Regulation:

Former FERC Commissioner Kelliher discusses new transmission, cost allocation rule

How will the Federal Energy Regulatory Commission's new transmission and cost allocation rule affect utilities? During today's OnPoint, Joe Kelliher, a former commissioner at the Federal Energy Regulatory Commission and now executive vice president for federal affairs at NextEra Energy, explains how the rule will affect consumers and industry. He also discusses the rule's effect on the United States' renewable energy goals.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Joe Kelliher, a former commissioner at the Federal Energy Regulatory Commission and now executive vice president for Federal Affairs at NextEra. Joe, it's great to see you.

Joe Kelliher: Thanks, thanks for having me.

Monica Trauzzi: Joe, FERC just released its final rule on transmission planning and cost allocation. How much of a game changer is this for transmission in the United States?

Joe Kelliher: I think the rule is hugely important and it's part of a process that could result in more change in federal transmission policy in the next months or year or two than we've seen in the last 75 years. And the biggest effect is that it will strengthen the U.S. power grid. That right now, up till today, you could argue that the core of federal transmission policy is open access, it's fair access to the grid. But adequacy of the grid itself is actually not important, it's not a priority in federal transmission policy. And this order is a huge step towards making adequacy of the grid just as important as open access, because open access to a constrained grid, a bottleneck grid, is a pretty small thing. But open access to a robust grid that meets the needs of all types of customers and suppliers is really going to change. It's going to change federal transmission policy, but also will fit in well with what's happening with the U.S. electricity supply overall.

Monica Trauzzi: Cost allocation has been a major point of debate as FERC has been discussing this new rule. What did FERC do with regards to cost allocation and how is that significant to the national debate?

Joe Kelliher: Sure. It's hard to understand cost allocation. It's almost a uniquely American issue. But cost allocation is an issue in part because we have a very large grid in the United States, but we don't have a national grid. We have 50 states, but we don't have 50 grids. We have 500 owners of the grid, but we don't have 500 grids. We have eight or 10 grids, eight or 10 large regional machines that have scores or hundreds of owners. So the problem is when you make an expansion on one part of those regional machines it changes the way power flows throughout the whole machine, the whole region. But if only the developer of that project is paying for that investment, it's giving benefits, free benefits to everyone else in that region. So there's a free rider issue. It's an issue that doesn't exist in the UK because you have one network and one owner. So when the UK makes an investment in Scotland, everyone in the UK pays. But because we have 500 owners, cost allocation is an issue that's sort of a workaround of the fractured nature of U.S. grid ownership. So the challenge is the grid is fractured in terms of ownership, but the way it operates is more consolidated. So cost allocation is a way to make sure that cost recovery matches the way the grid physically operates.

Monica Trauzzi: And so FERC has basically said that if you're benefiting from certain power that's being generated, then you should pay for it.

Joe Kelliher: Right.

Monica Trauzzi: But only if you're benefiting from it.

Joe Kelliher: Right, there's a clear principle in the FERC rule. It's no benefit, no pay. But the reverse is true as well, that if you're getting some kind of benefit, whether it's a reliability benefit, an economic benefit or a public-policy benefit, then it's fair to allocate costs to beneficiaries. The difficulty is that it's not easy to quantify the benefits, in part because a particular -- the benefits from a particular transmission project will change, because that project might operate for 40 or 50 years. Every power plant that's built in that region or retired in that region or other transmission projects built in that region change the benefits that come from that first project. So it's really impossible to look at a project and say, well, these will be the beneficiaries over the next half-century. And so you need a general rule up front, otherwise you litigate for years who's going to benefit from that particular project. And what you end up with is a snapshot in time, you know, next year you might be able to figure out who benefits, but you don't know five years down the road, let alone 50 years down the road.

Monica Trauzzi: So, it's a lengthy rule. What are the key questions that you have as you start reading through all the pages of this rule?

Joe Kelliher: Well, it is a lengthy rule and it will probably be like a Russian novel in the end, but a lot of FERC rules are like that. And so if you're comfortable reading FERC rules, it will probably be actually entertaining and enjoyable, but if you're not, it won't compete with beach reading. But the rule is important in part because FERC -- there's no question FERC has authority over cost allocation and that's one of the myths that has been swirling around over the past year. FERC has authority over cost allocation. It's had authority since 1935. It's actually been exercising that authority for years. It's approved regional cost allocation rules in New England, in the PJM region, the mid-Atlantic region, the Midwest and the south central United States. So FERC has the authority. It's been using it. What they're doing now is the previous decisions have been case-by-case decisions and FERC's approved very different cost allocation rules in different regions. Now what they're doing is laying out a general rule that will help guide regional application of cost allocation decisions. But they're also, in the rule, applying -- they're requiring that regional cost allocation be established outside of the RTO regions and that's important.

Monica Trauzzi: So, how could this rule affect a company like yours?

Joe Kelliher: Well, how it could affect a company like ours, because we're really two companies, we're Florida Power & Light, a vertically integrated utility in Florida that has a large transmission system and it already participates in regional planning in Florida and there's Florida cost allocation rules. We're another company, NextEra Energy Resources, and we're a competitive power company that's in 27 states and some Canadian provinces. So we are in most regions of the -- we're really in every region of the United States and so we're a transmission customer, by and large, outside of the United States. So to the extent the grid is stronger, it gives us more choices on where to build renewable energy in particular, because we're the number one wind developer in North America, number two in the world, and we're the number one solar -- utility scale solar operator. So to the extent the grid is stronger, it helps competitive companies, so it also helps customers because to the extent that this rule, this FERC rule on cost allocation provides more clarity on cost recovery, it will result in larger investments in the grid. And a more robust grid is going to benefit the American consumer because they're going to end up with cleaner, less expensive power and they're going to have higher-quality service because the grid will be more reliable. So it clears the way towards grid investment and some of that investment is being thwarted now because of uncertainty on cost recovery.

Monica Trauzzi: Senators Corker and Wyden recently introduced a cost allocation measure to ensure that consumers wouldn't be unfairly burdened by any new transmission that came online. Is a measure like that necessary now that FERC has released this rule?

Joe Kelliher: No, I personally don't think so and I used to work for Congress and I described myself as a creature of Congress once in sworn testimony, so I respect Congress. But here, the main -- the Corker bill actually was a reaction to congressional proposals to require interconnection-wide cost allocation. FERC never proposed interconnection-wide cost allocation, Congress proposed it. The Corker bill, initially it was in a Corker amendment that was posed during Senate legislation -- consideration of legislation in the Senate that preceded the FERC proposed rule. So the Corker bill is not really a reaction to the FERC proposed rule, because it came out before the FERC rule. But the Corker bill, I think, stands for the proposition that there should not be cost allocation where there's no benefit and there shouldn't be interconnection wide cost allocation. The FERC rule lines up with the Corker bill on both those points. There's no cost allocation where there's no benefit and FERC really, starting a year ago, last June, made it very clear they were not proposing interconnection-wide cost allocation. So I would think, respectfully, that the sponsors of the Corker bill should see that the FERC rule -- that FERC listened to them and that the FERC rule is respectful to their views.

Monica Trauzzi: OK, we'll end it right there. Thank you for coming on the show, nice to see you.

Joe Kelliher: Great, thanks very much.

Monica Trauzzi: Thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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