V. Application of § 399.25 and Funding of Tehachapi Transmission Upgrades

Section 399.25, implemented as part of SB 1078 effective January 1, 2003, addresses funding of transmission facilities necessary to facilitate achievement of California's renewable power goals, as follows:

(a) Notwithstanding any other provision in Sections 1001 to 1013, inclusive, an application of an electric corporation for a certificate authorizing the construction of new transmission facilities shall be deemed necessary to the provision of electrical service for purposes of any determination made under Section 1003 if the commission finds that the new facility is necessary to facilitate achievement of the renewable power goals established in Article 16 (commencing with Section 399.14).

(b) With respect to a transmission facility described in subdivision (a), the commission shall take all feasible actions to ensure that the transmission rates established by the Federal Energy Regulatory Commission are fully reflected in any retail rates established by the commission. These actions shall include, but are not limited to:

(1) Making findings, where supported by an evidentiary record, that those transmission facilities provide benefit to the transmission network and are necessary to facilitate the achievement of the renewables portfolio standard established in Article 16 (commencing with Section 399.11).

(2) Directing the utility to which the generator will be interconnected, where the direction is not preempted by federal law, to seek the recovery through general transmission rates of the costs associated with the transmission facilities.

(3) Asserting the positions described in paragraphs (1) and (2) to the Federal Energy Regulatory Commission in appropriate proceedings.

(4) Allowing recovery in retail rates of any increase in transmission costs incurred by an electrical corporation resulting from the construction of the transmission facilities that are not approved for recovery in transmission rates by the Federal Energy Regulatory Commission after the commission determines that the costs were prudently incurred in accordance with subdivision (a) of Section 454.

We issued D.03-07-033 establishing procedures to implement § 399.25 on July 10, 2003, after the conclusion of hearings in this phase. We denied rehearing of D.03-07-033 in D.03-10-020.⁸

A. Positions of the Parties

Oak Creek asks that the Commission make affirmative findings pursuant to § 399.25 that Tehachapi upgrades are necessary to achieve renewable power goals and would provide benefit to the transmission network. Oak Creek claims network benefits both in correcting existing deficiencies and in accommodating new wind generation. Oak Creek points to on-going voltage/reactive power problems in the Tehachapi area which have caused both wind generation curtailments and customer outages. Oak Creek maintains that a Tehachapi project would resolve the existing deficiencies and, because Oak Creek anticipates operation in parallel with the existing grid, would enhance operation of the entire grid. Oak Creek submits that the costs of at least the first 230 kV line should be rolled-in and recovered through transmission rates. It recommends that the Commission direct SCE to submit transmission rate filings to the Federal Energy Regulatory Commission (FERC) to implement cost roll-in.

The ISO, SCE, and PG&E respond that reliability problems in the Tehachapi area are already being addressed. The ISO acknowledges that recent upgrades to the 66 kV system to provide additional reactive power (VAR) support and increase the deliverability of wind generation have not been as successful as had been hoped and that Tehachapi wind generation continues to be curtailed sporadically. SCE explains that it has not been able to determine the needed level of VAR support because it has lacked certain technical data regarding existing wind generation.

The ISO, SCE, and PG&E assert that the Commission should not determine at this time whether a Tehachapi project is necessary to meet renewable power goals, whether such a project would provide network benefits, or the appropriate ratemaking treatment. These parties maintain that essential information necessary for such determinations will not be available until an RPS auction is completed, winning bidders are selected, interconnection applications are submitted, detailed system impact and facilities studies are performed, and alternatives are examined. SCE recommends, however, that the Commission take this opportunity to adopt a plan for implementing what SCE calls the "protective backdrop" in § 399.25(b)(4) to ensure that a utility is able to promptly recover costs in retail rates if FERC does not approve recovery of prudently incurred costs in wholesale transmission rates.

The ISO explains that, under current policies, ratemaking treatment depends on the nature of a transmission project. If the ISO determines that a transmission network upgrade is needed for reliability or economic reasons, the transmission owner pays for the upgrade and recovers its costs through transmission rates, assuming FERC accepts inclusion of those costs in the transmission owner's transmission revenue requirement. The ISO reports that FERC's policy has been that generators fund transmission network upgrades necessary to accommodate interconnection of new generation projects. Transmission owners may credit back to generators the cost of such upgrades, with cost recovery within five years if the project becomes and remains operational. Generators fund transmission facilities from the generating plant to the point of interconnection with the transmission grid (called "gen-ties") and also fund all studies required for the interconnection process.

Because a large Tehachapi project would be far more expensive than needed to correct existing reliability problems, the ISO and SCE assert that there is no reliability-based justification for rolling costs of such upgrades into transmission rates. The ISO recognizes, however, that rolled-in treatment may be justified if a project allows a utility to meet its RPS requirements in the most economic manner.

