League of Women Voters of California Education Fund Energy Update Study Guide

Section 4: Transmission Constraints Deliverability TWO OF THE MOST FREQUENTLY USED TERMS in the deliberations of the CEC, the CPUC and CAISO over the past several years have been resource adequacy and deliverability. The first, addressed in the previous section, refers to having enough power either from local generation or imported from elsewhere to meet the demand. The second is somewhat more complicated. It relates to the fact that supplies of power and demands for power are usually in different places. When that is the case, high-voltage transmission lines are essential. Deliverability a growing challenge The grid of transmission lines that moves power to where it is needed to meet load demands has been developing for a century, and in recent years it has become increasingly automated. California investor-owned and municipal utilities own over 31,000 circuit miles of high-voltage transmission. However, even with an extensive and automated power grid, it is increasingly difficult to move power from a multiplicity of generators to the great number of load centers. If the power lines and substations in a particular locality are inadequate, the demands for power cannot be met no matter how much power may be available elsewhere. At one point in September 2004, when the California Independent System Operator (CAISO) recorded the highest peak loads ever, 1,300 MW of out-of-state power could not be imported because the lines couldn t carry it, and 1,800 MW of in-state power required major rerouting. Demand is volatile in the summer Low points are weekends or holidays Summer: May - Sept. The graph above portrays the pressure on the total system at times of high peak power demands. Transmission availability significantly impacts the market price of power. Inadequate power lines between an area and the best sources of power often require older, more expensive but closer, or otherwise better situated generators to come on line to meet the demand. This leads to significant price rises and increased profits for the generation owners. This is a natu- Energy Update Study Guide League of Women Voters of California Education Fund Page 25

ral result in a competitive market. Bidding related to congestion in the transmission system amounted to some $440 million in 2004 on a quite limited spot market. Resolving such transmission problems is likely to be a long-term effort. New generation can be put on line in as little as two years, but the lead time to acquire sites, obtain permits and build new transmission lines has historically been on the order of 10 to 15 years. Who s in charge? Prior to AB 1890, the individual investor-owned utilities (IOUs) both owned and operated the transmission lines within their own service territories. With deregulation, responsibility for operating the transmission grid of the IOUs passed to CAISO. Now the CAISO grid operators are in contact with all of the 1,400 generating units connected to the grid about a third of which are out-of-state. The operators decide which units should come on line, based on existing contracts, the costs of generation and the physical limits of the system. Baseload power is largely provided by qualifying facilities under contract to the IOUs, nuclear and hydro generation still owned by the IOUs, and by the suppliers that have continuing long-term contracts negotiated with the Department of Water Resources in 2001. Since 2002, the price that can be paid for peaking power has been capped at 25 per kwh. The CAISO accepts energy schedules something like flight plans for power in the day-ahead time frame, and also when needed in real time. If suppliers fail to meet the conditions of agreed-upon schedules, they could face financial penalties. Planning and permitting Before deregulation, the IOUs could not build or expand transmission lines without approval from the CPUC in the form of a Certificate of Public Convenience and Necessity (CPCN) for transmission lines with a voltage of 200 kilovolts (kv) or more, or a Permit to Construct (PTC) for transmission lines with voltages between 50 and 200 kv. These processes included review of the project under the California Environmental Quality Act (CEQA). Since CAISO was created, it has been responsible for ensuring the efficiency and reliability of the CAISOcontrolled transmission grid, and is now the first entity to review a proposed transmission project. If CAISO determines that a project is needed, a proposal then goes to the CPUC for CPCN or PTC review. In 2003, the CPUC, the CEC and the now defunded California Power Authority, speaking jointly in the collaborative context of the first state Energy Action Plan, saw the need to reform transmission planning and permitting. The Plan states: The agencies will collaborate, in partnership with other state, local and nongovernmental agencies with energy responsibilities, in the CEC s integrated energy planning process to determine the statewide need for bulk transmission projects. In 2004 the legislature passed SB 1565 (Bowen), requiring the CEC to assess the western regional and California transmission system every two years, beginning with the 2005 Integrated Energy Policy Report cycle, and prepare a strategic plan to identify and recommend investments needed to ensure reliability, relieve congestion and meet future growth. The effectiveness of this planning effort will depend on all load serving entities (LSEs) submitting load forecasts, resource plans and price information to the CEC. (The CEC will work with the LSEs and CAISO to avoid divulging proprietary data.) A CPUC rulemaking issued in September 2004 stated: We view the CEC s Integrated Energy Policy Report (IEPR) process, in particular, as the appropriate venue for considering issues of Page 26 League of Women Voters of California Education Fund Energy Update Study Guide

