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Untangling the cost recovery knot -- California transmission

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California transmission upgrade projects are a vital key to the state's mandated quest for reaching 20% in renewable electricity production by 2010. But the question of who ultimately pays for billions of dollars in new poles and wires remains a sticky part of an equation that has already led to considerable delays.

One project, proposed to enhance grid access for the wind-rich Tehachapi area in the central part of the state, could add 6000 MW of capacity by 2017. A first phase is expected to result in about 4500 MW of new transmission by 2010, says to Gregg Fishman of the California Independent System Operator (CAISO). Southern California Edison (SCE) operates the area's grid and is the project's sponsor. "We're expecting 4000 to 4500 MW of wind development around Tehachapi within the next five to seven years," says Fishman. "It's a great location near the middle of the state so it can send power either north or south."

SCE, which recently launched its fourth solicitation for renewable power contracts since 2002, is working with state officials to untangle cost-recovery issues as it tries to spearhead the drive for the much needed new transmission (Windpower Monthly, November 2005).

"With proper incentives, people want to be owners of transmission," says Mike Jacobs of the American Wind Energy Association. "But in general it's a case where lots of transmission lines are in this chicken-and-egg situation and it's pretty much the same everywhere. Does the transmission come first, or does the generation?"

SCE, a subsidiary of Edison International, currently counts 1021 MW of wind power in its renewables portfolio as it distributes electricity to 4.6 million California customers. Its latest solicitation seeks renewable projects for the next ten to 20 years.

But first, many miles of wires will need to be strung. And while any addition to the area's overall network will benefit all customers, allocating costs has traditionally been complex, time consuming work.

"The real issue is that normally a generator pays for an upgrade that it triggers," says Nancy Rader of the California Wind Energy Association. "But the problem is that you should really build a line that's ten times bigger than needed for that one generator so enough capacity will be there to accommodate other users. The good news is that CAISO's proposed configuration for Tehachapi is for a network line and costs can be recovered through transmission rates."

rolling over the cost

What Rader refers to as a network line, contributes to the overall transmission grid, while a non-network, or distribution, line involves interconnections to specific generators. Cost recovery for distribution lines comes from the state's ratepayers, while a network line's costs can be rolled into jurisdictional transmission rates set by the Federal Energy Regulatory Commission (FERC). A recent rule change by FERC, the transmission system's governing body, is designed to help sort out issues such as when and how costs are recovered (box).

"If you look at this project, some of it is purely to reach out to the wind farms in Tehachapi," says Fishman. "But there's another segment that connects SCE and Pacific Gas and Electric transmission systems. That's how the power from Tehachapi will be directed north or south. But it's important to remember that we're still in the approval process here, so we haven't officially endorsed any of the project."

Chicken and egg

Rader suggests the questions over who picks up the tab can and should be answered by the California Public Utilities Commission (PUC) without getting the federal agency involved. "One of our points is that the PUC has been given the authority to overcome this chicken-egg problem," she says. "When you have the situation where the generators would all pay, the PUC has the authority to guarantee that the utility will get its money back. But what is shocking is that we were expecting to see 4500 MW of new Tehachapi transmission by 2010, not 2015."

While another transmission project, planned for California's Imperial County in the southeast of the state, would add 1000 MW of wind power capacity by 2010, that area is projected to have only 10% of Tehachapi's huge wind potential.

"But if any region gets opened up by transmission, the wind guys are going to be a lot more nimble than other technologies," says AWEA's Jacobs. "Building transmission has predictable outcomes." One of those outcomes will be the making of money. "The thing to remember is that nobody has the power to order any of these guys to build a transmission line," Jacobs says. "They're building a transmission line for the purpose of being in the transmission business."

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