The Governor signed SB 350 into law on October 7, 2015 (Chapter 547). SB 350, the Clean Energy and Pollution Reduction Act of 2015, makes changes to the state RPS, energy efficiency, and several other programs and statutes. This post will focus on the statutory changes that seek to expand the California Independent Systems Operator (CAISO) from the existing system to a regional independent transmission operator.

The CAISO is a nonprofit public benefits based corporation that provides open and non-discriminatory wholesale high voltage, long-distance transmission across approximately 80% of California and a small part of Nevada (Figure 1).   This makes the CAISO the largest wholesale transmission balancing authority in California with over 100 transmission owner and generator market participants. The CAISO system provides transparent information about the state of the wholesale grid (matching generation with load and maintaining electric frequency) and prices to participants.

Figure 1 California Balancing Authorities (Source: California Energy Commission

The CAISO is overseen by the Federal Energy Regulatory Commission (FERC) and presided over by a five-member independent Board of Governors appointed by the California Governor and confirmed by the California Senate (See Public Utilities Code Section 337).

Since California’s attempt to restructure its electric industry in the early 2000s, the statutory intent has existed to create a western regional organization for transmission through voluntary adoption of a regional compact or other agreement among participating party states (See Public Utilities Code Section 359). Such an agreement or compact requires the creation of an equitable process for appointing and confirming members of the governing board; modification to the governing board in terms of size, structure, terms of service, among other issues; mechanism for party state oversight of the ISO for reliability and matters that affect retail sales; and adherence of investor and publicly owned utilities in the party states to enforce standards and protocols to protect the reliability of the regional ISO. Despite the legislative intent, no regional organization has been created in the Western Interconnect.   SB 350 sets the stage for the creation of such an entity.

Major Changes

The major change to the Public Utilities Code under SB 350 is the addition of Public Utilities Code Section 359.5 (See SB 350). Other major changes can be found in amendment language that controls what statutes remain on the books if a regional ISO does or does not come to fruition. Section 359.5 restates the legislative intent to provide for a transformation to a regional organization if such a change is in the best interest of California and its ratepayers. The language expressly provides that the transformation shall not alter the ISO’s obligation to the state, ratepayers, or obligations to comply with state law. Specifically, the ISO shall retain its obligation to comply with Public Utilities Code Section 345.5(make efficient use of available energy resources, reducing economic cost to consumers, protect public health and the environment, maintain reliability, among others), maintain open meeting and public access to record requirements, and facilitate effective tracking and reporting mechanisms in support of AB 32 (commencing with Health and Safety Code Section 38500).

Because expansion of the CAISO requires both that other balancing authorities join with the approval of their state or local regulatory authority and modification of existing CAISO governance, Public Utilities Code Section 359.5 requires that all the following occur prior to the modification becoming effective:

1. CAISO conducts one or more studies on the impacts of the proposed governance modification (with all modeling and assumptions made public for review) including:
   1. Overall benefits to ratepayers;
   2. Creation or retention of jobs and other benefits the California economy;
   3. Environmental impacts in California and elsewhere;
   4. Impacts on disadvantaged communities;
   5. Emissions of GHG and other air pollutants; and
   6. Reliability and Integration of renewable energy resources.
2. The California Public Utilities Commission (CPUC), California Energy Commission (CEC), and California Air Resources Board (CARB) must jointly hold at least one public workshop where the CAISO presents the proposed governance modifications and results from the above required study.
3. CAISO must submit to the Governor the studies described above and revised bylaws or other corporate governance documents setting forth the proposed modified governance structure.
4. The Governor must transmit these documents to the Legislature no later than December 31, 2017.
5. The Legislature must enact a statute implementing the revised governance changes.

Once these events and approvals occur, the CAISO is charged with expeditiously adopting the modifications. The modifications must be effective prior to transmission owners outside of California joining the new system. Additionally, it is important to note that FERC must approve modifications to the governing board and corporate governance prior to such changes becoming effective.

