HomeMy WebLinkAbout2002-01-28 City Council (2)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:JANUARY 28, 2002 CMR: 114:02
SUBJECT:ELECTRIC TRANSMISSION SERVICES OPTIONS FOR THE
CITY AFTER THE EXPIRATION OF THE INTERCONNECTION
AGREEMENT WITH PACIFIC GAS & ELECTRIC COMPANY
ON MARCH 31, 2002
This is an informational report and no Council action is required.
BACKGROUND
Electric energy for serving Palo Alto customers is presently delivered via the
transmission system owned by Pacific Gas and Electric Company (PG&E) and operated
by the California Independent System Operator (ISO). Palo Alto’s energy under the
Western Area Power Administration (Western) contract is delivered to the City under an
interconnection agreement between Western and PG&E. Energy from Northern
California Power Agency (NCPA) and other resources is delivered to the City using
PG&E transmission lines under an Interconnection Agreement (IA) between PG&E and
NCPA members, including Palo Alto. This agreement is set to expire on March 31, 2002.
Despite protracted discussions between PG&E and NCPA on the shape and form of a
replacement IA, no agreement has been reached. To meet the 6-month advanced filing
requirement, PG&E unilaterally filed a Revised IA (RIA) for Federal Energy Regulatory
Colmnission (FERC) approval in August 2001. The RIA filed did not address the
concerns of Palo Alto and other NCPA members, and effectively discontinues PG&E’s
role in providing transmission and related services to the City of Palo Alto after the IA
term expires.’ The filing directs the City to obtain such transmission related services from
the ISO.
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DISCUSSION
NCPA and the member Cities have several concerns regarding the RIA filed by PG&E on
August 30, 2001. These concerns were outlined in a motion filed with the FERC on
December 7,2001. The shortcomings of the RIA are the following:
The Stanislaus Commitments were agreed to by PG&E in 1976 as a condition for
securing a license to build the Diab_lo Canyon Nuclear power plant. These
commitments obligated PG&E to provide NCPA members with firm transmission
service through the year 2050. The 1991 settlement agreement between NCPA and
PG&E included further commitments by PG&E to provide transmission services to
NCPA members. The RIA does not provide ’firm transmission service’ consistent
with the terms of PG&E’s Stanislaus Commitments and the 1991 settlement
agreement. Firm transmission service is an important concept for Palo Alto to avoid
potential future Bay Area congestion charges for transmitting energy from
contracts/plants located outside the San Francisco peninsula to Palo Alto. The
recognition of this right also provides Palo Alto the contractual right for a ’virtual
connection’ to generation plants~ operated by Western and NCPA, thereby
potentially avoiding numerous ISO charges. Recognition of firm transmission rights
also improves the feasibility for Palo Alto to participate in a control area
independent of the ISO.
Assignment of PG&E’s obligation to provide transmission service to the ISO does
not appear to be a desirable substitute. The cash flow problems faced by the ISO, its
lack of independence, the dysfunctional market structure operated by the ISO, the
high cost of services offered, and the lack of firm transmission service are major
shortcomings related to ISO transmission service. Solutions to overcome these
issues seem do not appear to be readily available at this time.
Even if NCPA members decide to join the ISO, PG&E and other Investor Owned
Utilities (IOUs) oppose NCPA member rights to fully recover costs associated with
transmission assets handed over to the ISO. If Palo Alto decides to join the ISO, the
City would have to sign a Transmission Control Agreement (TCA) and turn over the
City’s operational control of about 50 MW of the California Oregon Transmission
Project (COTP) to the ISO. The City would then obtain full transmission services
from the ISO. The ISO recovers the investment transmission and O&M costs of all
participating transmission owners from all users of the ISO grid through the
Transmission Access Charge (TAC). However, since the transmission assets owned
by the California municipals, including COTP, are relatively new investments and
cost more than the older transmission assets owned by PG&E and other IOUs, the
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IOUs are attempting to limit the investment recovery of the municipally owned
transmission. In contrast, the IOUs as original PTOs, are recovering 100% of their
transmission investments and operating costs.
While NCPA is intervening at FERC and negotiating with PG&E to bilaterally change
the terms of the RIA or to extend the existing IA, NCPA and Palo Alto are pursuing other
options to obtain transmission and generation interconnection services.
Analysis ofPalo Alto’s Options after the IA Expires on March 31, 2002
The City is presently actively pursuing four distinct options to obtain transmissio~n
services.
No Extend the present IA, until satisfactory arrangements are worked out: Renegotiate
a 12-month extension of the IA with PG&E jointly with NCPA pool members and
Silicon Valley Power. NCPA has identified various ways to implement this policy
by ensuring support of FERC and/or the ISO. This option might provide the best
transmission access charge (TAC) with a potential minimal increase in the IA rate.
This option preserves Palo Alto’s flexibility to pursue other long-term options.
The ability for parties to agree to such an extension is uncertain.
Use ISO transmission service as a PTO: Join the ISO as early as July 1, 2002 and
hand over operational control of the City’s share of COTP. The main advantage of
this option is that Palo Alto can recover some or all of its share of COTP, which
anaounts to $1.4 million per year if full recovery is obtained. This is the option
contemplated under the RIA filed by PG&E.
While the advantage of Option B over Option A is the recovery of $1.4 million
related to COTP, actively joining the ISO may hamper City’s ability to pursue
other options. The unstable structure and lack of independence of the present ISO,
the complicated market rules and settlement procedures, the relatively high cost of
obtaining services, and the uncertainty of the future of ISO make Option B
unappealing in the short run.
