California%20Energy%20Crisis:%20Fact%20or%20Fiction?

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California Energy CrisisFact or Fiction?
Richard McCann, Ph.D. Partner, M.Cubed Davis,
California

• Presented to
• The California Independent Petroleum Association
• June 2002

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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

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A Brief Chronology

• 1970s energy crisis
• 1970s 1980s deregulation
• 1982 California QFs
• 1986 Gas pipeline deregulation
• 1988 Diablo Canyon agreement
• 1990s Age of Surpluses

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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

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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.

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The State of the Crisis Two Parts

• Financial
• PGE 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

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Bailing Out the UtilitiesSCE-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

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PGE Bankruptcy Competing Plans of
Reorganization (POR)

• PGE 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

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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 PGE yet.
• CDWR likely net long for at least 4 years

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The Federal Governments 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

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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?