EMP S3E10: ITC's Nathan Benedict defends monopoly transmission development and the incumbent's right of first refusal

We reached out to ITC Holdings Corp. for the transmission owner's view on monopoly transmission development and the incumbent transmission owner's right of first refusal, known by the acronym ROFR, to build new interregional transmission grid projects.

The issue has come to the fore as the federal government plans to undertake a massive buildout of the U.S. transmission network, and separately as the Federal Energy Regulatory Commission has proposed, in an as-yet unfinalized rulemaking, to partially reinstate ROFR for interregional transmission projects in hopes of sparking more much-needed transmission development.

The competitive selection process is too cumbersome to rapidly move oftentimes  controversial transmission projects, says Nathan Benedict, an economist and ITC's manager of regulatory strategies. "Relaxing of the federal ROFR has made it harder to collaborate on projects. When we think about . . . what it takes to get a regional transmission plan put together, you need people to come to the table who trust one another and who are focused on the reliability of the grid and not focused on dividing out these pieces in order to subject them to competitive bidding."

But how do we ensure that electricity consumers pay the least cost for the transmission buildout without competitive solicitations? "It's as easy as regulation," he says. 

Those who advocate denying the incumbent transmission owner the right of first refusal to build new transmission projects "are essentially wanting to bid on projects because they want monopoly rights," Benedict says. "What it is is it's a regulated bidding process that just creates new incumbents."

State lawmakers have been rushing to adopt new state-level ROFR mandates, and several of those already in place have been subject to litigation in both state and federal courts. Benedict declined to speak directly to a recent Iowa Supreme Court decision rejecting that state's ROFR as "quintissentionally crony capitalism." Nevertheless, he rejected the idea that ROFR protections for incumbent transmission owners represents crony capitalism. "It's simply regulation like we've had for a hundred years," he says.

Benedict is skeptical that FERC's proposed change in the federal ROFR standard will make much of a difference. He calls FERC's proposal a "limited reinstatement," and maintains full restoration of the federal ROFR is necessary. FERC's proposal is "a move in the right direction. But clearly, it's not enough to just do that."

Transcript

EMP S3E10: Nathan Benedict, Manager of Regulatory Strategy, ITC Holdings Corp., a subsidiary of Fortis Inc.
(transcript edited for clarity)

EMP: Welcome to the Energy Markets Podcast. I'm your host, Bryan Lee. And our conversation today is with Nathan Benedict, manager of regulatory strategies for ITC Holdings Corp. We invited ITC onto the podcast to discuss the company's support for incumbent transmission-owning entities having a right of first refusal to build new interstate transmission. Nathan, welcome to the podcast. 

NB: Hi, Bryan. Thanks for having me on.

EMP: Just a little background. ITC was established in 2003. It acquired the transmission assets in Michigan that were spun off by DTE – I guess that's Detroit Edison's parent company. It also ultimately acquired Consumers Energy’s transmission company, Michigan Electric Transmission Co. In 2005, ITC became the first publicly traded pure-play transmission company. It acquired a number of other assets in the Midwest and has built a number of assets and has become a major transmission provider in the region operating under the RTO umbrella of the Midwest ISO, or MISO. In 2016, ITC became a subsidiary of Fortis Inc. So, ITC is among those transmission owners advocating in favor of FERC’s proposal to relax the federal right of first refusal, or ROFR, as it is known. This is an issue that dates back to FERC’s Order No. 1000 that was issued in 2011, which eliminated the federal ROFR, meaning that new transmission should be competitively sourced. But as former FERC Chairman Rich Glick explained to us in a recent episode, eliminating the federal ROFR resulted in transmission-owning companies building mostly local projects which would not be subject to competition. The more necessary transmission investments bolstering the grid regionally weren't being made, because then they would be subject to competition. FERC has proposed relaxing the ROFR provision as a means of getting the types of transmission investments needed built. Nathan, why is ROFR a good thing?

NB: Well, I would say first, I'll not necessarily correct former Chairman Glick, but I’ll note that there's nothing nefarious going on about the lack of regional projects and the number of local projects. I'll say that regional projects and local projects go hand-in-hand. And what we're seeing is that the federal ROFR and the relaxing of the federal ROFR has made it harder to collaborate on projects. When we think about the MISO process, the SPP process and what it takes to get a regional transmission plan put together, you need people to come to the table who trust one another and who are focused on the reliability of the grid and not focused on dividing out these pieces in order to subject them to competitive bidding. And that's why we find it to be an important thing to have the federal ROFR to put the focus back on the planning and the right solution for our customers.