Co Use ISO transmission service under the Wheeling Access Charge: Obtain ISO
transmission service without joining the ISO, based on the ISO’s Wheeling Access
Charge (WAC). In this scenario, the transmission service would be provided by
the ISO as a wheeling operation. Palo Alto would not hand over operational
control of its share in the COTP. Accordingly, Palo Alto would not collect any
amounts on COTP. Palo Alto would pay the TAC for utilizing both the high
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voltage and low voltage grid similar to Option B. This option is inferior to Option
B in economic terms due to no recovery of costs associated with COTP, however,
it provides flexibility for Palo Alto to pursue other options. The mechanics of
implementing this option are being discussed with the ISO and PG&E.
Do Setup and participate in a new transmission control area: Due to the unstable
structure of the ISO and the possibility of a FERC-mandated Regional
Transmission Organization being created to run the transmission grid in the long
run, the municipal utilities in Northern California are contemplating setting up a
new transmission control area. Western and Bureau of Reclamation participation
is also anticipated. Studies have been commissioned to explore this feasibility.
Sacramento Municipal Utility District (SMUD) is actively pursuing this option on
its own and expects to operate its own control area by the end of 2002. SMUD is
an active participant in evaluating the feasibility of the Northern California wide
municipal control area and is open to expanding it’s control area operation to other
municipal utilities.
Since Palo Alto does not have local generation nor is the City directly connected
to the Western transmission system, the recognition of Palo Alto’s right for firm
transmission service until year 2050 under PG&E’s Stanislaus Commitment of
1991 is key for the City to participate in this option.
Cost Implications and Relative Merits of Future Transmission Service Options
Palo Alto’s electric customers presently pay approximately 7C/kWh for bundled
(commodity, transmission and distribution) electric service, of which 0.43 C/kWh (or 6%
of the cost of bundled electric service) is related to costs associated with transmission
services. However, the present transmission rates are expected to increase in the near
future, irrespective of the option pursued by the City. The cost increase is a result of the
improvements being made to the transmission system, ISO operating costs expected to be
passed op, and the expiration of some of the ’transmission rate locks’ which were in place
under existing agreements. The transmission cost incurred by the City last year and future
projections are presented below.
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Palo Alto Transmission Cost: Actual & Projections
Cost Category Present Cost Future Cost
FYO0-O1 Projections
Summary
Total Transmission Cost (MS/year)4.75 M$6.0 - 9.5 M$/yr
Unit Cost of Transmission (cents/kWh)0.43C/kWh 0.6- 0.9 C/kWh
Detail
M$/yr M$/yr
Westem-PG&E Wheeling Charge 2.5 3.0 - 4.0
PG&E IA Charges 0.85 0 - 1.5
COTP Debt and O&M Charges 1.4 0 - 1.4
ISO/Control Area Charges -1.0 - 3.5
Total Transmission Cost 4.75 6.0 - 9.5
Transmission unit costs could increase to 0.6-0.9 C/kWh. These projected increases have
already been included in the City budgeting and rate making process. The range of costs
reflects the uncertainties. The total cost range in the table reflects the range of possible
total cost and is not the addition of individual cost component ranges. Maintaining the
flexibility of lo.ng-term options may result in short-term costs increasing to the higher end
of the spectrum.
The cost variation between the four options is mainly related to the avoidance of some of
the ISO charges and the potential to have the COTP cost reimbursed by the ISO. The
transmission service is provided under the PG&E structure under Option A, while Option
B & C describe ISO service structure, with Option D a more independent municipal
control area structure. Any one of these options may become attractive depending on the
outcome of various negotiations in progress at present. Under each of the four options,
the common thread is to have PG&E recognize Palo Alto’s rights for firm transmission
service under the Stanislaus Commitment. NCPA is prepared to litigate this issue if an
amicable agreement is not reached.
In discussion with NCPA staff at the Utilities Advisory Commission (UAC) meeting on
October 3, 2001, UAC Commissioners urged NCPA to take a long-term view and
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contemplate the impacts of FERC mandated RTO structure on the future transmission
service needs of the City.This report was presented to the UAC at its January 9th
meeting.
Future Outlook
The TAC settlement talks are in progress in Washington, D.C. under the direction of the
FERC. These negotiations will influence the basis of assessing transmission rates for the
differ.ent regions within California. They will also influence the cost recovery structure
of transmission investments made by municipal utilities. NCPA is representing Palo Alto
in these negotiations, and a settlement might be reached in the coming months. An
acceptable settlement is a desirable precursor to Option B. The need to resort to litigation
to ensure that PG&E recognizes its Stanislaus commitments seems increasingly likely.
The Council will be kept informed of these developments in the coming months.
Palo Alto will continue to be actively involved in evaluating the transmission services
options available to the City. The options will be evaluated based on the objective of
obtaining transmission services at low cost and under a stable structure that is appropriate
for a load serving entity like Palo Alto.
POLIC~g IMPLICATIONS
Handing over the operational control of Palo Alto’s share of COTP will have policy
implications related to private use of investments made with municipal tax exempt bonds.
Bond counsel advice and IRS clarification is being sought by NCPA. FERC jurisdiction
over municipal utilities in determining transmission rates is another aspect of the
negotiations presently under way.
These recommendations meet the objectives outlined in the Utilities Strategic Plan.
Specifically, the recommendations meet the Key Strategy No. 2 of "Preserve supply cost
advantage compared to market prices"
Depending on the outcome of various ongoing negotiations, Utilities staff may return to
the Council as early as thirty days from now, with contracts related to implementing a
chosen strategy.
PREPARED BY:
Shishir Mukherj ee
Resource Planner
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~Sfii~va Swaminfiihan
Senior Resource Planner
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
of Utilities
Assistant City Manager
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