metaphor first. That is how things are today, and it is a terrible approach. New generators or new load, whatever it is, anything new connecting to the grid in many parts of the country is being treated as if it is the straw that broke the camel's back and is having to pay for that so-called lane expansion. Yet all of the other cars behind that one would get the benefit.

Going back to beneficiary pays and multi-purpose proactive planning, what this order does is plan for all of those future cars that might come, and then all of them -- not just the first car in line -- pay their fair shares. That should not only be much more fair, but it should also be more efficient. You plan the right highway and allocate the costs more fairly.

MS. GAMACHE: I have a question about that. Even if the costs are allocated more fairly eventually, generators have to provide security for these outrageously high costs in order to hold their places in the interconnection queue. Will this order help with any of those initial security requirements?

MR. GRAMLICH: I think it would by encouraging more proactive building of the necessary backbone network upgrades in advance. It does not mean generators can avoid paying anything and posting security. That will depend on regional policy, but I think we will have a more workable process and predictable cost for any generators or new loads coming into the system.

MS. CLEMENTS: That's the idea. What has happened as interconnection queues have exploded around the country is the interconnection process itself has become an ill-suited place where the grid planning takes place.

That's how you get to the place where the last car in line to get on the highway pays the full cost. We issued a rule last year called Order 2023 that starts to get at some of the interconnection problems and deals with costs that generators have to pay. We made sure that costs were high enough to prevent fake projects from taking up places in line.

What this new Order 1920 does is attempt to anticipate the future so that the planning does not have to happen in the interconnection process.

One of the factors that the order requires grid owners and operators to consider in the planning process is future power plant retirements and planned new power plants. This should make for better decisions about where to build out the grid. Of course it will take time to see the benefits.

Red and Blue States

MR. MARTIN: Allison, Republicans argue that more regional cost sharing will force red states to share in the cost of blue state policies to promote wider adoption of renewable energy. Do they have a point?

MS. CLEMENTS: Not so much. This is pretty incremental stuff fixing some of the deficiencies in Order 1000 to get regional planning going. The reality is that we have 2.6 TWh of generation in line to hook up to the grid and more than 90% of that is solar, wind and storage. That is the reality in which FERC is operating.

The conversation would be no different if 90% of that interconnection line was thermal generation. The question is how to build out the grid based on the resources that are coming on line. This order accommodates state policies and state expectations about load growth. Economic development is not a red or blue concept. There is a lot of it happening today in all shades of political states.

What this order does is help the states, regardless of political stripe, ensure they have the grid they need to accommodate planned economic development and to ensure reliable service to existing customers.

One more point specifically on cost allocation: as Rob said, it simply isn't true that if one state in PJM, for example, has an offshore wind policy goal and contributes to an offshore wind facility transmission line that any other state would be forced to help pay for that line.

However, if the line can be shown to bring economic benefits or reliability benefits to other states -- for example, say on day seven of a winter storm when the wind is blowing really hard -- then that is a benefit that would be counted in cost sharing. The point is there is more nuance to it than my state has to pay for your state's policy choices.

MR. MARTIN: Some of that gets lost in the noise of the public debate.

MS. CLEMENTS: I hesitate to get into more of the politics of it, but it is a 1,300-page rule. How many people are willing to read all 1,300 pages and work through that nuance. In a time when energy is such a polarized issue, it really does behoove us to take the time to have these kind of conversations where we drill down into what is actually in an order and how affects the market.

Big Deal?

MR. MARTIN: Kat Gamache, you are down in the trenches trying to help power projects connect to the grid. Will your clients' lives be any different after Order 1920 than before?

MS. GAMACHE: I don't think so, at least not immediately.

There are a couple aspects to it that may end up being helpful down the road. As Commissioner Clements explained, some of the long-term transmission planning needs might be taken care of so that they are not put into the interconnection requests and we are not seeing our developers having to front the money for them.

But the order does not really have much teeth. We talked about how it will be enforced. Commissioner Clements mentioned Order 2023 that had a little more teeth. There have been some recent interconnection-related orders that have more teeth where a developer can petition FERC to help with recalcitrant transmission providers.

In this case, I don't see any way that we could realistically, in any meaningful time frame, get relief for planning that a utility failed to do for what the grid should be able to accommodate 20 years from now. I am concerned that there is not really much in it for developers today.

MR. MARTIN: Rob Gramlich, is this an order that will reduce the interconnection costs for generators over time because of more sensible planning? Is that what you see as the principal benefit and, if so, how long will it be before generators start to see the benefit?

MR. GRAMLICH: That is an important effect. For anyone hoping to connect a new power plant to the grid, the status quo is insufficient capacity and very lengthy, five-year interconnection queues with very high interconnection costs and unpredictable processes. Keith, you and I have been doing this for a long time and have seen the industry go through cycles, like in the late aughts when the frustration with the long queues led to litigation in MISO. It led to an agreement in 2008. New transmission lines were built and almost instantaneously when those lines were energized, interconnection became extremely fast and cheap compared to earlier years.

