1. Results in Higher Bills
Lack of Political Will
Results in Higher Bills
June 25, 2001

2. Outline What could California have done differently?
Market power studies do not add megawatts!
Don’t blame the messenger

3. What Could California Have Done Differently?
1. Protect SDG&E customers by entering into long-term deals in early 2000
2. Avoid generation exodus and minimize blackouts
3. Encourage load reduction measures by setting reasonable retail rates
4. Pay the QFs so they could deliver power instead of sitting idle
5. Lower consumer costs by ensuring CDWR creditworthiness
6. End CDWR underscheduling of load requirements
Missteps of Politicians = $$$

4. Protect SDG&E Customers
Long term contracts were offered to California in late 2000 at $45-$55/mwh
“Last summer, Houston-based Enron and several other firms offered to sell power to California’s utilities for just five years at about $50 a megawatt-hour”
-L.A. Times, June 13, 2001
SDG&E could not get CPUC pre-approval for these deals
CDWR instead has paid $2.5 billion (1) contracting for power at prices significantly above the prices available and (2) buying on the spot market for $300/mwh
“The state will be paying an average price of $79/mwh over the next 5 years”
- Update of CDWR Power Purchase Contract Efforts (May 31, 2001)
Had the CPUC mandated that SDG&E, PG&E, and SCE enter into similar contracts, consumers could have saved $80 billion over the timeframe
Cost = $2.5 billion

5. Avoid Generation Exodus and Blackouts
As wholesale price caps were tightened in the Cal PX and Cal ISO from $750/mwh to $250/mwh, imports were reduced
“Net imports in August 2000 were 3,500 MW below 1999 levels.”
- FERC Staff Report on U.S. Bulk Power Markets: Part I (November 2000)
New peaking capacity got canceled after the $150/mwh price cap was put in place in November 2000
“At least 668 MW of peak capacity was dropped because of the proposal”
- California Energy Markets, November 10, 2000
The generation shortages are likely to affect 1.4 million homes and occur for nearly 113 hours
The shortfall could have been reduced by 10-20% without price caps
“The Impact of Wholesale Electricity Price Controls on California Summer Reliability”
- U.S. Department of Energy, June 2001
Cost = 120,000 homes w/o electricity

6. Encourage Earlier Load Reductions
CPUC and the Governor openly opposed any retail tariff increase in 2000 even though Utilities were heading towards financial insolvency
Without any appropriate retail price signals, businesses and homes in California had no reason to conserve energy
CPUC finally approved two retail rate increases
January $10/mwh
March $30/mwh (with the bill impact not until July)
Had the CPUC increased retail rates modestly in 2000 when wholesale prices were increasing, consumers would have reduced demand thereby moderating overall purchased energy costs
Cost = $2.5 billion

7. Bring QFs Back On-Line Earlier
Many Qualify Facilities went off-line in late 2000 and early 2001 due to
CPUC mandated change in the pricing formula for natural gas that made running uneconomic
Utilities failed to make scheduled payments to plants
“Edison owes $529 million and PG&E owes $387 million as of January 31st, 2001.”
- FERC Staff Report on U.S. Bulk Power Markets: Part I (November 2000)
DWR replaced the $125/mwh QF power with spot power at prices bought above $300/mwh between January and April 2001
Cost = $1.1 billion

8. Ensure CDWR Creditworthiness
CDWR told to manage Utilities “net short” beginning January 2001
CDWR future cash flows are unclear based on legislation and CPUC
CDWR continues to pay credit premium to market for failure of CPUC to set compensatory retail rates
FERC believes that 10% adder to cost is reasonable to compensate sellers for credit concerns
CDWR has spent $13 billion to date buying power
Cost = $1.3 billion

9. End Utility / CDWR Underscheduling
Underscheduling in early 2000 was the result of poor incentives directed at the Utilities trying to maximize their Stranded Cost recovery
During some hours last year, the CAISO was buying over 10,000 MW in real time to keep load and generation in balance
To address this situation, FERC ordered that CAISO implement $100/mwh penalty for parties that underschedule their load by more than 5%
Combined, the major buyers (CDWR, PG&E and SCE) have incurred to date as much as $1 billion due to their continued inability to forward contract
In addition, most of $1.1 billion Out of Market purchases in 2001 resulted from the CAISO having to buy due to underscheduling
Cost = $2.1 billion

10. Cost to California To-Date
$9.4 billion in quantified losses due to poor decisions
PG&E in bankruptcy and SCE on the brink
State of California downgraded by the Credit rating agencies, with budget surplus spent on electricity
120,000 home without power during many hours this Summer

11. CAISO Studies Do Not Add Up
DMA’s Hildebrandt arrived at an estimate of $8.9 billion
BUT
DMA’s Sheffrin identified excess payments of $505 million
The CAISO experts can’t agree

12. Drawbacks of the CAISO Studies
Fail to treat the entire Western region as an integrated market
Disregard of supply and demand conditions outside of California
Arbitrary heat rate cost-of-service standard for imports that does not reflect resource scarcity in the Pacific NW and Desert SW
Disregard of opportunity costs that impact competitive markets in California
Environmental limitations on operable hours (emissions, hydro)
Physical generation limitations
Unrealistic assumptions regarding cost and capabilities of new power plants
Include timeframe before October 2000, CDWR bilateral transactions, and CAISO Out-of-Market purchases

13. Conclusion
CAISO admits that its findings are preliminary and much more analysis need to be done before determining refund levels
CAISO reassessment of BPA’s “excess” payments casts doubts on both the methodology and motivations
“CAISO acknowledges that “the findings contained therein (DMA Studies) were preliminary and that they were based on assumptions derived from information available to the ISO at that time”
- Letter from Terry M. Winter (CEO, CAISO) to Stephen Oliver (VP, BPA)
CAISO has no independence from politicians in California and all analysis is subject to huge “agency” question

14. Don’t Blame the Messenger
Enron has long advocated that the rules put in place by the California government and blessed by FERC were doomed to fail
Enron has always operated fully within the law and FERC’s rules and has never benefited from the exercise of market power
Marketers provide a vital service in this highly volatile commodity market – transparency and price risk management
Enron has been attacked and outrageous statements have been made against Enron’s executives
While the CAISO alleges that Enron “owes” $39 million, Enron has not been paid many times that amount for CPUC approved retail obligations by both SCE and PG&E

15. Appendix

16. Appendix 1

17. Appendix 2

18. Appendix 3

19. Appendix 4

20. Appendix 5