Regarding the transmission and distribution infrastructure necessary to support competition for each identifiable generation product --
1. Are there transmission constraints inside or outside Arizona that currently impede the ability of competitors to reach Arizona customers during any seasons of the year or times of the day?
There are transmission constraints both inside and outside Arizona that currently impede competitors reaching Arizona customers during summer peak hours. These constraints were reported in Staff’s Biennial Transmission Assessment revised July 2001 and adopted by the Commission. The report established that three geographical load zones (Phoenix, Tucson and Yuma) are transmission import constrained at peak load conditions. Generation internal to these load zones "must run" at peak load conditions to avoid system overloads and voltage problems for outage of critical lines. Thus, merchant generators, which may be more cost-effective than generation available locally, are precluded from bidding to serve these areas during peak hours.
Similarly, new generation capacity under construction and interconnecting at the Palo Verde commercial hub will be constrained by existing 500 kV transmission lines interconnected at the hub. Firm regional transmission capacity for competitive Electric Service Providers to import power to Arizona retail customers is also very limited and only available on selected transmission paths.
Two additional transmission constraints have been identified since Staff’s Biennial Transmission Assessment was completed. Both constraints were revealed during Arizona Power Plant and Transmission Line Siting Committee hearings for two new projects. Testimony given during the Toltec Power Plant hearings (Case #112) established that the newly completed Reliant Desert Basin Power Plant could not deliver its full capacity to SRP in the Phoenix area because of 115 kV and 230 kV transmission system constraints between the plant and the Phoenix load zone. Similarly, testimony during Case #111 siting a TEP 345 kV transmission line and Citizens Communications 115 kV transmission line to serve Nogales and Santa Cruz County revealed another transmission constraint. Citizens Communications presented a load forecast that indicated that as early as summer peak 2003 the load in Santa Cruz County may exceed the delivery capability of the existing 155 kV line serving the area. Even with the proposed new transmission line to Nogales, continuity of service to customers is of concern in case of the outage of the new line.
2. What plans are in place to relieve transmission constraints?
A new 500 kV line from the Palo Verde hub to the new Southwest Valley switching station has been approved in Line Siting Case #115. That line is under construction for a Summer 2003 completion. Until that line is in service, local Phoenix area generation must run during peak hours. (And thus, merchant generators located outside of the Phoenix-area cannot bid to supply Phoenix during peak hours.) APS revealed in Case #115 that tripping schemes must also be activated by APS and SRP to drop load for a line outage or local generator outage during local peak load conditions until the new line is in service.
Pinnacle West Energy Corporation is a partner in expanding generation at the West Phoenix Power Plant. Similarly, SRP is expanding its Kyrene Power Plant and Santan Power Plant. All three projects are internal to the transmission import constrained Phoenix load zone.
During the past year, two additional 500 kV transmission lines have been announced for 2006 and 2008 that will help relieve the transmission import constraint for this area: a Palo Verde to Southeast Valley Switching Station line and a Palo Verde to Table Mesa line. APS has planned a new 230 kV line from Gila Bend to Yuma by 2006. This line will eliminate the transmission import constraint for the Yuma area. In addition, a new Yuma area generation project has been proposed by York and Welton Mohawk Irrigation and Drainage District for 2004. The generation project is active in the state siting process as Case #114. TEP has proposed several Transmission line enhancements that improve the Tucson area transmission constraints. Sierra Southwest Transmission has proposed a new 230 kV line from the Apache generating station to a new switchyard called Winchester interconnecting with TEP’s 345 kV line between Greenlee and Vail. Several transmission options remain under study by the Central Arizona Transmission Study (CATS) that will impact delivery to Tucson and southeastern Arizona.
In addition to the three new Palo Verde transmission lines identified above, Staff has conditioned Duke’s Arlington Valley II Power Plant with the upgrade of the Palo Verde to Kyrene and Palo Verde to North Gila 500 kV lines. A number of other Palo Verde line projects have been discussed but applications for Certificates of Environmental Compatibility (CEC) have not yet been filed with the Commission. Public Service Company of New Mexico (PNM) still has a transmission line from Palo Verde to Mexico under study through CATS. The PNM line is active in a federal Environmental Impact Assessment (EIS) and Presidential Permit process with the US Department of Energy as the lead agency. There has been recent discussion of upgrading the existing Palo Verde to Devers line and building a second Palo Verde to Devers 500 kV line. Similarly, a merchant transmission project to build a 500 kV line from Gila Bend to North Gila in conjunction with other transmission enhancements in California continues to seek a funding source.
The newly declared Nogales transmission import constrained area remains unresolved at present. Citizens Communications filed several alternative fixes in its most recent ten year plan with the Commission. Citizens Communications has committed to completing its study of those options and notifying the Commission of its selected plan of action by midyear.
3. How long will it take to relieve any existing transmission constraints and
what factors are affecting and will affect prospects for relief?
