1. The History of Direct Access “How Did We Get Here?” Presentation by Dan Douglass Douglass & Liddell PANC 2010 Annual Seminar April 19, 2010

2. Douglass & Liddell What is Direct Access? _____________________________  Direct access is the right for electricity end-users to choose their own supplier  First granted by AB 1890 (Statutes of 1996)  Implemented April 1, 1998, along with other restructuring features, such as:  The creation of the California Independent System Operator and California Power Exchange  The divestiture of gas-fired power plants by the utilities  The freezing of retail rates with certain mandatory rate reductions

3. Douglass & Liddell Why was Direct Access Suspended? _____________________________  A number of developments led to DA suspension  DA customers received a credit from the utilities equal to the amount they would have paid the utility had they remained on bundled service.  When the utilities faced severe financial stress during the energy crisis of 2000-2001, they stopped paying this “PX Credit,” causing customer return to bundled service.

4. Douglass & Liddell Why was Direct Access Suspended? _____________________________  Further, the State, through the DWR, had commenced buying power at what was considered to be high prices.  There was fear that customers would flee back to direct access in order to avoid the “high costs” of the DWR power, so legislation authorizing these purchase directed the CPUC to suspend direct access until “the department no longer supplies power.”  The CPUC therefore commenced a rulemaking to determine whether and how direct access should be suspended.

5. Douglass & Liddell How Was Suspension Implemented? ____________________________  There were proponents of retroactive suspension  This would have made the effective suspension date occur at the nadir of statewide DA participation  So a fundamental deal was struck:  DA would be suspended prospectively as of 9/20/01  But DA customers with contracts in effect prior to that date retained the right to be on direct access so long as they paid an “exit fee” to represent their “fair share” of the DWR contracts costs.  DA subsequently declined from 16% to about 9% statewide with no new customers allowed, with some exceptions.

6. Douglass & Liddell Efforts to Restore Competition _____________________________  200+ parties filed unique petition at CPUC in December 2006, seeking rulemaking on restoration of choice  CPUC responded with opening of Rulemaking R.07-05- 025, “Regarding Whether, or Subject to What Conditions, the Suspension of Direct Access May Be Lifted” (the DA OIR).  Proceeding divided into three phases:  Legality of reopening market  Public Policy ramifications  Rules of the game

7. Douglass & Liddell DA OIR – Phase 1 ______________________________ First phase decision D.08-02-033 determined “the Commission does not have authority to lift the suspension at present.” However, decision decided to explore alternatives to satisfy the statutory requirement a precondition to reopening was that the DWR no longer provide power.  Novation of the DWR contracts would mean the state was no longer providing power  Thus the statute would be satisfied and the suspension could be lifted.  Lengthy novation process has ensued.

8. Douglass & Liddell DA OIR – Phase 2(a) _____________________________  D.08-11-056 established Working Group to handle contract novations  Utilities  CPUC Staff  DWR  Goal was to complete novations by January 1, 2010  Obviously not achieved and largely made irrelevant by SB 695  Phase 3 to come next regarding market rules  Switching rules  Exit fees

9. Douglass & Liddell CPUC – Legislature Dynamic _______________________________________  Action moved to Sacramento in the last legislative session  Opponents have inaccurately contended that direct access was somehow a cause of the energy crisis.  Direct access thus became a bit of a “third rail” for politicians who don’t take the time to become fully informed.  There were efforts to get original statute amended to provide that only the Legislature can reopen the market.  However, negotiations ultimately led to a compromise whereby the market could be reopened sooner with volumetric limitations on the amount of load that could move to direct access.

10. Douglass & Liddell SB 695 ___________________________________  Approved by Governor on October 11, 2009  Chapter 337, Statutes of 2009.  Classified as urgency legislation, meaning it became effective six months after signature, or April 11, 2010.  Provided for phased, 3-4 year reopening of direct access, commencing this year.  Total DA load to be capped, based on the historical highest 12- month DA load in each utility’s service territory  CPUC directed to implement reopening  Any further reopening shall be at the direction of Legislature.

11. Douglass & Liddell DA OIR – SB 695 Implementation ______________________________ Joint Parties proposed rules for market reopening that are largely adopted in D.10-03-022.  Four-year phase-in: 35% in 2010; 35% in 2011; 20% in 2012 and 10% in 2013.  Switching rules waived for first year.  NOIs for 2010 filed April 16; awaiting IOU review and notice to customers.  Excess of demand anticipated.  Wait list for up to 25% of amount available under the cap.  Petition for modification pending regarding 2011 timing.

12. Douglass & Liddell Applicable Load Cap in GWh ___________________________________ SCEPG&ESDG&E Load Cap Pursuant to SB 69511,7109,5203,562 Existing Base Line DA7,7645,5743,100 New DA Load Allowance (Line 1 less Line 2) 3,946 462  The new load eligible for DA service represents a relatively small portion of each of the utilities’ portfolios, involving less than 10 million MWh of annual usage across the entire state.  This amount is less than 6% of the entire load served, and is much less than the annual variation in electricity consumption across the state due to the weather and the economy.

13. Douglass & Liddell For More Information: ______________________________________ Dan Douglass Douglass & Liddell 21700 Oxnard Street, Suite 1030 Woodland Hills, California 91367 Telephone: (818) 961-3001 Facsimile: (818) 961-3004 douglass@energyattorney.com