1. Tony Braun Bruce McLaughlin Braun & Blaising, P.C APPA Legal Seminar October 9, 2006 Resource Adequacy California Style An Overview and Examination of Implications for Public Power

2. Presentation Goals Overview of California Resource Adequacy Policies – Evolution – State Law and Regulation – Affects on Public Power – FERC Orders and Market Design Raise Issues of Policy Relevance for All of Public Power

3. Things to Think About Impact on Costs – Whether This Causes Higher Rates Probably Depends on Current Practices – Disturbing Trend Toward Light-handed Review of Procurement Rules, i.e. “Reliability at Any Cost” Jurisdictional Implications – Erosion of Local Control? – Federalization of Procurement Rules?

5. Background and California Context – THE CRISIS All Policy in California is Shaped by the 2000-2001 Energy Crisis Restructuring Choices – Major Incentives for Divestiture of Generation by the Investor-Owned Utilities Result, Almost 100% of Thermal Units Sold – No Legacy Contracts with Divested Units Mandatory Buy-Sell into California Power ExchangeResult – Few Forward Positions by the IOUs – PG&E, SCE, and SDG&E Roughly 50,000 MWs

6. “Recovery” From the Crisis The State Assumed Long Positions in Wholesale Energy Markets – IOUs are by now not creditworthy. – State Law froze retail competition The Politics of Exit Fees results in delay. Finally, statutes are enacted that require some long term procurement process for the IOUs

7. What Have We Been Doing Since Then? As a State, enacting ever changing rules to govern procurement As public power not subject to the jurisdiction of our public utilities commission: – Trying to Make Sense of It All – Protecting Our Turf – Bouncing Between State Rules and the Rules that Migrate to the Cal ISO

8. California Law Tackles Resource Adequacy Post Crisis Response Putting the IOUs Back in the Procurement Business AB 57 – Required IOU Procurement Plans – Guaranteed Recovery in Rates The Key Political Issue IOUs Agree. Generators Agree. Consumers?

9. CPUC Implementation of Procurement for IOUs CPUC Implements Process to Review IOU Procurement Plans 2004 First Effective Year Details – Adopts 7% Reserve Margin – Permits Contracts up to 5 years – Targets 5% Spot Market Purchases

10. Evolution of IOU Requirement CPUC January 2004 Order – Adopted Year Ahead Demonstration of Adequacy – 15-17% Planning Reserve Margin – 90% of Share of Summer Peak Requirements One Year Ahead – 100% of Load Share Plus Reserves One Month Ahead

11. The California Legislature Gets Involved AB 380 – Passed 2005, Effective January 1, 2006 – Creates Statutory Requirement to Prudently Plan to Meet Load Serving Obligations – Establishes Minimum Requirements for Planning Reserves for Almost All Entities Adopts Western Electricity Coordinating Council standards. But, there really are no WECC standards for planning reserves.

12. AB 380 and Data Collection for Public Power Along with Other Statutes, California Recreates its Integrated Forecasting, Data Collection, and Planning Function in the California Energy Commission (circa 1975) CEC has broad powers to require production of data and forecasts from public power to integrate into their own efforts and report on our compliance – No Sanctions, Just Reporting to the Legislature

13. Net Result of State Initiatives on Public Power – Not So Bad The CPUC’s Rules for the IOUs Did Not Directly Apply to Public Power Other Than Concerns About Burdensome Reporting Requirements, Most Municipal Utilities Treated Power Supply and Load Information as in the Public Domain No major impact on planning and procurement practices

14. The CAISO Gets Involved The CAISO Was An Active Participant in CPUC Proceedings on Resource Adequacy The CPUC Adopted Many Recommendations on Implementation Details Made by the CAISO The CAISO Has Migrated These Details Into its Tariff, Thus Applying Them to Public Power Entities in its Control Area

15. The Various Moving Parts (Not Necessarily In Chronological Order) Step 1 – The Interim Reliability Requirements Program (“IRRP”) Filed in Spring 2006 for Implementation Summer 2006 to “Ensure Reliability” – Deferred to the CPUC and the Local Regulatory Authorities (our boards) to set planning reserve policies – Requires Annual and Monthly Reporting to the CAISO – Sets Forth Grid Operational Procedures Whereby CAISO Uses Resources Identified by Load to Meet Grid Requirements

