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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \JQUENET (Non-Privileged)\Deleted Items X-Origin: Quenet-J X-FileName: JQUENET (Non-Privileged).pst SCIENTECH's IssueAlert Today's IssueAlert Sponsors: =09 [IMAGE] SCIENTECH is currently interviewing 1,500 utilities on CIS/CRM and= customer care in the United States and Canada to determine: The leadi= ng software providers Drivers of utility technology decisions Analysis of= license sales versus ASP sales New market opportunities Growing/shrinkin= g software markets Download a sample prospectus for an introduction to t= his new survey at: http://secure.scientech.com/specialpages/Multi_Client.as= p and contact Jon Brock at 505-244-7607 for more details.=09 [IMAGE] [IMAGE] October 19, 2001=20 Private Investors Align to Upgrade California's Path 15;=20 Project Causes New State / Federal Conflicts=20 By Will McNamara Director, Electric Industry Analysis=20 [IMAGE] [News item from Reuters] The federal government has reached a deal with a c= oalition of energy companies to build a transmission line in central Califo= rnia 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 Ener= gy Secretary Spencer Abraham, will begin in the spring of 2003 and could be= completed by as early as summer 2004. =20 Analysis: The California energy crisis, which clearly subsided over the sum= mer of 2001 due to new generation that came online in the state, mild weath= er patterns and conservation efforts, is generally considered the result of= a severe supply / demand imbalance. While this may be true, what often get= s overlooked is that deficient transmission capacity in the state-the lines= that actually transport power from point A to point B-also played a primar= y role in creating the tremendous instability of California's energy market= . This problem still persists today, and as California heads into the winte= r season concerns about power reliability once again are surfacing. The Dep= artment 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 th= e hands of private companies, which creates a whole new set of potential co= nflicts.=20 Amid a long list of uncertain ramifications of the Path 15 upgrade, there a= re some things that we know for sure. First, Path 15, which is owned by Pac= ific Gas & Electric Co., is a 90-mile high-voltage section of transmission = capacity that essentially carries power between Northern and Southern Calif= ornia. During the peak of the energy crisis in California, Path 15 became r= ather clogged and suffered from bottlenecks (points at which transmission c= ould not transport high volumes of power). This pre-empted any transport of= power from Southern California (and Arizona and Mexico) to the north, whic= h resulted in rolling blackouts in San Francisco and other Northern Califor= nia cities. As noted, these bottleneck problems remain and are particularly= acute during times of peak power demand, which is obviously a concern as w= inter approaches. =20 The deficiency of the California transmission systems is arguably the last = piece of the puzzle that remains toward bringing stability back to the stat= e's energy market. Ironically, power supply is no longer seen as an imminen= t problem. New reports from the California ISO indicate that the state shou= ld 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 n= ot as positive. If the Northwest continues to experience a drought, then No= rthern California will still need to import more power from the south. Heav= y dependence on the strained Path 15 could once again cause reliability pro= blems for California.=20 Thus, deficiencies along Path 15 can be seen as a symptom of larger problem= s 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 f= ederal / state jurisdiction. When President Bush released his national ener= gy 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 respo= nses 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 1= 5, is the result of that previous directive.=20 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 supp= ort the upgrade. The six other companies that will spearhead the project ar= e 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 st= ates and operates 17,000 miles of transmission lines. =20 Presently, Path 15 connects the Bay Area in Northern California to two of t= he state's largest generation facilities-Pacific Gas & Electric Co.'s Diabl= o Canyon nuclear facility and Duke Energy's Morro Bay natural-gas power pla= nt. 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 t= he upgrade is finished in 2004, Path 15 should be able to carry a total of = 5,400 MW of power.=20 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 1= 0-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 rema= ining 90 percent will be owned by the private companies that are devoting d= ifferent amounts of capital to fund the upgrade. The exact percentages of i= nvestment (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 comp= anies would want to participate in a transmission upgrade in California. Th= e answer is that the companies will be able to recoup their investments thr= ough fees charged to use the new transmission line. This could result in a = hefty payoff for the companies investing in the project, who presumably ant= icipate that California will remain a high-demand state through which huge = amounts of power will need to be transported.