EMP: So explain to me how by having a project competitively built you can’t have the best outcome for customers?

NB: Well, as you know, part of the planning process is identifying these larger regional projects, which are subject to regional cost allocation. And unfortunately, with Order 1000 they've set the trigger, or FERC has set the trigger for competitive bidding as being regional cost allocation. And regional cost allocation is tricky as it is. It's a very delicate balance among stakeholders balancing the need for the portfolio and then also who's going to pay for it. And adding this extra level of complexity about who's going to build transmission, so far, has shown that regional portfolios are not getting done. Effectively, the only regional portfolio we've seen since Order 1000 is in MISO with the long-range transmission plan. If you've been following us, we have Tranche One which was recently announced by the MISO board. And this takes place in what we call MISO Classic or MISO North, the original area of MISO before the Entergy integration. And it's worth noting that that area has state ROFRs. So in effect states have decided to do what FERC has not done and reinstate or, you know, basically issue ROFR legislation to take that role that the federal government basically pulled away from the transmission owners.

EMP: It seems like states have been rushing to adopt ROFR standards recently, particularly with the new focus on building transmission as part of the transition to a clean-energy economy. But yeah, I mean, we've had a number of court decisions over state ROFR laws. We had the 5th Circuit in a case out of Texas in which they invoked what's called the Dormant Commerce Clause, saying that this Texas law providing for a right of first refusal violates the Dormant Commerce Clause, which the Dormant Commerce Clause means states cannot enact laws that interfere in interstate commerce. But in the 8th Circuit, a case out of Minnesota, it's a completely different outcome. They found that it was not discriminatory, there was no Dormant Commerce Clause issue and that the state has a legitimate interest in regulating intrastate transmission. Are there any other federal appeals court rulings that we're not aware of? I know Texas has appealed the 5th Circuit decision to the Supreme Court. I would assume someone's going to appeal the 8th Circuit decision and these conflicting decisions might get the Supreme Court's interest?

NB: Yeah, by no means am I an expert on the appellate process. I'm more of a policy guy and an economist. But what I will say is based on things I've heard in the press and just talking with people. And each of these statutes are constructed a little bit differently and it's unclear to me which ones may withstand appeal and which ones may not. But clearly, to the extent we have differing decisions in the district courts, at some point that needs to get rectified and I don't personally know how that's going to shake out.

EMP: Yeah, and I guess you're in Iowa. There was a recent Iowa Supreme Court decision which rejected Iowa's state-level ROFR. The court derided the ROFR provision as, quote, “quintessentially crony capitalism.” Do you want to comment on that?

NB: Sure. I won't say anything about the court decision in particular, but about this notion about crony capitalism. Well, I'll have to confess I'm a little bit of a nerd here because I am an economist and I used to teach first-year college economics. And whenever we would teach one of these classes, we'd start with the notion of perfect competition, this idea of the various essentially assumptions that must be in place to get this competitive outcome that we as red-blooded Americans really believe in. But what we find is that all these assumptions they hold in a very perfect environment, it is just not facts-on-the-ground of what we see in real life. And in fact, when we look at transmission infrastructure investment, it truly is what we've learned in a textbook is a natural monopoly. There are economies of scale, huge economies of scale with transmission. Becoming a transmission developer is difficult. You can't simply decide to do it and then walk away. The (cost of) entry and exit is high and so on. And so the question isn't necessarily that, you know, ROFR is a crony capitalism-type situation, but really what ROFR does is it allows states to have some degree of control in who is building transmission and have some control over the siting, for example. And then at the federal level, we still have FERC who controls the ratemaking. And so that's not crony capitalism. It's simply regulation like we've had for a hundred years. 

EMP: There are arguments for transmission being a natural monopoly, but there are others who view it as transmission owners exercising monopoly protections. How do you gauge whether the utility is making an investment in the best interests of the consumers if you don't have a competing bid to compare it to?

NB: I would say it's as easy as regulation. I mean, I will say that before I began working at ITC, I worked on the consumer advocate side for a state consumer advocate agency. And it was our job to write discovery questions to really open up the hood on a rate case, to figure out what investments were made. Were there better alternatives? Are customers being protected? And we have currently, ITC and many other transmission owners across the country, have annual formula rate processes that let all of our stakeholders come in on an annual basis. They have windows in which they can ask questions and they can ask pretty much anything and we're responsible for giving them an answer whether they're satisfied with that answer or not. They can then take it on to a formal challenge with FERC. And some of our customers have done that. So I will say that there are processes in place that can do what regulation is intended to do.

