1. Direct Access and Utility Rates in 2003 Michael R. Peevey President Public Utilities Commission Presentation to Senate Energy, Utilities and Communications Committee January 21, 2003

2. California Public Utilities Commission 2 Overview The purpose of the “Cost Responsibility Surcharge” is to allow Direct Access customers to pay for costs incurred on their behalf by utilities and the Department of Water Resources, so that remaining customers pay only their fair share Residential customers provide the least financing of any customer group to support continuing the Direct Access program Residential customers were hit least by the 2001 rate increases

3. January 21, 2003California Public Utilities Commission 3 What Is “Direct Access”? Direct Access (“DA” ) service allows customers to purchase electricity directly from non- utility providers During its peak in May of 2000, DA load accounted for 16% of customer demand During the electricity crisis, DA share fell to 2% DA was suspended on September 20, 2001, pursuant to AB 1X Today, DA market share is 13.5% of total demand

4. January 21, 2003California Public Utilities Commission 4 Direct Access has returned to pre-crisis levels Direct Access service began on April 1, 1998 Direct Access market share peaked at 16% in May, 2000 Direct Access market share bottomed out at 2% in June, 2001 Direct Access was suspended on September 20, 2001 July 2002: CPUC adopts Historical Procurement Charge for Edison DA customers The “Cost Responsibility Surcharge” for Direct Access customers took effect January 1, 2003, capped at 2.7 cents per kilowatthour The CPUC will complete its reevaluation of the level of the CRS Cap by July 2003 Peak Trough Suspension Date

5. January 21, 2003California Public Utilities Commission 5 The Purpose of a Direct Access “Cost Responsibility Surcharge” Is to Maintain Fair Rates The Problem: Direct Access customers could avoid future payment for costs incurred on their behalf by DWR, leaving remaining utility customers to pay more than their fair share The Goal: Utility customers should be indifferent to an ongoing Direct Access market The Solution: Direct Access customers will pay their fair share of the costs of the power crisis through a “Cost Responsibility Surcharge”, so that they end up paying their fair share of past and future high power costs, including interest

6. January 21, 2003California Public Utilities Commission 6 The Purpose of a Direct Access “Cost Responsibility Surcharge” Is to Maintain Fair Rates [continued] Extremely high power costs were incurred in 2001, when few customers participated in Direct Access – DWR bonds that repay these costs must be repaid over 20 years DWR entered into long-term contracts to serve customers that later switched to Direct Access The “Cost Responsibility Surcharge” will allow Direct Access customers to pay for costs incurred on their behalf by DWR, so that remaining customers pay only their fair share

7. January 21, 2003California Public Utilities Commission 7 Why a Cap on the CRS? The Commission found, in D.02-03-055, which rejected an earlier suspension date for Direct Access, that California is better served by (1) maintaining direct access, while (2) imposing a direct access surcharge or exit fee, in lieu of an earlier suspension date, to recover DWR costs from direct access customers. In D.02-07-032, the Commission further committed to ensuring that (1) bundled customers do not pay more than their fair share of costs, and (2) the DA market would not be eliminated through injudicious imposition of charges. Extremely high power costs were incurred in 2001, and paid using state funds—it would be difficult for any customers to repay their share of these costs all at once Power costs are likely to decrease in the future, so a constant CRS will allow Direct Access customers to repay their remaining responsibility over time The Result: Utility customers will be repaid, with interest, for their excess payments in 2001 and 2002, while Direct Access customers continue to be served under their non-utility contracts

8. January 21, 2003California Public Utilities Commission 8 The Current Interim Cap Will Be Re-Examined by July 2003 The Commission estimates that the current cap of 2.7 cents would allow repayment of bundled customers in PG&E and Edison territory over the next 10 years For SDG&E, a cap of 2.7 cents might be too low to allow all costs to be repaid within a reasonable period of time The Commission is initiating an expedited proceeding to determine the proper caps and interest rates, by July 2003

9. Current Rate Levels and the Outlook for Utility Rates in 2003

10. January 21, 2003California Public Utilities Commission 10 What Goes Into Current Rates?

11. January 21, 2003California Public Utilities Commission 11 Who Pays the Higher Generation Rates Imposed in 2001? Average residential rates increased in 2001 less than commercial and industrial rates Residential usage up to 130% of baseline was exempted by AB 1X from any rate increase, so approximately one-third of all residential customers saw no increase in their bills –Residential customers contribute the least of any customer group to maintaining Direct Access

12. January 21, 2003California Public Utilities Commission 12

13. January 21, 2003California Public Utilities Commission 13

14. January 21, 2003California Public Utilities Commission 14 Outlook for Utility Rates in 2003 System Average Electric Rates (cents/kWh) Pre-CrisisCrisisOutlook for 2003 PG&E9.413.9 Possible rate decrease after bankruptcy outcome is determined Edison10.414.9 Edison has filed an Application for a rate decrease by July 2003 SDG&E9.413.5 Rates have increased less than for PG&E and Edison, and are expected to remain at current levels in 2003