1/16/2019 Univ. of Chicago/Argonne Agents 2002, Oct. 12, 2002 Introduction to Electricity Regulation Randal C. Picker Leffmann Professor of Commercial Law Senior Fellow, The Computation Institute The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2000-02 Randal C. Picker. All Rights Reserved.

Copyright © 2001-02 Randal C. Picker Background and Status Energy Policy Act of 1992 FERC Orders Order 888 (1996), on rehearing Order 888-A (1997), on rehearing Order 888-B (1997), on rehearing Order 888-C (1998) Affirmed in Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000) Sup Ct resolved case on Mar. 4, 2002 Order 889 (1996) Order 2000, 65 FR 810 (Jan. 6, 2000), on rehearing, Order 2000-A, 65 FR 12088 (Mar. 8, 2000) January 16, 2019 Copyright © 2001-02 Randal C. Picker

Changes in the Underlying Cost Structure Past Vertically-integrated local natural monopolies Economies of Scale in Electricity Generation Through the 1960s: Bigger is better Now Switch to smaller plants, and possibility of distributed generation (grow your own electricity) Substantial increase in downtime for larger plants (5x as likely to be down for 600 MW plant as compared to 100 MW plant) Smaller plants allow for closer match of new supply and market demand (fewer unnecessary dinosaurs) (10 year lead for 500 MW plant, 1 year lead for 50 to 150 MW plants) January 16, 2019 Copyright © 2001-02 Randal C. Picker

Cost Figures & Transmission Cost differences favor smaller plants Combined cycle plants at < 3 cents per kWh Large coal at 4 to 7 cents per kWh Nuclear at 9 to 15 cents per kWh Early 1999: 4 to 5 MW plants at < 3 cents per kWh (PUF, 2/1/99, p19) Transmission Distance Improvements Less loss from long transmissions Makes possible generation competition at a distance January 16, 2019 Copyright © 2001-02 Randal C. Picker

Orders 888/889: Creating a Nondiscriminatory Market Key Features Open-Access Tariffs Equal Access Online Information System Functional Unbundling, Not Corporate Unbundling Wholesale v. Retail Order 888: only wholesale power markets Retail: state level Separation of activities, but not corporate separation or divestiture January 16, 2019 Copyright © 2001-02 Randal C. Picker

Orders 888/889: Creating a Nondiscriminatory Market Major Steps Separate rates for generation, transmission and ancillary services Common information system, for both the owner of the grid and outsiders (the OASIS—Open Access Same-Time Information System) Owner of transmission grid must “buy” as outsider would January 16, 2019 Copyright © 2001-02 Randal C. Picker

Copyright © 2001-02 Randal C. Picker California AB 1890 Key Dates Passed Sept. 24, 1996 Retail competition by Jan. 1, 1998 Transition to be done by March 31, 2002 Big Picture Goals 10% price cut immediately, 20% eventually Move from local monopolies, with exclusive territories and corresponding service obligations, to unbundled, open access transmission January 16, 2019 Copyright © 2001-02 Randal C. Picker

Copyright © 2001-02 Randal C. Picker AB 1890 Path From “the regulatory framework existing on January 1, 1997, in which retail electricity service is provided principally by electrical corporations subject to an obligation to provide ultimate consumers in exclusive service territories with reliable electric service at regulated rates” To “a framework under which competition would be allowed in the supply of electric power and customers would be allowed to have the right to choose their supplier of electric power.” January 16, 2019 Copyright © 2001-02 Randal C. Picker

Copyright © 2001-02 Randal C. Picker AB 1890 Goals Six Goals 1. Accelerated, equitable, nonbypassable recovery of transition costs associated with uneconomic utility investments and contractual obligations. 2. An immediate rate reduction of no less than 10 percent for residential and small commercial ratepayers. 3. The financing of the rate reduction through the issuance of “rate reduction bonds” that create no new financial obligations or liabilities for the State of California. January 16, 2019 Copyright © 2001-02 Randal C. Picker

Copyright © 2001-02 Randal C. Picker AB 1890 Goals Six Goals 4. An anticipated result through implementation of this act of a subsequent, cumulative rate reduction for residential and small commercial customers of no less than 20 percent by April 1, 2002. 5. A “fire wall” that protects residential and small business consumers from paying for statewide transition cost policy exemptions required for reasons of equity or business development and retention. 6. Protection of the interests of utility employees who might otherwise be economically displaced in a restructured industry. January 16, 2019 Copyright © 2001-02 Randal C. Picker

Copyright © 2001-02 Randal C. Picker ISO Roles 345: ISO The Independent System Operator shall ensure efficient use and reliable operation of the transmission grid consistent with achievement of planning and operating reserve criteria no less stringent than those established by the Western Systems Coordinating Council and the North American Electric Reliability Council. 350: ISO (e) Identifies the need for additional generation reserves and other voltage support equipment, if any, or other resources that may be necessary to carry out its functions. (f) Identifies transmission capacity additions that may be necessary at certain times of the year or under certain conditions. January 16, 2019 Copyright © 2001-02 Randal C. Picker

Copyright © 2001-02 Randal C. Picker PX Role 355: PX The Power Exchange shall provide an efficient competitive auction, open on a nondiscriminatory basis to all suppliers, that meets the loads of all exchange customers at efficient prices. January 16, 2019 Copyright © 2001-02 Randal C. Picker

Copyright © 2001-02 Randal C. Picker Cal ISO Status: 5/8/02 January 16, 2019 Copyright © 2001-02 Randal C. Picker

The Situation in California The Key Issues Short Term Contracts and The Requirement to Sell Through the PX Underscheduling of Load and Resources Governance of PX and ISO Auction Design Demand Response January 16, 2019 Copyright © 2001-02 Randal C. Picker

Cal Sources of Electricity 1/16/2019 Cal Sources of Electricity http://www.cpuc.ca.gov/published/report/Table of Contents.htm January 16, 2019 Copyright © 2001-02 Randal C. Picker

Capacity Growth v. Demand Growth January 16, 2019 Copyright © 2001-02 Randal C. Picker

Copyright © 2001-02 Randal C. Picker Residential Rates January 16, 2019 Copyright © 2001-02 Randal C. Picker

Copyright © 2001-02 Randal C. Picker Sum 2000: Vols and Prices January 16, 2019 Copyright © 2001-02 Randal C. Picker