SCE takes the position that developers should pre-fund any Tehachapi upgrades used to connect new wind generation so that ratepayers and utility shareholders do not bear the financial risks. SCE maintains that this approach is consistent with FERC policy for network upgrades needed due to new generation. SCE also suggests that FERC may classify Tehachapi upgrades as gen-tie rather than network facilities, with a resultant requirement of developer funding. SCE points out that FERC classified transmission facilities to Diablo Canyon, Morrow Bay, and Moss Landing generation as gen-ties even though the transmission facilities provide network loop configurations.

B. Discussion

Section 399.25 provides for utility funding of transmission facilities that the Commission determines are necessary to facilitate achievement of renewable power goals. In D.03-07-033, we explained that § 399.25 applies to network transmission facilities and not to gen-ties used to connect generation projects to the transmission network.

SCE's assertion, made for the first time in its briefs, that the entirety of a Tehachapi transmission project may be deemed to be a gen-tie and thus ineligible for § 399.25 funding is not credible. A gen-tie is associated with a single generation project and is constructed to connect that project to network transmission facilities. The 66 kV collector lines contemplated in SCE's 2002 conceptual study to connect wind installations to the new substations may be gen-ties. However, the higher voltage portions of the contemplated Tehachapi upgrades used to carry power from multiple wind projects would properly be classified as network transmission facilities and thus would be eligible for § 399.25 funding if such upgrades are found to be necessary to facilitate achievement of renewable power goals.

It would be premature to determine based on the record before us that Tehachapi upgrades are necessary to facilitate achievement of renewable power goals and thus would qualify for § 399.25 funding. It must still be established that the Tehachapi resource potential, while large, can be developed in a way that is cost-competitive, taking into account transmission costs, and that Tehachapi projects are consistent with a best-fit procurement strategy. As contemplated in D.03-07-033, the appropriate forum for consideration of whether a Tehachapi transmission project is necessary to facilitate the achievement of renewable power goals is that project's CPCN proceeding. Consideration of whether Tehachapi upgrades would provide benefit to the transmission network, as contemplated by § 399.25(b)(1), is also best left to the relevant CPCN proceeding.

Section 399.25 requires that a CPCN or Permit to Construct (PTC) application be deemed necessary to the provision of electrical service if the Commission finds that the transmission project is necessary to facilitate achievement of renewable power goals. In D.03-07-033, we determined that the Commission will make such findings in the applicable CPCN or PTC proceeding, based on the results of the RPS procurement process and General Order 131-D considerations of alternatives to the proposed project. Because a determination that a transmission project is needed would be mandated if the Commission finds the project necessary to facilitate achievement of renewable power goals, a separate assessment of whether the project brings reliability or economic benefits would not be required for certification purposes. Thus, the issues raised in Rulemaking (R.) 04-01-026 regarding the assessment of reliability or economic need for new transmission projects do not pertain to findings of need pursuant to § 399.25.⁹

Contrary to some parties' assertions, a requirement pursuant to § 399.25 of utility funding of Tehachapi upgrades would not be inconsistent with FERC's current interconnection policies and would not trespass on FERC jurisdiction over interconnection agreements. FERC's Order 2003,¹⁰ issued after the conclusion of hearings in this phase, provides independent transmission providers, such as the ISO, flexibility regarding their interconnection and pricing provisions, subject to FERC approval.¹¹ In both Order 2003 and in its white paper issued in its Standard Market Design rulemaking, FERC has invited the formation of Regional State Committees, which would have policy input and some decision-making authority over their ISOs or RTOs. FERC contemplates that, among other things, Regional State Committees would establish criteria for the determination of which transmission system upgrades, including those required for generation interconnections, should be participant-funded and which should not.¹² We are exploring the establishment of a Regional State Committee for California and will take all needed actions, as directed by § 399.25, to obtain FERC approval of the inclusion in transmission rates of costs of transmission facilities funded by the utilities pursuant to § 399.25.

We decline to establish general policies at this time, as SCE requests, regarding how § 399.25(b)(4) would be implemented if FERC denies cost recovery for transmission projects funded pursuant to § 399.25. Whether FERC would deny such cost recovery is speculative at best, in light of the flexibility FERC has provided independent transmission providers and its stated willingness to allow Regional State Committees to determine which transmission system upgrades should be funded by their ISOs or RTOs. Further, if FERC were to disallow such transmission costs, the appropriate way to reflect such costs in retail rates may depend on the specific facts of the situation. We see no need to develop generic procedures for implementing § 399.25(b)(4) at this time.