THE BRATTLE GROUP

As the PVD2 analysis further shows, the estimated probability-weighted average of the project
benefits across the different scenarios is approximately $120 million per year (without long-term
contingencies), which exceeds the savings estimated under the base-case scenario.
With major long-term contingencies considered, the benefits are even higher. The CAISO studied
multiple long-term contingencies, one of which was a long-term San Onofre nuclear plant outage
(which has now become a reality). With this outage alone total annual benefits ranged from
$90 million/year in the lowest-benefit scenario to $740 million/year in the highest-benefit scenario.
In other words, while the total benefits of building the line were estimated to be $100 million/year
for the base case, the analysis shows that the total annual costs could be as high as $740 million/year
without the project for at least one of the evaluated future scenarios. This benefit range of up to
$740 million/year is over 10 times the average annual project cost of $71 million. It is also over
7 times the $100 million/year base-case benefit estimated without considering challenging futures
and contingencies.
Figure 2 below provides a graphical representation of the probability distribution of estimated
project-related benefits under three assumptions: (a) perfect competition between suppliers without
any major long-term contingencies (dashed dark-blue line); (b) imperfect competition between
suppliers without any major long-term contingencies (solid blue line); and (c) imperfect
competition with the San Onofre nuclear outage (dashed grey line). The x-axis shows the range of
estimated additional societal costs without the PVD2 project. In other words, the x-axis measures
the cost savings or societal benefits associated with the project. The y-axis shows the probability
that these cost savings are above or below a certain amount.
For example, the solid blue line of the chart shows there is 100% probability that the cost savings of
the project are at least $80 million under imperfect competition without major contingencies.
Moving down along this line, the graph shows that there is: (1) a 50% probability that the cost
savings would be greater than $90 million; (2) a 20% probability that the savings would be greater
than $125 million; and (3) a 10% chance that the savings would be between $190 and $550 million
per year.
These probability-distributed values exist due to the fact that there can be operational and market
conditions (such as higher loads, higher natural gas prices, or less hydro generation) that differ
significantly from base case assumptions. As the analysis shows, this can dramatically increase the
total benefit of (i.e., the additional costs faced without) the project. The wide distribution of these
results show that transmission can provide significant insurance value against the high costs of
challenging conditions (such as cold snaps, heat waves, price spikes in fuel markets, or droughts)
that affect power markets in the short term, as well as challenging shifts in market conditions and
regulations (such as major shifts in fuel costs or unanticipated plant retirements and load growth)
that can affect costs and risks in the long term.
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