California Energy Crisis:Fact or Fiction?

Presented to

The California Independent Petroleum Association

June 2002

Richard McCann, Ph.D. Partner, M.CubedDavis, California

Perfect Mess: Confluence of Forces

25 years of government policies, corporate decisions, economics and weather

Government policies often oversteered Environmental policies not to blame, but are

impediment to solving crisis Market did not cause problem, but

exacerbated impacts

A Brief Chronology

1970s energy crisis1970s & 1980s deregulation1982 California “QFs”1986 Gas pipeline deregulation1988 Diablo Canyon agreement1990s “Age of Surpluses”

How Did Rough Seas Rise So Quickly?

National natural gas prices doubled Rapid demand growth throughout the West Reduced hydropower supplies and oncoming

drought Aging power plant fleet CA gas pipeline market decoupled and explosion Utilities deterred retail competition Failure to lock in low prices in long terms

contracts Lack of trust among utilities, ratepayers and

regulators

Comparison of CEC Demand Forecasts

52952

53260

44000

46000

48000

50000

52000

54000

56000

58000

60000

1998 1999 2000 2001 2002 2003 2004 2005

Pea

k D

eman

d (

Meg

awat

ts)

1998

2000

Actual

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Gig

awat

t-H

ou

rs p

er Y

ear

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Key California Generation Sources 1983-2000

Gas Energy Imports Hydroelectric

Underlying Market Factors vs PX Price

$0

$50

$100

$150

$200

$250

Apr-9

8

May

-98

Jun-

98

Jul-9

8

Aug-9

8

Sep-9

8

Oct

-98

Nov-9

8

Dec-9

8

Jan-

99

Feb-9

9

Mar

-99

Apr-9

9

May

-99

Jun-

99

Jul-9

9

Aug-9

9

Sep-9

9

Oct

-99

Nov-9

9

Dec-9

9

Jan-

00

Feb-0

0

Mar

-00

Apr-0

0

May

-00

Jun-

00

Jul-0

0

Aug-0

0

Sep-0

0

Oct

-00

Nov-0

0

Dec-0

0

$ p

er M

egaw

att

Ho

ur

Gas RTC SP15

How Did California Survive Summer of 2001?

Consumers reduced demand 8-10% after December

CDWR maniacally bought forwards Generators “jawboned” into stopping

withholding FERC finally imposed price caps El Paso reauctioned pipeline capacity CPUC imposed two rate hikes, totaling

4.5 cents on avg.

The State of the Crisis: Two Parts

Financial PG&E Bankruptcy DWR Power Purchases and State Bond Issuance SCE-CPUC Bailout Settlement

Physical Demand Reduction Programs Undersubscription Drought and Hydro Shortage Capacity Shortage, "Gaming," and Higher Outages

Bailing Out the Utilities:

SCE-PUC Settlement - September 2001

$6.3 billion owed Current rates frozen until December 31, 2003 No dividends until December 2005 Ratepayers' share = $3 to 6 billion Shareholders = $300 million to $3 billion

PG&E Bankruptcy: Competing

Plans of Reorganization (POR)

PG&E POR - $12 billion debt

- Spin off generation, transmission and gas pipeline

- Wholesale power contracts with utility for 12 years

- No significant shareholder losses

CPUC POR -  Refinance $6 billion of debt   

- Issue $1.75 billion in added stock

- Shareholders contribute $1.6 billion

- Ratepayers contribute $4.7 billion from frozen rates through January 2003

CDWR Power Purchases CDWR is purchasing all “net short” energy for 3

IOUs CPUC has raised rates by 3 cents/kWh to cover

QFs and CDWR purchases CDWR is covering purchases through 2002, but

contracts in place past 2010. SCE Settlement in rates, but not PG&E yet. CDWR likely “net long” for at least 4 years

DWR Contracts 2001-2010

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Years

Me

ga

wa

tts

of

Pe

ak

Ca

pa

cit

y

DWR Contracts

URG & QFs

Demand - 0% Growth

Demand - 1% Growth

Demand - 2% Growth

The Federal Government’s Role

Deregulation of gas and electricity FERC pipeline and transmission decisions 1992 EPAct mandated open access 1994 EPA approves SCAQMD air emission

permit market 1995 FERC rejection of California BRPU 1997 FERC approval of restructuring 2000-01 FERC acted timidly to enforce market

rules

Some Misconceptions about the Crisis

Retail price freeze suppressed response Utilities were forced to sell their plants Power plants were not constructed Utilities were prohibited from signing long- term

contracts Everyone was forced to buy and sell in one

marketplace The rules in other states are much different What about stranded cost recovery?