III. Overview of Positions of the Parties

To assist our consideration of the proper principles and methodologies for evaluating the economic benefits of proposed transmission projects, we have the benefit of the Phase 1 record containing four project-specific economic evaluations: the CAISO's evaluation using the TEAM approach of a possible Path 26 upgrade, submitted originally in I.00-11-001, and three separate economic evaluations of the DPV2 project submitted by the CAISO, SCE, and DRA. All parties submitted testimony and took positions regarding the submitted economic evaluations and related issues.

In today's order, we describe in some detail the principles and methodologies used in each of the four economic evaluations because they assist in our determinations regarding how best to analyze the economic benefits of a transmission project. We provide an overview of the positions of the parties regarding the principles and methodologies for economic evaluations of transmission projects and the manner in which the Commission should consider such evaluations in CPCN proceedings. We then address individual issues.

A. CAISO

The CAISO has been developing its TEAM approach for several years. At the direction of the ALJ in I.00-11-001, the CAISO submitted a report in June 2004 describing the CAISO's TEAM approach and its application to a potential project to upgrade the transmission path between central and southern California, which is commonly called Path 26 (June 2004 Report, which is Attachment 1 to Exhibit 11 in the Phase 1 record). In the June 2004 Report, the CAISO explained that the Path 26 study provided an opportunity to evaluate its TEAM approach in a realistic situation and to gain experience regarding areas for further enhancements. The CAISO concluded that additional refinements to TEAM would be needed to reach a definite conclusion regarding whether a Path 26 upgrade would be economically viable.

In analyzing the DPV2 project proposed by SCE, the CAISO made certain refinements to its TEAM approach. The CAISO has approved the DPV2 project as economically needed.

The CAISO considers five aspects of its methodology, which it calls key principles, to be necessary to any economic evaluation of a transmission project. While described in more detail in Section V, in summary, the CAISO's key principles include the following:

1. Benefit framework: utilization of a standardized benefit-cost methodology to measure transmission expansion benefits regionally and separately for consumers, producers, and transmission owners.

2. Network representation: measurement of energy benefits using a network model that reflects physical constraints of the transmission grid and forecasts nodal prices.

3. Market prices: measurement of energy benefits using a methodology that forecasts market prices by simulating producer bid strategies, to assess consumer benefits from reduced supplier market power.

4. Uncertainty: assessment of the impact of uncertainty about future market conditions through analysis of a representative set of market scenarios, with assignment of weighting factors (relative probabilities) to the different scenarios so that the expected benefit and range of benefits can be determined.

5. Resource alternatives: identification and consideration of alternative generation, demand-side management, and transmission investment decisions.

In addition to these mandatory key principles, the CAISO described several other TEAM attributes that it considers to be either requirements or recommendations for economic evaluations of transmission projects.

The CAISO urges the Commission to adopt TEAM's key principles as the minimum requirements in any economic evaluation of a proposed transmission project. The CAISO recommends that, in a CPCN proceeding considering a transmission project that the CAISO has already found to be cost effective, a project proponent may rely on the study underlying the CAISO's determination to trigger a rebuttable presumption of economic efficiency. In the CAISO's proposal, this rebuttable presumption would shift the burden of proof to an opposing party to demonstrate either that the project is not economic or that other factors in Public Utilities Code Sections (§§) 1001 and 1002² compel denial. The CAISO submits that adoption of a rebuttable presumption standard in which the burden of proof is shifted is warranted because of the public policy benefits of streamlining infrastructure development and creating greater coordination between Commission and CAISO processes.

The CAISO cites its statutory responsibilities under §§ 334 and 335 and argues that the ability to identify economic transmission projects is an integral part of its responsibility under § 345 to ensure the efficient use of the transmission grid.

Much of the CAISO's description of the TEAM approach is contained in the June 2004 Report, which applies the methodology to the potential Path 26 upgrade. In assessing TEAM, we rely on the detailed description of TEAM in the June 2004 report and on the CAISO's evaluation of DPV2, since that is the state-of-the-art application of the TEAM approach.

