3. Zonal Capacity Requirements
3.1. The Need for Zonal RA Procurement
In Phase 1 of this proceeding the CAISO reported that it had identified a need to establish "zonal" procurement obligations to supplement the system and local obligations being established by the Commission. (D.06-06-064, pp. 31-32.) D.06-06-064 provided that the question of whether and how to establish zonal capacity requirements would be taken up later in the proceeding. (Id.) The Phase 2 Scoping Memo determined that the topic should be addressed in Track 1, and that the CAISO and other parties should present proposals for Zonal RA. (Phase 2 Scoping Memo, p. 9.) The Phase 2 Scoping Memo also asked parties to address "whether the CAISO's zonal needs necessarily require a Commission-imposed Zonal RAR, analogous to System RAR and Local RAR, or whether the CAISO's zonal needs can be satisfied through an alternative structure." (Id.)
In its January 26, 2007 proposal, the CAISO stated that the justification for identifying and meeting local capacity needs-existing transmission constraints preclude reliance solely on imported energy to serve load and comply with desired reliability performance standards in the constrained load pockets-applies equally at the zonal level. Identifying two zones in California, NP 26 and SP 26,2 the CAISO stated that these zones are nothing more than larger load pockets since the transmission capacity into each zone by itself is insufficient to satisfy demand and identified operating requirements.
The CAISO explained that the reliability concern to be resolved by a zonal requirement is the ability of the CAISO Controlled Grid to withstand the zone's single largest contingency. It further explained that "apart from a change in transmission topography the contingency could never be resolved without resort to firm load shedding in the absence of physical capacity, whether in the form of demand response or generation." (CAISO proposal, p. 18.)
Four components of the CAISO's preferred methodology for determining zonal capacity requirements are summarized below:
Forecasted load. The CAISO states that use of a "1-in-5 year peak forecast" is required under its Grid Planning Standards when conducting regional studies, and it asserts that a 1-in-5 standard is the minimum that should be used for zonal RA requirements. The CAISO anticipates using coincident zonal load forecasts prepared by the CEC.
Import capability. The CAISO proposes an import capability calculation that maximizes the quantity of imports into a zone. The calculation starts with the aggregate transfer capability from outside the CAISO control area into each zone that is calculated as part of the existing import capacity allocation process, and also includes import capacity between CAISO zones over Path 26. The CAISO notes that it will be necessary to coordinate the import allocation process with the zonal requirement. The CAISO further notes that in the case of SP 26, the proposal does not assess specific changes to flows on individual branch groups.
Generation outages. While the CAISO generally does not permit planned outages during peak demand periods, historically there have been a small number of such outages that are unavoidable. The CAISO estimates generator outages by examining historic outage data on peak summer conditions at hour-ending 1600. The CAISO notes that including an outage component in the zonal methodology does not constitute double-counting of outages in relation to the PRM.
Single largest contingency. The CAISO determined that the single largest contingency for SP 26 is the loss of 2,000 megawatts (MW) related to the loss of the Pacific DC Inter-tie. For NP 26 the largest single contingency is the loss of a Diablo Canyon Unit at 1,160 MW.
Based on these four components of zonal capacity requirements analysis, the CAISO estimated that for illustrative, "order-of-magnitude" purposes only, the total zonal requirement for SP 15 would be 19,190 MW and that for NP 26 would be 17,134 MW. Subsequently, in the workshops, the CAISO indicated a residual zonal capacity need in the amount of 6,290 MW for NP 26 and 7,566 MW for SP 26.
The CAISO presented its zonal study assumptions, calculations, and results at the Track 1 workshops. The workshop discussions yielded significant but not unanimous agreement that there is a need for the imposition of zonal procurement obligations on LSEs in addition to the existing system and local obligations. Of the parties filing post-workshop comments, Pilot Power believes that the zonal capacity need identified by the CAISO is "theoretical and potential." Pilot Power is concerned that there is no historical analysis showing that the potential issue actually arose in 2006 or in 2007 that caused the CAISO to engage in backstop procurement or take other steps to solve the problem.
