State Urges Federal Agency to Impose Cost Caps on Transmission Projects

Tom Johnson | October 11, 2016 | Energy & Environment
Large energy companies, utilities increasingly look to transmission to drive profits. Without caps, cost overruns can be passed along to customers

transmission towers
With new transmission projects boosting what consumers pay for electricity, state regulators and others are pressing for a federal agency to rein in costs for modernizing the electricity grid.

In comments submitted to the Federal Energy Regulatory Commission, New Jersey joined other states in urging the agency to impose cost caps on projects put out to competitive bid to build high-voltage transmission lines.

The issue has emerged as utilities in the state and across the nation are under increasing pressure to modernize the electric grid to make it more reliable against severe weather and better able to accommodate cleaner technologies designed to provide power to customers through solar and wind systems.

New Jersey Board of Public Utilities president Richard Mroz has been outspoken in calling on the federal agency to focus more closely on cost impact to consumers when looking at new transmission projects, a point the state emphasized in comments submitted to FERC earlier this month along with Delaware and Maryland regulators.

They recommended the “ultimate cost to customers should be a factor considered in the evaluation process.’’ In particular, the states, along with an independent monitor associated with PJM Interconnection, argued cost-containment provisions must include hard cost caps.

The problem arose when PJM, which operates the regional power grid, awarded its first competitively bid project to a combination of companies, including New Jersey-based Public Service Electric & Gas. The estimated cost for building a new transmission project from its nuclear power complex at Artificial Island more than doubled from its original bid, leading PJM to suspend the proposal this past August.

“Without cost caps, there is no effective incentive to bid competitively,’’ wrote Jeffrey Mayes, general counsel for the Independent Market Monitor for PJM, which assesses the competitiveness of the nation’s largest power grid from the Eastern Seaboard to Illinois.

“Cost caps place the risk of overruns on project developers, the parties most capable of managing such risks.’’ Mayes continued. “Customers have no ability to manage development risks and should be insulated from such risks.’’

FERC is responsible for overseeing what developers get for transmission projects, including rates of return, which are typically much higher than what utilities get for more localized distribution projects overseen by state regulators. As a result, transmission has become a more lucrative part of the utility business.

Big integrated energy companies that own power fleets as well as utilities have increasingly become more reliant on transmission to drive profitability as earnings from generation have declined in recent years with lower electricity prices. In some cases, transmission can account for up to 40 percent of a customer’s bill.

In their comments, New Jersey and other states also urged other restraints on costs involving transmission projects that are competitively bid. Among those was eliminating a provision allowing utilities that are part of a transmission system to receive added incentives for building a project within that system.

In its comments, PSE&G advocated against using cost caps, instead using more effective measures, including examining a developer’s track record in delivering projects on schedule and under budget.