2. 1 Ahmed Kaloko, Ph.D. Director Bureau of Conservation, Economics & Energy Planning Harrisburg, Pennsylvania Electric Restructuring in the United States with Special Emphasis on Pennsylvania & California Pennsylvania Public Utility Commission

3. 2 Mr. Kazuya Ito, Manager - Tohuko Electric Power Company, Inc. Mr. Tomohiko Ono, Manager - Chubu Electric Power Company, Inc. February 28, 2001 2:00 p.m. - 4:00 p.m. Delegation from Japan Welcome Pennsylvania Public Utility Commission

4. 3 ORGANIZATION This chart reflects the Commission’s organization structure and the authorized staff complement as of PENNSYLVANIA PUBLIC UTILITY COMMISSION Operations & Administration Prosecutory Functions Total Complement (500)

5. 4 Delegation from Japan TOPICS 1. Evaluation of Deregulation in PA 2. Long term planning to incorporate the appropriate system 3. Outline of general reasons for California’s energy crisis 4. Measures taken to prevent future energy crisis

6. 5 Historical Perspective n n Third largest producer of electricity in the US n n $10 billion in annual electric revenues n n Electric rates:15% higher than national avg. n n Produces 52% of the energy consumed in the PJM region n n 5.2 million customers n n 57% of our energy is produced from coal sources, 36% nuclear energy Pennsylvania…

7. 6 The Vertical Chain How an Electric Company Delivers its Product GENERATION Plants produce the product - Electricity TRANSMISSION The Towers move the product DISTRIBUTION The wires carry electricity into a house a business an industry

8. 7 ISSUE NO. 1 Evaluation of Deregulation in Pennsylvania Competition has... Competition has... n n Made utilities more efficient & reduced costs n n Increased choices for customers n n Customers pay rates more closely related to service n n Reduced rates for captive customers n n Increased innovation & improved overall efficiency

9. 8 ISSUE NO. 1, Cont’d Evaluation of Deregulation in Pennsylvania Competition has... Competition has... n n Customers saved $6 billion in stranded costs ($18 billion - $12 billion) n n Annual savings - 10% Residential; 10% Commercial & 15% Industrial n n Customers & utilities saved money on securitization of stranded costs through lower interest rates on refinanced stocks &/or bonds

10. 9 ISSUE NO. 1 Competition Saves Millions of Dollars Each Year n Schools, municipalities, government agencies, businesses and residents saving money Selected Examples: Philadelphia School District PPG Industries Penn State University Monroeville Borough Thomas Dodd, residential customer Norman Adam, residential customer $3.6 million $3.5 million $1.5 million $50,000 $213 $147

11. 10

12. 11 PJM/MAAC ECAR Long Term Planning Under Electric Competition PA is Served by Two Reliability Councils

13. 12 ISSUE NO. 2 Long Term Planning for Electric Reliability in the US n n US is served by 10 Reliability Councils under the North America Electric Reliability Council (NERC) n n NERC is responsible for electric generating capacity & transmission capacity planning n n Out of the 10 NERC regions, 2 serve PA.: ECAR & MAAC

14. 13 ISSUE NO. 2 Long Term Planning for Electric Reliability in the US n n ECAR has: load 88,573 MW; capacity 104,953 MW; control areas 16 n n MAAC has: load 49,406 MW; capacity 56,774 MW; control areas one n n PJM ISO, the largest centrally dispatched Pool in North America serves the load of 6 jurisdictions in the Mid Atlantic Region (MAAC)

15. 14 ISSUE NO. 2 Long Term Planning for Electric Reliability in the US n n PJM ISO, the largest centrally dispatched Power Pool in North America serves loads of 6 jurisdictions in the Mid Atlantic Region (MAAC) n n PJM serves 8.4% of the total peak load & has 7.8% of total generation in the US n n ECAR, MAAC & PJM combined provide one of the highest levels of electric reliability in the US n n PJM carries 19% reserve margin

16. 15 ISSUE NO. 2 Long Term Planning for Electric Reliability in the US n n The US has 2 interconnection systems: Eastern & Western n n The Eastern Interconnection is composed of ECAR, FRCC, MAAC, MAIN, MAPP, NPCC-US, NPCC-OH, NPCC Maritimes- US, SERC & SPP n n The Eastern Interconnection’s load is: 497,244 MW & capacity 585,231 MW n n California is part of the Western Interconnection & the WSCC Reliability Council

17. 16 ISSUE NO. 2 Long Term Planning for Electric Reliability in the US n n Total load 118,494 MW; capacity 154,377 MW; control areas 33 n n There are 10 states in the WSCC. 29% of the load is controlled by two control areas (each greater than 15,000 MW) n n 38% of the load is controlled by 25 control areas (each greater than 5,000 MW)

18. 17 ISSUE NO. 2 Long Term Planning for Electric Reliability in the US n n California ISO, a single state ISO, has 45,602 MW capacity & demand 52,586 MW n n California is speeding up the construction of generating & transmission capacity n n These facilities will not be ready for the Summer of 2001 heat wave n n 45% of California’s generation is gas-fired n n California’s electric demand will exceed supply until 2002 n n In 2003 California’s supply & demand will be in balance

