Procurement and Resource Adequacy Briefing August 2, 2006 Molly Sterkel, California Public Utilities Commission

2 AB57 (PU Code 454.5) Put IOUs back into the procurement business as of Jan. 1, 2003 Ensured that CPUC would establish policies and cost recovery mechanisms for procurement Ensured IOUs cost recovery if procurement done in accordance with a pre-approved procurement plan PUC Implementation of AB57 began in – Numerous decisions authorized PG&E, SCE, SDG&E to resume procurement Jan-2004 Adopted procurement policy framework, including biennial LTPP Proceedings that follow the biennial IEPR proceeding schedule Oct-2004 Adopted Resource Adequacy Requirements Framework Dec-2004 Approved first cycle of 10-year of Long-Term Plans Oct-2005 Adopted Resource Adequacy Rules for Key Developments in CPUC Procurement Policy

3 Feb 2006 – Opened Long-Term Procurement Proceeding (LTPP) R opened new LTPP cycle Phase 1 Goal was to review need for additional policies to support new generation and long-term contracts in California Problem is that new generation is not being built by market because new gen is not cost-effective compared to existing generation and requires long-term contracts to get built And new mechanisms that might support new generation have not yet been adopted by Commission (capacity markets, multi- year Resource Adequacy Requirements, etc.) Phase 2 Will kick off in Summer 2006 Will review IOUs biennial 10 year resource plans and updated procurement plans

4 Results of LTPP Phase 1 Decision Adopted a cost-allocation proposal to share benefits and costs of new capacity among all benefiting customers for 10-years from online date Includes direct access but excludes municipal utility loads Excludes utility owned generation from cost allocation mechanism 2. Required energy from new contracts be auctioned to highest bidder 3. Shares the net cost of capacity (total contract cost- energy revenues) and resource adequacy credit

5 Contracts in PG&E Application (A )

6 Edisons RFO Launched July 21, 2006

7 Resource Adequacy Central Component of Commission s Procurement Policy All LSE s must buy capacity ( Resource Adequacy ) in advance LSE s cannot just rely on Energy Markets, must contract for capacity Opened New Proceeding in December 2005 Phase 1 Issues Highest Priority - Adoption of Local Resource Adequacy Requirement (Local RAR) Other Issues re:- Tradable Capacity Product, Implementation, & Compliance Phase 2 Issues Capacity Markets & Multi-year forward RA Requirement Other Issues Local RA 2008 & Beyond Zonal RA Requirement Other RA Refinements and Implementation Issues General Order Dec 2005 – Opened n ew Resource Adequacy Proceeding R

8 Results of RA Phase 1a - Local Resource Adequacy (D ) Adopted a Local RA program for 2007 Requires one annual showing for local RA program compliance Leaves issues open to be reconsidered for 2008 and beyond Adopts a local capacity requirement (LCR) based on CAISOs local area study Adopts a local resource adequacy requirement for all Load- Serving Entities (LSE) Allocates local requirement to each LSE based on a percentage of load served Allows RMR resources to count for local, but requires preliminary filing process Does not allow unbundled local attribute to count for compliance Aggregation of local areas for compliance purposes Requires local procurement, but allows CAISO Backstop Allows Waivers from Local Procurement if no generation available, no bids are received in an RFO, or bids were above CAISO backstop price Imposes Penalties if LSE does not procure locally, and no waiver allowed

9 Results of RA Phase 1b – D Second Decision (based on same record) Implementation Issues addressed issues to resolve risk uncertainty and facilitate trading of resource adequacy products related to: Forced Outage Maintenance Obligations Import Requirements Creditworthiness Dealing with risk from future regulatory changes Trading Capacity Issues addressed to further define a standardized RA capacity product that can be easily traded by parties

10 Upcoming Procurement Issues Avoided Cost/Qualifying Facilities Proceeding Kickoff of Phase 2 for Long-Term Procurement Proceeding IOUs will file 10-year resource plans for CPUC consideration Commission will consider auction mechanism (from Phase 1 decision) Resource Adequacy Proceeding Commission will consider capacity markets and multi-year resource adequacy Commission will consider other implementation issues including: Local RAR for 2008 & beyond, Zonal RAR, System RAR program refinements, and other compliance/General Order issues