1. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project TDV Economic Update Brian Horii and Snuller Price Energy & Environmental Economics, Inc. for Pacific Gas & Electric Co. Codes & Standards Program

2. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Agenda Methodology Overview Conceptual Framework Detail on TDV Derivation Electricity Natural Gas Propane

3. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Methodology Overview of TDV TDV Method the Same for All Energy, Sum of Commodity Costs Marginal T&D Costs Rate Adjustments Air Emissions Externalities “1992 Adder” Hourly Lifecycle values for each area, class, and energy type

4. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Commodity Costs Marginal T&D Costs Rate Adjustments Air Emissions “1992 Adder” Formulation Based on TDV Goals Include New Market Structure System Efficiency Utilization Improve Environment Don’t Relax Standards Cost ComponentTDV Goal Total TDV Value TDV values made with publicly available data.

5. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project This is What it Looks Like! Example of Electric TDV Spreadsheet Down for 8760 Hours

6. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project How TDV Works in Evaluation $/kWh Monday Friday With flat energy costing a kW saved is valued the same for every hour of the day With TDV costing a kW saved during a high-cost peak hour is valued more highly than a kW saved during an off-peak hour Flat Energy Costing Time Dependent Energy Costing

7. Environment Building up the Electric TDVs $/kWh T&D PX Rate Adder 1. Start with the PX Commodity Costs 2. Add the marginal T&D delivery costs 3. Use flat adder to bring to rate levels 4. Add environmental externality of reduced air pollution 5. Add 1992 adder to bring to current standard levels Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project 1992 Adder

8. Building up Gas and Propane TDVs $/MMBtu Environmental Externality 1992 Adder (Nat. Gas Only) Commodity Cost January December Rate Adder 1. Start with the Gas Commodity Costs 2. Use flat adder to bring to rate levels 3. Add environmental externality of reduced air pollution 4. Add 1992 adder to bring to current standard levels Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project

9. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Annualized Rate Components of Electric TDV Values Weighted Average Electric TDV for Shasta 34% 21% 8% 6% 31%

10. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Annualized Rate Components of Natural Gas TDV Values Weighted Average Gas TDV for Shasta 48% 38% 8% 6% No T&D Component for natural gas or propane

11. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Annualized Rate Components of Propane TDV Values Weighted Average Propane TDV for Shasta 49% 45% 6% No 1992 Adder for propane

12. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Electric TDV Summary

13. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Natural Gas TDV Summary TDV Values by Service Area

14. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Propane TDV Summary Statewide Propane Values

15. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Details of the Electric TDV Estimation

16. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Electric Costs Time Dependent Components Generation - Commodity Transmission and Distribution Emissions  Attributes - Level - Shape Fixed Components Rate Adder 1992 Adder

17. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The Commodity Component: Generation Market Price - Level Price based on the “all-in” cost of a combined cycle gas turbine Gas price forecast is the major driver Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project

18. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The Commodity Component: Generation Market Price - Shapes Price[m,h] = All-in Cost * Monthly Price Ratio[m] * Typical Shape[m,h] Monthly Typical Shapes (normalized to average 1.0)

19. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The Commodity Component: Combining Level and Shape Yield the Hourly Prices Shapes mapped to 1997 chronology

20. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: T&D Marginal Cost - Levels Marginal costs will always be in flux. Use the most recent values available. SCE PTRD Proposal PG&E 1999 GRC Phase II Use full “ratemaking” marginal costs DSM marginal costs can be lower – Timeframe of impacts – Pervasiveness of impacts

21. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: T&D Cost - Shape Concept T&D systems are built for peak loads Peak load is driven largely by weather Peak Capacity Allocation Factors (PCAFs) are used to allocate the marginal costs to the high load hours – Used by PG&E and SCE Want price signals highest when load is highest in an area. PCAFs reflect this. – Allocate cost to hours in the peak period. The higher the relative load, the higher the allocated cost.

22. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: PCAFs and Temperature Temperature Loads PCAFs Drives Load Information Missing or Difficult to Obtain in Many Areas Temperature PCAFs We used temperature as a proxy for load, and as the basis for allocating costs to hours of the year.

23. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: PCAF / Load Relationship PCAFs focus on the highest load hours

24. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: Temperatures Drive the Peaks Milpitas illustrates the strong correlation of weekday temp with peak loads. Sunday

25. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: Results of Load & Temperature Correlation Peak period is all weekday hours with temperatures within 15 degrees of the highest observed temperature in the area (weekday only). This 15 degree span defines the hours that could drive peak demand, and thus drive the need for capacity expansion. This definition is independent of climate zone. This definition is spot-on with PCAFs in the summer

26. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: Sample Summer PCAF Results Similarly good correlation was obtained for all summer peaking areas: San Jose Bakersfield

27. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: Same Principles Apply to the Winter - w/ Refinements Same 15 degree bandwidth Only consider 7am to 9pm

28. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: Winter PCAF Timing Winter Areas Current areas peak in the evening. Do we need to worry about a morning peak?

29. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: Hourly Costs Hourly Cost is the T&D capacity cost (from the utilities) times the temperature weight. Temp weight is the total PCAF for each degree F, divided by the number of hours that are at that degree F. Temp h = temperature category for that hour. (nearest whole degree) TotalPCAF[Temp h ] = total % of capacity cost allocated to that temp category NumberofHours = # of hours that fall into that temp category in the year CapacityCost = T&D marginal capacity cost in $/kW-yr a = Area, h = hour

30. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The T&D Component: Winter PCAF Problems Assigning costs to the winter (in summer peaking areas) doubles the T&D costs for the area Favors measures that save in summer and winter --- bit issue? Spreading actual costs over summer and winter would undervalue summer reductions

31. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Environmental Adder: Emissions A realistic valuation of NOx emissions is on the order of $3000-12,300/ton, centered on $7500-8000/ton.. A reasonable, albeit very tentative and highly uncertain, range of values for CO 2 emissions is about $5-13/ton-CO 2. Thus, the $9/ton-CO 2 value used in both the 1994 and 1998 CEC valuations appears to be reasonable. E3 concludes that a realistic valuation of environmental externalities should be closer to the CEC ER94 valuations, but perhaps at the lower end of this range. For common electric generation plants in California, this level of externality valuation corresponds to a total emission cost, or energy adder, of about $10/MWh.

32. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Environmental Adder: Emission Cost Estimates Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project

33. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Rate Adder Example for Fresno Commercial Building Flat adder to adjust marginal cost up to retail rate levels. Shape still represents underlying social marginal costs.

34. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project 1992 Adder: Comparison of Electric Rate Forecasts Current rate forecast is much lower than existing. Adder up to existing levels removes any IOU rate differentials

35. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Electric TDV Summary

36. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Details of the Natural Gas Estimation

37. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The Commodity Component: Monthly Natural Gas Shape Monthly, not hourly variation for natural gas.

38. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The Commodity Component: Long Run Forecast Long run residential natural gas rate forecast

39. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Environmental Adder: Externality for Natural Gas Natural Gas Externalities 0.058 ton-CO2/MMBtu 0.045 lb NOx/MMBtu.

40. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Rate Adder Example for Commercial Fresno Customer Flat adder to adjust marginal cost up to retail rate levels. No T&D component in marginal cost, assumption is flat allocation across hours.

41. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project 1992 Adder: Comparison of Gas Forecasts

42. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Natural Gas TDV Summary TDV Values by Service Area

43. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Details of the Propane Estimation

44. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The Commodity Component: Long Run Trend for Propane EIA Crude Oil Forecast Used Going Forward

45. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project The Commodity Component: Monthly Shape of Propane Based on EIA Historical California Propane Prices

46. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Environmental Adder: Propane Externalities Propane Externalities 0.07 ton-CO2/MMBtu 0.045 lb NOx/MMBtu

47. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Rate Adder Example for Commercial Customer Flat adder to adjust marginal cost up to retail rate levels. No T&D component in marginal cost, assumption is flat allocation across hours.

48. Copyrighted © 2000 PG&E All Rights Reserved CASE Initiative Project Propane TDV Summary Statewide Propane Values