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October 19, 2001 
Private Investors Align to Upgrade California's Path 15; 
Project Causes New State / Federal Conflicts 
By Will McNamara
Director, Electric Industry Analysis 

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[News item from Reuters] The federal government has reached a deal with a coalition of energy companies to build a transmission line in central California under a $300-million project to relieve a chronic bottleneck in moving electricity supplies between the northern and southern parts of the state. Construction on the so-called Path 15 project, which was announced by Energy Secretary Spencer Abraham, will begin in the spring of 2003 and could be completed by as early as summer 2004.  
Analysis: The California energy crisis, which clearly subsided over the summer of 2001 due to new generation that came online in the state, mild weather patterns and conservation efforts, is generally considered the result of a severe supply / demand imbalance. While this may be true, what often gets overlooked is that deficient transmission capacity in the state-the lines that actually transport power from point A to point B-also played a primary role in creating the tremendous instability of California's energy market. This problem still persists today, and as California heads into the winter season concerns about power reliability once again are surfacing. The Department of Energy (DOE) has stepped in to correct the problem by overseeing a massive upgrade to California's main transmission line. While this is a positive step, the upgrade creates a new level of state / federal disputes for California and also puts ownership of the new transmission line into the hands of private companies, which creates a whole new set of potential conflicts. 
Amid a long list of uncertain ramifications of the Path 15 upgrade, there are some things that we know for sure. First, Path 15, which is owned by Pacific Gas & Electric Co., is a 90-mile high-voltage section of transmission capacity that essentially carries power between Northern and Southern California. During the peak of the energy crisis in California, Path 15 became rather clogged and suffered from bottlenecks (points at which transmission could not transport high volumes of power). This pre-empted any transport of power from Southern California (and Arizona and Mexico) to the north, which resulted in rolling blackouts in San Francisco and other Northern California cities. As noted, these bottleneck problems remain and are particularly acute during times of peak power demand, which is obviously a concern as winter approaches.  
The deficiency of the California transmission systems is arguably the last piece of the puzzle that remains toward bringing stability back to the state's energy market. Ironically, power supply is no longer seen as an imminent problem. New reports from the California ISO indicate that the state should have operating reserves of between 2,000 and 2,200 MW this winter, which has been deemed sufficient to stave off problems that plagued the previous winter season. However, the report on the state's transmission system is not as positive. If the Northwest continues to experience a drought, then Northern California will still need to import more power from the south. Heavy dependence on the strained Path 15 could once again cause reliability problems for California. 
Thus, deficiencies along Path 15 can be seen as a symptom of larger problems that continue to plague California, and problems that have been the focus of both state and federal intervention for months, if not years. In fact, there is a history here that is worth noting, especially as it relates to federal / state jurisdiction. When President Bush released his national energy plan in April of this year, he directed the DOE to explore efforts that would relieve congestion along Path 15. Following through with this order, Energy Secretary Abraham issued a request for proposals that elicited responses from 13 companies interested in participating in the expansion of Path 15. The current contract, which will add a new line to the existing Path 15, is the result of that previous directive. 
At present, it appears that PG?Corp. (NYSE: PCG), the parent of Pacific Gas & Electric Co., and six other companies have signed on to financially support the upgrade. The six other companies that will spearhead the project are the Transmission Agency of Northern California, Trans-Elect, Inc., Kinder Morgan Power Co., PG?National Energy Group, Williams Energy Marketing and Trading, and the Western Area Power Administration (WAPA), a federal agency within the DOE that sells electricity from water projects in 15 western states and operates 17,000 miles of transmission lines.  
Presently, Path 15 connects the Bay Area in Northern California to two of the state's largest generation facilities-Pacific Gas & Electric Co.'s Diablo Canyon nuclear facility and Duke Energy's Morro Bay natural-gas power plant. The upgrade will reportedly include a new 500-kilovolt line that would boost transmission by about 1,500 MW from these two plants. Further, when the upgrade is finished in 2004, Path 15 should be able to carry a total of 5,400 MW of power. 
