Electric customers in Arizona and across the West could face a higher risk of blackouts and increased energy costs, after a ruling allowing California’s main grid operator to limit some electric power exports to other states, Arizona utilities and regulators say.
The Federal Energy Regulatory Commission recently approved a plan by the California Independent System Operator, or CAISO, to give in-state power transfers priority over some interstate power exports through its system, when demand for power is high and supplies are tight.
The plan to favor in-state power deliveries over some interstate sales was proposed in the wake of a regionwide heat wave last August that prompted CAISO to impose rolling blackouts for two days to stave off a larger system collapse.
Like other system operators, CAISO handles power transmission among its in-state utility members while also operating a competitive wholesale electricity market that facilitates interstate transfers of power to utilities across the West.
CAISO says the priority change, part of a tariff filed with FERC in April, is needed to ensure its member in-state utilities have the capacity to deliver the power they need, stressing the measure is temporary and would only be used during times of significant stress on the grid.
Utilities including Tucson Electric Power Co. and Arizona Public Service Co. — along with utilities and power authorities across the West outside of California — had vehemently objected to CAISO’s proposed changes in the FERC proceeding, which they say could leave them scrambling for extra power when their customers need it most.
The opponents also contend the new CAISO rules violate FERC’s “open access” transmission rules, which require utilities and system operators to serve all transmission customers on an equal basis.
The CAISO changes — which became effective June 28 and will last until next June — create a new procedure of assigning priorities to power exports through its system, known as “wheeling-throughs,” on CAISO’s system.
Energy exports that are explicitly linked to a generating resource and satisfy other requirements are given a “high-priority” status and are delivered on an equal footing with in-state loads on CAISO’s system.
Exports that don’t meet the requirements are deemed “low priority” and will be cleared for delivery only if there is sufficient supply to serve CAISO’s in-state demand, or “native load.”
And, since energy is not stored on transmission systems but instead delivered based on capacity available at a given moment, that means some low-priority exports could be delayed or not delivered at all.
FERC’s decision approving the CAISO tariff changes settles the matter for now, and though parties to the case can request a rehearing, any subsequent decision would likely come after the summer demand peak.
A car drives through a darkened area during a power shutdown in Oakland, Calif., in 2019. Arizona could face blackout risks due to a recent ruling that could limit electric power from other states.
Setting up an energy reserve
TEP is disappointed by the ruling but has taken steps to ensure that service to its customers isn’t affected, spokesman Joe Barrios said.
“We remain concerned it will make it difficult for TEP to purchase short-term energy supplies when our customers rely on our service the most,” Barrios said, adding that the company hopes to reach a more constructive, longer-term solution with CAISO and other stakeholders.
Though TEP made arrangements well in advance of summer to secure adequate power supplies, Barrios said, it may need to buy short-term energy supplies if generating units unexpectedly go offline or unplanned disruptions hit the regional energy grid.
And TEP must be ready to act quickly if CAISO limits power exports, he said.
“If CAISO chooses to curtail the energy supply, TEP and other affected Arizona utilities will find out on the day of the scheduled transaction,” he said.
Barrios said the FERC decision could contribute to significant increases in the cost of purchased power, which TEP’s customers pay for through their rates without markup by the utility.
In filings with the ACC last fall, TEP showed that wholesale electricity prices at the Palo Verde transmission hub soared from as little as $23 per megawatt-hour of energy early last August to $1,600 per MWh on Aug. 18, when CAISO imposed the first of two days of rolling blackouts.
On Aug. 18 and Aug. 19, TEP spent a total of about $5.7 million for wholesale power that cost about $1,500 to $1,700 per MWh, the documents show.
Now, forward market prices have increased by about 300% compared with last year, Barrios said.
TEP has planned for hotter-than-normal conditions this summer, setting up an energy reserve margin of more than 15% and limiting its risk by seeking market power from generation that doesn’t flow through CAISO.
TEP continues to ask customers to conserve power use between 3-7 p.m. during the summer, to help maintain reliable power and keep costs down.
TEP filed objections to the CAISO export limits with the FERC as part of an Arizona utilities group that also includes TEP’s sister rural utility, UNS Electric; APS; the Salt River Project; and Arizona Electric Power Cooperative, which serves the state’s electric co-ops.