To evaluate potential energy benefits of DPV2 (and also Path 26), the CAISO used the PLEXOS DC Optimal Power Flow (DC-OPF) network model. We address system modeling issues in Section V.B.1 of this order. To forecast the amount by which market prices may be bid above system marginal costs, the CAISO used statistical relationships it found historically between price markups above cost and two measurements of system supply and demand conditions, as described in more detail in Section V.B.2.

As described in Section V.B.5, the CAISO analyzed the effects of uncertainty on the energy benefits of DPV2 by undertaking 17 system simulations using combinations of variations in load growth, hydro conditions, gas prices, and the degree of market power exhibited in producers' bids. The CAISO also analyzed several contingency scenarios representing extreme events for which it did not assign probabilities and whose results it did not include in the calculated benefit-cost ratios.

The CAISO modeled the energy system throughout the Western Electricity Coordinating Council (WECC) region with and without DPV2 in two years: 2008 and 2013. In calculating benefit-cost ratios for DPV2, the CAISO assumed that the energy benefits it found for 2013 would continue with a 1% real (adjusted for inflation) annual escalation rate through 2057.

In addition to energy benefits, the CAISO quantified and included in the benefit-cost ratios certain non-energy benefits of the DPV2 upgrade.

B. SCE

SCE agrees with the concept of adopting general principles to guide the economic evaluation of transmission projects in CPCN proceedings. SCE emphasizes its view, however, that whatever guidance the Commission provides should not include any requirement that parties use a specific type of computer model or database, or that they forecast the effect of the proposed transmission project on producers' ability to wield market power.

SCE states that, under § 1003, the applicant has the burden of demonstrating in a certificate proceeding that the proposed project is, or will be, required for the public convenience and necessity. SCE is concerned that, in considering the CAISO's proposal to create a rebuttable presumption, the parties confuse the burden of proof with the burden of producing evidence. SCE states that the applicant in a CPCN proceeding always has the burden of proving that its proposed project is reasonable, and also the burden of producing evidence that supports its request.

SCE is concerned that emphasizing the CAISO's economic evaluation of the need for a project in a certificate proceeding may confuse the CAISO's role with that of the utility applicant. SCE emphasizes its view that the utility applicant must have the ability to choose how best to meet its burden of proof and that the applicant can choose whether to rely on the CAISO's evaluation. SCE suggests that the Commission adopt a modification of the fourth principle that DRA recommends (see Section III.C below) as follows:

The applicant is responsible for its showing and justification before the Commission. If the CAISO has determined that a project is needed, the applicant should present that fact and may use the CAISO assessment to help it meet its burden of proof. The CAISO is encouraged, but not required, to participate in Commission licensing proceedings.

SCE forecasted DPV2's impact on energy costs using the Global Energy (formerly Henwood) transportation model. SCE studied the period from June 1, 2009-the proposed energization date for DPV2-through December 31, 2015. SCE assumed that estimated 2015 energy benefits would continue at the same level in real terms through 2055, i.e., escalated each year only by inflation. To assess DPV2's benefits over a wide range of load forecasts, natural gas prices, and available hydroelectric generation, SCE utilized stochastic tools (also known as Monte Carlo analysis) to perform 100 simulations, with load forecasts, gas prices, and hydro levels chosen stochastically.

In addition to energy benefits, SCE quantified and included in its benefit-cost analysis the amount by which it expects third-party transmission revenues to increase with the addition of DPV2, due to the increased revenue requirement used to develop rates for CAISO wheeling service and Existing Transmission Contracts.

C. DRA

DRA recommends that the Commission focus on general principles used to evaluate the economic need for a transmission project, and allow applicants to determine how to apply the adopted principles, subject to Commission scrutiny on a case-by-case basis.

DRA recommends adoption of four principles, which can be summarized as follows:

1. Assessment of energy benefits. Energy benefits should be assessed using an established, credible, and commercially-available production cost modeling tool. Computer model access requirements of §§ 1821 and 1822 should be met consistent with Rule 74,³ or reasonable alternative computer model access rules may be established on a case-by-case basis.