19. 18 ISSUE NO. 3 California Energy Crisis Summer 2000 - Winter 2001 n What Happened Natural Gas is the fuel of choice for the future. It is clean and environmentally friendly.Natural Gas is the fuel of choice for the future. It is clean and environmentally friendly. The shortage in gas supply in Summer & Autumn increased Prices from $3.10/Mcf to $9.50/Mcf in December 2000. Crude oil prices increased.The shortage in gas supply in Summer & Autumn increased Prices from $3.10/Mcf to $9.50/Mcf in December 2000. Crude oil prices increased. The Deep Freeze of November 2000 & January 2001 increased Gas Prices to $9/McfThe Deep Freeze of November 2000 & January 2001 increased Gas Prices to $9/Mcf

20. 19 ISSUE NO. 3 California Energy Crisis Summer 2000 - Winter 2001 n Higher Gas Prices & NO x Emission Credits significantly increased generation costs to $26/Mwh from $90/Mwh. Calculation includes fuel costs for Combine Cycle, NO x Credits for Gas Peaking (FERC)

21. 20 ISSUE NO. 3 California Energy Crisis Summer 2000 - Winter 2001 n What Happened ? End of the Gas Bubble due to reduction in gas exploration and production in the U.SEnd of the Gas Bubble due to reduction in gas exploration and production in the U.S Severe heat wave in May and June 2000Severe heat wave in May and June 2000 Gas storage down 10% below normal levels due to strong economy & use of gas for electric generation. Crude oil prices up $30/Barrel, first time in 9 Years: thus Energy CrisisGas storage down 10% below normal levels due to strong economy & use of gas for electric generation. Crude oil prices up $30/Barrel, first time in 9 Years: thus Energy Crisis Natural Gas Prices increased in June 2000 from $2.30/Mcf to $3.50/McfNatural Gas Prices increased in June 2000 from $2.30/Mcf to $3.50/Mcf

22. 21 ISSUE NO. 3 California Energy Crisis What Went Wrong? ISSUE NO. 3 California Energy Crisis What Went Wrong? (FERC Report) n Several Factors Led to Price Spikes Requiring Utilities to Divest Power GenerationRequiring Utilities to Divest Power Generation Design of ISO & Market ManipulationDesign of ISO & Market Manipulation Strong Economic Growth, increase in Population=12% increase in Peak DemandStrong Economic Growth, increase in Population=12% increase in Peak Demand Lack of Energy Planning-Inadequate SupplyLack of Energy Planning-Inadequate Supply Strong Demand, Load Growth & Heat WaveStrong Demand, Load Growth & Heat Wave Generation & Transmission Supply ConstraintsGeneration & Transmission Supply Constraints Significantly Higher Prices for Energy SupplySignificantly Higher Prices for Energy Supply

23. 22 ISSUE NO. 3 ISO Average Load & PX Prices ISSUE NO. 3 ISO Average Load & PX Prices (FERC Report) n May-00: Load 26883 MW, Price $50.4/Mwh n June-00: Load 29981 MW, Price $132.4/Mwh n July-00: Load 29461 MW, Price $115.3/Mwh n Aug-00: Load 31104 MW, Price $175.8/Mwh n Sept-00: Load 119.6 MW, Price $119.6 n Peak demand increased by 5,522 MW from 1996-1999, but only 672 MW of Net Capacity was added. Result (FERC Staff Report)

24. 23 ISSUE NO. 3 California’s ISO Energy Constraints ISSUE NO. 3 California’s ISO Energy Constraints (FERC Report) n Significant decrease in Bulk Power Imports into ISO throughout the Summer of 2000 n ISO Bulk Power Imports decreased by 40% n California Generator owners exported power from California to regions that are willing to pay much higher prices for their energy, thus creating a shortage of power in California. (FERC Staff) n California’s demand for energy cannot be matched with available Transmission Capacity (FERC Staff Report)

25. 24 ISSUE NO. 3 California’s Unplanned Power Outages Summer Of 2000 ISSUE NO. 3 California’s Unplanned Power Outages Summer Of 2000 (FERC Report) n Year 2000 Planned & Unplanned Outages increased by 53% in June, 57% in July & 23.5% in August Compared to 1999 n Average megawatts out of service increased by 77% in June, 121% in July & 461% in August above same period in 1999 (FERC Staff Report)

26. 25 ISSUE NO. 3 Selected Wholesale Power Marketers n Exelon, largest (customer) Electric Utility n Calpine Corporation, sells to California/U.S. n Duke Energy, sells to California & U.S. n Dynergy Crop. sells to California & U.S. n Reliant Energy, sells to California & U.S. n PPL Crop. member of 3 ISOs sells to Eastern Interconnected Region n Allegheny Energy Solutions

27. 26 ISSUE NO. 4 Long Term Planning for Electric Reliability in Pennsylvania n Total scheduled capacity (MW) n Total available capacity (MW) n Projected peak load (MW) n Projected operating reserve (MW n Projected amount of scheduled imports (MW) n Projected amount of scheduled exports (MW) n Discuss unplanned outages or reductions (MW) n Discuss contingencies EDCs have to maintain transmission system reliability PA PUC Continuously Monitors...