Of course, the first question that I asked was: Who is going to pay for the upgrade? The way it appears at this writing is that the WAPA will retain 10-percent ownership of the new line for its role as project manager and for acquiring the rights from property owners to hold the power line. The remaining 90 percent will be owned by the private companies that are devoting different amounts of capital to fund the upgrade. The exact percentages of investment (and ownership) have yet to be defined, but should be revealed in a subsequent plan outlined in the next 90 days. You may ask why these companies would want to participate in a transmission upgrade in California. The answer is that the companies will be able to recoup their investments through fees charged to use the new transmission line. This could result in a hefty payoff for the companies investing in the project, who presumably anticipate that California will remain a high-demand state through which huge amounts of power will need to be transported. 
As I mentioned, there are some potential conflicts that might arise with this upgrade plan. First, there is the issue of potential state / federal regulatory conflicts. Presently, state governments have jurisdiction over power line siting. Thus, the California Public Utilities Commission (CPUC) had already been pursuing its own upgrade plan for Path 15 prior to Secretary Abraham's call for private-company bids. Specifically, the CPUC had directed Pacific Gas & Electric Co., which it regulates, to upgrade the bottleneck spots along Path 15. As seems to be a growing occurrence, we may find that there is a state / federal jurisdictional dispute regarding which regulatory body has the authority to direct and manage transmission upgrades in California. Gov. Gray Davis and the CPUC certainly seem to believe that it is the state's prerogative, and have issued strong criticisms over the DOE's venture into this territory. However, in his energy plan, President Bush seemed to support a change in policy that would allow federal officials to obtain transmission rights of way as a way to increase national transmission capacity.  If there is indeed a dispute between the CPUC and the DOE, it is not known if federal policy would supersede state policy in this area. In any event, representatives from Trans-Elect, one of the participating companies, have said that balancing the various interests among federal and state (and public and private) interests will be one of the key challenges for the upgrade project. Note that Trans-Elect was the company that had unsuccessfully attempted to purchase the transmission assets of Southern California Edison earlier this year.   
Also viewed by some as a potential conflict with the DOE's upgrade plan for Path 15 are the difficulties that could arise with private ownership of a major piece of California's transmission grid. The DOE-sponsored upgrade, unlike the one that the CPUC has directed, reportedly would not be subject to review or approval by either the California ISO or the CPUC. Further, because the companies participating in the upgrade will own a portion of the new line, these companies will be able to charge "tolls" to the power marketers that use the lines to transport power. This is most likely a point of contention for California officials, especially Gov. Gray Davis, who has sought state ownership of existing transmission lines and is not too keen on private-company ownership of generation facilities in the state. The positive side of this issue is that, according to the DOE, the bids from private contracts enable the upgrade of Path 15 to proceed without any increase to "either the taxpayers or ratepayers of California or the United States of America." 
As a side note, in addition to Path 15 the CPUC is also proceeding with a new transmission line in Southern California, known as the Valley-Rainbow Interconnect transmission line. Although the timetable has been delayed until 2005, San Diego Gas & Electric is proceeding with a 500,000-volt transmission line that would connect Southern California Edison's Valley Substation near Romoland, Calif., with a future substation to be located in the Rainbow, Calif. area, just south of the Riverside-San Diego county line. The new transmission line would provide a second interconnection between SDG&E's and SCE's transmission systems. The first interconnection is at the San Onofre Substation near San Clemente, Calif. The project is designed to deliver approximately 1,000 MW.  
Moreover, the expansion of Path 15 is a necessary step to help California lower its risk for further reliability problems. Due to generation development, the imminent threat of the California energy crisis has diminished, but the state is still wrestling with an equally important mix of risk factors. The state government still has its hand in power purchases, which represents a huge part of the state's energy market. The state has accrued $12.5 billion in debt to buy power for the state's utilities, the recovery for which remains an unresolved issue. While Gov. Davis has preferred to increase the state's role in California's energy infrastructure, this new DOE-sponsored project on Path 15 puts ownership of transmission assets into the hands of private companies.  

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