EMP: This whole ROFR issue came to the fore because FERC has proposed in one of its transmission rulemakings to relax the federal ROFR. Former FERC Chairman Glick, when he spoke with us, described it as a relatively minor change in federal ROFR policy, but it apparently generated far more opposition than FERC apparently expected. So the issue has become a flashpoint of controversy in the still unfinalized transmission rulemaking. Can you tell us about the state of play in that rulemaking? Are we going to see a final rule soon? 

NB: As far as timing, your guess will be as good as mine. And hearing recent comments by Chair Phillips it seems there are other things in the deck that may come up first, such as a rule on interregional transfer capability or perhaps a rule on generator interconnection. So I don't know that we'll see anything on ROFR anytime soon. But that said, I will agree, there was a lot of consternation over this proposal and to characterize it as former Chairman Glick characterized it, I think, is correct. It's a relatively minor change. It would reinstate the federal ROFR for these long-range transmission projects that are essentially collaborative. And what collaboration means is yet to be defined. That would be something that would come out in the final rule. But it's a relatively minor change and there was a relatively large blowback. And the way I look at it, the reason I think there was a relatively large blow back is because many of the people who oppose that are essentially wanting to bid on projects because they want monopoly rights. And that I think that's what's kind of strange about all this is we talk about competition as being a competitive market. But indeed what it is, is it's a regulated bidding process that just creates new incumbents. 

EMP: Okay, but doesn't that competitive bidding process assure that ratepayers get these assets built at least cost?

NB: No. I would say what this process does is it allows the RTOs, say MISO, SPP, PJM, to run through all these bids and compare out all of them which they prefer. Cost is one part of it, but least-cost is not the selection criteria. For example, in SPP there's a 100-point scorecard with a variety of things in there that include your ability to operate and maintain the assets over their lifetime, and includes essentially a whole host of things, but cost is one part. But what we've seen, overall, it seems that the focus has been on least-cost to the exclusion of all else. But then on the back end, when we evaluate whether this bid that was allegedly least-cost ends up being least-cost when the projects are put into service, that hasn't borne fruit. And a good example of this is this report that came out from Concentric Energy Advisors, I think it was in 2019. They looked at these projects that had gone through a competitive process, and on average, they were coming out with 27% cost increases. And so it begs the question, is winning a bid necessarily what you're paying on the backside and are customers being protected? And I would argue no.

EMP: This study found that competitively bid transmission projects resulted in a 27% cost more than what would happen otherwise. How does that happen?

NB: Yeah, so what Concentric Energy Advisors did is they looked at the competitive projects that had actually been delivered and placed into service and they found of that pool of projects they looked at they observed cost increases of 27%.

EMP: A cost increase of 27% from what they bid, is that what you mean? 

NB: Yes. 

EMP: Yeah. Okay. So that's where the argument comes in that what's happening is folks are bidding low to get the project and then coming back afterwards and trying to get a higher cost out of the commission. 

NB: Sure. 

EMP: If there was a federal ROFR, as well as a state ROFR, why would these facilities be built more readily than they are now?

NB: They would be built more readily because there wouldn't be a selection process. So whatever would come out of the regional transmission plans would be assigned to the incumbent for that area and the RTOs would not need to go through a selection process. A good example of this is with that Tranche One of MISO’s LRTP, as I mentioned. MISO has had to stagger the process for running its competitive developer process due to resources. It simply is more projects than they can just snap their fingers and evaluate. And so the last of those projects will not even have a developer named until around June of 2024, which is about two years after they were approved by the MISO board. And so that's one of our concerns about these developer selection processes, is if we agree that transmission investment is needed, and there's no time to wait, we can't wait years to go through an administrative bidding process.

EMP: Ari Peskoe of the Harvard Law School Environmental and Energy Law Program told Governing magazine, “If we give the utility industry a monopoly, our transmission system is going to evolve to meet the utilities’ needs. And those needs are not always aligned with the public interest or the clean-energy transition.” Do you want to respond to that?

NB: I would respond to that by saying we keep our customers’ needs at the forefront because, ultimately, we're accountable to our customers. And with ITC, we're in a very unique position because our largest customers are the distribution utilities in our footprints. They are very sophisticated entities, and they have no qualms about asking questions about the various transmission investments we make. A good example of this is in Michigan. We have, or Michigan has, an IRP process where the distribution utilities are talking about the generation mix they're planning to serve their customers. And one part of that is them reaching out to ITC and METC, our Michigan operating companies, to talk about the transmission investment that's needed to support the IRP and what the right mix of generation and the right mix of transmission is to facilitate that. And this is all under the review of the Michigan state commission. So I would say that the decisions we’re making, and particularly in an environment like that where we're working with our distribution utilities in a collaborative IRP-type environment, at its core we are doing what our customers want us to do, and we are not operating solely in our own interest.