load forecasting, resource assessment, and scenario analyses, to determine the appropriate level and ranges of resources needs for load serving entities in California. Resource needs encompass transmission needs. The goal of the collaborative IEPR process is a comprehensive, coordinated infrastructure plan for the state. Additions to the transmission grid are only one option. Utilities have the responsibility for also considering additional conventional generation, renewable generation, distributed and self-generation, and demand-side resources. The criteria are that additions be cost-effective, efficient and environmentally sensitive. While this description of the planning process appears to be straightforward, there continues to be a notable disconnect between planning and permitting. Plans are paper products; permits imply commitments to construct. In August 2005 the governor proposed that the CEC be the permitting authority for new transmission. The CPUC has rejected this proposal. Priority projects Transmission projects can be justified for economic reasons primarily to reduce congestion and thus make better use of less-expensive generation or for greater system reliability. For example, the PG&E Jefferson-Martin line south of San Francisco (number two priority as shown on the following map of Transmission Projects on the Watch List) is considered essential for reliability reasons. If it is not completed, the aging, inefficient and unreliable Hunters Point Power Plant units in San Francisco cannot be retired. On the other hand, the SDG&E Mission-Miguel #2 project outside San Diego (number one on the map) is classified primarily as an economic project. It will relieve congestion into the San Diego load center by increasing access to less-expensive out-of-state power and save SDG&E ratepayers $6-$12 million annually in congestion mitigation charges. Transmission projects may also be justified by the obligation to bring increasing quantities of renewable energy on line so that the state will be able to meet its goal of 20 percent renewable energy by 2010. Much of the renewable resources in the state are located in areas with limited available transmission. One such area is the Tehachapi Wind Resource Area, which has the potential for approximately 4,000 MW of renewable wind development. The individual developers of the projects that might be built in that area cannot finance a major transmission line to bring that power to market, so the CPUC ordered Southern California Edison (SCE) to file applications to construct the initial segments of the line. SCE also filed a petition with the Federal Energy Regulatory Commission (FERC) requesting clarification regarding the issues of cost recovery for connection of large concentrations of renewable generation resources. This issue of cost recovery has not been resolved. Two other areas of the state where additional transmission capability would be required to bring renewable power to significant load centers are the northeast corner of the state, which has significant biomass and geothermal potential, and the Imperial Valley, which has rich geothermal resources. The CPUC has ruled that the cost of transmission to a proposed renewable resource is to be considered as a facet of the least cost-best fit principle that is to guide the utilities renewables procurement process. A further consideration yet to be fully addressed is just how much intermittent wind energy can be integrated into the grid, as well as the relative value of the intermittent power as compared with power from a baseload combined-cycle natural-gas-fired plant. Just what sorts of swings in energy loading can the transmission grid actually handle? Energy Update Study Guide League of Women Voters of California Education Fund Page 27

Transmission Projects on the Watch List 1. Miguel - Mission #2 230kV TL 2. Jefferson - Martin 230kV TL 3. Martin - Hunters Point 115kV Underground Cable 4. Potrero - Hunters Point 115kV Cable 5. Otay Mesa Power Purchase Agreement TL Project - (San Diego County) 6. Tehachapi Area TL (Kern and LA counties) 7. STEP Short-term upgrades 8. STEP Short-term, non-caiso portion 9. Palo Verde - Devers #2 500kV line 10. Lake Elsinore Advanced Pump-Storage Project (LEAPS) 11. Imperial Valley San Diego Expansion Plan (ISEP) 12. Gates - Gregg 230kV Double-Circuit Tower Line 13. Sacramento Area Valley Voltage Support 14. Metcalf - Moss Landing 230kv Line Reinforcement 15. Tesla - Newark 230kV Upgrade 16. Path 26 Upgrade to 3700MW (North-to-South Rating) 17. Path 26 Upgrade to 4400MW (North-to-South Rating) 18. Gregg - Henrietta 230kV Line Reconductoring Project Page 28 League of Women Voters of California Education Fund Energy Update Study Guide