2. Input assumptions and uncertainty analysis. The applicant should rely on input assumptions developed for the State's most recent major resource planning proceeding. In addition to a base case, uncertainty analyses are appropriate based on alternative assumptions about key variables.

3. Analysis of alternative resource options. The applicant should prepare economic assessments of a variety of resource alternatives to the proposed transmission project, including, but not limited to, other transmission projects, generation projects, demand-side options, and distributed generation.

4. Responsibility of the applicant. The applicant is responsible for its showing and justification before the Commission. The applicant is encouraged, but not required, to coordinate its assessment of the transmission project with the CAISO's assessment of the project.

DRA states that the CAISO's TEAM approach is generally consistent with the four principles DRA recommends, but that the CAISO over-prescribes methodologies to implement the principles, in particular, its requirement that a full network model be used.

DRA opposes the CAISO's recommendation that economic analyses performed by or otherwise found acceptable by the CAISO for its own purposes be granted a rebuttable presumption of reasonableness in Commission CPCN proceedings. DRA argues that the CAISO's rebuttable presumption proposal is inconsistent with the Commission's statutory mandates under §§ 1001 and 1003 and the historical use of rebuttable presumptions. DRA maintains that the CAISO's analysis and findings should be treated like any other facts presented to the Commission and should be accorded the appropriate weight due any evidence that has been tested through the hearing process.

Like SCE, DRA used the Global Energy transportation model for its economic assessments of DPV2. DRA based its modeling of DPV2's potential energy benefits on SCE's analysis, with modifications as DRA deemed appropriate. While SCE performed stochastic analyses, DRA developed a deterministic reference case and several additional market simulations to evaluate DPV2.

To assess the impact of "forecast risk," DRA developed an Uncertainty Margin method to quantify the level of forecast risk that can be accepted. DRA also proposes what it calls a tipping point analysis, in which parties identify which parameters, assumptions, or relationships drive the conclusions of their economic evaluations.

D. PG&E

PG&E cautions that the Commission should minimize the need for continuing reassessment of principles and criteria endorsed in this proceeding by focusing on general principles rather than particular models or assumptions.

PG&E's view is that, if the CAISO employs general principles articulated by the Commission, the Commission should defer in a CPCN proceeding to the CAISO's finding of need. PG&E argues that pursuant to §§ 334 and 345 and the CAISO's tariff approved by the Federal Energy Regulatory Commission, the CAISO is responsible for determining which transmission projects are needed within its control area. PG&E asserts that, consistent with the CAISO's tariff, the CAISO has the authority to compel construction of transmission upgrades it determines to be needed, subject to right of appeal. PG&E recommends that the Commission adopt the three-step procedural framework identified in Issue 3 in the September 27, 2005 ALJ ruling, on the basis that these procedures would reduce the threat of inconsistent results and would expedite the siting process for transmission projects.

PG&E recommends that Commission consideration of project need issues be limited to verifying that the CAISO applied Commission-recommended principles, and that the Commission not review the merits of the CAISO's analysis unless the CAISO failed to apply one or more of the Commission-recommended principles. PG&E would also support the solution developed by the CAISO of creating a rebuttable presumption, if needed to address legal concerns raised by granting full deference to a CAISO need determination. PG&E submits that such an approach provides more than adequate safeguards for intervenors in CPCN cases, is consistent with the CAISO's authority over transmission planning, and is well within the Commission's authority to adopt.

Regarding specific guidelines, PG&E generally supports the principles recommended by the CAISO, but takes issue with the CAISO's proposal that use of a network model be required.

E. SDG&E

SDG&E states that the Commission should defer to CAISO need determinations, giving them a rebuttable presumption of validity. In SDG&E's view, if the CAISO follows principles and an analytical framework adopted by the Commission in a reasonable manner, the Commission should adopt the CAISO's need determinations.

SDG&E disagrees with some of the more prescriptive recommendations of the CAISO, in particular its network model requirement and its suggestion that the Seams Steering Group - Western Interconnection (SSG-WI) database be used. SDG&E acknowledges possible complications regarding access limitations to models and databases the CAISO may use, but submits that the Commission must accept these access limitations in order to grant deference to the CAISO need determinations. SDG&E acknowledges that Commission deference to the CAISO may not be appropriate if the Commission wishes to consider a broader range of generation and demand-side alternatives than the CAISO evaluates. SDG&E also cites transmission needed to attain renewable resource goals as a situation where the Commission may approve a transmission project even if the CAISO found it was not needed.

