L.A. vs. The ISO

May 15, 2000

By Bruce Radford

FERC chairman Hoecker wants everyone to join his managed grid. But in California, public power will need some convincing.

First, the news.

On March 23, the St. Petersburg Times had reported that Florida Power had lobbied state legislators "to consider stopping out-of-state energy companies from building new power plants in Florida." Six days later, on March 29, the Palm Beach Post reported that state senator Buddy Dyer had offered an amendment to Florida's pending Senate Bill 2020 seeking to do just that.

But the state couldn't wait for a bill to become law.

On April 20, the Florida Supreme Court took matters into its own hands. In a case that would make a good candidate for a bar exam, the court said that a power producer from out of state can not prove "need" for a new plant in Florida unless that need comes from a regulated Florida utility that has a duty to serve a captive local customer base. (Tampa Elec. Co. v. Garcia, Nos. SC95444 et al.)

Now the talk concerns whether the Florida legislature can come up with an interim "fix" to undo the damage before the session closes at the end of this month.

WHILE FLORIDA BATTLED MERCHANT POWER, LOS ANGELES DUELED ITS OWN DEMON--THE CALIFORNIA ISO. I'm talking about what might be the most significant development so far this year in electric utility regulation--the decision by the California ISO on March 22 to launch a 10-year phase-in plan to replace license-plate pricing with a grid-wide postage-stamp method for the "TAC," or transmission access charge.

Writing on April 21, the Sacramento Municipal Utility District said, "The TAC filing is not a 'run-of-the-mill' amendment to an existing rate schedule. [It] addresses issues that are fundamental the implications cannot be underestimated." (See FERC Docket No. ER00-2019-000.)

On the surface, it's about rate making. But deep down, it's about whether the independent system operators and regional transmission operators in the long run can solve the tough questions that they typically postpone in the early going to put together a coalition so they can claim to be up and running. But here's the rub: In California they're trying to entice public power to join the ISO, but the invitation is having the opposite effect.

As I understand it, when the ISO was first forming in California, everyone agreed that in theory, the most logical way to price transmission access was to divide the grid into two tiers--lower-voltage lines that serve local needs, and higher-voltage lines used for moving power long-distance. Prices for access to the neighborhood grid would reflect the embedded costs of those local assets (license-plate pricing). But for the superhighway, all users would pay the same fee (postage-stamp rate), based on an average of grid-wide costs (sometimes called "HVAC," for high-voltage average cost).

But practice doesn't always follow theory. So as a stopgap measure, to reach a consensus among the investor-owned utilities required to join, the ISO settled on license-plate pricing for the entire grid. Assembly Bill 1890, the California restructuring law, gave the ISO two years after startup to revisit the question.

Now the ISO is trying to do just that. It is trying to revamp its entire pricing scheme to achieve that original goal of a simple, single gridwide postage-stamp price for access to the transmission network. At the same time, the ISO wants to phase in the change in such a way that it offers an incentive for some of the big municipal government-owned utilities (GOUs) out West to consider joining the managed grid. One of the those big munis is the Los Angeles Department of Water and Power. But L.A. is having none of it.

When the ISO's governing board of independent stakeholders met in March, it voted 16-5 to adopt Amendment 27. But, as the LADWP points out, "Every GOU representative on the ISO governing board [four out of four] voted against the proposed access charge a unanimous rejection."

BACK EAST, ON APRIL 27, ALL FOUR SITTING FERC COMMISSIONERS WERE TESTIFYING before Sen. Frank H. Murkowski's Energy and Natural Resources Committee. They were weighing the relative merits of some eight separate pieces of federal legislation, including the Republican bill, S. 2098, and the offer from the Clinton Administration, S. 1047. While commissioners Massey, Breathitt, and Hébert each offered something different, none of them disagreed with Chairman Jim Hoecker's call for congress to help the FERC bring public power into the arms of the managed grid.

Said Hoecker, "Because our jurisdiction over [public power] transmission-owning entities is limited, approximately one-third of the nation's integrated transmission grid is beyond the reach of Order 888's open-access requirements.

"While I am pleased to say that a number of [public power] utilities such as the Bonneville Power Administration and the Western Area Power Administration have voluntarily offered transmission services under FERC-approved open-access tariffs, many others have not."

But now consider what it would mean for the city of Los Angeles to join the California ISO under the ISO's new rate plan in Tariff Amendment 27.

Like other municipal utilities, Los Angeles came late to the transmission game. Its transmission lines on the whole are much newer than those of the investor-owned utilities, and thus tend to be more expensive.

In fact, Los Angeles is the largest participant in some of the most recent high-voltage transmission lines constructed in California--the Mead-Adelanto, Mead-Phoenix, and Southern lines--rated at 500 kilovolts. Because of these additions of high-voltage transmission lines, Los Angeles controls and pays for approximately 25 percent of the total transmission import capacity into California, while serving approximately 10 percent of the load. Thus, Los Angeles has the greatest amount of unused transmission capacity into California.

Now you might think L.A. would like the idea of throwing those high-priced lines into the HVAC pot, and paying a cheap grid-wide average access charge in trade. But the ISO's TAC plan would stretch out the phase-in to 10 years, delaying benefits to Los Angeles. Meanwhile it would offer a complex web of "hold harmless" safeguards to current ISO participants to protect them from cost-shifting. Those safeguards would include, among other things, a cap of $72 million per year on costs shifted to the investor-owned utilities that would lose their preferred license-plate pricing, plus a another cost cap on the ISO's grid management charge.

So overall, Los Angeles and public power generally see no profit in Amendment 27. As SMUD says, "The ISO's proposed hold harmless provision, touted as a balm to cure misgivings about joining the ISO, falls far short of its intended goal. The numbers do not lie."

Los Angeles raises the bar high for Hoecker, the ISO, and any other RTO seeking to pull public power into the fold: "It is crucial to keep in mind why [for] Los Angeles and other GOUs, transmission costs are higher. It is not because GOUs have been inefficient or imprudent in constructing their transmission systems. The differential in transmission costs is primarily a function of timing.

"Much of this investment is of recent vintage, which results in higher transmission costs.

"Los Angeles will measure any proposed transmission rate method. First, there can be no net increase in costs in any year during the transition period due to participation in the ISO."

Lots of luck.

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