The history of transmission as a guide for the future of distribution
Last month, I discussed franchise rights and the importance of opening up distribution level infrastructure to competitive forces in the way wholesale markets and the transmission network did in the late 20th and early 21st century. As such, I think it’s important to revisit how transmission and wholesale generation became competitive and what lessons we can take from the process that may be applicable to distribution. While I don’t think it will be a one-to-one mapping of ideas, it could be a useful historical example from which to model introduction of competitive forces to the distribution grid.
A trip back in time
First, a brief history of how we got the transmission system of today. It all started with the invention of alternating current (AC) electricity, which allowed power to be transmitted long distances without lots of energy lost as heat. For context, today’s system results in about 6% of total supply lost as heat during the transmission process. Because less energy was lost in transmission, AC was a better solution for conducting power long distances than the incumbent direct current (DC) technology Edison first used in New York in the late 1800s. Two entrepreneurs, George Westinghouse and Nikola Tesla are credited with the discovery and implementation of AC technology as a way to transmit power.
Tesla combined AC electricity with transformers (devices that increase and decrease the voltage of the electricity) to move power long distances with minimal line losses in the process. The transformers would shift the voltage of the electricity way up when it hit the transmission lines, then another transformer on the other end would shift the voltage back down to a level appropriate for use in homes and businesses. The first application of this technology was by the Niagara Falls Power Company, which generated electricity from hydropower at Niagara Falls. From there, a set of transformers and transmission lines carried that power from Niagara all the way to New York City, hundreds of miles away.
At the time, existing large-scale wholesale power production all but required such a transmission system for the energy generated to actually be valuable to consumers. Since these production facilities were typically sited far away from major metropolitan areas for size and safety purposes, transmission infrastructure was the only way to get that power from the site of generation to the site of load. In other words, transmission lines became a critical highway along which the life-source of major metropolitan areas flowed, since such large-scale generation could not possibly be built in a dense area like New York City. Tangentially, as I have a strong viewpoint on the value of distributed energy, I think it’s important to note that DERs do not require such massive scale or transmission infrastructure to generate value for end users, a benefit that should be accounted for in the economic valuation of DERs. I will save the long digression for another time though.
Once Tesla and Westinghouse demonstrated the power of transmission, other entrepreneurs tacked onto the idea and built their own transmission systems, creating essentially mini power monopolies in specific geographic regions of the country. By 1935, President Franklin Delano Roosevelt signed the Public Utility Holding Company Act, which regulated the geographical scope and corporate structure of utilities, ultimately creating vertically integrated utilities that were granted monopolies in specific geographical regions. In my piece on franchise rights, I acknowledge that at the time such a system made a lot of sense, as the grid was in a massive build-out phase and needed lots of power and T&D stood up quickly. This legislation gave utilities the financial predictability they needed to invest big in generation and transmission infrastructure, which during the build-out phase of history was absolutely crucial to promoting growth.
These vertically integrated utilities owned everything from the transmission and distribution lines to the wholesale power generation facilities and as a result faced zero competition in the geographical area in which they were allowed to operate. This all changed in 1978 when President Jimmy Carter signed the Public Utilities Regulatory Policies Act (PURPA) into law. PURPA is responsible for the first wave of energy market liberalization in the United States. It introduced non-utility-owned wholesale power generation to the bulk grid and mandated that those producers be allowed to sell power to the grid and move it around on utility-owned transmission lines. That just meant that independent power plants were allowed to bid in their supply to the bulk grid and compete with the incumbent utility’s wholesale generating capacity. The expected impact of this, obviously, was a sharp increase in competition in wholesale power markets, which incentivized all participants to find the most cost effective way to produce power, thereby driving down prices for end consumers.
However, utilities technically still owned the superhighway transmission lines that power needed to move along and could charge whatever tariff or toll they wanted to their wholesale competition. In other words, they could abuse their market power and hold other non-utility wholesale producers hostage until they paid exorbitant fees to the utility to access their transmission lines. Realizing this was unfair and unlikely to deliver more options for wholesale energy to the grid, Congress passed and President Bill Clinton signed the 1992 Energy Policy Act, which mandated that any competitive power generator or utility be granted access to a utility’s transmission lines at the prices the utility would charge itself for the access — in other words, it mandated utilities not abuse their market power and price gouge their competitors purely for access to the transmission lines.