People flocked to the beach in Huntington Beach, Calif., during a sweltering day last year. Dangerous heat waves over much of the West are raising concerns about power outages.
State regulators weigh in
The five members of the Arizona Corporation Commission voted unanimously in May to protest CAISO’s proposed export limits, citing concerns over Arizona’s summer power supply.
Lea Márquez Peterson, chairwoman of the Arizona Corporation Commission, said in a statement last week she was “alarmed” by the FERC decision, which she said allows CAISO “to unfairly block energy flowing through the state” and prioritize electric utilities in California over those in other states.
“This decision is problematic for many Western states, including Arizona,” Márquez Peterson said.
Márquez Peterson said Arizonans for years have relied on energy purchased from hydropower dams in Oregon, flowing through power lines in California, to cool their homes during the hot summer months.
“Our electric utilities did the right thing and planned ahead, securing pre-negotiated contracts with utilities in the Pacific Northwest to ensure that critical hydropower would be available to Arizonans when it would be needed the most,” she said.
But FERC’s decision will allow CAISO to limit the flow of power to Arizona, which “could mean power shortages for Arizonans” as well as residents of other Western states, Márquez Peterson said.
The Tucson Republican said the ACC is examining its next steps, which could include requesting a rehearing before FERC.
But with the summer heat already bearing down on the West, it’s unclear whether any challenge would be taken up in time to affect the new policy.
The deadline to file with the FERC for rehearing is July 26 and before filing any challenge, the commission staff would need instructions from the ACC at its next staff open meeting, ACC spokesman Nick Debus said. The ACC had not scheduled a July staff meeting as of Friday.
Fairness debated
Arizona Public Service plans to ask FERC to reconsider its decision, while shoring up its summer energy supplies and working with CAISO and other stakeholders on a solution, the company said.
“We are disappointed in FERC’s decision, especially considering the level of opposition from utilities and regulators across the West,” the company said in a statement to the Star. “Despite the challenges this presents from a longer-term planning perspective, we have adequate generation and transmission capacity in place to reliably meet our customers’ energy needs this summer.”
A former chairman of the Corporation Commission and former FERC member said the CAISO export issue is more about economics than reliability and is just the latest in a decades-old tussle between California and other Western states over energy and water policy.
“People argue that there are potential impacts on grid reliability, but they’re not direct,” said Marc Spitzer, an attorney and former Phoenix legislator who served on the ACC from 2001 to 2006.
He served as a member of FERC from 2006 to 2011 and helped establish the nations first transmission grid reliability rules.
“The argument made is that the California utilities are suddenly getting a free ride at the expense of other states,” said Spitzer, an attorney with the Washington, D.C., law firm Steptoe & Johnson who has represented TEP and other utilities in other matters.
“The California utilities said no, that’s not true, we may need to prepare resources in emergency situations without scheduling transmission in advance, because we don’t know when these situations will arise,” he said.
Spitzer, who is not representing any utilities in the CAISO matter and isn’t taking a position on CAISO’s tariff changes, said the burden is on the parties objecting to a tariff before FERC to show that the tariff is not “just and reasonable” or is unduly discriminatory.
But he said federal law does allow transmission-owning companies — including utilities like TEP — to file tariffs that give a preference for their native loads.
Indeed, in its decision, FERC cited precedents allowing such native-load preferences, finding that CAISO’s tariff changes were not unduly discriminatory and did not violate federal open-access principles.
Impact uncertain
Any higher costs for wholesale power TEP purchases will eventually hit customers’ bills as part of a surcharge, or credit, called the Purchased Power and Fuel Adjustment Clause or PPFAC, that is periodically adjusted to reflect changing power and fuel costs.
Under a Corporation Commission order issued in March, TEP’s PPFAC surcharge went up by an average of about $1.48 per month, to a total average charge of $2.69 per month.
The surcharge is scheduled to go up another $1.51 next year, as the commission voted in March to spread a larger increase over two years to help customers cope with the financial stress of COVID-19.
TEP attributed the higher PPFAC surcharge in part to $7 million in unforeseen costs due to hotter weather, COVID-19 and higher-than-expected market prices for power.
It’s impossible to tell how much additional cost may be imposed on TEP and its ratepayers due to the new CAISO export policy, Barrios said, noting that excess costs are passed along to ratepayers with no markup by TEP.
