CAISO tariff proposal divides new FERC. On September 1, 2017, FERC in a 2-1 decision, found the California Independent System Operator Corporation’s (CAISO) Open Access Transmission Tariff (OATT) amendment proposal unjust and unreasonable and unduly discriminatory or preferential, thus rejecting it without prejudice. Such tariff amendments would have created a new category of participating transmission owner (PTO) referred to as the Certified Small PTO – “whose low-voltage, generator interconnection-driven network upgrade costs would be allocated regionally, rather than locally.” California Independent System Operator Corporation, 160 FERC ¶ 61,047, at P 1., [hereinafter CAISO]. CAISO’s goal was to create a tariff mechanism that would shield a small pocket of local customers from inordinate expense driven by interconnection costs on the low voltage transmission system of the Valley Electric Association.
In accordance with CAISO’s OATT, costs of transmission network upgrades made necessary for the interconnection of new electric generation are recovered through high-voltage and low voltage transmission access charges. CAISO, Fifth Replacement FERC Electric Tariff § 26, App. A, App. F, App. D. “Costs associated with network upgrades to the high-voltage [transmission] system (200 kV and above) are assessed to CAISO PTOs and are recovered through a single regional transmission access charge, paid by utility distribution companies and metered subsystem operators based on the gross load in their service areas” and across the entire CAISO region. CAISO, at P 2. “Conversely, costs associated with network upgrades to the low-voltage [transmission] system (below 200 kV) are assessed separately to each [individual] PTO’s local transmission access charge and recovered from the PTO’s load” when applicable. Id. For instance, any costs applicable to the upgrade of a 115 kV (under 230 kV) transmission line owned exclusively by SDG&E would be recovered by such utility’s customers exclusively via a localized transmission access charge. In comparison, costs related to an upgrade of a 345 kV (over 230 kV) high-voltage transmission line, irrespective of which PTO owns such line would be allocated to the entire CAISO region and recovered via transmission access charges levied upon every customer in the CAISO system.
“CAISO’s system consists of four load-serving PTOs:” (1) Pacific Gas and Electric Company (PG&E), (2) Southern California Edison Company (SoCal Edison), (3) San Diego Gas & Electric Company (SDG&E); and (4) the Valley Electric Association (Valley Electric), a rural electric cooperative located in Pahrump, Nevada. CAISO, at P 3. Valley Electric is extraordinarily small in comparison to the other three PTOs comprising only 0.27 percent of the CAISO system load. Even though Valley Electric is exceedingly small in comparison to the other three PTOs, the Co-op operates out of Pahrump, Nevada, which is adjacent to Death Valley. “The Death Valley region receives more solar radiance than anywhere in the United States,” CAISO Fn 8., which has caused numerous electric generation developers to identify “Valley Electric’s low-voltage system as an ideal, cost-efficient point of interconnection.” Currently, CAISO has a subset of 25 interconnection customers, which in the aggregate comprise a grand total of 3,952 MW of generating capacity. All such customers seek approval to interconnect to Valley Electric’s low-voltage system. CAISO, at P 3-4.
If all 25 of these interconnection customers interconnect to Valley Electric’s low-voltage system, all of the necessary network upgrades to accommodate such interconnection customers would be allocated locally to Valley Electric’s retail customers exclusively. “To remedy this cost allocation issue for Valley Electric [and its customers], and potential similarly situated PTOs in the future, CAISO propose[d the creation of] a new class of PTO called the Certified Small PTO.” CAISO, at P 5. CAISO devised a three part criteria that transmission owners seeking certification must satisfy. First, the applicant PTO must maintain an annual gross load at or below 2,000 GWh. Second, the applicant PTO must be located in an area where there is ‘significant interest’ in developing new generating facilities that can support municipal, county, state, federal, or other renewable portfolio standards. Lastly, the applicant PTO must not be subject to a renewable portfolio requirement or comparable directive that requires it to procure some or all of the energy generated by the interconnection customers it expects to plan, build, construct network upgrades for and recover applicable network upgrade costs regionally as a result. According to CAISO, Valley Electric qualifies in accordance with the criteria and requested that FERC classify the Co-op as the ISO’s first Certified Small PTO. “Once approved as a Certified Small PTO,” Valley Electric’s low-voltage network upgrade costs would be regionally allocated. Id., at P 9.
