Reliability is paramount, but electric system operators still want a good deal. It appears there may be a reshuffling of reliability coordinators in the works — in part because of a unique funding mechanism and the economics of spreading out fixed costs.

The California ISO announced Jan. 2 it will soon act as its own reliability coordinator (RC), a responsibility currently handled by Peak Reliability. In addition, CAISO will offer reliability services to any transmission owner interested — at a fraction of the current cost, the operator is promising.

Peak and a subsidiary of PJM Interconnection announced last month they had signed "a formal agreement to explore reliability services and markets in the West."

What's going on here?

A couple of things to keep in mind. First, the California ISO has been working to expand its western market, a process known as regionalization that could save customers money and allow greater renewables integration. But it brings with it a host of operational concerns, including the fear that out-of-state coal generators could be allowed to export power to California. The process was delayed until this year, and now the Peak-PJM partnership could potentially be competing for some of the same customers.

Also, last fall the Mountain West Transmission Group began the process of joining the Southwest Power Pool (SPP), and ditching Peak as its reliability coordinator. The coalition of 10 electricity service providers (with about 6.4 million customers and 16,000 miles of transmission lines among them) says SPP membership would provide opportunities to reduce customer costs and maximize resource and electric grid utilization. Fewer customers means Peak's fixed costs will need to be redistributed.

What's happened is a series of dominoes.

A key factor is Peak Reliability's funding mechanism. In negotiating the transfer of reliability services from the Western Electricity Coordinating Council, which used to handle the RC functions for the Western Interconnection, over to Peak, Peak agreed to take voluntary payments from participating utilities rather than the more typical mandatory tariff under Section 215 of the Federal Power Act. If Mountain West leaves, fixed costs will need to be redistributed.

The situation is unique, according to Montana Public Service Commission Vice Chairman Travis Kavulla. There was no precedent determining a standalone reliability coordinator's eligibility for Section 215 authority. But because Peak's Section 215 authority wasn't fully litigated, and Peak agreed to the voluntary funding mechanism, the departure of Mountain West is significant, given that Mountain West's departure will likely cause Peak's costs to be redistributed to fewer members of over Peak's footprint, prompting CAISO's decision to provide its own reliability coordination services.

"You're left with a classic utility ratemaking problem: you have a lot of fixed costs with fewer people to spread them over," said Kavulla. He called Peak's move, to launch market services with PJM, "a hail mary."

"If big utilities peel off from Peak, even though fixed costs remain largely the same, the dues for everyone else inevitably rise. Peak senses an existential threat," Kavula said.

CAISO to offer reliability services at least 50% cheaper

California ISO's Jan. 2 announcement did more than just indicate Peak's services were no longer needed. The ISO is also offering reliability services to others who may want to leave Peak. Among the services CAISO could offer include outage coordination and day-ahead planning, in addition to real-time monitoring for reliability.

California grid officials also say they are extending the withdrawal period from the required 18 months to 20 months to ensure coordination with Peak Reliability’s members on the transition. CAISO will then complete necessary tariff changes, oversight functions, and certification processes in order to certify the new RC and start operations by spring 2019.

In a Jan. 4 conference call giving more details on the proposal, Phil Pettingill, director of regional and federal affairs for the ISO, laid out the scope. "What we are offering and what we intend to build over these next few months is an RC offering that provides the core services required from any RC," he said. Those would include both oversight and outage coordination of a much larger footprint.

"But then also there are hosted applications that are necessary to support some of the other balancing areas that maybe are smaller in the West or need some of those additional services," Pettingill added. One service that CAISO plans to offer is real-time contingency analysis.

The plan is to offer all of the services Peak Reliability offers, only cheaper.

"With [Mountain West Transmission Group] leaving, there's a potential for increased costs; there will certainly be a restructuring of the offering of RC services," Pettingill said. "We can offer it not just to our balancing area, but certainly to the rest of the interconnection, for at least 50% less than the current costs from Peak Reliability."

"It is dependent on how many different entities would potentially come and join the ISO and receive RC services from us ... depending on how many entities there are, then we can start to leverage the service," he said.

CAISO sales pitch

CAISO's presentation was partly a sales pitch. Pettingill said the process would be open and transparent, and the ISO would share a straw proposal for how to value the service. A stakeholder initiative to examine rates will begin by the second quarter.

"We want to engage with all stakeholders with regards to what [are] the appropriate rates, terms and conditions for the ISO providing RC services," Pettingill said. That process will run five to six months, and then CAISO would make the appropriate filings with FERC to revise its tariffs.

The final step would be a certification audit conducted by the Western Electricity Coordinating Council, and Pettingill said the ISO is expecting to work with the group for about six months on that process.

A skeptical audience pressed for additional details on the cost savings, and how additional entities joining the ISO would drive higher savings. Pettingill indicated he would try to have some clarification available at upcoming regional meetings. Questions of savings and rates would be more appropriately addressed in the stakeholder process, he added.

Peak Reliability waived off any impact from CAISO's decision to drop its services. In a statement, the reliability coordinator said that "on a practical level, this means no change in Peak’s day-to-day operations." The 20-month withdrawal period ensures funding from CAISO, as the coordinator prepares for a "smooth transition."

"Our strategic focus continues to be addressing the issues facing our funders in the West. Declining load, increased renewables on the grid and other cost pressures mean that every utility is looking at how to adapt," Peak said. "Peak is in the same situation and that is what our recently announced partnership with PJM Connext is seeking to address. We see it as the most strategic path to preserve the West-wide model and continue to provide RC services in the West."