28. 27 ISSUE NO. 4 Electric Reliability Standards PUC Regulations PURPOSE To establish standards and procedures for continuing and ensuring the safety and reliability of the electric system in PA To establish standards and procedures for continuing and ensuring the safety and reliability of the electric system in PA The standards provide a uniform method of assessing the reasonableness of electric service reliability The standards provide a uniform method of assessing the reasonableness of electric service reliability

29. 28 ISSUE NO. 4 Transmission System Reliability EDC Requirement: n Must meet National Electrical Safety Code (NESC) n Must meet requirements of NERC, ECAR, MAAC & PJM n Services to wholesale customers must meet comparability standards n File with PUC data concerning performance of transmission system n Data must include available transfer capability, total transfer capability & use of transmission

30. 29 ISSUE NO. 4 Distribution System Reliability n EDCs must maintain their distribution facilities in an efficient, safe & reasonable manner n The performance of the system must be continuous & without unreasonable interruptions or delay n The distribution system must meet NESC requirements n When interruptions occur, service must be restored within shortest reasonable time n EDCs must design procedures to achieve PUC reliability standards n EDCs must maintain a 5-year historical record of customer interruptions (including time, duration, & cause of interruption)

31. 30 ISSUE NO. 4 PUC Reporting Requirements for EDCs All EDCs must file a reliability report each year (May 31). Report must include the following: All EDCs must file a reliability report each year (May 31). Report must include the following: Assessment of EDC’s electric service reliability Programs & procedures for reliable service Description of major event, time, duration, number of customers affected, cause of event & modifications to procedures adopted to minimize impacts Provide table showing actual values of reliability indices, performance measures, operation of the EDC for the 5 proceeding years Analysis of service interruptions, maintenance history, etc.

32. 31 ISSUE NO. 4 Electric Reliability Performance Standards n April 23, 1998 PUC adopted final rulemaking to ensure safety, adequacy & reliability of generation, transmission & distribution of electricity in Pennsylvania n The PUC has established numerical values for reliability index that identify the benchmark performance of each EDC. n The benchmarks were based on an EDC’s historic performance of its service area (system wide performance) n The performance standards are the minimal level of performance for each measure for the EDC regardless of the benchmark established

33. 32 ISSUE NO. 4 Purpose of Reliability Indices n To measure the performance of EDCs transmission & distribution systems in terms of the frequency & duration of unplanned electric service outages, to ensure that current levels of reliability do not deteriorate n The indices include: 1. Customer Average Interruption Duration Index (CAIDI) 2. Momentary Average Interruption Frequency Index (MAIFI) 3. System Average Interruption Duration Index (SAIDI) 4. System Average Interruption Frequency Index (SAIFI)

34. 33 ISSUE NO. 4 California: Measures Taken to Prevent Future Energy Crisis n $10 billion state plan to buy electricity from the wholesale market for consumers n $400 million state plan to buy electricity for State Department of Water Resources n Law passed to prevent the sale of utility assets & for the state to take over power grid n Asked FERC to implement price cap on wholesale energy, but failed n Streamline regulations to site & build generation & transmission

35. 34 ISSUE NO. 4 California: Measures Taken to Prevent Future Energy Crisis n Accelerate the construction of new power plants n Develop a financial strategy to rescue state utilities from going bankrupt n Give more time to California utilities to pay debt n Encourage Demand Side Response (DSR) or reduce consumption n Encourage distributed generation n Investigate market abuse

36. 35 ISSUE NO. 4 Pennsylvania: Measures Taken to Prevent Future Energy Crisis n Pennsylvania’s Electric Energy Emergency Investigation in 1994 produced a set of recommendations to prevent future major electrical emergencies n Established a market monitoring unit in CEEP n Bring issues of concern to PUC Commissioners n Monitor EDCs, MAAC, ECAR & PJM n Staff may initiate an investigation whether EDC is providing reasonable service

37. 36 ISSUE NO. 4 Pennsylvania: Measures Taken to Prevent Future Energy Crisis n Based on the Investigation PUC may order EDC to take corrective action to improve reliability, MAAC, ECAR & PJM n Staff may initiate an investigation whether generation supplier is providing reasonable service in accordance with PUC regulations n Staff continually measures EDCs’ transmission, distribution system frequency & duration of unplanned electric outages to ensure current levels of reliability do not deteriorate

38. 37 Conclusion n The staff will monitor how EDCs comply with the Commission’s Permanent Reliability Benchmarks & Standards Based on EDCs’ 5-year historical performance from 1994 to 1998 n The Benchmarks & Standards will be used to assess future reliability performance beginning with 1999 to be filed May 31, 2000.