Under the current RA counting rules, even if system, local, and import RA requirements are collectively satisfied by LSEs, the portfolio of RA resources procured by LSEs could result in a zone relying on transfer capacity across Path 26 that exceeds the path's rated capacity. Thus, for the same reason that we have adopted local procurement obligations to address reliability issues in local load pockets associated with transmission constraints, we find that establishing LSE-based procurement obligations to address the reliability problem caused by the Path 26 transmission constraint is reasonable and should be adopted. If this Commission does not address the problem through the imposition of LSE-based procurement obligations, the CAISO would likely need to rely on less cost-effective alternatives such as non-RA capacity or its backstop authority to balance needs within the zones. Such reliance on CAISO-based procurement is inconsistent with the LSE-based procurement objectives of the RA program and therefore ought to be minimized.
By definition, future loads and operational circumstances can only be forecast. Thus, it is true that the zonal procurement obligation addresses a "potential" as opposed to an "actual" zonal event. However, as with the RA program as a whole, we regard the establishment of LSE-based zonal capacity obligations as equivalent to the purchase of insurance for reliability. A prudent driver decides to obtain car insurance on the basis of informed judgment regarding risk assessment, not on the basis that he had an accident in the prior year. We believe that the same principle holds true here; we should not await the actual occurrence of a zonal reliability event before we take prudent action to avoid the occurrence of the next such event.
3.2. Zonal RA Implementation Proposals
Notwithstanding the zonal capacity need identified by the CAISO, pre-workshop comments and workshop discussions revealed substantial concern regarding the regulatory complexity of adding a third set of regulatory requirements to the existing system and local components of the RA program. Two alternative proposals for resolving the zonal capacity requirements emerged from the workshops. One, initiated by SCE, led to a joint proposal of the CAISO, the three IOUs, and TURN for a Path 26 Counting Constraint. The second proposal, advanced by DRA, was presented by DRA as a variation of the Path 26 constraint. On March 22, 2007, Joint Parties and DRA each submitted post-workshop refinements to the proposals that surfaced at the workshops. We summarize them below, then address our preferred approach to resolving zonal capacity needs identified by the CAISO.
Recognizing that an explicit zonal RA requirement was being considered largely due to the concern that Path 26 may be collectively over-relied upon in the RA compliance showings of individual LSEs, the Joint Parties advocate the adoption of a Path 26 counting constraint for system RA starting with the 2008 compliance filing cycle. This approach would be in lieu of an explicit zonal RA procurement requirement. Essentially, Path 26 would be treated analogously to an RA import path for RA counting purposes. In brief, there would be a CAISO-determined, Commission-adopted limit on the amount of capacity LSEs may count crossing Path 26 in connection with their System RA compliance filings. The following five-step, CAISO-administered iterative process would be used to determine this counting constraint:
Step 1. The CAISO determines the amount of Path 26 transfer capacity available for RA counting purposes after accounting for Existing Transmission Contracts (ETCs) and loop flow.3 The CAISO calculated the Path 26 transfer capability as 3,430 MW north-to-south and 2,583 MW south-to-north.
Step 2. The CAISO determines the baseline amount of Path 26 counting capacity that an LSE is eligible to receive in the allocation process without consideration of the impact of netting the north-south and south-north RA counting "flows" on Path 26. This baseline amount is the higher of (1) the LSE's load-ratio share of load in the zone or (2) the sum of the LSE's existing commitments-ETCs, Transmission Ownership Rights (TORs), and RA resource agreements in effect as of February 21, 2007 (Grandfathered RA Commitments). If an LSE has such Grandfathered RA Commitments that exceed its load-share ratio, other LSEs in that zone will receive a baseline allocation that is less than their load-ratio share. While we find the proposal unclear on this point, it appears that this reduced allocation for LSEs without Grandfathered RA Commitments reflects a pro rata share of the total amount by which the allocations for LSEs with Grandfathered RA Commitments exceed the load-ratio shares for those LSEs. The CAISO will notify LSEs of their baseline allocations by mid-July. An LSE will be able to receive more than its baseline share if additional capacity becomes available through the netting process identified in Step 3. Once the Grandfathered RA Commitments expire, an LSE's baseline share will revert to its load-ratio share.