Any new generation facility that seeks to connect to the CAISO-controlled transmission grid must submit an application. Upon review of the application, the utility and the CAISO determine what studies should be required. Generally these are a system impact study and a facility study which will identify any system impacts, problems and potential solutions, as well as provide estimates of the cost of any required system reinforcement. The intent is to enable the utility to evaluate cumulative system impacts of multiple, and possibly successive, energy projects. Corridor planning and designation From start to finish, a major new transmission line typically takes 10 years or more. As part of its IEPR process, the CEC has recommended that an anticipatory process of corridor planning and designation be initiated to ensure that future needs for infrastructure including electric transmission can be met. The vision that is developing would call for a statewide projection of future needs, including coordination and public participation at the regional and local levels. Senate Bill 1059, introduced by Senators Escutia and Morrow in February 2005, would authorize the CEC to designate a transmission corridor on its own motion or on petition by any party that plans to construct an electric transmission line in the state. The bill would provide that the designation of the corridor identify the land on which a future line could be built, consistent with the state s needs as set forth in the strategic transmission plan. While this bill explicitly calls for designation for electric transmission purposes, the corridor would also be available as a right-of-way for other public needs. Although the CEC has called for the designation of electric transmission as a public good, it is unclear what the financial implications of protecting specific lands for future options would be. The map opposite indicates the areas of the state that might be considered for corridor designation and construction of additional transmission lines. CEC staff have pointed out that near-term priorities focus on southern areas of the state, e.g., Tehachapi, San Diego and the I- 10 corridor in Riverside. Part of the wider West In some years as much as 25 percent of the electric energy used in California is imported from out of state. For this to continue to be possible, California s transmission grid must be part of a larger transmission network which links all the western states. California is already part of the Western Electricity Coordinating Council (WECC) which was formed in April 2002 by merging the existing Western Systems Coordinating Council with two other regional transmission associations. WECC is responsible for coordinating and promoting electric system reliability. In addition, it supports efficient competitive power markets, assures open and nondiscriminatory transmission access among members, and provides a forum for resolving transmission access disputes and for coordinating the operating and planning activities of its members. Over the last 36 years a number of 500-kV AC and some DC lines were built to bring in power from large out-of-state nuclear, coal-fired and hydroelectric generation; 500-kV lines were also constructed to take advantage of seasonal load diversity patterns between regions. The Pacific Northwest has had winter peaks, while California is summer-peaking. Thus, surplus energy and capacity exchange contracts have provided notable benefits to both regions. Energy Update Study Guide League of Women Voters of California Education Fund Page 29

What about EMF? Alternating current electricity produces two types of fields simultaneously: electric fields and magnetic fields. Together these are called an electromagnetic field, or EMF. Transmission lines produce radiation in a specific frequency range of the electromagnetic spectrum. Cosmic rays, microwaves, television and radio transmission also produce radiation, but at notably higher frequencies than 60-Hertz transmission line EMF. The higher the frequency, the greater the energy emitted. Cosmic rays have sufficient energy to break molecular bonds (ionizing energy), whereas microwaves, television and radio transmission do not. Magnetic fields from power lines or electric appliances are very low frequency and low energy and cannot break molecular bonds; however, a great deal of research has been done over the past several decades to determine if they could have other biological effects. Studies supported by the National Institute of Environmental Health Sciences have been going on for more than 20 years, and the conclusion from this research is that the probability that EMF is a health hazard is very small. However, exposure cannot be considered entirely safe because of weak evidence suggesting that significant exposure could pose some risk of causing leukemia. Power tools, hair dryers, or microwave ovens at a distance of 12 to 20 inches, as well as major power lines within a 100-to-200 foot distance will produce measurable magnetic fields. The intensity of the magnetic field coming from a power line is not determined by the voltage of the line, but by the amount of current the line is carrying and the distance from the line. Undergrounding transmission lines diminishes the intensity of the magnetic field but does not eliminate it. While overhead transmission lines may not please the general public from an aesthetic perspective, they are designed to protect the public from any sort of health risk. Because of the increasing use of mobile telephones that emit considerably higher-frequency radiation, epidemiological research is now being done to assess the possible health effects associated with increased use of cell phones. Page 30 League of Women Voters of California Education Fund Energy Update Study Guide

