Results in Higher Bills Lack of Political Will Results in Higher Bills ® June 25, 2001

Outline What could California have done differently? Market power studies do not add megawatts! Don’t blame the messenger

What Could California Have Done Differently? 1. Protect SDG&E customers by entering into long-term deals in early 2000 2. Avoid generation exodus and minimize blackouts 3. Encourage load reduction measures by setting reasonable retail rates 4. Pay the QFs so they could deliver power instead of sitting idle 5. Lower consumer costs by ensuring CDWR creditworthiness 6. End CDWR underscheduling of load requirements Missteps of Politicians = $$$

Protect SDG&E Customers Long term contracts were offered to California in late 2000 at $45-$55/mwh “Last summer, Houston-based Enron and several other firms offered to sell power to California’s utilities for just five years at about $50 a megawatt-hour” -L.A. Times, June 13, 2001 SDG&E could not get CPUC pre-approval for these deals CDWR instead has paid $2.5 billion (1) contracting for power at prices significantly above the prices available and (2) buying on the spot market for $300/mwh “The state will be paying an average price of $79/mwh over the next 5 years” - Update of CDWR Power Purchase Contract Efforts (May 31, 2001) Had the CPUC mandated that SDG&E, PG&E, and SCE enter into similar contracts, consumers could have saved $80 billion over the 2000-2006 timeframe Cost = $2.5 billion

Avoid Generation Exodus and Blackouts As wholesale price caps were tightened in the Cal PX and Cal ISO from $750/mwh to $250/mwh, imports were reduced “Net imports in August 2000 were 3,500 MW below 1999 levels.” - FERC Staff Report on U.S. Bulk Power Markets: Part I (November 2000) New peaking capacity got canceled after the $150/mwh price cap was put in place in November 2000 “At least 668 MW of peak capacity was dropped because of the proposal” - California Energy Markets, November 10, 2000 The generation shortages are likely to affect 1.4 million homes and occur for nearly 113 hours The shortfall could have been reduced by 10-20% without price caps “The Impact of Wholesale Electricity Price Controls on California Summer Reliability” - U.S. Department of Energy, June 2001 Cost = 120,000 homes w/o electricity

Encourage Earlier Load Reductions CPUC and the Governor openly opposed any retail tariff increase in 2000 even though Utilities were heading towards financial insolvency Without any appropriate retail price signals, businesses and homes in California had no reason to conserve energy CPUC finally approved two retail rate increases January 2001 - $10/mwh March 2001 - $30/mwh (with the bill impact not until July) Had the CPUC increased retail rates modestly in 2000 when wholesale prices were increasing, consumers would have reduced demand thereby moderating overall purchased energy costs Cost = $2.5 billion

Bring QFs Back On-Line Earlier Many Qualify Facilities went off-line in late 2000 and early 2001 due to CPUC mandated change in the pricing formula for natural gas that made running uneconomic Utilities failed to make scheduled payments to plants “Edison owes $529 million and PG&E owes $387 million as of January 31st, 2001.” - FERC Staff Report on U.S. Bulk Power Markets: Part I (November 2000) DWR replaced the $125/mwh QF power with spot power at prices bought above $300/mwh between January and April 2001 Cost = $1.1 billion

Ensure CDWR Creditworthiness CDWR told to manage Utilities “net short” beginning January 2001 CDWR future cash flows are unclear based on legislation and CPUC CDWR continues to pay credit premium to market for failure of CPUC to set compensatory retail rates FERC believes that 10% adder to cost is reasonable to compensate sellers for credit concerns CDWR has spent $13 billion to date buying power Cost = $1.3 billion

End Utility / CDWR Underscheduling Underscheduling in early 2000 was the result of poor incentives directed at the Utilities trying to maximize their Stranded Cost recovery During some hours last year, the CAISO was buying over 10,000 MW in real time to keep load and generation in balance To address this situation, FERC ordered that CAISO implement $100/mwh penalty for parties that underschedule their load by more than 5% Combined, the major buyers (CDWR, PG&E and SCE) have incurred to date as much as $1 billion due to their continued inability to forward contract In addition, most of $1.1 billion Out of Market purchases in 2001 resulted from the CAISO having to buy due to underscheduling Cost = $2.1 billion

Cost to California To-Date $9.4 billion in quantified losses due to poor decisions PG&E in bankruptcy and SCE on the brink State of California downgraded by the Credit rating agencies, with budget surplus spent on electricity 120,000 home without power during many hours this Summer

CAISO Studies Do Not Add Up DMA’s Hildebrandt arrived at an estimate of $8.9 billion BUT DMA’s Sheffrin identified excess payments of $505 million The CAISO experts can’t agree

Drawbacks of the CAISO Studies Fail to treat the entire Western region as an integrated market Disregard of supply and demand conditions outside of California Arbitrary heat rate cost-of-service standard for imports that does not reflect resource scarcity in the Pacific NW and Desert SW Disregard of opportunity costs that impact competitive markets in California Environmental limitations on operable hours (emissions, hydro) Physical generation limitations Unrealistic assumptions regarding cost and capabilities of new power plants Include timeframe before October 2000, CDWR bilateral transactions, and CAISO Out-of-Market purchases

Conclusion CAISO admits that its findings are preliminary and much more analysis need to be done before determining refund levels CAISO reassessment of BPA’s “excess” payments casts doubts on both the methodology and motivations “CAISO acknowledges that “the findings contained therein (DMA Studies) were preliminary and that they were based on assumptions derived from information available to the ISO at that time” - Letter from Terry M. Winter (CEO, CAISO) to Stephen Oliver (VP, BPA) CAISO has no independence from politicians in California and all analysis is subject to huge “agency” question

Don’t Blame the Messenger Enron has long advocated that the rules put in place by the California government and blessed by FERC were doomed to fail Enron has always operated fully within the law and FERC’s rules and has never benefited from the exercise of market power Marketers provide a vital service in this highly volatile commodity market – transparency and price risk management Enron has been attacked and outrageous statements have been made against Enron’s executives While the CAISO alleges that Enron “owes” $39 million, Enron has not been paid many times that amount for CPUC approved retail obligations by both SCE and PG&E

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