California Energy Crisis: Fact or Fiction? Presented to The California Independent Petroleum Association June 2002 Richard McCann, Ph.D. Partner, M.Cubed Davis, California

Perfect Mess: Confluence of Forces  25 years of government policies, corporate decisions, economics and weather  Government policies often oversteered  Environmental policies not to blame, but are impediment to solving crisis  Market did not cause problem, but exacerbated impacts

A Brief Chronology  1970s energy crisis  1970s & 1980s deregulation  1982 California “QFs”  1986 Gas pipeline deregulation  1988 Diablo Canyon agreement  1990s “Age of Surpluses”

How Did Rough Seas Rise So Quickly?  National natural gas prices doubled  Rapid demand growth throughout the West  Reduced hydropower supplies and oncoming drought  Aging power plant fleet  CA gas pipeline market decoupled and explosion  Utilities deterred retail competition  Failure to lock in low prices in long terms contracts  Lack of trust among utilities, ratepayers and regulators

How Did California Survive Summer of 2001?  Consumers reduced demand 8-10% after December  CDWR maniacally bought forwards  Generators “jawboned” into stopping withholding  FERC finally imposed price caps  El Paso reauctioned pipeline capacity  CPUC imposed two rate hikes, totaling 4.5 cents on avg.

The State of the Crisis: Two Parts Financial  PG&E Bankruptcy  DWR Power Purchases and State Bond Issuance  SCE-CPUC Bailout Settlement Physical  Demand Reduction Programs Undersubscription  Drought and Hydro Shortage  Capacity Shortage, "Gaming," and Higher Outages

Bailing Out the Utilities: SCE-PUC Settlement - September 2001  $6.3 billion owed  Current rates frozen until December 31, 2003  No dividends until December 2005  Ratepayers' share = $3 to 6 billion  Shareholders = $300 million to $3 billion

PG&E Bankruptcy: C ompeting Plans of Reorganization (POR)  PG&E POR - $12 billion debt - Spin off generation, transmission and gas pipeline - Wholesale power contracts with utility for 12 years - No significant shareholder losses  CPUC POR - Refinance $6 billion of debt - Issue $1.75 billion in added stock - Shareholders contribute $1.6 billion - Ratepayers contribute $4.7 billion from frozen rates through January 2003

CDWR Power Purchases  CDWR is purchasing all “net short” energy for 3 IOUs  CPUC has raised rates by 3 cents/kWh to cover QFs and CDWR purchases  CDWR is covering purchases through 2002, but contracts in place past  SCE Settlement in rates, but not PG&E yet.  CDWR likely “net long” for at least 4 years

The Federal Government’s Role  Deregulation of gas and electricity  FERC pipeline and transmission decisions  1992 EPAct mandated open access  1994 EPA approves SCAQMD air emission permit market  1995 FERC rejection of California BRPU  1997 FERC approval of restructuring  FERC acted timidly to enforce market rules

Some Misconceptions about the Crisis  Retail price freeze suppressed response  Utilities were forced to sell their plants  Power plants were not constructed  Utilities were prohibited from signing long- term contracts  Everyone was forced to buy and sell in one marketplace  The rules in other states are much different  What about stranded cost recovery?