The California Electricity Crisis:

Transcription

1 The California Electricity Crisis: Causes and Lessons Learned Dr. John L. Jurewitz Director, Regulatory Policy Southern California Edison Company

2 Outline What happened? Why did it happen? What lessons should we learn from it? - 2 -

3 The Making of California s Electricity Crisis Short-Sighted Restructuring Rules Adverse Market Fundamentals Complex Market Rules and Supplier Behaviour Regulatory and Political Inaction - 3 -

4 Regulatory Jurisdictions in the United States Marketers Generators Utilities Federal Jurisdiction Sales for Resale and Transmission service in interstate commerce Competitive Retailers End-Use Customers Utilities State Jurisdiction Local utility distribution service and sales to retail end-use customers - 4 -

5 California s Major Investor-Owned Utilities PG&E 23,031 MW Peak Demand 4.5 Million Customers PG&E New Zealand 5,800 MW Peak Demand 1.6 Million Customers SCE 19,935 MW Peak Demand 4.3 Million Customers SDG&E 4,763 MW Peak Demand 1.2 Million Customers SCE SDG&E - 5 -

6 The New California Structure New Private Businesses Gen Gen Gen Gen Market-Based Regulation by The FERC New Non-Profit Governmental Company Independent System Operator (ISO) Regulated by the FERC Remaining Local Utility Transmission Distribution Default Retail Regulated by the CPUC Energy Service Providers ESP ESP ESP ESP Customers No economic regulation - 6 -

7 Rate Freeze Creates Headroom for Transition Cost Recovery /kwh Rate Freeze HEADROOM Business-as-usual Rate Trajectory

8 California Generation Divestiture 10,016 8,040 1,996 SCE PG&E SDG&E 20,212 MW Divested so far New owners: AES 4,076 Calpine 1,224 DukeEnergy 3,751 Dynegy 3,447 Port of San Diego 713 Reliant 3,776 Southern 3,065 Thermo Ecotek 280 Sales proceeds used to reduce customer stranded cost obligation Market valuation of remaining nonnuclear generation (over 6,000 MWs) required by year-end

9 CPUC Initially Insisted that Utilities Buy Everything Through the PX and ISO Spot Markets? Wanted transparent pricing to assure against self-dealing Did not want utilities incurring long-term obligations and potentially stranded costs in their role as default provider Wanted to encourage independent retailers Customers wanting price hedges should seek them from ESPs - 9 -

10 Key Restructuring Rules Created Over-Exposure To Spot Market CPUC s requirement that utilities buy all power through Power Exchange and ISO Generation divestiture without buy-back contracts Over-exposure to the spot market Retail rate freeze

11 California s Electricity Market Crisis

12 California Day-Ahead Electricity Prices (PX - Southern Zone) $/MWh Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Min/Max Zonal Avg

13 California Market Prices Have Skyrocketed in 2000 Comparison of Average Cal PX SP15 Monthly* Prices $/MWh Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Actual prices for last six months of 2000 averaged more than four times 1998 and 1999 prices *Simple average of all hourly prices within the month

14 30 Cumulative Cost of California Electricity 1999 and 2000 Cost of Electricity $ (Billions) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Estimated annual cumulative cost to serve all load in the CA ISO s control area Cost includes energy and ancillary services Source: ISO Board material, January,

15 ISO Emergency Operations Summer 1999 Occurrences Summer 2000 Nov/Dec 2000 Jan/Feb 2001 Stage 1 Emergency » Operating reserve below 7% Stage 2 Emergency » Operating reserves below 5%» Interruption of voluntary customers Stage 3 Emergency » Operating reserves below 1.5%» Possible involuntary interruptions (rolling blackouts) Involuntary Rolling Blackouts Rolling blackouts were initiated on 1/17, 1/

16 How Can Rolling Blackouts Be Needed in Winter? ISO Actual Load 08/16/ /17/ Summer 2000 Peak MWh Load levels when rolling blackouts implemented Hour This winter, the ISO initiated rolling blackouts at a demand of only 65% of last summer s peak

17 Anatomy of a Rolling Disaster High Retail Prices (SDG&E) High Wholesale Spot Prices Over-Reliance On Spot Market Retail Price Freeze Utility Undercollections Political Inaction California Government Enters Market as Purchaser Generators Reluctant to Supply Bankruptcy Fears Rolling Blackouts and Higher Prices

18 High Wholesale Prices: Market Fundamentals High rate of demand growth Virtually no new plants sited Reduced availability of imports Skyrocketing gas prices Pipeline capacity shortages Air emissions limitations and high priced emission credits

19 SCE Sales Growth Rates (Weather Adjusted) Growth Rate Percentages

20 Comparing Growth in Electricity Capacity and Population in California vs. Other WSCC States California % Change in Capacity MWs % Change in Population WSCC (Other)

21 Comparing Growth in Electricity Capacity and Peak Load Demand in California vs. Other WSCC States California % Change in Capacity MWs % Change in Peak Load Demand WSCC (Other)