Phoenix-area 500 kV transmission additions in the 2003 through 2006 time period coupled with new power plants and expansions internal to the constrained area should be sufficient to reduce dependence upon older, more costly, and higher polluting local generation through about 2008. However, Staff has yet to see transmission solutions proposed for the Phoenix area that will eliminate the transmission import constraints in the long term. Since two of the three new 500 kV lines from Palo Verde must still go through the rigors of a state line siting process, there remains some risk of public opposition for the new lines...
The Tucson transmission import area faces the same line siting risks as the Phoenix area. In fact the environmental community and public at large have already been very vocal regarding a variety of transmission projects in Central and Southern Arizona. Nevertheless, there appear to be sufficient transmission options under investigation to assure the Tucson import constraint will get resolved within the next few years.
The Yuma transmission import constrained area appears to have several competing line solutions moving forward towards a 2004 resolution. New proposed merchant generation in the local area may also offer a remedy as early as 2004. It is premature to judge how quickly the Nogales constrained area will be resolved until Citizens Communications identifies its proposed solution.
Resolution of transmission constraints at the Palo Verde hub are the most difficult to project. Except for the new 500 kV lines proposed by Arizona transmission providers, all other transmission improvements remain very speculative and lack any definitive funding sponsor, specific scope or well-defined, in-service date. Most of these proposed 500 kV transmission projects improving the Arizona / California transfer capability will require Arizona line siting approval. At best, these projects are likely to formally emerge in the last half of this decade.
4. Are the owners of constrained transmission facilities, or holders of transmission rights, able to use their control to affect market prices?
Yes, transmission owners and holders of transmission rights can exercise market control and affect market price in a variety of ways.
In the case of transmission import constrained load zones, local generation must run during peak periods to avoid transmission system problems. When local must-run generators are old and are of a fuel source and technology that yields high operating and maintenance costs, then relying on these must-run generators can result in higher system incremental costs for energy purchases than would have occurred had there been ample transmission capacity. Such market power is further exacerbated when a single company or affiliates of a common company own both the transmission and local generation. By placing obligations on new competitive
Electric Service Providers (ESP) to share in the cost of must-run generation, an incumbent utility can cause the energy prices for competitive customers to be elevated in some instances above the shopping credit level at which the incumbent serves standard offer customers.
Market control and pricing effects in the case of a commercial hub such as Palo Verde that is constrained by transmission capacity take a somewhat different form. By there not being sufficient transmission available to reliably deliver all of the output of all units connected to the hub, there is an effect of stranding some of the connected generation capacity. This has a dual effect on prices. It first can cause the interconnected power plants to primarily compete to a floor price within the hub and to offer non-firm energy where firm energy would otherwise be available. If the interconnected transmission providers are able to purchase and deliver all the energy that they need for their local consumers, then they are satisfied. However, the constraint also protects higher pricing of energy from other plants owned by affiliates of the transmission providers because the hub units cannot compete with them due to delivery constraints. Secondly, transmission constraints at a hub can cause the bidding price for transmission rights to be elevated due to transmission congestion. Arizona does not yet have such a transmission congestion pricing mechanism but proposes such a pricing mechanism when its proposed Regional Transmission Organization (RTO), WestConnect, becomes operational. The California Independent System Operator already has such a transmission pricing mechanism in place for lines from Palo Verde to California. If a company has both a power plant affiliate and a transmission provider affiliate interconnected at such a hub, then they can certainly leverage the price of energy production versus the price of energy delivery.
5. Are these transmission owners currently doing things that will allow them to
exert more or less control in the future? If so, please detail.
It is Staff’s opinion that Arizona transmission owners have over the past year made significant progress in planning and announcing new transmission additions to resolve perceived market power via transmission constraints within Arizona. While it will take a number of years for these new lines to be sited and constructed, there is certainly a good faith demonstration of Arizona utilities’ commitment to respond favorably on a forward looking basis. The recent transition from a Desert STAR RTO to a WestConnect RTO is also reflective of a commitment to have an RTO with the authority to build transmission lines if others do not.
6. Will the transmission system be adequate prospectively (e.g., in the next 5,
10, 15, 20 years) to deliver power from new generation plants?
FERC anticipates that a regional RTO will in time be the entity responsible for ensuring the adequacy of transmission capability in the Southwest or West. FERC has suggested that some form of incentive ratemaking could be used to encourage appropriate transmission upgrades identified through an RTO planning process. The process of getting an overall "indicative planning" and incentive pricing structure in place will likely take several years.
Staff is not in a position to accurately assess the adequacy of planned transmission system enhancements filed with the Commission as of January 31, 2002. Such an assessment will be rendered upon completion of a second ACC biennial transmission assessment that will commence in April. However, Staff’s preliminary opinion is that Arizona transmission adequacy for new generating plants will likely be achieved in the last half of this decade.