Step 3. Once the baseline quantities are determined, LSEs will have an opportunity, but not an obligation, to submit RA resource contract commitments (Preliminary Path 26 Submittals) that exist as of July 31 of each year, including Grandfathered RA Commitments, that need to use Path 26 to deliver to the LSE's loads (Existing RA Commitments). The CAISO will use these Preliminary Path 26 Submittals to "net" the north-to-south and south-to-north Path 26 RA counting impacts associated with the Existing RA Commitments. An LSE's Preliminary Path 26 Submittal cannot exceed its baseline Path 26 RA counting capacity. Once submitted, the Preliminary Path 26 Submittals will create a binding obligation on the LSE to include the Existing RA Commitments in its year-ahead and month-ahead RA compliance filings. The Existing RA Commitments submitted and accepted by the CAISO through the Preliminary Path 26 Submittals process will also be subject to all CAISO Tariff offer obligations. This Preliminary Path 26 Submittal process will take place each year.
Step 4. The CAISO will allocate the additional Path 26 RA counting capacity that was made available due to netting of existing commitments. This additional counting capacity will be allocated to LSEs based on load-ratio shares, and will be additive to the LSEs' baseline allocations. However, LSEs whose baseline Path 26 RA counting capacity exceeds their load-ratio shares because of Grandfathered RA commitments will only receive additional Path 26 RA counting capacity after all other LSEs have been "topped off" by being allocated additional Path 26 RA counting capacity in an amount that causes them to exceed their respective load-ratio share by the same percentage that the initial LSE receive because its baseline allocation exceeded its load-ratio share.
Step 5. The CAISO will notify LSEs of the final results of the Path 26 RA counting capacity process within 5-7 business days of July 31 of each year. This final notification can only increase the amount initially allocated to each LSE by mid-July in Step 2, but cannot decrease that initial allocation. In order for an LSE to count an RA resource that requires the use of Path 26 to be delivered to its load zone, an LSE would have to have sufficient Path 26 RA counting capacity.
DRA essentially agrees that the Path 26 Counting Constraint is a conceptually simple resolution of the reliability problem caused by potential over-reliance on Path 26. DRA nevertheless finds that that proposal's provisions for establishing the quantity of RA counting rights available on Path 26 are complicated due to existing RA resource commitments, loop flow, and netting impacts. DRA proposes that a simpler way to ensure an appropriate regional balance of RA resources is to set minimum percentages of System RA that must be provided by RA capacity located in either SP 26 or NP 26. The minimum percentages would be calculated by determining the load forecast for each zone, subtracting DR impacts, and adding 15% to determine a Total Zonal Need that includes a PRM. Then, to determine the Zonal Physical Capacity Need to be met through intra-zonal RA procurement obligations, the total of import and Path 26 capacity and DWR Liquidated Damages (LD) contract capacity would be subtracted from the Total Zonal Need. The minimum percentage to be applied to LSE procurement obligations would be based on the ratio of Zonal Physical Capacity Need to Total Zonal Need. Using data for 2008 that was available in the Track 1 workshops, DRA determined for illustrative purposes that each LSE4 located in SP 26 would have to provide at least 53.0% of its System RA obligation from plants located within SP 26. For LSEs located in NP 26, the minimum percentage would be set at 63.5%. DRA notes that these percentages would have to be refined to take into account loop flow, the size of DWR LD contracts by zone, and the size of DR impacts within each zone.
DRA proposes that the CAISO would annually calculate the minimum percentages for each zone and provide the results to LSEs. LSEs would be required to show they have met the minimum intra-zonal percentage requirements in their RA compliance filings. DRA anticipates the percentages would change over time as changes occur in load, DR impacts, import capacity, and the size of DWR LD contracts.
In the wake of the Track 1 workshops, no party proposes that we establish a stand-alone Zonal Capacity RA requirement. Compared to such a requirement, the two alternatives before us represent relatively minor modifications to the existing System RA program that should operate to achieve the same objectives of a stand-alone requirement. We appreciate the parties' efforts in fashioning such practical solutions to reliability issues. We find that the relative RA program simplicity achieved by these alternatives is consistent with our stated objective to reduce regulatory uncertainty pertaining to the RA program. (D.06-07-031, pp. 23-24.)