EMP: Okay, so if we reinstate the ROFR, at least in the limited respect that FERC has proposed, we're going to see a lot more transmission built more rapidly?

NB: I don't know about that. I think reinstating the ROFR as proposed by FERC is a limited reinstatement. As I mentioned, it has some criteria yet to be defined as something loosely about long-term projects with some sort of collaborative ownership and how that's defined is yet to be known. And it's a move in the right direction. But clearly, it's not enough to just do that. If you asked me, I would prefer for the federal ROFR to be reinstated as it was prior to Order 1000. So we can go back to the collaborative planning approach that we had when, for example, we developed the MVP portfolio back in 2011.

EMP: What other factors are getting in the way of building transmission? Of course, there's NIMBY, or BANANA, build anything nowhere anywhere near anything. How does your company deal with the NIMBY issue?

NB: I think with the NIMBY issue you engage landowners early and often. For example, we've already been out talking to affected land landowners with respect to the MISO LRTP Tranche One to understand what their concerns are, and we don't yet know specific routes or anything like that, but it's engaging people, finding out how they want to be engaged, what types of engagement work? So for example, you know, I was reading a report by one of our folks who’s out in the field, and landowners say, yeah, we would prefer to see something from you along with messages from our local governments, you know, that this is like a legitimate communication because there's a lot of suspicion now around things we see in the media or pieces of mail or email we get, and so we're trying to figure out the ways to best engage our landowners and ease that process. But I will say, ITC is generally effective in getting easements from our customers and being collaborative with the communities we serve.

EMP: Okay, so what are some of the other obstacles in the way of getting transmission built? Because we need to build this transmission, right?

NB: Right. I think one of the biggest obstacles, in particular when you look at interregional, which I know this is one of Chair Phillips’ priorities is that region-to-region, we don't necessarily look at the benefits of transient transmission in the same way over the same timeframes. We have different project categories. And in a nutshell, I think a good way to wrap it up is in order to get transmission built, you need everyone at the table to see the same problems and the same benefits from resolving those problems. And then agree to who's going to pay to resolve the problems. And that's a difficult conversation to have. And I think that's where FERC has a great opportunity with its transmission planning NOPR to provide leadership, some principles by which the regions can move forward with tariff revisions that then would help to create that environment to bring stakeholders together. I know another big piece of this is with state regulators, and this is something Chairman Glick began in his tenure, was engaging state regulators to make sure they're along, you know, participating in the RTO processes and have a voice in the planning process. Because if we come out with some sort of tone-deaf transmission plan, and then try to work with the states on routing, it's going to go nowhere. And so that's why bringing states in as well, early and often, is a good path forward.

EMP: Cost allocation is a real problem, right? That's always contested?

NB: I would say, yes, cost allocation is always challenging in the sense that, you know, you go out to dinner with your friends and the bill comes and everyone's fighting about how to divide it up, and fortunately in MISO with the LRTP they were able to move forward with the MVP cost allocation and make some small changes to allow a subregional cost allocation. So they didn't necessarily need to go back and reinvent the wheel. And so I think to the extent you have a well-defined cost allocation process that stakeholders agree to, that's durable, it makes it easier in the future to do regional transmission.

EMP: Well, as Rich Glick noted, everybody wants transmission, but nobody wants to pay for it. Well, I think I've pretty much exhausted my rounds of questions. As I do with every guest, I'll kick it back to you to bring up anything for the good of the order that you think we should have discussed.

NB: I will just make one comment which relates to something I mentioned before about how you can regulate transmission owners. If you think that incumbents perhaps are operating in their own self-interest, how can you ensure that's not happening? And I would encourage any of the listeners today who are ITC stakeholders, or stakeholders of other transmission companies, please use the available means, such as our formula rate protocols. It's something that recently came up in questions from FERC about how can we have cost control in the transmission industry? And this is where it starts. It's having stakeholders engaged, asking questions, putting our feet to the fire, and we have a duty to share information and to be transparent. And so I would encourage everyone to use those protocols as they're available.

EMP: Nathan Benedict, manager of regulatory strategy for ITC Holdings. Thank you very much.

NB: Thanks for having me.

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