Summary

This report attempts to provide a comprehensive analysis of the various factors that must be coordinated to achieve a consistent and sound plan for energy infrastructure in California with a focus on transmission. As a foundation, it describes and makes recommendations about the current transmission planning processes at the Independent System Operator (ISO) and the CPUC. A discussion of federal authority and how it impacts generation and transmission decision-making follows. Finally, since the Western transmission grid is interconnected, no discussion of California transmission would be complete without an understanding of regional initiatives.

In attempting to evaluate the state, federal, and regional components of transmission planning it has become obvious that transmission planning is extremely complicated, balkanized, and redundant in some circumstances in California. In evaluating how to conduct planning in a manner that best meets the energy infrastructure requirements and policy goals of California from both an economic and social perspective, this report makes the following recommendations:

1. The determination of "need" for a transmission project should only be assessed once to eliminate the redundancy that currently exists in the CPUC and ISO processes. To mitigate existing duplicative efforts, the Commission should move quickly to adopt an economic methodology for application in the CPCN process and, if required, in the interconnection process.

2. The Commission should consider revising GO 131-D, or develop a new general order, to implement changes to the existing process for determining need.

3. As part of the IOUs long-term procurement plans in R.01-10-024, the Commission should integrate local reliability considerations into the utilities overall procurement portfolio to reduce the need for expensive annual RMR contracts.

4. The CPUC should be more active in the ISO planning process.

5. The CPUC should drive a higher level of coordination between federal and state transmission related issues. There are two key areas where this sort of coordination is critical: 1) in the Commission's procurement proceeding; and 2) in the CPUC's transmission investigation.

Background

The Energy Action Plan recognizes that California needs to review its transmission planning oversight. It states:

The Public Utilities Commission will issue an Order Instituting Rulemaking to propose changes to its Certificate of Public Convenience and Necessity process, required under Public Utilities Code § 1001 et seq., in recognition of industry, marketplace, and legislative changes, like the creation of the CAISO and the directives of SB 1389. The Rulemaking will, among other things, propose to use the results of the Energy Commission's collaborative transmission assessment process to guide and fund IOU-sponsored transmission expansion or upgrade projects without having the PUC revisit questions of need for individual projects in certifying transmission improvements (EAP, page 7).

The CPUC, the CEC, and ISO all have a statutory role in transmission planning. In some instances this results in inefficiencies and redundant review of transmission projects. This report has been developed entirely from the perspective of which entity is best able to do a particular job well and most efficiently. That is, like any other efficient and competent corporation or organization, duties and responsibilities should be assigned in a manner that allows for core competencies to be leveraged and expertise to govern. Assigning responsibility is this manner is more important now than ever given California's tight budgets and resource shortages.

Historically, the utilities internally evaluated options for new transmission by comparing generation versus transmission alternatives. Since AB 1890 and the onset of restructuring, the entire evaluation and the sequencing of necessary steps has changed making comprehensive analysis difficult. In the current environment, independent market participants often make decisions about new generation investment. The segregation of transmission and generation decision-making has served to create a fragmented and uncoordinated planning process that makes least cost analysis challenging. In addition, the complexity of issues and influences contributing to the decision-making of the unregulated market entities compounds the difficulties in planning. For example, transmission planners make certain assumptions when they assess the need for a particular project. One assumption is the location of particular generating units. An assumption that the utility and CAISO transmission planners made when assessing the transmission needs of Southern California, for example, was that additional generation in San Diego would be installed in summer 2003 (Otay Mesa). However, the Otay Mesa generating facility was not on-line as anticipated in the planning process because the generator was grappling with various financial and economic considerations. When that plant was not on-line in summer 2003 to serve local demand on one side of a constrained transmission line, problems arose as congestion compounded existing bottlenecks¹. This example underscores the challenges the State faces in coordinating the planning process and fostering an all-inclusive approach that balances options for meeting system need.

The current process for transmission planning from a statewide perspective is balkanized and in some instances redundant. This assessment of the transmission planning process originally set out to analyze ways that the CPUC's transmission assessment could be improved from a substance and process standpoint. However, in working through the current state of transmission planning in California as well as looking at generation and transmission trends recently, an evaluation that looks only through the lens of the CPUC process would be limited and out of step with the current state of affairs. Indeed, an evaluation that centered only on California and state jurisdiction would be limited and inadequate in light of the fact that California remains import dependent and much of the new generation coming on-line to serve California load is being sited outside the state.

This reality has large implications for successful planning coordination and for California consumers because generation siting out-of-state creates a demand for transmission accommodation within California. That is, since much of the new generation coming on-line originates outside California and therefore sidesteps the California planning and siting process, it still poses transmission requirements in-state so that the generation can reach customers. This circumstance highlights the difficulty in coordinating planning. It has also created a situation where transmission is "chasing" generation. The state has already been forced to recognize this planning disconnect as demonstrated in the problems surrounding the new generation on the Mexican border². In truth, this is only the beginning since large quantities of new generation are coming on-line in Arizona and Nevada and are expected to compound the current bottlenecked transmission lines into California from the Southwest.

Ultimately, the pricing incentives that FERC authorizes through interconnection rules, the resolution of intra-zonal congestion management problems through the ISO's market redesign, and transmission ratemaking, bear strongly on the degree to which generation is located rationally and the implications for transmission. In short, a coordination of federal and state policy will be the deciding factor in whether the state can successfully analyze generation/transmission tradeoffs from a cost perspective, and implement a planning process that is rational, efficient, and cost effective.

While the focus of this report is the pricing incentives that have resulted in the generation and transmission landscape that we see today, there are non-price related reasons that California will be making transmission decisions on particular projects in the future. The premise of this report is generally that gas-fired generation can be located closer to load centers and therefore reduce the need for transmission. That is, a trade-off evaluation occurs that will result in a least cost, most efficient result. However, in some instances this is simply not the case. Renewable generation fuel resources are often constrained to specific sites (e.g. geothermal fields, high wind areas), and may require additional ancillary services. Therefore, a policy promoting renewables essentially takes the trade-off analysis off the table since a particular generation type, regardless of the transmission demand, will be chosen. In the case of wind, for example, much of the generation is not close to load centers and will require transmission to serve load. This situation creates a requirement for a different kind of analysis than what is required when one evaluates whether demand side options, transmission, or generation is the best and most cost effective way to meet need in a particular location. Inherently, state policy encouraging growth in the renewable power supply makes the determination that a particular generation type will meet a portion of need to serve the overarching objective of fuel diversity and environmental quality. In the case of renewables, this generation determination replaces the analysis described and encouraged in this report, which recommends an evaluation considering how best to serve need from a generation, transmission, and demand-side perspective.