Commission Watch
Gridlock Over Path 15
May 1, 2003
By Lori A. Burkhart
PUC could oust PG&E from the project, finding no need for an upgrade.
Nearly a year after the Federal Energy Regulatory Commission (FERC) gave its blessing for upgrading California's notorious "Path 15" transmission bottleneck, an administrative law judge (ALJ) at the California Public Utilities Commission (PUC) has thrown a monkeywrench into the plan.
In a tentative decision issued on March 7 (which will require further review by the full state commission), the ALJ found no economic need for the project and would deny permission to Pacific Gas & Electric Co. (PG&E) to continue to play a part in the multi-party project. See Cal. PUC Dkt. Nos. I. 00-11-001, A.01-04-012, Mar. 7, 2003 (proposed decision).
But Trans-Elect President and COO Bernie Schroeder remains defiant, insisting that the California PUC will not stop his company from going forward on the project, worth more than $300 million. Trans-Elect would be supplying most of the funding, with PG&E upgrading existing substations and low-voltage facilities, and the Western Area Power Administration (WAPA) adding new construction, as well as taking title to the transmission line and land.
"It will have no impact on us, and if they don't build it, presumably we will find somebody who will," Schroeder explained.
"Financing is pretty much in place," he added. "It is being syndicated right now, and I don't have any doubts about it, I can tell you that."
Yet the ALJ decision could hardly have been more discouraging for those pushing grid upgrades-whether in California or across the nation. In strongly worded language, Judge Meg Gottlieb questioned the very idea of looking to transmission expansion as a logical first step in improving wholesale power markets, instead of simply building new generation closer to load, or improving regulatory oversight of power producers who exert market dominance.
"What this signals to us," Gottlieb wrote, "is a failure to regulate wholesale market players effectively, rather than a failure to build transmission infrastructure."
The Deal
The California PUC had warned from the very beginning that it would want to weigh in on the project. It had intervened at FERC and had protested certain aspects of the deal before FERC approved the $323 million project last June. At that time, FERC awarded Trans-Elect a 13.5 percent return on equity (ROE) plus an incentive worth 200 basis points. It also granted a 10-year accelerated depreciation schedule for PG&E and a 50/50 "hypothetical" capital structure. See Dkt. No. ER02-1672, 99 FERC 61,306, rehearing denied, 100 FERC 61,331.
The deal called for upgrades to the already existing 84-mile stretch of transmission, including a new 500-kV transmission line that would increase north-south transmission from 3,900 MW to 5,400 MW. Path 15 remains a key interface for power flows moving from southern to northern California and on to the Pacific Northwest.
The California Power Authority and the California Energy Commission have called for Path 15 expansion as one of three vital transmission corridors that need immediate expansion. Yet the question of need remains open to interpretation.
Last June FERC Chairman Pat Wood said he was "encouraged" by the "creative approach by the three very different partners." He acknowledged state jurisdiction over permitting but thought that the parties had proven the need for the project-more than just about "any other transmission project in U.S. history," he said at the time.
But, as Gottlieb explained in her order, Path 15 already satisfies all relevant engineering requirements to maintain reliability. The upgrade, Gottlieb says, would serve only economic need-increasing the grid's capacity to deliver product to customers at a cheaper price-and the value of that benefit obviously depends on forecasts of future prices.
PUC Commissioner Loretta Lynch, in her proposed alternate decision, said the upgrade, though not strictly needed for the sake of reliability, would still act as an "insurance policy" (albeit an expensive one) against market gaming abuses such as those that occurred in 2000 and 2001. Lynch would allow the upgrade.
PG&E spokesman Jon Tremayne admitted the conflict had caused some confusion for the utility. "We're looking to the commission to give better direction," he said. (PG&E was expected to weigh in formally on the proposed ALJ order after this issue went to press.)
Back at Trans-Elect, however, Schroeder emphasized that the project involves three sponsors. "The vast majority of it-82 percent-is between WAPA and us. Eighteen percent-the substations-are about PG&E." The PUC order only speaks to PG&E's participation.
"I feel sorry for PG&E," Schroeder noted. "They are the ones getting caught in the crossfire, but I assume they will work it out."
The Outlook
The cost-benefit analysis turned on one of two studies conducted by the California Independent System Operator (CAISO). That study assumed continued dysfunction in wholesale power markets through 2005, with continued wide fluctuations in power prices, and it attempted to weigh the benefits of a Path 15 upgrade in that environment.
Yet, according to Gottlieb, CAISO's assumption of continued market dysfunction was wrong in principle, but also could not justify construction even if accepted for the sake of argument.
Gottlieb said CAISO had erred "by putting arguably the most expensive fix-construction of a $323 million project-as the first step in mitigating the market abuses experienced in 2000."
Gottlieb said the first task of the PUC, as regulator of electricity delivery in California, was to ensure just and reasonable costs and prices-not to look for infrastructure investment projects designed to counteract failed regulation. And she saw the CAISO study as demonstrating that concentration of generation capacity in the hands of a few owners had more of an impact on power markets than transmission infrastructure. Thus, she urged the PUC to address market power first.
"Even if it [the study] was valid," she added, Path 15 benefits would "never catch up with costs except under implausible scenarios."
The CAISO cost study had weighed the possible benefits of Path 15 expansion, based on the likelihood of a certain ratio of years with drought conditions (bad for hydroelectric generation). But Gottlieb found that even if one accepted the rationale of the CAISO's cost analysis, the Path 15 upgrade would be cost-effective only under the most implausible of scenarios: "For every five years of average hydro conditions, California would need eight years of drought conditions for the project to break even."
Trans-Elect's Schroeder questioned the ALJ decision. "In order to protect the people of California this line has to be built-the federal government believes that. And the federal government has authorized, indeed encouraged us, to do that," he said.
At the end of the day, Schroeder puts his money on the feds. "The decision-maker probably would be the owner of the project, which is WAPA-the federal government."
Lori Burkhart is a legal editor of Public Utilities Fortnightly.
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