SB 540 - Pathways Initiative
SUMMARY
SB 540 provides the California Independent
System Operator (CAISO) the authority
necessary to implement the Pathways Initiative
Proposal if it determines an independent regional
organization (RO) meets specific requirements.
The bill allows CAISO to tap into a wider
market of electricity resources which studies
have shown stand to provide significant benefits
to Californians including cost savings, enhanced
grid reliability, and reduced air pollution.
While prior attempts to create a wider regional
market have failed out of concerns that
California would lose control over its
environmental policies, SB 540 enables an
innovative approach that would secure the gains
of an expanded market while protecting
California’s ability to set and enforce its own
procurement, environmental, reliability, and
other public policies.
PROBLEM
For many years, California’s energy regulators
have explored how they could optimize
available energy supplies across other western
states to expand our energy markets and enable
an affordable, clean, and reliable grid.
Studies have shown that there are significant
benefits for California in an expanded energy
market. For example, a Stanford Woods Institute
(2024) study found that an expanded market
would relieve strain on the electric grid during
extreme heat events–in an expanded market
scenario the grid was strained 40% fewer hours.
1 A study commissioned by the California Energy
Commission (CEC) found that under an
expanded market, California would save nearly
$800 million per year and gas generation would
fall by 31%, moving us closer to our 100% clean
1 Stanford Woods Institute: “Grid Regionalization in
the West”
energy goals while reducing air pollution.
2 However, these benefits only materialize if
other states want to join the regional market, a
market they are wary of if it’s solely under
California’s control.
Several different proposals, that would reassure
other Western states of California’s willingness
to work jointly, have made their way before the
Legislature. Most recently, AB 538 (Holden,
2023) would have transformed CAISO into a
regional transmission organization (RTO).
However, these previous efforts have failed over
reasonable concerns about losing control of the
state’s critical public policies.
The Pathways Proposal offers a way to solve
these problems. Instead of creating an RTO, the
Pathways Proposal creates an RO that only
governs the market rules for energy markets
while retaining CAISO’s role as a
California-governed balancing authority so that
California and CAISO retain control over
procurement, environmental, reliability, and
other public policies.
CURRENT LAW
Existing law enables CAISO to, and instructs
how it will, manage the transmission grid and
related energy markets. It requires, among other
things, that CAISO manage those markets in a
manner that maximizes efficiency, reduces costs
to consumers, protects public health and the
environment, and ensures reliability. However,
additional authority is required in order for
CAISO and California utilities to use energy
markets overseen by an RO as proposed by the
Pathways Initiative.
THIS BILL
SB 540 enables the CAISO and California
utilities to participate in energy markets
governed by a separate, independent regional
2 Brattle: “Preliminary Day-Ahead Market Impacts
Study”
Last Updated 02/20/2025
organization. If the RO meets specific criteria,
CAISO would be authorized to enact a
resolution allowing the RO’s rules to govern
CAISO’s energy markets. The CAISO would
continue to be the operator of the energy
markets.
SB 540 does not transfer authority for
transmission planning, transmission cost
allocation, balancing authority functions, or
reliability coordination–this authority would
remain with the existing CAISO board structure.
The bill also does not immediately authorize
utilities to enter a market governed by an RO,
CAISO must first demonstrate the RO meets a
number of statutory requirements before moving
control of the market rules to the RO including:
confirming that California regulatory agencies
and CAISO retain control over Renewables
Portfolio Standard requirements, climate policy,
other procurement requirements, transmission
planning, CAISO’s interconnection queue, and
resource adequacy requirements; requiring that
the RO provides a procedure for withdrawal
from the market, should it no longer benefit
California to participate; maintaining the
capability to operate its own market, should
California decide to withdraw from the RO;
ensuring the RO is obligated to make decisions
in an open process; making funding available
for consumer advocates to engage in the process,
and more.
The expanded market that SB 540 would enable
will save ratepayers money, improve grid
reliability, and reduce air pollution from power
plants in California by:
1) Optimizing the use of generation, storage and
transmission resources.
2) Securing California’s ability to export excess
renewables rather than curtailing them and
importing them from other states when
available.
3) Allowing California to draw upon a wider set
of Western renewable resources when our grid is
stressed.
4) Making less use of back-up diesel generators
and the oldest, dirtiest gas plants during system
peaks.
SB 540 will ensure that we reach our climate
goals in the most cost-effective and reliable
manner possible by tapping into a much wider
set of Western resources–lowering energy bills,
improving grid reliability, and reducing
pollution in front-line communities, while also
retaining control of our procurement,
environmental, reliability, and other public
policies.
SUPPORT
Coalition of California Utility Employees
(co-sponsor)
State Association of Electrical Workers
(co-sponsor)
Environmental Defense Fund (co-sponsor)
Natural Resources Defense Council (co-sponsor)
American Clean Power–California
California Community Choice Association
California Environmental Voters
Clean Energy Buyers Association
Pattern Energy
Peninsula Clean Energy
FOR MORE INFORMATION
Erika Romero
Policy Analyst
[email protected]
Last Updated 02/20/2025