Years in the making, the final rule lays the groundwork for new ways to expand and modernize the nation's electric grid

At a special open meeting held on May 13, 2024, the Federal Energy Regulatory Commission ("FERC" or "Commission") approved, by a 2-1 vote, a final rule reforming transmission planning and cost allocation requirements. The final rule, designated "Order No. 1920," represents the outcome of a nearly three-year rulemaking proceeding that began with an Advanced Notice of Proposed Rulemaking in 2021 that was further developed through a Notice of Proposed Rulemaking issued in April 2022 ("NOPR").

Order No. 1920 represents the most significant change to the way the nation's electric grid will be expanded to meet growing needs for electricity at least since Order No. 1000 was promulgated over a decade ago. The rule is intended to maintain reliability in the face of aging infrastructure and extreme weather challenges while promoting a modernized grid that can connect renewable resources. However, based on the strongly polarized views among the three sitting commissioners as to the legal and policy-related merits of this new rule, and taking into account the current political backdrop, Order No. 1920's fate seems far from certain.

Mandatory Long-Term Planning

The majority of Order No. 1920 focuses on the requirement that transmission utilities regulated by FERC engage in long-term transmission planning over a 20-year horizon. Such long-term planning must be conducted at least every five years using best available data, taking into account at least seven specified categories of factors, including state and local laws and policies. Transmission providers must consider seven required cost- and reliability-related benefits to determine whether any regional transmission project proposals will address identified long-term needs. Each transmission provider must develop an evaluation process and selection criteria to determine whether proposed projects will be included in a long-term plan. Order No. 1920 does not mandate the selection of any particular projects, but finds the absence of long-term planning has resulted in a less cost-effective approach of "piecemeal transmission expansion" that impacts Commission-jurisdictional rates.

The new order also requires transmission providers to consider the use of certain "grid-enhancing technologies," including dynamic line ratings, in satisfying identified long-term needs, and to revise interregional planning processes to reflect the long-term planning directives contained in the new rule.

Cost Allocation

Order No. 1920 directs transmission providers to develop and file one or more ex ante cost allocation methods specifying how projects selected in long-term transmission plans will be paid for by customers within each region. Transmission providers are also permitted to propose cost allocation approaches based on the voluntary agreement of one or more states, but such "state agreement processes" cannot be the sole method that a transmission provider proposes to allocate the costs of long-term transmission facilities. Notably, Order No. 1920 did not adopt the NOPR proposal to require transmission providers to seek state agreement on proposed long-term cost allocation methodologies, instead requiring a six-month "engagement period" with relevant state entities before a compliance approach is filed for FERC approval.

Local Planning and "Right Sizing"

Order No. 1920 adopts rules intended to enhance the transparency of local planning for lower voltage transmission facilities allocated to only a single utility's customers by requiring transmission utilities to provide certain types of information relating to local planning projects as well as implementing an iterative stakeholder process to solicit input on those projects. These increased transparency requirements are limited to transmission planning that falls within the scope of Order No. 890, i.e., facilities that expand grid capacity more than incidentally; they do not apply to asset-management projects (e.g., like-for-like replacements).

Order No. 1920 also requires transmission providers, as part of the long-term planning cycle, to evaluate whether facilities above a specified voltage threshold, and which a transmission provider anticipates replacing in-kind with a new facility during the next 10 years, can be "right-sized" (increased in capability) to more efficiently or cost-effectively address a long-term need. Transmission providers will have a right of first refusal ("ROFR") to develop and construct any "right-sized" projects that replace the existing facilities they identify as part of this process.

No Rollback of Regional ROFR or Construction Work In Progress ("CWIP") Rate Incentives

FERC declined to adopt in Order No. 1920 the NOPR proposal to permit a limited re-introduction of a federal ROFR for incumbent transmission owners to build new transmission projects in their footprint in certain situations involving jointly owned projects without competition for transmission development, indicating that it would continue to consider potential ROFR reforms in the future.

FERC also declined to adopt a proposal to limit the availability of the Construction Work In Progress (CWIP) transmission rate incentive for long-term regional transmission facilities, stating that any action on this topic would be more appropriately considered in a separate proceeding devoted to transmission incentive issues. This CWIP incentive is permitted by FERC today and allows utilities to recover the costs of new transmission projects in rates before those projects go into service.

Compliance Filings

Order No. 1920 directs transmission providers to make compliance filings to reflect most of the rule's requirements within 10 months of the rule's effective date, which is 60 days after publication in the Federal Register. Filings to amend interregional transmission planning processes to reflect the regional planning changes in the rule are due 12 months after the effective date.

Divided Commission and an Uncertain Future

Unlike the NOPR, which the three sitting FERC commissioners supported on a compromise basis, Order No. 1920 elicited strongly divergent views among the current commissioners, resulting in a 2-1 vote along party lines. In a lengthy and sharply worded dissent, Commissioner Christie attacked the rule as deficient from a number of legal and policy standpoints. Commissioner Christie charged that the rule is simply a pretext to implement the Biden administration's climate-related agenda and, among other perceived infirmities, contended that the rule runs afoul of the Supreme Court's "major questions" doctrine. On the other hand, Chairman Phillips and Commissioner Clements defended the need for the new rule, emphasizing the challenges currently facing the nation's electric grid, and criticized Commissioner Christie's views as "myopic" and unrepresentative of the actual rule.

Regardless of the merits of these drastically opposed viewpoints, it seems a safe bet that key portions of Order No. 1920 will be challenged on appeal and some or all of the challenges may ultimately reach the Supreme Court. In addition, given pending changes to the composition of the Commission over the next year, and an upcoming presidential election, the ultimate fate of Order No. 1920 is far from certain. While any such challenges are ongoing, the nation's electric transmission utilities, including regional transmission organizations ("RTOs") and independent system operators ("ISOs"), are expected to devote substantial efforts to swiftly developing updates to comply with the new planning requirements.

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