Competition for Electric Transmission Projects in the USA: FERC Order 1000

Abstract

Historically, high voltage electric transmission facilities in the USA have been owned and operated primarily by incumbent utilities subject to state and federal certification, siting, and cost-of-service regulation. Federal and state regulation of transmission as a natural geographic monopoly continued after vertical and horizontal restructuring, the creation of competitive wholesale electricity markets, and the formation of independent system operators (ISO/RTO) (There is little difference between an RTO and an ISO. I will simply refer to both as an ISO in this paper. https://www.ferc.gov/industries/electric/indus-act/rto.asp.) to operate these markets and the associated transmission networks. The possibility of extending competition into the development, ownership, and operation of high voltage transmission projects has been a subject of interest to economists and other students of electricity sector restructuring for many years. A theoretical merchant transmission model where transmission investments are supported by tradeable transmission rights whose value reflects the difference in locational prices, attracted a lot of attention and excitement as restructured wholesale electricity markets matured in the 1990s. While this merchant transmission model is elegant, and in some ways, remarkable, when more realistic assumptions are introduced, the attractive attributes of the merchant model are seriously undermined. More importantly, this model has attracted very little interest in practice, especially in the US FERC Order 1000 issued in 2011 has stimulated increased interest in and use of competitive transmission procurement programs in the USA. This paper discusses the provisions of Order 1000, its application by ISOs, and examines the evidence to date regarding the use and attributes of the competitive transmission procurement model in the USA. The limited evidence to date is promising, though the diffusion of transparent head-to-head competitive procurement programs has been slow. Refinements can help to secure more of the potential benefits of competition in the future.