Section 5: Who s In Charge? Our State Energy Agencies THREE AGENCIES, one nearly as old as the California electric industry itself and the others much more recent, oversee and to a large extent govern the industry s actions today. Here are brief sketches of the work of each. California Energy Commission The California Energy Resources Conservation and Development Commission (almost always called the Energy Commission, or CEC, even shorter) was established in 1974 and is the state s principal energy policy and planning organization. Its six major areas of responsibility are: Forecasting future statewide demand, supply and prices for electricity, natural gas, and transportation-fuel Licensing power plants larger than 50 MW Promoting energy efficiency and reduction in peak demands for electricity Developing energy-efficiency standards for appliances, homes and commercial buildings Funding renewable-energy resource projects Funding research, development and demonstration (RD&D) projects Planning for and directing state response to energy emergencies Licensing power plants and developing building and appliance standards are the commission s two main regulatory functions. Recently, the commission requested that it be given authority for licensing new transmission lines, a responsibility currently held by the California Public Utilities Commission. The Energy Commission receives funding from an electricity consumption surcharge collected through utility bills. Other funding to cover specific responsibilities comes from a public goods surcharge on electricity bills and from the federal government. The public goods surcharge was created through AB 1890, the electricity industry deregulation law, in 1996. The Energy Commission receives chiefly those public goods funds collected for the Public Interest Energy Research (PIER) program and associated renewable energy projects. (The California Public Utilities Commission administers the remaining public goods funds collected for energy efficiency and low-income assistance programs.) The Governor s Office, the Resources Agency and the California legislature frequently contact the Energy Commission for objective information and advice regarding California s energy supply-and-demand situation. Its Integrated Energy Policy Report (IEPR), required by SB 1389 of 2002, is published every other year and intended to shape the state s energy policy. The IEPR, with additional input from the governor, has become a major factor in shaping the state s coordinated Energy Action Plan, along with the governor s executive orders. The Energy Action Plan (EAP) was first developed in 2003 by the Energy Commission, California Public Utilities Commission, and the now-defunct California Power Authority. This document was intended as the agencies coordinated effort to increase regulatory certainty for the electricity market participants and to foster the policy recommendations in the Energy Commission s 2003 Integrated Energy Policy Report. It established a priority list of strategies (a loading order ) for meeting California s future energy needs a list that is meant to change Energy Update Study Guide League of Women Voters of California Education Fund Page 31

and evolve over time. The initial loading order reflected a preference for energy efficiency first, renewables second, and distributed generation and clean fossil-fuel-fired electricity generation third, as well as ongoing improvement of the electricity transmission infrastructure. Rulemakings by the state agencies were to follow this loading order when contracting for future electricity resources. In June 2005, the draft of a second EAP was made public. Participating agencies besides the Energy Commission, the CPUC and the CAISO, included the departments of Resources; Food and Agriculture; and Business, Housing and Transportation. It is now clear that the EAP is intended to serve as the proposed format for state energy policy. This unprecedented example of collaboration indicates that it is realistic to expect a single, statewide energy policy, even if the responsibilities for differing aspects of the policy fall within separate agencies. By presenting this second iteration in a public venue, the state agencies are actively seeking public involvement in defining state priorities. Included as additional priorities in the current EAP are an assessment of the issues associated with transportation fuels and an emphasis on research, development and demonstration programs. The definition of state priorities is intended to provide direction for policy development. Furthermore, there is a commitment to remove any remaining barriers to transparency in the resource procurement processes. California Public Utilities Commission The Public Utilities Act of 1912 gave the California Public Utilities Commission (CPUC) authority to regulate the following types of privately owned companies and utilities: natural gas, electric, telephone, water, railroad, and marine transportation companies. The CPUC regulates investor-owned electric and natural gas utilities (IOUs) to assure that customers have safe, reliable service at reasonable rates. The four largest IOUs are Southern California Gas Company, Pacific Gas and Electric Company, Southern California Edison Company, and San Diego Gas and Electric Company. The utilities have had a monopoly right to build and own natural gas pipelines and/or electricity distribution lines for delivering energy services within a designated geographical area. The CPUC s major regulatory responsibilities are to: Establish service standards and safety rules and monitor the safety of utility operations Oversee markets to inhibit anti-competitive activity and rule on mergers and restructuring of utility corporations Prosecute unlawful utility marketing and billing activities Govern business relationships between utilities and their affiliates Resolve complaints by customers against utilities Authorize changes in utility tariffs (rates) Authorize construction of utility-owned transmission lines and natural gas pipelines Intervene in federal proceedings on issues that affect California utility rates or services Recently, the CPUC asserted it has jurisdiction for approving proposed onshore liquefied natural gas (LNG) import terminals in California, but this jurisdiction is being disputed by the Federal Energy Regulatory Commission. Every three years, the CPUC conducts a major regulatory proceeding called a general rate case for each IOU, during which it examines in depth the utility s revenues, expenses, and Page 32 League of Women Voters of California Education Fund Energy Update Study Guide

