An ‘even playing field’ is in the eye of the beholder: Will Order 1000 create harmony—or discord?

With the deadline looming large, public utilities across the transmission industry have spent long hours of late putting together their compliance filings for FERC’s Order 1000.

Under these landmark regulations, the “big boys” were to submit their regional* planning and cost-allocation methodologies for regulatory approval by no later than Oct. 11. (In fact, FERC granted a 120-day extension to a number of utilities from the South and the Midwest; they now have until Feb. 8 to submit their plans.) With Order 1000, FERC also strongly encouraged non-jurisdictional entities—whether a startup focused on renewable energy or a municipal electric group—to say how they aim to fit into the evolving grid.

On paper, the intent of this final order, originally issued in July 2011 and affirmed in an order denying rehearing this past May, is simple enough—to create an even playing field in terms of transmission planning, construction and utilization, such that no single power resource ever holds another hostage, and to promote regional and interregional coordination as never before.

The goal is laudable. In the arena of renewables, after all, the United States is clearly at the beginning of a renaissance of sorts, with our best and brightest minds focused on generating energy, not just from the wind and the sun, but from wave-motion, algae, waste-decomposition—you name it. Clearly, utilities are no longer the only game in town. We must have adequate planning in order to make room on the grid for this next generation of users. Failure to do so would surely inhibit competition and, eventually, our economic growth and prosperity. But this is not just a business matter: In the age of “big data,” our national and financial security hinge increasingly upon the strength and reliability of the grid itself. After all, those massive data centers relied upon by our financial and military institutions must have ready access to power—and lots of it.

And so, with these broad aims in mind, FERC has asked public utilities to show how they have modified their transmission tariffs and how they plan to pursue regional and interregional coordination actions over time. To be sure, regulations of this scope and scale always create big questions. And indeed, Order 1000 has generated no shortage of doubters and skeptics, particularly when it comes to cost-allocation methodologies. Will the smaller-scale grid users be forced to pay unfair rates in order to piggyback on the growing grid? Will the big boys, in the end, be allowed to dictate unfavorable terms and shape the evolution of the nation’s transmission infrastructure in ways that benefit their own bottom lines? For their part, some public utilities bemoan the apparent loss of bottom-up planning—a traditional prerogative that has been a key to their growth and prosperity thus far.

Such questions are important, of course, but so, too, are the tremendous benefits that could accrue if, despite the challenges associated with this endeavor, Order 1000 actually accomplishes its ambitious ends. For one thing, closer coordination among regional entities surely would increase the reliability of the transmission system overall. By agreeing on cost-allocation — exactly who is going to pay the tab, or at least the appropriate portion of it, when transmission is built or rebuilt — it becomes much easier to create the infrastructure needed to meet the nation’s evolving need for power. This, of course, leads to much-improved customer service for the industry itself, even as the new cost structure evens out some of the disproportionate burden now carried by the biggest entities. The country’s nine or 10 biggest transmission grids, moreover, do not operate in isolation. While we might not have a “national grid,” per se, the actions of one regional neighbor always affect those nearby. Order 1000’s specific focus on “zooming out” to look at the interregional big picture clearly is in sync with the overall evolution of the grid into something akin to an interstate highway system that can accommodate a huge variety and volume of vehicles, day and night.

For the U.S. power industry, the real question is whether these regulations will indeed accomplish their laudable aims, or if they will fizzle and fail. In coming months, FERC’s analysts will be looking hard at the submitted filings to see whether they are the product of realism and good faith, or of a more provisional attitude in which companies are, not to put too fine a point on it, mostly “looking out for No. 1.”

In the worst-case scenario, the filed cost allocation methodologies will stir widespread opposition and cries of foul play as grid-users small and large dicker over who should pay what and why. The cost allocation plans must be defensible and stand the test of scrutiny, both from regulators and from those companies directly affected by the calculations. All parties must share a perception of fairness — and this is something that tends to be a tall order in politics, business and life in general. The industry might witness widespread loggerheads over these filed methodologies. If so, this will be telling about the ultimate prospects of Order 1000. On the other hand, the collective good faith of the industry might just translate into a new era of collaboration along the lines of what FERC had envisioned. Or perhaps what will transpire is something harder to characterize — a mixed bag of outcomes, with some regions getting along swimmingly and others not at all.

Regardless, it is clear that in order to safeguard its own future, the power industry must have a broad vision, one that inspires individual entities to look past their own provisional concerns in favor of the greater good. This is precisely why FERC encouraged non-jurisdictional entities to participate in the regional and interregional planning process. This happens to serve the non-jurisdictional entities well: by participating, they get a chance to educate themselves on the current dialogue—what the jurisdictional utilities are saying, doing, expecting and offering. If you are not at the table, you do not know what is being said. It also gives them a chance to explain how they calculate costs and to express their concerns about how other entities heap costs upon them. From here, the industry needs to sit back and watch how this picture unfolds. What unintended consequences will arise? Will they be properly addressed? How will the cost-allocation issue play out?

A decade or two ago, this business was about running a wire between two points and connecting it with electricity. That simple picture has changed drastically, and FERC Order 1000 might just be a key step in helping the industry adjust to this new, heterogeneous reality. We will soon have early indications of whether this process will work. Keep an eye on the headlines.

*Interregional planning and cost allocation methodologies are due April 11, 2013. 

Roy M. Palk, former President and CEO of East Kentucky Power Cooperative, is Senior Energy Advisor for the national law firm LeClairRyan.