California Restructuring Plan

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• Stranded Benefits
• Mandatory utility-funded conservation
• Social cost dispatch
• Integrated resource planning
• What happens to these kinds of programs after
  restructuring?
• How does restructuring affect dispatch and
  investment decisions?
• How can restructuring states retain incentives
  for cleaner sources of power?

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• California
• Today
• Basics of CA restructuring plan
• Events of mid 2000 to mid 2001
• Factors contributing to price spikes
• Reactions of CA and FERC
• Tomorrow
• Diagnosis of market manipulation
• Implications for restructuring

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California Restructuring Plan

• Old System
• PGE SDEG SoCalEd
• Customers Customers Customers

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California Restructuring Plan

• New System
• Wholesalers/Generators
• CalPX
• PGE SDEG SoCalEd OtherRetailers
• Customers

wta bids
wtp bids
Customer choice of retailer
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• Why this approach?
• Why so much reliance on short term market? Why
  restrict use of forward markets, long term
  contracts?
• Why use clearinghouse for bidding?
• Why make all sales at marginal clearing sale
  price?

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California's Declared Staged Power Emergencies,
1998--May 22, 2001
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What happened? The perfect storm

• insufficient generation capacity?
• insufficient generation available?
• Hydro Outages
• Gen Cost factors gas/emissions rights
• transmission constraints?
• market manipulation?

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Issues affecting generation -- initially

• Capability decreased 2 percent from 1990-1999,
  while retail sales increased by 11 percent
• 10,000 megawatts of total capability out of
  operation due to forced and/or planned outages
• Unusually low water level, losing about 3,000
  megawatts of capacity from the Northwest

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Pacific Region Precipitation and Hydroelectric
Generation, 1996 - 2000
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Cost factors for generators

• Excess electric generation in summer caused some
  to use all available emission allowances for year
• Natural gas price increases and El Paso natural
  gas pipeline explosion
• Transmission Scarcity
• Transmission constraints limit the amount of
  electricity that can be moved between Northern
  and Southern California

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How/Why was the CA market susceptible to price
increases caused by strategic bidding?
If daily demand ranges between 1000MW and 1300MW
And there are 5 200MW units plus 30 10MW units
selling into the CA system
What if one of the owners of a 200 MW plant
offers to sell at 50/MW every day for 2 months,
then suddenly begins offering to sell at 200/MW?
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How/Why was the CA market susceptible to price
increases caused by strategic bidding?
If daily demand ranges between 1000MW and 1300MW
And there are 5 200MW units plus 30 10MW units
selling into the CA system
What if a different owner of a 200 MW plant
offers to sell at 200/MW each day? What ought
buyers do when the marginal plant charges much
more than other plants?
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How/Why was the CA market susceptible to price
increases caused by strategic bidding?
If daily demand ranges between 1000MW and 1300MW
And there are 5 200MW units plus 30 10MW units
selling into the CA system
What if the owner of 2 of the larger plants shuts
one down and then offers to sell power from the
other at higher rates?
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Caps and the Squeeze late 2000 PGE and SoCalEd
customers faced retail rate caps imposed by the
original restructuring plan. SDEG customers
cap had expired, so their retail prices went up.
Why the original retail caps? CA legislature
stopped this by imposing a cap for residential
SDEG customers. Wholesale prices gt Retail
prices, despite maximum buy side bid price of
250/MW imposed by CA PUC. Why the original
wholesale buy bid caps? ESPs began to default on
payments late in 2000. What would these events do
to prices?
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• Winter 2000-01
• Shortages/rolling blackouts Why?
• Generators ordered to sell into CA market. Fair?
• Feb. 2001 State takes over wholesale purchase
  obligation for PGE and SoCalEd. Why?
• April 2001
• PGE filed for Chp. 11 bankruptcy.
• FERC price mitigation plan reinforces mandatory
  supply order imposes system of caps during low
  reserve periods based upon prices during high
  reserve periods.
• Sept. 2001 end of retail choice in CA

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• By mid to late 2001
• State had purchased many transmission facilities
• Capacity crunch had diminished, due to increasing
  supply and decreasing demand
• Spot market accounted for much smaller portion of
  sales state made long term bulk power purchase
  sales on behalf of ESPs
• Unpaid debts on wholesale sales were piling up
  ESPs and CA charged manipulation of wholesale
  market by Enron and other sellers. FERC
  investigated.

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• Subsequently
• Refund proceedings
• CA claim 8.9 bln overcharges
• FERC 12/02 1.8 bln
• FERC 2003 approx. 3 bln
• Unpaid bills from CA buyers approx 3 bln
• Settlements with FERC
• CA long term power purchase contracts
• Path 15

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• Is the following wholesale price just and
  reasonable?
• 200/MWH
• cost 20/mwh under normal conditions
• cost 30/mwh now because fuel and emissions
  credits are expensive
• 70/mwh scarcity rent
• 100 (100/mwh) risk premium because buyer is
  near bankruptcy and is not paying bills

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