Fortnightly
Gold-Plated Grid
February 01, 2000
By Bruce W. Radford
Some in California say they will pay double - once to the ISO, then again to the IOU.
What if power prices fall but the savings get eaten up by higher transmission rates? Let's say we unbundle the wires, but end up creating just another layer of costs? We pay the independent system operator (ISO) to run the grid, but the investor-owned utility (IOU) still owns the wires. It has its own costs to recover. So now we pay two bills, right?
The issue is troublesome for California's electric utilities and a quagmire for Pacific Gas & Electric Co. In a new tariff it filed on Nov. 12 with the U.S. Federal Energy Regulatory Commission, PG&E seeks to bill certain wholesale customers to recover costs it now pays to the California ISO. The customers oppose the idea. Some of them signed contracts with the utility years ago for transmission service. Those contracts say nothing about ISO charges. The list includes the city of San Francisco and the Sacramento Municipal Utility District (SMUD), plus newcomers like Dynegy Power Services.
For SMUD, PG&E's move comes too late: "The treatment of existing contracts was a carefully crafted compromise among the ISO participants, and pulling on any of its threads threatens to unravel the entire fabric."
But I wonder if there's even more at stake. Do electric utilities face stranded costs on the transmission side?
I raised that issue with a PG&E executive (see his answer at the end) and some attorneys representing municipal and public power agencies that purchase grid-related services from PG&E. The opposing attorneys preferred to stay off the record. But they volunteered that the PG&E case involves issues that will face every region and utility that restructures its transmission sector:
"In theory," said one attorney, "the total costs ought to drop, because the ISO is doing things that PG&E used to do. But PG&E has yet to face up to that and make the difficult decisions."
"THE MAGNITUDE OF THE DOLLARS INVOLVED, if unrecoverable ¼ would send a chilling message to any utility contemplating joining an RTO [regional transmission organization]." That view comes from PG&E corporate counsel Mark Patrizio, in a brief filed Oct. 1 in FERC Docket No. ER97-2358-002. The issues in that case have been pending for several years. They concern both PG&E's new proposed tariff and the nonrate terms and conditions in wholesale transmission owner (TO) tariffs filed by PG&E, Southern California Edison Co. and San Diego Gas & Electric.
Edison and SDG&E echo PG&E's concern: "If allowed to stand, the initial decision in this proceeding will ¼ send a very clear negative message to the industry concerning RTO membership and the severity of the financial risks to utilities and their shareholders."
The decision in question was issued by FERC administrative law judge Stephen Grossman last September, and was awaiting FERC review at press time. Judge Grossman ruled that when PG&E acts as a scheduling coordinator (SC) for its wholesale customers, and pays a grid management charge to the ISO, it cannot recover that cost in TO tariff. Instead it must recover that cost only from its SC customers. See 88 FERC ¶63,007.
It seems the protocols in the ISO tariff for identifying, allocating and recovering costs for ancillary services and transmission losses don't agree with contracts that PG&E and the other electric IOUs signed with certain transmission customers long before there ever was an ISO. That means PG&E must make up the difference. Attorneys Glen Ortman and Michael Yuffee (Verner, Liipfert, Berhard, McPherson and Hand), who represent SMUD against PG&E, say that while SoCal Edison "went out and negotiated with its existing customers to resolve the obvious discrepancies," PG&E took a chance and lost its bet:
"Basically, one can look at California's restructuring as a cake. ¼ PG&E chose not to negotiate the crumbs ¼ because it assumed that those costs - the crumbs - would be small. Now, upon further reflection, PG&E realizes that those crumbs it left to its existing contract customers were bigger than it first thought."
Two months after Judge Grossman barred recovery in TO tariffs, PG&E filed its new tariff for its SC customers, including SMUD. In its application, PG&E claimed that California's restructuring created a new regime with requirements for new services, necessitating a new tariff for a new rate classification:
"The role of an SC is not even a function that PG&E is obligated to perform. ¼ Rather, at the time of commencement of ISO operations, PG&E voluntarily agreed to fulfill that role so that the SC customers could gain access to the ISO-controlled grid. Under the ISO rules, the SC customers could not gain access to the ISO-controlled grid without an SC."
Yet SMUD and the other SC customers (mostly municipal power agencies) view any added charge as an infringement of their contracts. Further, while SMUD relies on PG&E as its scheduling coordinator, it believes that the newly filed SC tariff targets costs for ancillary services - which SMUD says it doesn't want or need from PG&E, as the muni explained in its protest filed on Dec. 2:
"The math is rudimentary. SMUD pays for its own self-supplied ancillary services. PG&E, which does not provide these services or incur any costs for them, now seeks to charge SMUD for such services under the ISO tariff. This unquestionably amounts to a double charging."
THE FERC ACCEPTED PG&E'S NEW TARIFF on Jan. 11 (see 90 FERC ¶61,010) but suspended it immediately, saying it must first review Judge Grossman's order and the other issues pending in the case on TO tariffs. That list includes whether to mandate a pro forma TO tariff in California, or even a pro forma wholesale distribution tariff. (Such a tariff might aid California customers such as the city of Vernon, which must rely on a dedicated, utility-owned 66-kilovolt distribution line to connect with the ISO grid for wholesale power.) Enron, in particular, has urged the FERC to mandate a pro forma tariff for wholesale distribution, with capacity posted on OASIS, but Judge Grossman rejected that idea and the FERC staff appears to oppose it.
The Jan. 11 action led me to contact Robert J. Doran, PG&E's director of FERC rates and regulation. I asked him whether PG&E's real problem was a failure to downsize staff and trim costs to accommodate the shift of responsibility for grid management to the ISO.
"Not true," said Doran.
"First of all, these SC costs are not the administrative costs of ISO personnel, but rather ISO costs related to system operation. PG&E has found that its personnel are still necessary to perform functions related to the ISO and its transmission customers."
In fact, Doran avers that PG&E's transmission sector staff has actually grown since the ISO started up.
"Originally a reduction in PG&E's staff was contemplated; however, the increased complexity of operating PG&E's system under ISO direction has resulted in an increased workload in the transmission switching centers. In addition, PG&E still needs to maintain schedulers 24 hours per day in its control center to receive real-time schedule changes from its transmission customers and relay them to the ISO as well as other personnel which receive preschedules from the customers daily and submit them to the ISO using the ISO's rules and protocols."
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