Relying on Ill. Commerce Comm’n v. FERC, 576 F.3d 470, 476 (7th Cir. 2009), the Commission found that CAISO has not demonstrated its proposal would allocate costs of network upgrades to those that benefit from such upgrades. In Ill. Commerce Comm’n, the Seventh Circuit Court of Appeals found that “FERC is not authorized to approve a pricing scheme that requires a group of utilities to pay for facilities from which its members derive no benefits, or benefits that are trivial in relation to the costs sought to be shifted to its members.” Id., P 33. Furthermore, the Commission found CAISO’s proposal “inconsistent with [FERC’s] cost causation principles because [it purports to] shift costs from a single PTO to all load in CAISO without providing evidence that CAISO transmission system users being allocated such costs [would actually] benefit from the network upgrades [that would be made] to Valley Electric’s low-voltage transmission system.” Id., at P 33. The Commission is ultimately concerned with CAISO’s explanation or lack thereof, regarding its proposed disparate rate treatment of upgrades to Valley Electric’s low-voltage system versus potential network upgrades made to the other PTOs’ low-voltage systems.
FERC is critical of the third aspect of CAISO’s criteria where it attempts to “to distinguish PTOs based on whether they are subject to a renewable portfolio standard,” stating that such criteria has “no basis in the Commission’s policy concerning the benefits of network upgrades.” Id., at P 34. “The Commission has found that network upgrades represent improvements to the integrated transmission system and that these benefits to the transmission system are considered independent from any benefits customers may receive as a result of generation that interconnects to the system.” Id. Moreover, the Commission inferred that CAISO’s proposal may have been reviewed more favorably if it had requested “independent entity variation” treatment pursuant to FERC Order No. 2003 to accommodate the problem faced by Valley Electric. Order No. 2003 prescribes Commission interconnection guidelines and the pro forma generator interconnection procedures and agreement. In accordance with Order No. 2003, FERC allows transmission providers flexibility “to propose different methods of cost allocation, because their independence reduces concerns about whether all generation owners will be treated comparably.” Order No. 2003, FERC Stats. & Regs ¶ 31,146 at P 701.
The Commission references its analysis in Interstate Power & Light Co. v. ITC Midwest, LLC, 144 FERC ¶ 61,052, at P 40 (2013) illustrating that if CAISO’s proposal leads to the allocation of costs commensurate with benefits, rather than the regional allocation of such costs, its proposal may have received a more favorable order by FERC. FERC has “accepted alternative rate treatments [(rate treatments like the one CAISO sought approval of here)] in the Southwest Power Pool because of” an unanticipated imbalance of benefits to costs caused by a high concentration of generator interconnections in low-load areas.” SPP, 127 FERC ¶ 61,283 at P 28. However, SPP’s proposed cost allocation designated 33 percent of the burden to interconnection customers and the remaining 67 percent regionally, whereas here, CAISO’s proposal purports to allocate 100% of the costs regionally. Similarly, FERC approved a separate proposal, where MISO sought to allocate 90 percent of network upgrade costs to interconnection customers and 10 percent to the regional rate. Midwest Indep. Transmission Sys. Operator, Inc., 154 FERC ¶ 61,073, at P 3 (2016).
Commissioner LaFleur’s Dissent
Commissioner LaFleur disagrees with the majority’s decision, calling CAISO’s proposal just and reasonable. Indeed, she claims that CAISO’s proposed tariff rules would result in an allocation of network upgrade costs that are commensurate with the purported benefits. Furthermore, Commissioner LaFleur believes “that any differential treatment between those PTOs who qualify [as Certified Small PTOs] and those who do not is fair and ‘due’ discrimination, not ‘undue discrimination’ under the Federal Power Act.” The Dissent is critical of the majority’s order in that it accuses the majority of setting a high threshold for CAISO where it purportedly sought “the only or even the best solution available.”
The divided FERC dismissed CAISO’s tariff filing without prejudice, leaving the ISO to re-file. CAISO must demonstrate that the Certified Small PTO rules “allocate the costs of network upgrades to those that [actually] benefit from the network upgrades” as reflected in Ill. Commerce Comm’n. By the time CAISO re-files, FERC will likely have five commissioners available to weigh in on the issues. It is unlikely that CAISO would petition review of this Order for doing so would severely delay tariff rule implementation. However, if CAISO seeks review, would the ISO seek review in the 9th Circuit and take the opportunity to test home field advantage? One may never know.