Making beneficiaries pay for new power lines is fair strategy

The nation's aging electrical grid crosses state lines, jurisdictions and ideologies, but the costs for new power lines should be borne by those who benefit from them, according to new Cornell research.

Failure to upgrade the grid leads to unreliability and higher electricity bills, in part because it remains tough to get cheap wind and solar to market. From a policy perspective, tensions swirl around affordability, reliability and achieving decarbonization commitments.

"What this has become is a fight about cost allocation," said Jacob Mays, assistant professor in Cornell Engineering's School of Civil and Environmental Engineering and co-author of the study, "The Law and Economics of Transmission Planning and Cost Allocation," published Nov. 15 in the Energy Law Journal. "Half of the country wants to decarbonize and half doesn't. The allegation on one side is that transmission expansion is just a ploy to get people to pay to serve the policy goals of the states that are aiming to decarbonize. Our paper is trying to help clarify and resolve those disagreements."

Mays and co-author Joshua Macey, associate professor of law at Yale Law School, examined the history of Federal Energy Regulatory Commission regulation, touching on court cases that show that passing cost of new power transmission lines specifically to those who benefit works best to build investment in the grid. Other strategies, they say, provide perverse investment incentives to think small, providers focusing instead on modest and discrete projects that do not increase transfer capacity between utility service territories.

It's a hot and complicated topic because the White House and Federal Energy Regulatory Commission (FERC) are introducing new laws about planning and cost allocation, much of it focused on renewable energy and climate change resiliency. And while many states and providers focus on the logistics of expanding access to energy services and keeping costs down for customers, others concentrate more on the imperative to reduce emissions of greenhouse gases.

After receiving more than 15,000 pages of comments from nearly 200 stakeholders representing all sectors of the electric power industry, the FERC in May issued a new order to help electricity transmission providers and states make sense of the process of planning and allocating the costs of transmission investments. Order No. 1920requires the nation's transmission providers to plan for future transmission needs, and it adopts specific requirements addressing how transmission providers must conduct long-term planning for regional transmission facilities and determine how to pay for them.

In response to the May FERC order, a group of 19 states claimed it "requires that some states, tribes, local governments, and private companies' plans and goals override the plans and goals of other states, tribes, local governments, and private companies, and to charge the latter group for the costs." And dissenting FERC commissioner Mark Christie called the order a "shell game" with an agenda to promote a "'green energy' transformation agenda" and "socialize trillions of dollars of costs."

Mays and Macey concluded that the "beneficiary pays" approach to cost allocation is consistent with decades of judicial precedent and adopts the cost allocation that courts have required for decades.

This means that people or companies who directly benefit from new power lines, the "beneficiaries," should be the ones who pay for them, preventing situations where residents in one state are unfairly charged for power lines that only benefit people in a neighboring state. Without the "beneficiary pays" system, they say, some groups might get a free ride on others' investments in new transmission lines, enjoying the benefits of expanded power access without contributing to the cost.

"The paper is responding to landmark FERC Order 1920 as well as its critics, who appear to agree that customers should only pay for the benefits they receive," Macey said. "But they disagree on how you calculate that."

Mays says the order, and their paper, are "ultimately trying to get better transmission planning - better for reliability and better for decarbonization." In part because of a lack of agreement on cost, big, multi-state projects have been avoided, and Mays and Macey see this order as an effort to push back against that trend.

For the analysis, the researchers looked back over the last century to show that federal involvement in energy markets, both for electricity and natural gas, has generally supported policies like "beneficiary pays." The current approach is part of a larger, long-standing pattern of fair cost allocation in the energy sector.

To explain the utility of the "beneficiary pays" strategy, Mays and Macey use New Jersey and Ohio as case studies, the former with strong clean energy goals and the latter without.

"The order says, 'Plan the system to meet all the relevant goals, determine who benefits from the new lines, and then we'll allocate cost based on their specific benefits,'" Macey said. This means if a line provides economic benefits to Ohio while facilitating emissions reductions in New Jersey, then Ohio pays for its economic benefits, but only New Jersey pays for the environmental benefits.

The reality of an interconnected transmission system is that essentially every new power line produces some economic benefits, some reliability benefits and some climate benefits. The "beneficiary pays" principle, the authors said, is not only the fairest approach but also the one most likely to encourage investment without causing disputes over cost-sharing.

Public link

Please use the above public link if you want to share this noodl on another website.