22 Natural Gas Prices in 2000 $60 $50 $40 $/MMBtu $30 $20 $10 $- 02-Jan 16-Jan 30-Jan 13-Feb 27-Feb 12-Mar 26-Mar 09-Apr 23-Apr 07-May 21-May 04-Jun 18-Jun 02-Jul 16-Jul 30-Jul 13-Aug 27-Aug 10-Sep 24-Sep 08-Oct 22-Oct 05-Nov 19-Nov 03-Dec 17-Dec 31-Dec Prices peak at an unheard level of $60/MMBtu Gas prices for the second half of 2000 were more than four times higher than 1998 and 1999 prices

23 Emissions Credit Prices in Los Angeles Area $60.00 $50.00 (dollars/pound) $40.00 $30.00 $20.00 spot price $10.00 $ Feb Feb Mar May Jun Jul Jul Aug Aug Aug Sep Sep Sep Oct Nov Nov Dec Dec Dec Dec Jan Jan Jan Jan Jan Jan Feb Feb Feb

24 High Wholesale Prices: Market Structure, Rules, and Conduct Complex ISO/PX market protocols Large amount of unhedged power purchases Underdeveloped demand-side responsiveness Question of market power or shortage-induced high prices

25 Comparison of Forward Contracting/Hedging in Other Electricity Markets Regulatory Constraints in Forward Contracting in CAISO Market Was a Key Source of High Costs in Summer 2000 % Market Hedged (long-term forward contracts, self-owned generation) Unhedged Spot Market CAISO 40-50% 50-60% PJM 85-90% 10-15% New England 80% 20% Australia 90% 10%

26 Utility Undercollections: Wholesale Average Electricity Prices as Flowed Through to SCE Customers in Monthly Billing Cycles /kwh Headroom available for CTC collection Undercollection of operating costs

27 Procurement Undercollections (SCE) $Billions $644 Million $457 Million $870 Million $387 Million $283 Million $561 Million $1,288 Million $975 Million $5.5 Billion $1.7 Billion $3.8 Billion 0 June July Aug Sept Oct Nov Dec Jan Total Net Net Gross Revenues from Utility-owned Generation

28 Regulatory and Political Inaction FERC s blamed California for creating a flawed structure Californian Governor blamed FERC for not setting tighter controls on wholesale prices CPUC s inaction in approving long-term contracts and setting reasonableness standards CPUC s unwillingness to end the retail rate freeze last Fall

29 California State Government Enters Power Purchasing Business On January 17, Governor Davis authorized the California Department of Water Resources (CDWR) to begin purchasing spot and short-term power to avoid rolling blackouts On February 1, Governor Signed Assembly Bill 1X CDWR directed to purchase entire net short requirements of utilities Authorizes up to $10 billion in revenue bonds for long-term power contracts CDWR authorized to enter into contracts until 1/2/3003 CDWR now spending $40-50 million per day on near-term power purchases; $3 billion spent so far Governor recently announced the signing of 40 long-term contracts totaling 8900 MWs

30 Governor Davis Announced Utility Recovery Plan State purchase of transmission grid at fair value Amount in excess of book used to pay down utility undercollections Utility-owned generation will supply power at cost-based rates for ten years State receives conservation easements on utility-owned wilderness lands

31 What s Needed in the Near Term? Reasonable long-term wholesale contracts FERC enforcement of its just and reasonable standard would be helpful Reasonable retail price increases Assurance of recovery of past and future procurement undercollections Very serious statewide (and West-wide) conservation program Governor s objective is 5,000 MW in Summer 2001 Continue to foster development of new generation Governor s objective is 5,000 MW by Summer

32 Is There Long-Term Relief? New Generation In California Approved/Under Construction In Licensing Proposed California Total 6,273 MW 7,716 MW 5,780 MW 19,769 MW Generation Scheduled for Summer 2001 Project Date MW California Sutter Los Medanos Various California Total Southwest Northwest Summer 2001 Total 8/1 7/1 6/1-9/1 6/1 7/1 7/ ,070 2,070 1, ,

33 California ISO Load/Resource Forecast 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Max Import Capacity Max Avail. Gen. Capacity Load Forecast + OR ,260 11,260 11,260 11,260 11,260 11,260 11,260 11,260 45,565 45,602 50,011 62,861 62,878 62,861 63,190 63,180 49,209 50,188 51,463 53,602 54,462 55,306 56,177 57,928 Source: California Independent Operator

34 Lessons Learned Regulatory vision must be internally consistent - Mixture of regulated retail prices and unregulated wholesale prices was an especially inconsistent and dangerous combination in California. Policies need to respond to unforeseen and unintended consequences Absence of clear policy accountability creates a slowness or inability to respond to evolving problems - The blame game doesn t solve problems Uncertainty deters investors - key generation investments in late 1990 s were delayed due to policy uncertainty Market realities cannot be sidestepped - policy design should harness rather than ignore these forces