Transmission owners retain the contractual right to leave the new system at anytime or for any reason (which suggests that there will not be exit fees just like the Energy Imbalance Market). The statute requires reporting one year after the governance change and every two years after with regards to the furtherance of applicable state and federal laws and regulations affecting the electricity industry. Finally, Public Utilities Code Section 359.5 is repealed on January 1, 2019, if a statute implementing the governance changes is not effective on or before January 1, 2019.

Possible Paths of Expansion

The Energy Imbalance Market (EIM) serves as a likely pathway for subsequent regional expansion of the CAISO because transmission owners that join the EIM will sign agreements and make the necessary investments to participate in the CAISO system from a regulatory and operational standpoint (Open Access Transmission Tariff (OATT) modification, metering, telemetry, etc). The creation of the EIM facilitated necessary long-term governance changes to the CAISO through a Transitional Committed process that will mirror many of the changes necessary to create a regional transmission organization. These changes included such things as the establishment of a regionally minded EIM five member independent governing body nominated by a committee of stakeholders. The CAISO Board of Governor’s approved these proposals on September 17, 2015. The CAISO is now drafting revisions to its bylaws and creating a charter for the EIM governing body for later CAISO Board of Governor’s approval.

Beginning in November 2015, PacifiCorp East and West joined the voluntary CAISO Energy Imbalance Market. In April 2015, PacifiCorp and the CAISO signed a memorandum of understanding (MOU) to explore the feasibility, cost, and benefit of PacifiCorp joining the CAISO as a transmission owner. Full participating in CAISO allows PacifiCorp to participate in the day-ahead energy market as well as the integrated planning proceedings and operations of CAISO. For PacifiCorp to join the CAISO, both statutory and CAISO governance changes are required.

SB 350 was amended and chaptered to include the necessary language to begin the process of CAISO expansion required for entities like PacifiCorp to join CAISO.

In light of this statutory modification, it is likely that the transmission owners that are currently set to join – or are reviewing the costs and benefits of joining – the CAISO EIM will be the first to review the possibility of joining the full CAISO market. These entities include:

• Nevada Energy has a modified OATT conditionally approved by FERC but is awaiting final approval before going operational in the EIM, perhaps by December 1, 2015 or January 1, 2016.
• Puget Sound Energy is expected to become operational October 2016 subject to FERC approval.
• Arizona Public Service (APS) has no target date set to begin operations.
• Portland General Electric announced plans to investigate participation.
• Idaho Power announced plans to investigate participation.

Additionally, it is possible that other transmission owners in the Western Interconnect will evaluate joining the regional independent system operator. Interest may increase if the Environmental Protection Agency’s (EPA) Clean Power Plan (CPP) for existing power plants survives legal challenge because interstate trading and organization remains the most efficient and cost effective mechanism to comply. The figure below shows balancing authorities and transmission owners in the Western Interconnect:

Figure 2 Western Interconnect Balancing Authorities (Source: WECC)

Potential Models and Pros and Cons

A regional transmission operator is not a new concept. Several examples of multistate systems exist, such as the Midcontinent Independent System Operator (MISO) and PJM Interconnection. These systems serve broad and diverse territories (MISO and PJM) and may serve as models for board and governance modification. Some potential benefits of a larger regional ISO include:

• Enhanced reliability through efficient resource sharing;
• Efficient grid dispatch;
• Price transparency;
• Ease of entry and private investment under standardized non-discriminatory rules for grid interconnection and investment need;
• Renewable energy integration;
• Market flexibility, liquidity, and resource diversity; and
• Further development of products such as demand response.

Some potential drawbacks to a larger regional ISO include:

• Diminished control of the Board of Governors;
• Conflicting state policies, laws, and goals; and
• Likely need for more high voltage transmission lines in the West.

How and when these potential benefits and drawbacks occur depends on many factors. Time will tell whether such an expansion is viable.