The Calculus of Consent and Transmission Policy

What's so great about a unanimity rule?

The Driftless region of Wisconsin. Source: Milwaukee magazine

I've been away from Substack for a bit due to work, work writing, and work travel. There's a lot going on in the areas I work on; this is my attempt to connect the dots in particular between the problem of electricity transmission investment and economist James Buchanan's work on constitutional design. In the first week of May I co-directed a week-long workshop on Buchanan's research organized by Duke University's Philosophy, Politics, and Economics (PPE) Program and the estimable Michael Munger, so my mind is in a very public choice/political economy place, which is just right for thinking about transmission policy.

Transmission planning and investment is a serious challenge, and has been a problem for several decades, an incentive problem I'll return to shortly. Some background for non-electricity readers: The modern transmission system's origins lie in the development of the electric utility industry in the late 19th and early 20th centuries. Since its origins in the 1880s, the U.S. electric utility industry has been organized around vertically integrated utilities that owned and operated the entire supply chain from electricity generation, through transmission, to distribution and retailing to consumers. This model dominated the 20th century and is still in place in most states in the US.

In the late 20th century, the industry began to restructure to promote competition and efficiency, which led to the separation of generation, transmission, and distribution into distinct entities in 13 states and DC. Utilities in several states that are still vertically integrated have joined Regional Transmission Organizations (RTOs) and their regional power markets. Today, the organization of electricity transmission involves several key players: transmission owners (mostly incumbent utilities and municipal utilities, with some independent transmission companies), RTOs in some regions that operate transmission systems and wholesale power markets, generation companies, and distribution utilities that serve end users (many utilities own both transmission and distribution companies, and utilities in vertically integrated states also still own generation). Distribution utilities are the buyers in wholesale power markets, and transmission enables the transport of power they buy from others to reach their customers.

In 2011 the Federal Energy Regulatory Commission (FERC) issued Order 1000 as an attempt to enhance transmission planning and cost allocation processes. Regional transmission planning requirements, interregional coordination to identify beneficial cross-region projects, cost allocation methods grounded in the "beneficiaries pay" principle, and eliminating the incumbent's right of first refusal to veto transmission projects from other providers; all were intended to promote competition in transmission and to increase the amount of economically valuable transmission. Despite these ambitious goals, Order 1000 has faced significant criticism and is widely considered to have fallen short of its objectives. Few transmission projects have been implemented that fit the vision of the regulators; instead, incumbent regulated transmission-owning utilities disproportionately invested in transmission projects within their service territory footprint and did not collaborate on regional investments. The increase in interregional transmission projects has been modest, and the complexities of cost allocation have often led to protracted disputes. As a result, many industry experts and regulatory bodies view the order as an incomplete solution that has not addressed the critical issues in transmission planning and development.

Source: White & Case

Enter Order 1920, which FERC issued on May 13, 2024. Order 1920 implements significant reforms in transmission infrastructure regulation, planning, and investment. This order addresses deficiencies in the existing regional and local transmission planning and cost allocation processes, and is FERC's effort to address long-term transmission needs while fulfilling their regulatory remit to ensure rates and practices are just, reasonable, and not unduly discriminatory or preferential.

A primary focus of Order 1920 is long-term regional transmission planning (LTRTP). Order 1920 mandates that transmission providers adopt a forward-looking approach to regional transmission planning, including identifying, evaluating, and selecting transmission solutions that address long-term needs more efficiently and cost-effectively. The LTRTP must consider a broad set of seven factors and provide a comprehensive assessment of transmission requirements. It also must use a 20-year planning horizon, considerably longer than the 3-5 years currently used, and must be reviewed and updated every five years. The LTRTP also must consider three distinct planning scenarios, which should help transmission providers identify projects and factors that recur in multiple scenarios and are thus more likely to be good investments in the face of demand and climactic uncertainties.

Order 1920 also addresses the thorny issue of cost allocation for multi-state, multi-party regional projects. The principle that costs should be apportioned proportionately to benefits remains the objective, to minimize the free-rider problem: entities that benefit from the transmission infrastructure improvements may not contribute proportionately to the costs, thereby discouraging investment. Transmission providers are required to engage with state regulators from the relevant states early and over a six-month timeframe, and to figure out the cost allocation process in that early stage.

This transmission planning regulation is clearly very complex (and my summary only scratches the surface!). If you want to read more but aren't up for the 1,300+ pages of the actual order (!!), here are a couple of useful summaries from law firms: Hunton Andrews Kurth summary and White Case summary. See also this practical and informed analysis focusing on consumer benefits and incremental moves in a market/competition direction (with lots of useful links to background resources if you want to dig further) from Devin Hartman at R Street.

What does Buchanan's constitutional political economy work have to do with transmission policy? Everything. The problem is achieving consensus in a collective action setting. The problem is unanimity.

