July 27, 2011 - why FERC issued Order No. 1000, and what it means

I've been covering FERC Order 1000, a landmark regulatory decision that will reshape the U.S. electric grid.

To understand what FERC's Order No. 1000 means for the U.S. transmission system, you need to understand the direction in which the electric industry is changing.  A shift in the generation mix coupled with a sharp uptick in transmission line construction are largely responsible for the need for reforms.

Utility investment in transmission lines is booming.  For example, utility members of the Edison Electric Institute reported $55.3 billion in new transmission facility investment, while another report commissioned by EEI suggests about $298 billion in new transmission facility needs between 2010 and 2030.  In the next five years, new transmission line mileage will be built at a rate nearly three times higher than the historical average.

Why is so much new transmission line being built?  FERC points to changes in the generation mix.  Between air emissions regulation, state renewable portfolio standards, and fuel costs, the mix of energy resources used to generate electricity is shifting.  An increasing reliance on natural gas and large-scale integration of renewable generation means new transmission lines are needed to connect these new generators to markets.  Meanwhile, while coal-fired generation continues to be significant, some facilities like the Salem Harbor Power Station are being retired.  The existing electric grid was not built to accommodate these shifts in the energy mix.

With so much transmission line development underway, the stakes are high.  How lines are planned affects whether society finds the least-cost solution to our electric needs.  How the costs of new transmission lines are split affects whether users of the electric grid -- including both consumers and generators -- get fair treatment.  In issuing Order No. 1000, FERC concluded that the status quo can lead to inefficient and higher-cost decisions being made:

We conclude that the narrow focus of current planning requirements and shortcomings of current cost allocation practices create an environment that fails to promote the more efficient and cost-effective development of new transmission facilities, and that addressing these issues is necessary to ensure just and reasonable rates.

Order No. 1000 aims to fix these shortcomings through new requirements on the transmission planning and cost allocation processes.