Manufacturers in CaliforniaThe engine of growth is still in the shop

Dorothy RothrockVP Government RelationsCalifornia Manufacturers & Technology Association

The Engine of the Economy

• What’s so great about manufacturing?

• What’s happening to manufacturing in California?

• California energy woes hurt manufacturers more than anyone else.

• What can be done about it?

• Can manufacturing be saved?

• Manufacturing jobs pay especially well. – *Average pay is over $57,000 per year, as compared to California’s

median income of $37,298.

– *Only Californians with an advanced degree had higher median annual earnings – $65,101.

• Manufacturing jobs have an economic multiplier effect two to three times greater than that of other jobs.

• Manufacturing jobs are the ticket to the middle class, especially for California’s growing Latino population. – Loss of these jobs has the greatest impact on Latino families.

What’s So Great About Manufacturing?

*2000 U.S. Census

Yes, at a rapidly accelerating rate.

Nearly 400,000 jobs lost between 1990-2003 (13 yrs.)

288,000 jobs lost between 1998 – 2003 (5 yrs.)

348,000 jobs lost between Dec 2000 – Aug 2004 (less than 4 yrs.)

Is California Losing Manufacturing Jobs?

Jobs Over the Last 20 YearsManufacturing vs. Services vs. Govt.

Manufacturing in CaliforniaPerception Vs. Reality

PERCEPTION

Global economy is the reason for job losses in California.

REALITY

California has lost jobs to every state in the union, including states that are equally or more expensive.

Manufacturing in CaliforniaPerception Vs. Reality

PERCEPTION

California is gaining jobs and businesses.

REALITY

The jobs we are losing pay more than the ones we are creating. The companies leaving are more mature and generate greater economic output than the companies that are staying or starting operations in California.

Manufacturing in CaliforniaPerception Vs. Reality

PERCEPTION

The legislation aims to protect workers and create an improved workforce and quality of life.

REALITY

Job losses have accelerated in the last four years. Latinos are disproportionately impacted. Accelerated job loss is largely due to business-unfriendly legislation and resulting costs (workers comp, healthcare, paid time off, employer liability, etc.)

Manufacturers and Energy

• How the energy crisis hit manufacturers hard

• Utility Rates and Exit Fees for Direct Access

• Supply Concerns

PG&E Average E-19 Rate

4

6

8

10

12

14

16

93 94 95 96 97 98 99 00 01 02 03 04

Cen

ts/k

Wh CPI

E-19 Rate9.6¢

12.5¢

12.6¢

PG&E Average E-20 Rate

4

6

8

10

12

93 94 95 96 97 98 99 00 01 02 03 04

Cen

ts/k

Wh CPI

E-20 Rate

7.2¢

9.4¢

10.5¢

PG&E Average Residential Rate

4

6

8

10

12

14

16

18

93 94 95 96 97 98 99 00 01 02 03 04

Cen

ts/k

Wh

CPI

Residential Rate12.3¢

16.0¢

12.5¢

Compare PG&E Class Average Rates to the System Average Rate: June 1996 vs. July 2004

Cents/kWh

Jun-96 % of SAR Jul-04 % of SAR Dollar ShiftMillions*

Residential 11.87 126% 12.55 98% (1,040)$

Comm (A-10) 9.9 105% 14.14 110%

E-19 8.72 93% 12.77 100%

E-20 6.48 69% 10.62 83%

E-20-T 4.7 50% 8.83 69%

System 9.4 100% 12.8 100%

*The reduction of the current Residential class average rate from 126% to just 98% of the current system average rate, saves residential customers $1.040 billion/year.

Much of the Higher Revenue Requirement is Locked in, at Least

Through 2012 • DWR undercollection is bonded through 2022 at 5

mills/kWh

• DWR contract portfolio runs through 2012 at a current average cost of 9 cents/kWh

• PG&E’s $2 billion regulatory asset is set for 9 years at roughly 6 mills/kWh

• Edison QF contract portfolio has an average cost of 7.9 cents

Direct Access Rates Are High, Can Exceed Bundled Rates

• Energy Cost – Spot/2 yr block 3.5-5.5

• ISO Costs 0.5• Utility T&D (Trans. Customer) 1.0• Capped CRS 2.7• Total 7.7-9.7

– Note that Edison’s bundled rate for transmission customers is currently 7.6 cents and PG&E’s is 8.8 cents.

Estimated Sources of Supply

Other6.4%

DWR Must-Take

27.2%

Fossil1.2%

Hydro18.9%

Diablo Canyon21.1%QFs

25.2%

2005 -- 79,900 GWh

Other = DWR dispatchable, other contracts market purchases and sales, etc.