Consider the regional transmission planning and investment process with the following example, near and dear to my heart because it involves Wisconsin's Driftless region, one of my favorite places to ride my bike. American Transmission Co. and several utilities proposed the Cardinal-Hickory line, a 100-mile, 345-kilovolt transmission line running from Dubuque County, Iowa through Wisconsin's Driftless to Middleton, Wisconsin outside of Madison. The project is intended to increase transmission capacity and reliability, and provide access to renewable energy sources in the region, with an estimated cost over $600 million. Controversies have led to years of legal battles, public hearings, protests, and intense debate over the balance of energy needs, environmental protection, and property rights in western Wisconsin. Opponents argue the line would damage the scenic and environmentally sensitive Driftless region, affecting wildlife habitats, trout streams, and forest resources. Landowners along the proposed route have voiced concerns about having their land seized through eminent domain for the transmission corridor. Groups like the Ho-Chunk Nation have opposed the line's potential impact on culturally significant sites and tribal lands. Regulators re-approved the project in 2023 after prior approvals were overturned on appeal (although the last few miles are still under legal challenge), which has been a years-long process.

And that's a relatively short line that involves only two states. Consider a realistic hypothetical proposal to build a line from South Dakota to bring wind energy into northern Illinois. The primary beneficiaries (and thus those who should bear proportionate costs) are in those two states. But the line crosses two other states, Minnesota and Wisconsin, and landowners and regulators (utility, siting, environmental permitting, ...) and other stakeholders in those states have to agree to the project. The fact that South Dakota (and Minnesota and Wisconsin) are in the MISO transmission organization and northern Illinois is in the PJM transmission organization adds another layer of planning complexity.

People in Minnesota and Wisconsin have no incentive to agree to site the project. But, you may say, what if South Dakota and Illinois compensate them for the environmental and property costs in their states? If the project has an expected positive net benefit taking all of that into consideration, then the beneficiaries should be willing to compensate them (what's known in economics as Kaldor-Hicks-Scitovsky compensation). If that's true, then building the line would be Pareto efficient, would (with compensation) make everyone better off without making anyone worse off.

Abstracting from the transaction costs of doing this, what this implies is that if you got all of the affected parties together and they had to bargain over whether or not to do the project and how to scope it and site it, getting them all to agree to it would be the best way to ensure that the project is likely to be net beneficial. Even better, James Buchanan would argue, if the parties in the room don't know their identity, don't know if they are a wind developer or a farmer or a dairy farmer or a tribal member or a regulator or a wealthy consumer or a poor consumer (John Rawls wasn't the first person to use this idea!). A unanimity rule is the only way to get that Pareto efficient outcome from the project.

Buchanan's work with Gordon Tullock, The Calculus of Consent (1962), is a seminal work in public choice theory that explores the logical foundations of constitutional democracy and the decision-making processes involved in collective action. One of the central pillars of their argument is advocacy for unanimity as a voting rule, which they present as the most desirable and efficient (using the Pareto criterion) approach to decision-making in a constitutional context.

Buchanan and Tullock's case for unanimity is grounded in their analysis of the costs and benefits associated with collective action. They argue that under a simple majority voting rule, the potential exists for decisions to be made that impose net costs on a minority of individuals within the collective. This scenario arises when the benefits accrued by the majority outweigh the costs they bear, while the costs imposed on the minority exceed the benefits they receive. But a simple majority voting rule is a less costly and time-consuming decision process. That's the tradeoff.

Unanimity, on the other hand, ensures that no decision is made unless it represents a net gain for all individuals involved, thereby maximizing the overall social net benefit. However, achieving unanimity is a laborious and time-consuming process, particularly if the issues are complex and the people involved in the decision-making process have diverse preferences and expectations.

Unanimity serves as a safeguard against the exploitation of minorities by majorities, a phenomenon they refer to as the "external cost" problem. By requiring the consent of all individuals affected by a decision, unanimity effectively internalizes these external costs, ensuring that they are accounted for in the decision-making process.

Buchanan and Tullock also argued that unanimity promotes efficiency by encouraging individuals to reveal their true preferences and valuations during the negotiation process. Under a majority voting rule, individuals may have incentives to misrepresent their preferences or engage in strategic behavior, potentially leading to suboptimal outcomes. Unanimity, however, creates an environment where open and honest negotiation is incentivized, as each individual's consent is necessary for a decision to be made. I don't think they are entirely right about that point; a unanimity rule can create an incentive for holdout, for someone to say they don't agree until they get compensated way beyond their actual harm (but in the transmission policy context, that's why painful rules like eminent domain exist, as a backstop hammer to undermine holdout incentives).

Despite the theoretical appeal of unanimity, Buchanan and Tullock acknowledged the practical challenges associated with implementing it in large-scale decision-making scenarios. They proposed the use of constitutional rules and institutional arrangements as a means to approximate the benefits of unanimity while maintaining operational feasibility.

Does FERC Order 1920 do that? Transmission planning and investment projects are challenging on multiple margins. When I analyze transmission policy and evaluate regulatory moves like Order 1920, the calculus of consent and the tradeoffs between majority rule and unanimity rule provide a lens I can use. It allows for asking questions like

• Does the order move toward an institutional framework that can get some of the benefits of unanimity without all of the procedural costs?

• Does the order enable bargaining and legally binding compensation processes so people can discover which projects really are Pareto improvements?

• Does the order neutralize the incentives that existing transmission owners have to block such discovery processes?