F. TURN

TURN supports Commission endorsement of the CAISO's proposed benefits framework, but recommends that the Commission not endorse the other elements of TEAM at this time. TURN submits that methods for economic evaluation of transmission projects are still evolving and, it contends, there is no need to halt that evolution by locking into one specific approach.

TURN believes that the three-step procedures identified in Issue 3 in the September 27, 2005 ALJ ruling "move much too far and too fast." TURN believes that the first step, in which the Commission would adopt principles, a framework for decision-making, and criteria for the economic evaluation of transmission lines, is as far as the Commission should go at this time. TURN recommends that the Commission evaluate in CPCN proceedings whether each party has followed any adopted guidelines or has made a reasonable case for modifying those guidelines. TURN opposes any special deference to the CAISO's determination of economic need, citing both legal and practical reasons, including that the CAISO is a private corporation rather than a governmental agency, and that the CAISO does not conduct a public process in which its assumptions and model inputs can be tested and ratepayer concerns fully aired.

TURN argues that the Commission should continue to hear from all parties in CPCN proceedings and should continue to make its decisions based on the overall weight of the evidence. TURN emphasizes its views that the applicant has the burden of proving that its proposed project has economic benefits for ratepayers and that shifting this burden would be inappropriate.

TURN maintains that the TEAM approach, while a valuable work product, is not specific enough to allow the Commission to defer to any one party's proposed implementation of the methodology. TURN maintains that two different parties could undertake analyses consistent with the overall TEAM framework but still reach different conclusions regarding the economics of a particular project, and that those differences would still need to be examined in a regulatory process.

Regarding the perceived need to shorten the approval process for proposed transmission projects, TURN points out that there is no requirement that a utility present a proposed transmission project to the CAISO first and gain its approval prior to filing a CPCN application. TURN suggests instead that the CAISO and Commission could conduct their analyses in parallel as a way to speed approval of worthy transmission projects.

G. Global Energy

Global Energy does not support the three-step procedures identified in Issue 3 in the September 27, 2005 ALJ ruling. It argues that deference to the CAISO could deprive the Commission of hearing the recommendations and analyses of the applicant and other parties and, since the CAISO does not hold hearings, could deprive parties of a reasonable opportunity to participate in the project evaluation. Global Energy comments that, in order for a more deferential approach to be reasonable, the Commission would have to be highly prescriptive in identifying the principles to be used and the framework and criteria for decision-making. Global Energy asserts that such a prescriptive approach is not practicable now and could quickly become outdated. Global Energy suggests instead that the Commission adopt general guidelines, principles, and methodologies for use by all parties.

Global Energy argues that the type of network model used by the CAISO does not provide a true DC-OPF analysis and is less acceptable than a transportation model such as the one used by SCE and DRA. Global Energy suggests that the Commission provide guidance that, for proposed transmission projects above a specific dollar threshold (e.g., if the project is expected to cost $500 million or more), parties must perform a more accurate AC-OPF analysis. For smaller projects, Global Energy recommends that the Commission allow what it calls "true" DC-OPF analysis using variable shift factors and with the modeling of non-linear elements such as DC lines, and also allow transportation models if computational experiments show that little bias results from using such models.

H. BAMx

BAMx supports the CAISO's TEAM approach as a useful analytical framework for the economic evaluation of transmission projects. BAMx suggests that the Commission adopt certain elements of the TEAM principles as "safe harbor" principles, with studies in compliance with the adopted principles accorded greater weight in a determination of project need. In particular, BAMx recommends that the Commission give preference to use of a network model and the SSG-WI database. BAMx suggests that the costs of new entry, that is, capacity values, need to be developed to assess project benefits.

² All references to statutory Sections refer to the Public Utilities Code.

³ Cites to Rules refer to the Commission Rules of Practice and Procedure.