California may finally achieve its dream of an integrated western grid — if skeptics can be convinced the state's energy policies and economy are protected.
Regionalizing would eliminate barriers between the 38 independent systems across the Western states and create a full regional electricity market. Advocates for Assembly Bill 813, which would the process in motion, say it could cut the West's electricity costs by eliminating interregional transmission charges and the building of redundant generation.
Opponents agree the benefits are appealing. But, they say, regionalization will risk renewable energy jobs and incentivize the building of expensive transmission lines.
Although the California Independent System Operator (CAISO) is already under federal jurisdiction, regionalization opponents argue that it would make California's nation-leading climate policies more vulnerable to action from Trump appointees on the Federal Energy Regulatory Commission (FERC).
Those arguments are likely to come to a head in the next few weeks as the California legislature debates the bill.
The regionalization debate
California Senate Bill 350, passed and signed in 2015, requires the state's investor-owned utilities (IOUs) to obtain 50% of their power from renewables by 2030. It also ordered CAISO to study the feasibility of expanding its market across the West.
Studies completed in 2016 showed regionalization could generate $1 billion to $1.5 billion in annual benefits to California ratepayers. By 2030, it could also provide between 9,900 and 19,400 jobs throughout the West and significantly reduce greenhouse gas emissions.
State lawmakers failed to pass a version of AB 813, the regionalization bill, in 2017. But this year, with Gov. Jerry Brown’s support, the legislation has already passed two committees and stands a better chance of approval -- though not without controversy.
In early June, Assemblymember Chris Holden, a Democrat from the San Gabriel Valley who sponsors the bill, introduced amendments aimed at preserving California clean energy jobs. Those language changes helped get the bill through the committees, ut also cost it some stakeholder support among environmental and renewable energy groups. Bringing the bill to a floor vote could be challenging if the groups that initially supported the bill do not come around, several sources close to the negotiations told Utility Dive.
In two potential compromises, the bill could push California toward a more limited regionalization or move toward a full regional market more slowly, but both ideas have generated powerful opposition. A member of the CAISO Board of Governors told Utility Dive a limited regional system is a “false hope,” and Holden’s spokesperson said delaying regionalization would be “a red light” for the bill’s passage.
"With this bill, anything we do makes somebody grumpy."
Kellie Smith
Chief Consultant for the Committee on Utilities and Energy
Governance issues loom
Kellie Smith, the chief consultant for the Committee on Utilities and Energy in the California Assembly, leads the effort to pass AB 813 on behalf of Holden.
The bill is the first step in a process which would not be completed before 2021, she told Utility Dive. It would restructure CAISO governance to allow participation by other Western states which would be part of the market.
Governance issues have loomed large in the regionalization debate. In 2016, Wyoming Governor Matthew Mead wrote to the California Energy Commission (CEC), expressing reluctance to approve his state’s participation in a regional market because "CAISO derives its ultimate authority from the California Legislature." A filing from PacifiCorp made the same point.
Western states will not let their utilities participate in a market governed exclusively by California, former California Public Utilities Commission (CPUC) commissioner Mike Florio emailed Utility Dive. Florio helped formulate the new governance structure in 2016.
Sitting CAISO Governor David Olsen agreed with Florio’s observation.
AB 813 would create a stakeholder-led process to appoint board independent of California policymakers or market participants to govern the market, Smith said. It also creates an advisory committee of state representatives that would participate in the board's proceedings.
A coalition of ratepayer, labor, and environmental advocates opposes the bill, led by The Utility Reform Network (TURN), Sierra Club California and the State Building and Construction Trades Council. It creates "significant risks" and "could substantially harm California," their letter to Holden said.
"Alternative approaches" can capture regionalization's benefits "without abandoning state oversight" and "jeopardizing" state renewables and climate policies, the critics argued.
The letter's multiple concerns included the inadequacy of the proposed governance, a weakening of California's climate and renewables policies, a loss of California renewables jobs, and increased electricity costs.
Finally, a regional market could leave California subject to Trump administration initiatives, the letter argued.
On that point, sitting FERC Commissioner Cheryl LaFleur disagreed.
"A regional system will not suddenly bring California under FERC jurisdiction, because CAISO is already under FERC jurisdiction," she told Utility Dive.
FERC is required to see that the new regional organization complies with the law, LaFleur said. But "we will need to be attuned to the unique qualities of the West and to be flexible rather than didactic in addressing them."
Amendments and abandonment
The June amendments were intended to clarify protections for California renewables jobs, Smith said. They were changes in the bill's language specifying that definitions of in-state and out-of-state jobs in the state's 50% renewables mandate would not be altered.
Keeping those definitions in place was meant as assurance to organized labor groups that regionalization is not a threat to their members, but critics say it could also alter the bill’s overall impact. Some environmental and renewable energy advocates dropped their support of the measure, saying it ccould increase regionalization's cost by $500 million and compromise environmental benefits identified by CAISO-commissioned studies.
Even CAISO, which has backed regionalization from the beginning, opposes the amendment, Olsen told Utility Dive.
The amendment also did not change the opposing coalition's position, according to Adams Broadwell attorney Marc Joseph, who represents labor groups.
"Mr. Holden proposed the amendment to address the jobs issue because it was important to many Senators," Smith said. "But, with this bill, anything we do makes somebody grumpy. We will continue talking."
Policy trade-offs
Regionalization involves trade-offs, according to Paulos Analysis principal Bentham Paulos, co-author of "A Regional Power Market for the West," released July 17 by the energy think tank Next 10.
