High PX price can reflect: 1. High operating cost of final units 2. Weak demand response 3. West-wide market conditions 4. Withheld capacity

One Market -- Before and After 1/96 5/98 9/00

Why San Diego suffers, Phoenix doesn’t, and Fullerton will [I] Non-California prices on charts are for final increments of power The rest is under contract or produced in utility-owned plants Every unit of power in the California PX sells at the market-clearing price. That price is the highest accepted supply bid.

Why San Diego suffers, Phoenix doesn’t, and Fullerton will [II] FERC requires SDG&E to pass PX prices through in full as incurred The company originally wanted and got very limited options to hedge the PX price –And didn’t use them this summer The “headroom” provisions of AB 1890 discouraged entry of competitive sellers –By summer, prices for power contracts all over the west had already risen

Purpose of CalPX Block Forward Market Firm forward pricing Manage transmission congestion uncertainty Provide benefits of CalPX exchange-based trading to block forward market –ready market –price discovery –standardized contract –anonymity –reduced trading risks –one-stop shop

Why San Diego suffers, Phoenix doesn’t, and Fullerton will [III] SoCal Edison and PG&E have frozen rates, sometimes don’t cover energy price Uncertain if they can meet 3/31/02 stranded cost deadline If they do, customers get PX passthrough If they don’t, they intend to seek extension and surcharges –Political allocation of loss between shareholders and consumers

Treating symptoms or problems? [I] Real problem: market prices in west show long- term production-demand imbalance –Only a matter of time before contracts adjust Non-storeability and transmission constraints lead to expectation of price spikes –Frozen retail bills inhibit demand responses Single PX market-clearing price is unlike any other commodity market –This market was imposed, not evolved

Treating symptoms or problems? [II] Outside California, western consumers still benefit from markets California rejected This summer, the southwest is hot and the northwest is dry -- high cost power must replace imports Longer-term, the southwest is filling up, the northwest has decreasing export capacity, and very little is being built in California