California Energy Crisis:Fact or Fiction? Richard McCann, Ph.D. Partner, M.Cubed Davis, California Presented to The California Independent Petroleum Association June 2002
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 crisis • 1970s & 1980s deregulation • 1982 California “QFs” • 1986 Gas pipeline deregulation • 1988 Diablo Canyon agreement • 1990s “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
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
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?