By Robert Mullin

CAISO met with stakeholders last week to refine a proposal for allocating costs of new transmission facilities in an expanded balancing authority (BA) that would include areas of the West outside California.

ISO staff laid out options for creating “default” cost allocation provisions, a requirement under FERC Order 1000, at an Aug. 11 working group.

Under CAISO’s proposal, “new facilities” would include new construction, additions and upgrades approved through the transmission planning process for an expanded ISO.

It would apply the transmission access charge (TAC) only to ISO-wide — or “regional” — projects meeting at least one of three criteria:

• Receives a rating of 200 kV or more;
• Facilitates a connection between two sub-regions; or
• Creates, supports or helps increase intertie capacity with a neighboring balancing authority area.

The proposal also creates a new category of “sub-regional” transmission projects excluded from the ISO-wide TAC, including facilities under 200 kV, as well as those constructed or approved before expansion. Costs for those projects would be allocated entirely to the sub-region requiring the project — such as PacifiCorp’s service territory or the current CAISO BA.

Planning Process

CAISO staff told stakeholders that the TAC proposal is predicated on the assumption that the ISO’s current planning process is “a reasonable model” for expansion.

“We redesigned our [planning process] in 2010 and we think it’s a good model,” said Lorenzo Kristov, CAISO principal of market infrastructure and policy. “There’s no reason to think it wouldn’t work with expansion.”

That detail is important because the decision-making approach under the current planning process underpins the framework for the ISO’s proposed default cost allocation scheme.

CAISO breaks down projects into three categories: reliability-driven, policy-driven and economically driven.

ISO transmission planners run a proposed project through three stages of analysis, first determining the project’s reliability benefits, followed by an assessment of how the project helps fulfill state objectives for increased renewable generation. A third stage examines the economic benefits of the project.

Some projects may have more than one driver.

“We want to avoid tagging projects as just being economic or policy — the world doesn’t work that way,” said Neil Millar, the ISO’s executive director of infrastructure development.

Economically driven projects must produce total benefits exceeding the project’s cost — demonstrating a benefit-cost ratio of 1.0 or greater. To calculate those benefits, the ISO relies on the transmission economic assessment model, which considers savings from more efficient dispatch, reduced line losses and congestion and increased resource adequacy.

While the ISO said it weighs economics in its evaluation of any proposed project, reliability- and policy-driven projects don’t have to meet the same threshold as economically driven projects.

“We look at it this way so that people don’t think we can kill a project just for economic reasons, because it might meet a reliability and policy need,” Millar said.

The analytical approach underlying the planning process would inform the ISO’s proposed default cost allocation scheme under a redesigned TAC.

Benefit-Cost Ratio

Under the TAC proposal, costs for a project — including those for a reliability- or policy-driven project — with a benefit-cost ratio of 1.0 or greater would be allocated to sub-regions in proportion to the total economic benefits assessed for each sub-region.

For projects with a ratio less than 1.0, a portion of the cost would be allocated across sub-regions according to financial benefits, under the assumption that even uneconomic projects provide some economic benefits for market participants. Leftover charges — representing the portion of the costs not covered by economic benefits — would be assigned to the sub-region responsible for the reliability need or policy mandate driving the project.

In cases where multiple sub-regions derive policy or reliability benefits, leftover costs would be allocated in proportion to the total internal load for those areas during the year in which the project is placed into service, according to the proposal.

“The economics would be used to allocate the first tranche of needs, and then the incremental policy or reliability needs would be allocated on an incremental basis,” Millar said.

The ISO is also considering a concept by which the avoided costs for a reliability- or policy-driven alternative would be factored into a sub-region’s total benefits calculation for a proposed project.

A potential downside: A sub-region’s TAC allocation could rise based on the assumed cost of a “hypothetical” project.

“Is the avoided cost of a hypothetical sub-regional alternative an appropriate basis for cost allocation?” the ISO asked stakeholders.

Feedback

“This looks good [as] a conceptual idea,” said David Oliver, a managing consultant with Navigant. “But we’re talking about transferring money in sub-regions and that’s often not a fun thing to do.”

LS Power Vice President Sandeep Arora said, “I think this is very encouraging — the entire approach of looking at a transmission project not just fitting into one bucket but looking at the various benefits a project brings.”

The ISO said updating the TAC plan is a “central policy element” in the development of a Western RTO. Utility commissions in five states must grant approval before Portland-based PacifiCorp can join the ISO. The cost allocation scheme is likely to weigh heavily in regulators’ decisions.

CAISO planners initially expected to wrap up the TAC proposal in time to present it to the ISO’s board of governors in late August, in concert with a push to submit an RTO governance plan to California lawmakers before the end of this summer’s legislative session. (See CAISO Floats Latest Cost Allocation Plan for Expanded Balancing Area.)

The ISO got more breathing room after Gov. Jerry Brown’s Aug. 8 decision to postpone efforts to win legislative approval to expand the ISO until early 2017. (See Governor Delays CAISO Regionalization Effort.)

“Last time we had a meeting on this topic … we were still contemplating taking this to the board at the end of August, as ridiculous as that sounds,” CAISO’s Kristov said.

Instead, the ISO is likely to continue work on the proposal for the rest of the year, Kristov said.