Having determined that there is a significant zonal reliability problem arising from the physical constraint across Path 26, and that the problem should be addressed through LSE procurement obligations rather than CAISO procurement, we turn to resolving which of the two proposals-the Path 26 Counting Constraint or the Minimum Percentage Requirement-will more effectively resolve the problem both from a reliability and a cost standpoint.
DRA presented its proposal as a less complicated, and therefore preferable, alternative to the proposed Path 26 Counting Constraint. We are not persuaded that is the case, however. If the DRA approach is less complex, it is because it does not consider counter-flows across Path 26 that would allow netting of resources across the path. In contrast, the Joint Parties' Path 26 Counting proposal explicitly provides for such netting. By not providing for netting, DRA's approach unnecessarily restricts LSE access to economic resources at times when no physical limitation exists that would preclude such access. The effect of such a restriction would be a constraint on the RA market that could lead to LSEs and ultimately their customers paying more for RA capacity, with no resulting enhancement to reliability.
Moreover, the simplicity advantage of the DRA approach does not appear to be a straightforward proposition. As the Joint Parties point out, if we were to approve the Minimum Percentage Requirement it may be appropriate to implement it using monthly calculations of the physical zonal requirement. If such a determination were made, the need for monthly calculations would offset any simplicity advantage of the method. In addition, by assigning the same minimum percentage requirement to each LSE based on aggregate amounts of DR impacts, RA imports, Path 26 transfer capability, and DWR LD contracts, the DRA proposal in effect assigns a pro-rata allocation of these RA counting assets to LSEs. However, these are LSE-specific assets under the current RA regime. As the Joint Parties note, the proposal could result in a "false deficiency," i.e., an LSE could be found deficient with respect to its minimum required percentage of resources within a zone even though the CAISO's zonal reliability needs have been satisfied and the LSE has met its System and Local obligations.
AReM is concerned that the Path 26 Counting Constraint's grandfathering provision would give preferential access to Path 26 counting rights to some LSEs. AReM might be inclined to support the proposal if the Path 26 allocations were capped at the load-ratio share for each LSE. AReM has found that the RA intertie import allocation process to be contentious, and is concerned that it disadvantages ESPs. AReM is therefore hesitant to support a similar allocation process for Path 26 counting rights. Constellation et al., Pilot Power, and Sempra Global also raise concerns about the proposed allocation process for Path 26 and the preference it gives to long-term arrangements. Like AReM, Constellation et al. support making the allocation on a load-ratio share basis. Constellation et al. also disagree with the selection of February 21, 2007 as the cutoff for preferential treatment of RA contracts.
We find the grandfathering of existing arrangements under the Path 26 Counting Constraint to be reasonable. In particular, it is appropriate to recognize that some LSEs have entered into long-term commitments prior to the advent of a path allocation requirement, and that such procurement practices are consistent with the objectives of the RA program. We also note that according to Joint Parties, the impact of grandfathering is "inconsequential overall." It is proposed in response to the need to give effect to the policy of honoring DWR contracts for RA purposes. Joint Parties state there is only one ETC held by an LSE serving load within the CAISO control area that exists on Path 26, in the South to North direction amount of 52.5 MW.
Based on the foregoing, we will adopt the Path 26 Counting Constraint beginning with the 2008 compliance period, with one modification. Joint Parties propose February 21, 2007 as the cutoff date after which new RA resource agreements would not be grandfathered for Path 26 allocation purposes. We understand that this cutoff date was selected because it is the date of the Track 1 workshop at which the concept of the Path 26 constraint was first discussed. We do not find that date to be reasonable. As Constellation et al. point out, the workshop discussion was initially focused on the need for a zonal RA procurement requirement, not the mechanics of a path allocation. We will instead set March 22, 2007, the date the proposal was filed, as the cutoff date.
2 Path 26 is composed of transmission lines between northern and southern California. The two constrained zones identified by the CAISO are the electrical footprint north of this path (NP 26) and the electrical footprint south of it (SP 26).
3 The transfer capacity on Path 26 must be de-rated to accommodate ETCs that are used to serve load outside the CAISO control area. "Loop flow" is common to large electric power systems and must be accommodated to prevent overloading of lines.
4 Although DRA referred to "ESP" in presenting its proposal (DRA Zonal Capacity proposal, p. 4), we understand the intended references are to "LSE."