=20 As I mentioned, there are some potential conflicts that might arise with th= is upgrade plan. First, there is the issue of potential state / federal reg= ulatory conflicts. Presently, state governments have jurisdiction over powe= r line siting. Thus, the California Public Utilities Commission (CPUC) had = already been pursuing its own upgrade plan for Path 15 prior to Secretary A= braham'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 regulator= y body has the authority to direct and manage transmission upgrades in Cali= fornia. Gov. Gray Davis and the CPUC certainly seem to believe that it is t= he state's prerogative, and have issued strong criticisms over the DOE's ve= nture into this territory. However, in his energy plan, President Bush seem= ed to support a change in policy that would allow federal officials to obta= in transmission rights of way as a way to increase national transmission ca= pacity. If there is indeed a dispute between the CPUC and the DOE, it is n= ot known if federal policy would supersede state policy in this area. In an= y event, representatives from Trans-Elect, one of the participating compani= es, have said that balancing the various interests among federal and state = (and public and private) interests will be one of the key challenges for th= e upgrade project. Note that Trans-Elect was the company that had unsuccess= fully attempted to purchase the transmission assets of Southern California = Edison earlier this year. =20 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, u= nlike the one that the CPUC has directed, reportedly would not be subject t= o review or approval by either the California ISO or the CPUC. Further, bec= ause the companies participating in the upgrade will own a portion of the n= ew line, these companies will be able to charge "tolls" to the power market= ers that use the lines to transport power. This is most likely a point of c= ontention for California officials, especially Gov. Gray Davis, who has sou= ght state ownership of existing transmission lines and is not too keen on p= rivate-company ownership of generation facilities in the state. The positiv= e side of this issue is that, according to the DOE, the bids from private c= ontracts enable the upgrade of Path 15 to proceed without any increase to "= either the taxpayers or ratepayers of California or the United States of Am= erica."=20 As a side note, in addition to Path 15 the CPUC is also proceeding with a n= ew transmission line in Southern California, known as the Valley-Rainbow In= terconnect transmission line. Although the timetable has been delayed until= 2005, San Diego Gas & Electric is proceeding with a 500,000-volt transmiss= ion line that would connect Southern California Edison's Valley Substation = near Romoland, Calif., with a future substation to be located in the Rainbo= w, Calif. area, just south of the Riverside-San Diego county line. The new = transmission line would provide a second interconnection between SDG&E's an= d SCE's transmission systems. The first interconnection is at the San Onofr= e Substation near San Clemente, Calif. The project is designed to deliver a= pproximately 1,000 MW. =20 Moreover, the expansion of Path 15 is a necessary step to help California l= ower its risk for further reliability problems. Due to generation developme= nt, 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 represe= nts a huge part of the state's energy market. The state has accrued $12.5 b= illion in debt to buy power for the state's utilities, the recovery for whi= ch remains an unresolved issue. While Gov. Davis has preferred to increase = the state's role in California's energy infrastructure, this new DOE-sponso= red project on Path 15 puts ownership of transmission assets into the hands= of private companies. =20 An archive list of previous IssueAlerts is available atwww.scientech.com=20 We encourage our readers to contact us with their comments. We look forwar= d to hearing from you. Nancy Spring Reach thousands of utility analysts = and decision makers every day. Your company can schedule a sponsorship of I= ssueAlert by contacting Jane Pelz . Advertising opportunities are also ava= ilable on our Website. =09 Our staff is comprised of leading energy experts with diverse background= s in utility generation, transmission & distribution, retail markets, new = technologies, I/T, renewable energy, regulatory affairs, community relatio= ns and international issues. Contact consulting@scientech.com or call Nan= cy Spring at 1-505-244-7613. =09 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us know if we can help you with in-depth analyses or any other SCIENTECH i= nformation products. If you would like to refer a colleague to receive our= free, daily IssueAlerts, please reply to this e-mail and include their f= ull name and e-mail address or register directly on our site. If you no = longer wish to receive this daily e-mail, and you are currently a registere= d subscriber to IssueAlert via SCIENTECH's website, please visit http://s= ecure.scientech.com/account/ to unsubscribe. Otherwise, please send an e-= mail to to IssueAlert , with "Delete IA Subscription" in the subject line.= =09 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAler= ts are not intended to predict financial performance of companies discusse= d, or to be the basis for investment decisions of any kind. SCIENTECH's so= le purpose in publishing its IssueAlerts is to offer an independent perspe= ctive regarding the key events occurring in the energy industry, based on = its long-standing reputation as an expert on energy issues. Copyright = 2001. SCIENTECH, Inc. All rights reserved.=09
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