PG&E and Edison Propose Just Slight Reductions for Large Industrial Rates

• PG&E’s E-20 rate would fall from 10.6 to 9.7 cents (E-20T from 8.8 to 8.6 cents)

• Edison’s TOU-8 rate would drop from 10.3 to 9.95 cents

• But, Edison’s TOU-8-Sub rate would actually increase from 7.6 to 8.0 cents– A return to the 1996 relationship would

drop this rate from 7.6 to 5.5 cents

Will the CPUC Permit Even These Modest Residential Increases?

• AB 1X exempted all residential usage below 130% of baseline from any rate increase for duration of DWR contracts.– 65% of resid. load and 25% of utility bundled load.– Exemption worth roughly $600 million for each of

the SCE and PG&E resid. groups in June 2001 increase.

– Approval of SCE’s proposed 15% resid. increase requires a 45% increase for the top 35% of resid. usage.

• Residential and Agricultural customers will demand caps on class increases, say 5%.

Nat Gas and Electric Supply

• Some Manufacturers on interruptible schedules

• Others have 24/7 processes, are highly risk averse

• Competition for dollars to move from interruptible or install protection is fierce

• Hard for DA customers to find long term deals, uncertainty is high.

California Electricity Outlook:2004 - 2010

Emergency Response Programs/Interruptibles

Spot Market Imports

High Probability Additions- Onlycounts plants deemed 75% orbetter chance of being built.

Net Firm Imports

Existing Generation (reflectsadjustments for retiring units andboth forced & planned outages)

1-in-10 Summer TemperatureDemand (Hot)

1-in-2 Summer TemperatureDemand (Normal)

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

2004 2005 2006 2007 2008 2009 2010

Meg

aWat

tsCalifornia Electricity Outlook:

2004 - 2010

California’s Electricity Outlook: Projected Operating Reserves

0%

2%

4%

6%

8%

10%

12%

14%

16%

2004 2005 2006 2007 2008 2009 2010

Year

Op

erat

ing

Res

erve

Projected Operating Reserve (1-in-2)

Projected Operating Reserve (1-in-10)

7 % Target Operating Reserve

Stage 2 Emergency - When Reserves dropbelow 5.0%

Stage 3 Emergency - When Reserves dropbelow 1.5%

1,415

2,172

3,199

0

2,518 2,386

185

730

6,158

2,891

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2001 2002 2003 2004 2005 2006 2007 2008

Me

ga

wa

tts

Power Plant Status Report Over 20,000 MW approved, but many projects not moving forward…

Approved butNo Construction

UnderReview

Approved &Operating

Approved & UnderConstruction

California’s Natural Gas OutlookGeneral Observations

• Current supply/infrastructure is adequate…FOR NOW.

• Prices are higher than desired, but we are positioned to do better than the rest of the nation.

• Demand for natural gas is growing in California despite aggressive energy efficiency programs.

• Additional import capacity is needed to meet future demand.

The Political Questions

• Are Policymakers more concerned about electric reliability than about cost of service?

• Is this goal best served by:– Competitive wholesale markets?– Utility built cost of service generation?– Adding energy efficiency, renewables and demand side

management?

• Is electricity unique, such that market solutions do not apply?

• Does California care about its business climate?• Should California favor residential (voters) over

business electric customers?

Thanks to:

• Tom Bottorff, VP, PG&E

• Larry Kosmont, Kosmont Group

• William Booth, Counsel to CLECA

System Average Bundled Rate

Transmission*

Distribution

Energy

Other

7.7¢

1.0¢

3.1¢

0.9¢

12.7¢

Average rate under GRC Settlement.

*Includes 0.394 cents/kWh charge for reliability services.

Compare Edison Class Average Rates to the System Average Rate: June 1996 vs. July 2004

Cents/kWh

Jun-96 % of SAR Jul-04 % of SAR Dollar ShiftMillions*

Residential 12.7 126% 12.6 102% (725)$

Comm 10.6 105% 13.8 112%

TOU-8 7 69% 10.2 83%

TOU-8-Sub 4.5 45% 7.6 61%

System 10.1 100% 12.3 100%

*The reduction of the current Residential class average rate from 126% to 102% of the current system average rate, saves residential customers $725 billion/year.

Industrial Rates Are Clearly Too High, But What Can Be Done About It?

• As a result of the energy crisis, CA has added billions to utility revenue requirement– DWR undercollections of $8 billion in 2001

– DWR contract portfolio is at least $15 billion over market levels through 2011

– Utilities granted recovery of billions of procurement undercollections and “get well “ costs

• Edison’s system average rate is up 22% and PG&E’s is up 36% from pre-crisis levels