1. Energy in California: new crisis, or business as usual? Robert J. Michaels California State University Fullerton and Tabors Caramanis & Associates, Cambridge MA rmichaels@fullerton.edu Marin County Council of Governments Green Brae, California Oct. 27, 2004

2. That was then, this is now  Legacy of the 2000-2001 electricity crisis  The politics and economics of the legacy  Electricity: regulation, markets, or both?  Return of planning or rebirth of markets?  Customer choice and utility formations  Generation: supply and demand, once more  Transmission: the system operator and the new markets  Natural gas: the other half of the energy picture  Beyond today’s horizon

3. Electricity’s basic governance  Federal Energy Regulatory Commission [FERC] Non-local transmission, electricity sales for resale Interstate gas pipelines  California Public Utilities Commission [CPUC] Cost-based rates to final [“retail”] users Administer corporate utility customer choice New / old role in utility planning  California Energy Commission [CEC] Approval of larger new powerplants, forecasts  Governmental and Cooperative utilities Federal marketing, Municipals, Irrigation districts  California Independent System Operator [ISO] Operates transmission owned by three corporate utilities Runs day-ahead and real-time energy and reserve markets Under 10 percent of deliveries pass through markets

4. The end of the good old days  1994: High power prices, CPUC rulings  1996: AB 1890: new markets, transition costs, divestitures, rate freezes Atop a basic supply/demand imbalance  Numerous causes of 2000-01 price run-up Law was a gamble on low day-to-day prices Utility insolvency and bankruptcy  State long-term contracts: deal in haste, repent for a decade Prices are over market two months after signing

5. Today’s questions  Federal / state tension re markets FERC’s “mission statement” Federal preemption issues [transmission]  What rights for customers to choose?  Utility organization in the future Buy or build? State role in resource planning, renewables  The Governor, legislature, and CPUC Advisors and appointments, term limits

6. Aftermath of the state contracts  State contracts plus utility resources [post- 1996-1998 divestitures] nearly meet load  Contract power diminishes over 10+ years Allocating costs to customers of individual utilities  Phased-in return to procurement by utilities AB 57, SB 1008 require CPUC to set up procurement and planning procedures  2004 utility procurement plans Important data redacted for commercial reasons  PUC imposes resource 15-17% reserve requirements on utilities May be imposed on all load-serving entities

7. The new planning  “Integrated resource planning” of 1980s Four-year biennial plans, market modeling, politics  Must failed reforms imply a return to IRP?  Renewable resource requirements How quickly, what are definitions, how clean?  Demand management and pricing reforms  How frozen will plans be? SCE’s Mountainview episode  Big question is who will own generation Utilities rewarded for what they spend Indep.power politically important, wants contracts

8. Bulk power markets  FERC: “Dependable, affordable energy through sustained competitive markets”  Contract and short-term markets cover west Cost-based charges giving way to market-based California imports average 20% per year, exports 10%  FERC favors Regional Transmission Operators and standard market design Cal-ISO markets operating under redesign [“MD02”] Possible consolidation of RTO West (northwest), WestConnect (sw) and Cal-ISO Resistance to RTOs in northwest and southeast

9. Retail customer choice  Direct access to continue for 10% of load Poorly designed, suspended in crisis  Almost surely coming: core / non-core Customer separation by size and alternatives Has worked well in gas, need not harm small users but will force rational cost allocation  Utility resistance: AB 2006 [“Edison bill”] New utility cost recovery guarantees Restrictive re noncore customers, return conditions Rewritten to death, passed narrowly and vetoed “Electricity is different”

10. New utilities  Assorted attempts to evade contract cost allocations by forming distribution islands  AB 117 [2002] allows “community choice aggregation” by municipal governments Utilities will distribute this power as usual Questions re allocation of state contract costs and customer reversion to utilities  “Spot municipals” on undeveloped city land Eliminate costly, time-consuming condemnation Questions re costs of power supplies to meet loads, dependence on gas-fired generation

11. New resources [if any]  Flurry of new plant announcements 2001, many since cancelled Financial health of builders, uncertainty re policy  Up to 9,000 MW (12% of CA capacity) of aging plants may be retired by 2008  CEC sees deficiencies by or before 2006 Inclusive of imports and demand management  Proposals (Bay Area Econ Forum) for stopgap generator retention policies  Proposals (CEC and others) for pricing reforms and additional demand response programs

12. Transmission: the big shortfall  Not a “third world” grid, but badly stressed  Problem paths in Calif. Growing Path 15 being built, San Diego not  Power flows like water, no “valves” in grid Over 50% of N-S Calif flow goes out of state  But 1935 law gives states siting authority  Many states permissive re local protests  Decline 1978-2002 of 1.5% / year in capacity relative to throughput, up 50% Means higher cost generation, more health risk

13. Transmission: Federal or state?  Blackouts and legislation Aug. 2004 National Governors’ Conference  Reliability in failed 2004 energy bill Congress does not sever reliability provisions  National Interest Economic Transmission Corridors” [NIETC] Federal backstop orders if states do not approve projects FERC says are needed Liberal standards (high prices) for issuing order Power flow patterns probably mean orders can be issued for lines outside of corridors

14. Gas: the local picture  Nationally: wellhead prices rising, reflects increased cost of accessing new gas Not “running out,” just more expensive Reserves have risen in past three years  Pipelines to Calif adequate except at peaks  In-state: Southern Calif pipe capacity adequate, northern short  General agreement re desirability of additional (underground) storage in-state

15. Gas: the bigger picture  Regulatory change induces increased use Efficient small powerplants More stringent environmental laws  Interstate pipes have fed eminent domain Feds asserting jurisdiction over liquefied NG  Concerns re excessive gas dependence for electricity generation in west, not east  The biggest picture: the beginning of a worldwide gas market

16. Off in the distance  Power markets are here or arriving worldwide, generally desirable California cannot dwell on memory of a bad first experience, other states getting it right  Incremental reform is particularly important in electricity, because we know so little about what markets can and cannot do  Electricity ceased to be a local affair decades ago, and sooner or later the law will catch up with reality.  Do not count on a bigger crisis (Kyoto) to allow evasion of responsibility