general financial condition. It also examines the utility s service quality, overall productivity, and managerial effectiveness. General rate cases also become the forum for discussing major policy issues. The proceeding is initiated by the utility filing an application to consider changes to the amount of revenue it is allowed to collect from ratepayers (its annual revenue requirement ) to cover its operations and maintenance expenses, equipment depreciation, and taxes, and to provide a rate of return (profit) on invested capital. In the past these intense adjudicatory proceedings have been attended almost solely by the immediate parties, but the recent draft Energy Action Plan suggests that rate-setting deliberations could become public workshops. The CPUC also conducts proceedings to examine specific issues that may lead to new or changed legislation, programs, enforcement, policies, or rates (called Orders Instituting Investigation) and to establish new rules (called Orders Instituting Rulemaking). At any one time, the CPUC has 30 to 50 major energy policy proceedings open, and it issues more than 200 energy-related decisions each year. In mid-2005 it was addressing long-term electricity procurement, energy efficiency, the renewable portfolio standard, natural gas policy, distributed generation policy, replacement steam generators at two nuclear power stations, major transmission upgrades for San Diego Gas & Electric and Southern California Edison, demand-response investments, community choice aggregation, direct access, and liquefied natural gas terminal siting. Before the Energy Commission was created in 1976, the CPUC and IOUs worked together to forecast growth in electricity demand and the need to build new power plants to meet that growth. The CPUC would review and approve the IOUs forecasts, approve utility requests to build new power plants, and allow the costs of these new facilities to be recovered through utility rates. Since the utilities rates of return were based on the cumulative value of their capital investments, they were perceived to have an incentive to build power plants rather than pursue energy efficiency and peak-load management programs. The Energy Commission was created to provide an independent forecast of demand growth and the need to build new electricity generation as well as to streamline the regulatory processes for power plant licensing. The CPUC, however, retained its role in rate regulation and was instrumental in initiating electric industry deregulation in California. Today, the CPUC s electricity procurement and resource planning proceedings are the nexus for carrying out the state s loading order for the 60 percent of the state s electricity customers served by IOUs. The Energy Commission s responsibilities for long-term integrated planning as a component of the IEPR are now integral to the CPUC s procurement process. California Independent System Operator The California Independent System Operator (CAISO) is a not-for-profit public benefit corporation created in 1996 by AB 1890, the same law that implemented electricity industry restructuring. (The legislature also established the Energy Oversight Board, three persons who watch over CAISO.) CAISO s core functions are to: Provide open and nondiscriminatory access to the transmission grid Ensure safe and reliable operation of the grid Operate energy and reliability markets in a responsive, flexible and transparent manner Foster reasonable energy costs for California consumers CAISO manages the flow of electricity along transmission lines and supervises transmission system maintenance, but the transmission systems themselves are still owned and physically Energy Update Study Guide League of Women Voters of California Education Fund Page 33