Regionalization would "facilitate regional development of renewables, which could mean construction jobs happening in other states," Paulos wrote. But that would lower the cost of California electricity, "creating a much larger number of jobs across the California economy."
The opposing coalition disagreed. Regionalization will "according to the CAISO's own analysis, cost more than 110,000 California middle class, union solar construction jobs," according to a factsheet it released.
The likely outcome "will be a large expenditure for transmission projects in the West so others can sell into the very large California market," Broadwell’s Joseph told Utility Dive. The CAISO studies "proudly trumpeted the cost savings for building less in California."
The claim that the bill will cost 110,000 California renewables construction jobs "is a real whopper," Natural Resources Defense Council (NRDC) Director of Western Transmission Carl Zichella emailed Utility Dive. The studies "showed robust job growth of 10,000 jobs to 20,000 jobs by 2030."
Next 10 agreed with Zichella. "Studies show the overall number of jobs in California will increase," it reported.
The claim of 110,000 jobs lost "is a misreading of the studies," Paulos added. “The opponents found a loss of 9,000 jobs in 2030 and multiplied it by the years to 2030."
The opposing coalition's factsheet argued CAISO's studies were "flawed," though it based its jobs loss calculation on the findings.
The studies were "the subject of numerous public workshops and presentations and their results were carefully explained," Zichella said.
A threat from FERC?
"The election of Donald Trump and his appointment of a new majority at the FERC establishes new risks," the coalition factsheet argues. A regional market could be "used" to impede California policy "and force California customers to subsidize the continued operation of coal-fired generation located in other parts of the West."
"As we watch the Trump Administration in action, our concerns about the potential negative effects of this bill are heightened," Bill Corcoran, the Western Director of Sierra Club's Beyond Coal Campaign, added.
NRDC’s Zichella, a former Sierra Club director, disagreed.
"A regional system would be required to observe all the statutes and policies of the states it serves,” he said. “That is where the legislature maintains accountability."
But AB 813 "enlarges the number of entities that could bring legal challenges to California policies under the Federal Power Act," Broadwell’s Joseph warned. "If a judge agrees, California carbon policies are out the window. After the recent FERC decision on PJM capacity markets, that seems a real possibility."
Smith noted that AB 813 excludes a capacity market, so the recent capacity market rulings are not a concern. Recent FERC and Department of Justice comments on zero emission credits suggest they would uphold any challenge to California's policies, she said.
Besides prohibiting capacity markets, Smith said there are additional safety nets against interferences. First, the states' committee allows participation in governance by three gubernatorial appointees from each state.
A second provision is a final CEC review of regionalization plans, Smith said. "They will not approve regionalization if it violates California climate and energy policies."
Another protection is that AB 813 prevents California load serving entities (LSEs) from participating in any regional system that does not support California policies. If FERC threatens the system's tariff and the carbon adder in it that makes coal too expensive to compete, or threatens to impose a capacity market, California's IOUs would be required to withdraw, Smith said.
The bill does provide "the right to unilaterally withdraw," the opposition's factsheet acknowledges. But exercising that right "would be fraught with huge challenges and substantial costs."
"It would be complicated and expensive," Smith agreed. "But the threat of withdrawal by California's LSEs, which are the bulk of the market, would likely make approval of California policies necessary."
Finally, new governance would not go into operation before 2021, Smith said. "The time factor adds to the safety net. But the key element is that this does not go forward unless FERC approves the tariff, including California's carbon adder."
The biggest safety net factor might be that only like-minded Western states with "strong green principles" will want to participate, Smith said. "Coal states won't join because their coal cannot compete with the West's renewables. They will stay with their precious little coal plants until they realize it doesn't make economic sense."
Little middle ground
"The Legislature should direct CAISO to explore other measures," the opposition factsheet argues.
Its first alternative proposal is expanding the six-utility, voluntary, CAISO-led energy imbalance market (EIM), which allows real-time sharing of energy to balance system needs. The EIM accounts for about 5% of the West's energy.
CAISO and stakeholders, including TURN, are working toward a day-ahead EIM, which would account for almost all the West's energy.
Participants "like the EIM because it has benefited all of them," CAISO Governor Olsen said. "But the out-of-state utilities have made it clear to the ISO that California-appointed governance is a non-starter for their participation in a day-ahead EIM or a regional system."
The opponents' factsheet suggests other ways CAISO could coordinate with Western system operators to exchange resources without a governance change.
"We reject the idea that California must give up governing control to get those resources," Broadwell’s Joseph said.
"Without regionalization, the cost would be extraordinary," NRDC's Zichella said. Efficiencies would be lost from shared reserves, more modest transmission build-out, decreased fossil ramping for flexibility, and access to lower cost renewable energy with complementary load shapes.
After detailed conversations with representatives from all EIM entities, CAISO has concluded that "the best solution is full regional integration, and the day ahead EIM is second best," Olsen said. "The opponents of 813 see the day ahead EIM as a middle path, but they are fundamentally mistaken. It is a false hope."
One other compromise has been proposed.
Veteran renewables advocate V. John White, Executive Director of the Center for Energy Efficiency and Renewable Technologies, suggested slowing the political process. "A smaller step forward is still a step forward, but it keeps our options open," he told Utility Dive.
He proposed amending the bill to require final approval by the governor and legislature elected in November. "That would reduce opposition and get more buy-in by not forcing the issue," he said. "It will disappoint the governor and the ISO, but prospective participants will understand this is a logical step for building confidence and support."
Smith disagreed. "It would be seen as hesitation and would be a red light for out-of-state participants," she said. "They will not invest until they get a clear green light that California is serious. This path was chosen because it is necessary to make regionalization happen."
