ELECTRICITY What California Must Do and What FERC Will Allow Robert J. Michaels California State University, Fullerton and Tabors, Caramanis & Associates, Cambridge MA Power Association of Northern California May Energy Conference Pleasanton, California May 14, 2002 © 2002 Robert J. Michaels

For California For FERC Learn self-governance Restore utility procurement functions Learn that Direct Access will survive Standardize our markets Fit the west back together Rethink contracting and market power

: how not to govern Cognizant of financial issues, state lets utilities wither Almost everything goes wrong at once, state blames Texans Government becomes a panic buyer and then a remorseful one A CPUC “responsive” to momentary interests No one to fill stability void left by utilities SCE and PG&E recovery plans tell the same story The Power Authority -- On a mission from Jerry Brown Feel-good agency consolidation legislation That everyone knows will not become law

Governing the markets ISO governance Did FERC order the current board of Davis appointees? A fascination with refunds A “hypothetical” market design Non-fixes for creditworthiness, plus the CPUC tries budgeting Filling out the EOB Waiting for the jackpot, blaming the casino Attorney General admission that cases are long shots FERC and the CDWR contracts How big the ISO refunds? Calpine settles: $6 million well spent?

What will the utilities become? Jan. ‘03: will DWR regime be just a bad memory? Initially, only short-term buys for utilities CPUC’s nut: find rules for utilities to use markets that the Commission would prefer did not exist No more PX, no ISO market reform Simultaneously: cost-of-service and utility purchase discretion No obvious PBR choice, retrospective imprudence awaits Utilities’ procurement proceeding filings The Lynch scoping memo: back to IRP? Adding what to utility-retained generation? Watch the near-term level of micromanagement

Direct Access: deal with it If it could have been extinguished, it would have A Davis-majority CPUC will keep it, with exit fees Politically important users: education, Enron, and AZ Disgruntled green households and marketers? Rebirth: antibypass rates as analogy Core-noncore separation Strategies as cost-of-service returns Utilities and generators in agreement? Distributed generation: also back from the dead A logical component of IRP Lesson: the competition worth having usually comes through the back door

What about FERC? California’s problems are largely its own creations Largely soluble at home, FERC still fairly permissive Instead of proposing solutions, we look for jackpots And FERC is getting tired of our posture Our big problem: FERC’s consistent competitive vision What Massey, Hebert, and Wood have in common FERC’s market mandates leave us substantial room The “hypothetical” ISO market design Why ACAP? To whose advantage? Why fight the CPUC over procurement and jurisdiction?

Nodes to you Here come nodal prices, like it or not Keeping consumers from feeling them defeats their purpose Why do utilities want them so badly? FTR inequities? Congestion costs, “socialization,” and locational choice Existing contracts and the new markets Grandfathered governmental rights and phantom congestion Damage control bid caps and future FERC mitigation ISO monitoring: a cosmetic change? The longer term: coercing unification of the west? RTO west resigns itself to option-based nodal rights WestConnect: does FERC remember it? If (since?) nobody else wants us, will FERC take us as we are?

Market power FERC’s dilemma: more and more effort to monitor less and less of the market Encouraging contracts it may alter ex post? Real-time: wagging the dog? Whose business is demand response? Using regulatory tools to evaluate competition Why didn’t they learn from gas?