maintained by California s electric private and public utilities. The service areas of those electricity utilities whose transmission systems are operated by CAISO define CAISO s control area, representing 70 percent of the state s grid (see map in the appendix). In decreasing order of size, other control areas in California are operated by Los Angeles Department of Water and Power, the Sacramento Municipal Utility District/Western Area Power Administration, Imperial Irrigation District, and Sierra-Pacific. CAISO charges fees to use the transmission grid. Every day, California s electric-load-serving entities (IOUs, participating municipal utilities and energy service providers) forecast how much electricity their customers will use on the following day and identify what combination of power generators they will operate (utilityowned) or contract with (merchant-owned) to meet this forecasted demand. (See graphic in Section 2.) Long-term contracts for baseload power take precedence, including qualifyingfacility contracts for renewables and cogeneration, nuclear generation, and the remaining Department of Water Resources contracts, which include out-of-state coal. Load-following capacity, single-cycle natural gas plants and much of the hydropower capacity are next in line. To the extent there is a need for further power, the operators have a list of peak-serving generators, in- and out-of-state, to call and ask for bids to supply it. CAISO s job is to make sure that wholesale electricity supplies that have been scheduled for delivery are delivered. Among the myriad complexities of this job is the need to match the contracted power demands of many large industrial and commercial electricity consumers with the wholesale electricity brokers or merchant generators who are under contract to supply them. CAISO must compile all delivery schedules for the next day and identify whether the transmission grid will be able to meet those schedules or whether portions of the grid would be overloaded, making some transactions impossible to carry out. If necessary, generating units in alternative locations may have to be called on to overcome anticipated constraints. Overloading of the grid is both a technical and an economic concern. The estimated cost to utility customers in 2004 because CAISO operators were required to select a more expensive generation resource because of inadequate transmission capacity amounted to about $440 million. Once delivery schedules are confirmed, CAISO monitors electric demand and generator and grid performance. If demand rises more quickly than anticipated, if a scheduled generator has an unexpected ( forced ) outage, or if segments of the grid are not functioning, CAISO must respond quickly. To meet unanticipated loads, for example, CAISO may conduct another competitive solicitation for power in its hour ahead or real time markets. Thus, merchant generators that were unsuccessful in the first, day ahead, competition have another opportunity to serve load. At present CAISO must also ensure that a seven percent surplus of electricity (above the forecasted daily peak demand for its whole system) is available to meet unanticipated increases in peak demand. This surplus, called the operating reserve margin, is required to maintain transmission system reliability. (The CPUC recently established a 15-17 percent reserve margin as the basis for the next round of energy procurement solicitations.) CAISO maintains its operating reserve margin using electricity supplies from merchant generators participating in its ancillary services market. Generators may provide spinning or nonspinning reserves of electricity for voltage support in key locations within the transmission system. Page 34 League of Women Voters of California Education Fund Energy Update Study Guide

CAISO directs traffic on two-thirds of the state s power grid, and because at present nearly all the power that flows is under long-term contracts, CAISO directly manages only a small fraction, perhaps 5 percent, of the total wholesale (spot) electricity marketplace. It uses competitive bidding only to allocate transmission space, maintain operating reserves and match supply with demand. These markets are watched closely by economists within CAISO s Department of Market Analysis who keep an eye on wholesale prices, looking for any attempt to influence these prices illegally. In addition, CAISO s Compliance Department ensures that market participants meet their obligations; it monitors responses to power-supply dispatch instructions and imposes penalties for non-compliance. (A CAISO statement regarding its role in market surveillance is in the appendix.) CAISO s board of governors is appointed by the governor; its meetings are publicly announced and all agenda materials are posted on its Web site. The highly technical nature of CAISO s responsibilities, however, makes its processes difficult for laypersons to participate in. Concerns have been raised because the agency is not public and thus not subject to the Bagley-Keene Open Meeting Act for state boards and commissions, or to the California Public Records Act. Collaboration The Energy Commission, CPUC, and CAISO are working together to ensure that California consumers have adequate electricity (and natural gas) supplies at reasonable cost while protecting the state s environment. Currently, they are seeking to conform their load forecasting and supply assessment methodologies so that information is more consistent and one agency s findings can be readily used by the other agencies. Energy Update Study Guide League of Women Voters of California Education Fund Page 35

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