Can FERC deliver transmission?

This May, the Arizona Corporation Commission (ACC) rejected a proposal by Southern California Edison (SCE) to build Devers-Palo Verde No. 2 (DPV2)—a 230-mile-long, high-voltage transmission line connecting California and Arizona. The line, approved by the California Public Utilities Commission (CPUC) four months earlier, would enable SCE to import additional low-cost electricity from Arizona. The ACC’s rejection of DPV2 highlights a significant challenge for state and regional resource planners—weighing state interests against the regional benefits of interstate electricity commerce.

State v. state

Although it unanimously approved DPV2, the CPUC found that the project has several significant unmitigable environmental impacts. Nevertheless, it also determined that DPV2 would “provide significant economic benefits . . . , increase the reliability of the interstate transmission network . . . [and provide] . . . an economic hedge” against transmission and generation outages and natural gas price hikes. Given these benefits, the CPUC concluded that the environmental impacts of DPV2 would be acceptable.

The ACC, by contrast, rejected DPV2 as a California “power grab”—both literally and figuratively. Commissioner Kris Mayes scorned the line as a “230-mile extension cord into Arizona . . . [that] . . . would come at the expense of Arizona ratepayers, Arizona air quality, Arizona land, Arizona water, and Arizona wildlife.” Commissioner Jeff Hatch-Miller called on California “to step up to the plate and begin building its own generation—in California.”

The ACC’s rejection places the future of DPV2 in serious doubt.

Overruling the states

The Energy Policy Act of 2005 (EPAct) directs the U.S. Department of Energy (DOE) to pinpoint transmission congestion problems and authorizes the secretary of energy to designate as “national interest electric transmission corridors” geographic areas where such problems “adversely affect consumers.” Once an area has been designated a national interest corridor, the federal government—specifically, the Federal Energy Regulatory Commission (FERC)—can approve any proposed transmission project within the area for which state regulators have “withheld” approval for more than a year. In a 2006 rulemaking, FERC interpreted the meaning of the word “withheld” in EPAct to include “denied.” So, in effect, FERC can overrule a state’s rejection of any transmission project in a designated congested region simply by finding that it would ease the congestion.

Last month, the DOE designated areas of Arizona and southern California—including some that DPV2 would pass through—as the Southwest national interest corridor, presenting SCE the opportunity to have FERC reverse the ACC decision. It remains unclear, however, whether the utility will take it. SCE has stated that it will continue to work with the CPUC and ACC on DPV2 permitting issues.

Back to square one

SCE’s initial reluctance to involve FERC suggests that the utility believes it may be cheaper and quicker to try to work things out with Arizona. Asking FERC to intervene requires a project’s sponsor to file an application, essentially restarting the entire approval process. The application would be (as at the state level) subject to protest—an inevitability for any large transmission project. As part of any application proceeding, FERC would also conduct a full environmental review and evaluate “alternatives.”

SCE filed its DPV2 application at the CPUC in April 2005. Now, more than two years later, it finds its only two options are to address the ACC’s concerns or to begin again at FERC. Although FERC’s history of approving virtually every application it has received for natural gas transmission pipelines suggests it offers a “friendlier” venue, pursuing either option will delay the project and increase its cost.

A road to nowhere?

In designating the Southwest corridor, the DOE—noting growing demand for power—explained that, “now, more than ever, we must look at electricity generation from a regional and national perspective.” However, the designation by itself neither overturns the ACC’s ruling nor guarantees that any new transmission lines will be built in the corridor. Indeed, given the considerable time and cost needed to secure a FERC decision overruling a state decision, using the national corridor process to change jurisdiction may not prove to be a practical alternative to the state project approval processes that EPAct clearly intended to reform.

As the need for new generating capacity (particularly capacity powered by renewable resources) grows, states must work together to develop regional transmission solutions. Wind in Wyoming, solar in Arizona, and hydro and biomass in the Pacific Northwest all require a network of interstate facilities to bring power from remote areas to load centers.

Accordingly, transmission needs should increasingly be assessed through a regional lens. Whenever the political and parochial interests of a state impede the development of a needed project, a practical alternative must be available. National interest transmission corridors could be the answer, but at first blush, they may not offer one.

—Steven F. Greenwald (stevegreenwald@dwt.com) leads Davis Wright Tremaine’s Energy Practice Group. Jeffrey P. Gray (jeffgray@dwt.com) is a partner in the firm’s Energy Practice Group.