16. IEPA v. CAISO, FERC Docket ER05- 146-000 Complaint filed by the state merchant generator trade association Alleges CAISO energy-only market not compensatory Alleges CAISO operational practices to procure local capacity dissuade load from entering into contracts

17. IEPA v. CAISO Offer of Settlement – Creates Reliability Capacity Services Tariff (RCST) – Provides that CAISO determine local and system capacity requirements – Allows LSEs to Attempt to Meet Requirements – If LSEs Procurement not Sufficient per CAISO determination, CAISO makes RCST designation of units, and pays a Tariff price for capacity

18. IEPA v. CAISO Offer of Settlement pending before the Commission. Settling Parties are the CAISO, CPUC, IOUs, and Generators. Not Public Power. Issues Raised – Price, i.e. paying all generators the cost of new entry – CAISO determinations of local requirements – Cost Allocations

19. Going Forward – Market Redesign and Technology Upgrade (“MRTU”) The CAISO MRTU filing merges many of the CPUC policy decisions and other elements MRTU Order of “Conditional Approval” Issued Last Month Implementation of MRTU Scheduled for November 2007

20. MRTU Establishes a Pooled Dispatch of the Grid Based on Locational Marginal Pricing (LMP) Defers to the CPUC to set Planning Reserve margins for LSEs under CPUC jurisdiction Defers to Public Power Boards, unless the local authorities do not meet a minimum planning standard Provides the CAISO as the default provider of capacity if state and local efforts are not “adequate.”

21. MRTU Order With a Major Exception, Approved What the CAISO proposed on Resource Adequacy Major Exception – Refused to Specify a Planning Reserve Margin in the CAISO Tariff The Order Did Approve – Mandatory availability of units designed to meet Resource Adequacy – CAISO Determine of Reliability Requirements

22. MRTU Order and FERC Authority Over Supply Adequacy Questions Wisdom of Energy Bid Caps if Not for a Regulatory Requirement to Ensure Capacity Adequacy Reliable Service Part of Just and Reason Terms of Service and CAISO Mandate It is Reasonable to Condition Participation in the CAISO Markets on a Resource Adequacy Requirement FERC Does Not “Have to” Regulate All Aspects of Resource Adequacy, But Must Ensure Some Policy Exists

23. Key Implementation Issues for CA Public Power Allows State and Local Officials to Determine the Planning Reserve Margin – Rejected CAISO Proposal to Specify Level Only for Public Power and Defer to the CPUC Applies RA to All Entities Taking Service from the CAISO, including Federal PMAs Gives CAISO discretion to determine level of local procurement requirements Gives CAISO authority to procure to levels necessary to meet reliability criteria, and pass costs onto load.

24. MRTU Order Continued Establishes procedures to determine how to allocate import capacity into California for capacity counting purposes – California imports 20% of its energy. Capacity eligible to be counted toward an LSE requirement must be bid into the CAISO markets CAISO establish rules for counting capacity, and will test, monitor, and verify generator availability Hydro and other use limited resources have bid requirements.

25. MRTU Bottom Line FERC claims broad jurisdiction to include Resource Adequacy rules in FERC-regulated tariffs On every issue but the planning reserve margin itself (which is not too controversial), CAISO is given broad powers and discretion

26. What We Have Learned, Continue to Learn Be Careful What You Ask For. – We Supported Resource Adequacy Requirements but Never Envisioned Something This Pervasive or Complex Ultimately, FERC Believes It Has Broad Authority Over Procurement Rules. How Far Will This Go? – Location, Levels, Types of Resources, Fuel Mix – What is Not Included in Reliability?

27. Lessons Learned Continued Our local control embodied in state law was eroded by FERC assertion of jurisdiction and state industry politics – FERC tariff application of rules homogenize all load serving entities. – Dominant state regulators get more deference than local city councils and boards. – The CAISO Knows Where Its Bread is Buttered

28. More Lessons Learned If You Don’t Pool Resources Now … – Central Pooled Dispatch and Mandatory Bid Rules for Resource Adequacy Capacity Can Fundamentally Alter Your Procurement How Your Resources are Located What Fuel Type How Use Maximize Their Value, i.e. when your units run may not be within your control