The anti-competitive practice this legislation addressed actually reminds me quite a lot of some of the anti-competitive practices Amazon and Apple engage in — abusing their platform / monopoly status to gain a pricing advantage for their vertically integrated business over their competitors who compete with them on only a single dimension (in this case, the product being sold or distributed on the platform). Ironically, regulators understood this conflict of interest in the context of transmission, and around the time of the Energy Policy Act becoming law, the FERC encouraged the formation of RTOs and ISOs to act as the neutral party conducting wholesale market operations and accounting for all the wholesale supply — utility owned and non-utility owned — bidding into the market.
At any rate, the Energy Policy Act forced the transmission-owning utilities to open up their network at fair market rates to non-utility providers, thereby allowing for truly competitive wholesale power markets. As a result, by the dawn of the 21st century wholesale power production and transmission was booming, with transmission networks crisscrossing the country with over 150,000 miles of high voltage transmission. And customers got to reap the benefits through more economically produced power and thus cheaper prices for them. The Energy Policy Act was the last phase of wholesale deregulation in the United States and the change has allowed for hundreds of MWs of new wholesale supply — including increasingly important renewable energy sources like wind and solar — to get built and connect to the grid, all while leveraging existing transmission infrastructure.
Overall, the introduction of market forces to the bulk grid and transmission system provided for a few things. (1) It drove down the price of wholesale power by allowing greater access to non-utility wholesale power generators and (2) it broke the concept of transmission as a natural monopoly and allowed for actors other than utilities to build transmission lines and reduce congestion pricing across the grid. I believe these are both desirable outcomes that are good for end consumers. Moreover, they likely would not have occurred were it not for the liberalization of wholesale markets. As a result, I think we should take these important lessons and apply them to the distribution grid.
Transmission as model for distribution
There are two key takeaways my study of the evolution of transmission highlighted. Lesson one: In general, allowing more market forces to shape outcomes is a good thing. Like I wrote about in my piece on franchise rights, distribution today is owned entirely by utilities that are granted regulated monopoly status in their area of service. Similar to how utilities had a stranglehold on the transmission network all market participants needed access to before the EPACT was signed, distribution owners today are similarly abusing their position and imposing arbitrary constraints on data access and what they pay retail consumers for their distributed generation and demand response, thereby diminishing the value to end users of adopting DERs.
Why are they allowed to do this? Well, like utilities formerly had monopolies on transmission infrastructure, utilities today have monopolies on distribution infrastructure. They are a platform like Amazon or the Apple Store, aware of their massive market power and in a position to gatekeep and impose such constraints if it suits their economic interests, rather than the economic interests of the consumers. This is bad, and the PUCs in these markets are not doing their job if they are ignoring this. Alas, that is what’s happening in places all over the country. For a great perspective on and eye-popping examples of the specific challenges around data access imposed by utilities, I recommend you follow Michael Murray of Mission:data on Twitter.
Lesson two: Well-crafted, precisely targeted policies can facilitate and guide the formation of new markets where there is a clear need for market forces. In the case of transmission, Congress signed PURPA and EPACT into law which clearly established requirements for utilities to allow non-utility wholesale power to access transmission infrastructure, and, importantly, to gain access to this network at fair market rates. This combination allowed for true price competition across wholesale supply, resulting in greater supply and lower overall wholesale energy prices. While there has been some movement in recent years to allow DERs to participate in wholesale markets via FERC Order 2222, there is yet to be any major move to liberalize the distribution level grid through such a well-crafted, precisely targeted policy. That, I believe, is what needs to happen for the grid to enter its next phase of growth in distributed generation.
What does this mean for the future?
Examining the evolution of transmission, we broadly went from vertically integrated utilities to gatekeeping transmission infrastructure to the establishment of neutral parties in charge of operating the wholesale market and ensuring that all wholesale generation could access the network at fair prices. To me, it seems obvious that a similar evolution needs to occur at the distribution level. We need to move from a utility monopoly ownership model gatekeeping distribution infrastructure to the establishment of a neutral party that operates the distribution-level market and ensures that all retail market participants can access the network at fair prices. This sounds a lot like a DSO to me.
What happens to the utilities, you ask? In my view, there needs to be a fundamental change to the incentive structure driving utilities today. I would propose moving away from a profit model driven by return on infrastructure investment and instead shift towards a model that rewards utilities for ensuring reliability at the distribution level, regardless of who is providing the supply or altering the load at a given time. Another potential model could be incentivizing utilities through volume of retail market participants with open access to the distribution grid. In other words, we need to rethink how utilities are incentivized and what their role will be in a world where they can no longer gatekeep distribution and make profit on investment in that infrastructure. We need this shift towards liberalized distribution markets to occur just like it did for transmission, and to get there we need bright minds and bold legislators from across the country to take up the cause and move this issue forward. A resilient and decarbonized future grid depends on it!