I expect we will see that again in regions that actually follow through on implementation of this order. The benefits are not just for generators or renewables. It is a technology-neutral order, and it affects load just as much as generation.

MR. MARTIN: That's an important point. Another goal is to increase the overall capacity to accommodate economic growth.

MS. GAMACHE: One thing that I have been wondering about is the cost will be allocated to those who use the additional grid capacity, and as you know today there are some hyperscale energy users. AI is expected to be a huge energy user. Depending on how costs are allocated, companies that are flexible about where they locate may have an incentive to locate elsewhere. I am wondering how this will change where such things as data centers and new factories are located?

MR. GRAMLICH: A lot of that is under state PUC rather than FERC jurisdiction. The allocation between large industrial versus other customer classes was not really taken up in this order. I'm hearing about it like you are, Kat, just very recently.

I am not sure FERC can really do much about that. We are all aware that the large energy users are looking around for available power and for the right rate treatment. Some of those large users are interruptible and can save themselves a lot of time and money by being interruptible. Different data center applications are more interruptible than others.

The numerator and denominator change when you have a lot more people to share the cost with a lot more paying customers. It is not the case necessarily that rates will increase, even though some people are saying that in some of the states.

Other Issues

MR. MARTIN: Let me try to touch on a few other subjects in the remaining time. Allison Clements, FERC has scheduled a workshop on September 10 and 11 to focus further on interconnection queue reform. What do you expect to come out of that workshop?

MS. CLEMENTS: I am really glad the workshops are taking place. They are important not only for renewable developers in particular, but also for all kinds of people who care about interconnection policy.

The order we put out last year was a strong baseline. We looked at the utilities around the country who were not waiting for interconnection reform and were already making changes. We learned from observing them that some things are obvious mitigants for long interconnection queues. Cluster studies, more stringent site control and study deposits make sense. Accountability on the utility side for getting the studies actually done on time makes sense.

There is a lot more to be done. There is an opportunity for more standardization in the way that applications are processed. There is an opportunity for machine learning to help us do these studies quickly. There are some really interesting conversations going on in SPP around dollar-per-MW standard fees for interconnecting.

The new transmission order is not going to help today's projects, except to the extent that grid-enhancing technologies are brought into economic and reliability planning processes right away.

The workshop is focused on the rest of the knotty interconnection issues. If FERC puts out the perfect regional planning order and everyone loves it and nobody finds anything to complain about in all 1,300 pages, it is still only one piece of a three-dimensional puzzle. It is one row of a Rubik's Cube that keeps turning.

How do you make the US electricity system, the backbone of the modern US economy as the interstate highway system was from the 1950s through the 1980s, sufficient to protect customers and reliable in the face of all the changes that are taking place? No one thing is going to be the magic solution to this broader set of challenges. Order 1920 is just a piece.

MR. MARTIN: It is a very complicated puzzle.

Permitting reform has bogged down on Capitol Hill. Is what FERC did meaningful if utilities and developers cannot get permits to build new transmission lines?

MS. CLEMENTS: Permitting is another large piece of that complicated puzzle. Interregional planning is another thing that Congress could act on to get us moving in the right direction. We do have some limited backup siting authority through the national interest electric transmission corridor process. The Department of Energy has just proposed a number of corridors, and FERC can act to help push through new lines in such corridors if they cannot get through the state permitting process, but most permitting is likely to continue to be handled by the states.

MR. MARTIN: Rob Gramlich, Order 1920 was adopted by FERC by a two-to one vote -- two Democrats for and one Republican against -- but when it came to approving procedures for exercise of the FERC backstop authority to push through new transmission lines in national interest electric corridors, potentially over state opposition, the vote was unanimous. In the last month, DOE named 10 national interest corridors. FERC cannot step in, though, until one year has passed after a developer filed with the state to build a new power line and the state has failed to act.

How quickly do you think FERC will use that authority after the one year has run?

MR. GRAMLICH: It will turn on the specific facts of the case and the individuals who are the FERC commissioners at the time. Personally, I don't see FERC exercising its backstop authority super fast. It is an important tool that FERC has had for the last 20 years, but a couple of court decisions made its use difficult. The Infrastructure Investment and Jobs Act essentially undid those court decisions, and now the policy is back in place and all FERC really did was embrace the authority, which is why I think the vote was unanimous and bipartisan.

I think about it as a form of financial risk management for transmission project developers. A single land owner along a route can hold up the entire project. That is a big risk. The backstop siting authority is a way to mitigate that risk.

MR. MARTIN: Allison Clements, we are going to finish with you. The two main actions, the ability to push through new transmission lines in national interest corridors over state opposition and then the Order 1920 that we have been discussing are, as you said, parts of a larger puzzle. There is no single step FERC could take that would solve all of the problems. You have thought a lot about transmission over your career.

If you could choose one thing for the government to do next to address grid congestion, what is it?

MS. CLEMENTS: I am not sure I can choose just one. I think one big item and a small item.

The big item is that even though FERC has authority to mandate interregional planning, I think Congress could do more to move that along.

The smaller item is we have gone about as far as we can telling utilities to consider grid-enhancing technologies, but "consider" does not have teeth.