On August 31, 2009, the Climate Change Policy Partnership based at Duke University released a report, Electrical Transmission-Barriers and Policy Solutions, suggesting that real estate investment trusts (“REITs”) could provide the vehicle for creating the capital necessary to expand the national transmission grid in order to meet future electricity demands.
Chi-Jen Yang, the lead author and technology policy analyst, claims that REITs could serve as a vehicle for consolidating ownership while reducing regulatory hurdles to transmission growth. Yang does not believe that the United States has a national grid system, per se; instead, he maintains that the system is comprised of three major networks that are composed of “many smaller networks with highly balkanized ownership.” The report notes that there are more than 500 owners of a small portion of the grid, which is a key problem with any effort to expand the grid. Furthermore, the report found that the fragmented regulatory authority between the Federal Energy Regulatory Commission (“FERC”) and local/state authorities further hinders transmission expansion.
To overcome barriers to building transmission, Yang proposes enabling REITs to provide investment opportunities in transmission, similar to the way mutual funds work. Once corporations put their assets into an REIT, income taxes from those real estate assets would be reduced or eliminated as long as 90 percent of the income is distributed to the shareholders. In addition, when a vertically-integrated state utility converts to a REIT, jurisdiction for the transmission facility would transfer to FERC, allowing for consolidated jurisdiction over the transmission system. Since the existing tax code is ambiguous with respect to REITs being used for electricity transmission assets, Congress would have to modify the Internal Revenue Code to officially enable electric transmission REITs. States and local opposition to transferring authority over siting to FERC also presents an obstacle, but Yang recommends implementing interstate siting compacts to promote coordination and joint siting with the states.
Yang also recommends national funding for feasibility studies and environmental impact studies, allowing cost recovery for projects in progress, abandoned/cancelled plant protection, and true FERC siting authority to promote transmission investments. Yang points out that FERC has yet to exercise backstop siting authority under the Energy Policy Act of 2005. He argues that FERC is further limited because of court decisions which limited backstop siting authority only to situations where states fail to grant permits—FERC cannot overrule a state’s rejection of a permit.