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Utilities, Transmission, and the Grid: An Interview with Ari Peskoe

Ari Peskoe currently serves as the Director of the Electricity Law Initiative at the Harvard Law School Environmental and Energy Law Program. His work has primarily engaged with questions pertaining to electricity regulation at the federal and state levels. Peskoe has also litigated before the Federal Energy Regulatory Commission on landmark issues in electricity regulation such as the Western Energy Crisis.

Charlie Adams: In your paper, “Is the Utility Transmission Syndicate Forever?” you describe the unsavory extent to which investor-owned utilities wield monopolistic and anticompetitive power. How did we get to this point?

Ari Peskoe: Well, electric utilities are monopolists, and they were granted monopoly privileges by states about 100 years ago. When states allowed these monopolies, they were primarily concerned about local consumers’ access to reliable and affordable electricity. The monopoly model was designed to electrify America. You can think of it as a financing model that matches the private interests of utilities in terms of profiting from providing service with the public interests of reliable and expanding electricity. State regulators set rates that reimburse utilities for the costs of providing service and provide a profit margin on their infrastructure investments. This model de-risks investments and incentivizes the utility to build more infrastructure. As the physical electricity system expanded in the first half of the 20th century, it made sense for electric utility companies to connect to each other to provide more efficient and reliable service to consumers. But, the effect of those connections was the regionalization of companies’ dominance and control over the industry because you had local monopolists linking up with each other and controlling the operations and expansion of this essential infrastructure. This model might have made sense when investor­-owned electric utilities were the primary players in the industry, but today, through a series of reforms by state governments and the federal government, we now have competition for the sale of power and the development of power plants and transmission infrastructure. These local monopolists can act anti-competitively in ways that harm consumers particularly, when we have companies that, if given a fair chance, can provide service that is just as reliable and is cheaper and cleaner for consumers.

CA: What role does federalism have in preventing or enabling progress on transmission?

AP: Right now, permitting transmission is done at a state-by-state level. There are some exceptions. For example, when the federal government owns land that your project is going to traverse, you need federal permission. So, transmission is already built around federalism because, for large-scale projects, the Federal Energy Regulatory Commission (FERC) regulates rates and planning processes that determine how utility rates are spent on transmission, but ultimately developers need state permission. So the question is, what’s the right role for the states in these federally ­regulated processes? 

FERC has put out a proposal that would give state regulators a greater role in the process of selecting projects and figuring out how those projects are going to be paid for. The idea is if you involve states earlier in the process, it will basically ensure that those projects are later permitted when they go before state permitting authorities. I think that the short history of the successful regional transmission development processes shows that states can play important roles in facilitating the development of major projects. At the same time, when we have large-scale projects with a clear national interest, such as those designed to move renewable energy across state lines from where it can be produced cheaply to where there’s a higher energy demand, there’s a good argument that maybe the federal government should be the only permitting authority. So, I don’t think anyone has figured out what the optimal role is here for state regulators and for the federal government, but I think what is clear is that it’s very hard to change federal law in this area.

CA: If you were to design a new electric grid and regulatory scheme, taking influences from other countries, states, or existing elements in our system, what differences would you prioritize? What did we get right the first time? 

AP: One of the differences between the United States and other parts of the world is disparate ownership. In the United States, there used to be hundreds of privately ­owned utilities that have since consolidated into what really amounts to a few dozen. We also have public power entities in which municipalities own their local utilities, and then there are rural cooperatives. In many other parts of the world, electricity was a government ­provided service controlled by the central government. Many countries have since liberalized through various free-market reforms and sold off the assets to various different types of companies. But our disparate ownership makes large-scale transmission development challenging because entities naturally look out for their own interests, and large-scale development may harm the parochial interests of utilities that still own power plants, which is the case in 35 states, for whom the transmission may harm their local generation monopolies.

If I were going to design something new but accept the fact that we have this diverse ownership mix, I think there has to be somebody with real authority at either the regional or the federal level to plan projects that meet 21st century clean energy and reliability challenges; there has to be somebody to figure out who’s going to pay for those projects; and there has to be somebody to permit their construction. All three of those things must happen without having to worry about the political influence of the incumbent utilities—that’s really the key. Also, right now we don’t have clean energy goals in this country. A lot of states have clean energy goals, but Congress has never enacted similar goals for carbon dioxide or renewable energy. So, I think my solution would be having a national goal to match the evolving energy mix, and creating new institutions at the regional or national level to develop transmission.

CA: Are you optimistic about FERC’s appetite and ability to institute these reforms that might create something that looks closer than what you’re imagining?

AP: What I’d like to see FERC do is regulate utilities. A lot of the issues involving Regional Transmission Organizations (RTOs) grab most of the attention these days, but FERC has pretty expansive authority, as do state utility commissions, to investigate utility practices and ensure that rates are just and reasonable. This is a pretty broad standard. One of the reasons that I think utilities are not investing enough in large-scale regional projects is because it’s easier and faster for them to make money by rebuilding last century’s transmission system. There’s just a lot less oversight over small scale projects as compared to large-scale projects—that limited oversight is both on the state permitting side and on the FERC-regulated side of things. It’s just so much simpler for utilities to wreck and rebuild an existing line, and they can often justify doing so because a lot of the existing infrastructure across the country is very old and there’s just no oversight over these decisions. That’s simply not how you regulate a utility: by just trusting their judgment, not reviewing their rates, and then not requiring a permit for their projects.

There’s an open proceeding right now at FERC overseeing more of these local projects, and I’ve had the theory that if local projects were scrutinized in a way that utility projects have traditionally been scrutinized, then maybe that would remove this attractive nuisance of rebuilding last century’s grid and induce more development at the regional and interregional levels. So I’m hopeful that FERC will take that issue seriously. I’m also hopeful that FERC can push utilities to do more to consider all the benefits of larger scale transmission development. I think in some regions of the country, there’s momentum for doing more on large-scale transmission development. In New England, states have been calling for more. In the middle of the country, in a region called the Midcontinent Independent System Operator (MISO), there’s been some real progress on building large-scale transmission. A new FERC rule that requires utilities to consider the full range of benefits transmission offers to consumers can have some really positive effects in some parts of the country. 

*This interview has been edited for length and clarity.