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Resource Adequacy - California Exports to the PNW

May 25, 2004

“The crisis you have to worry about most is the one you don’t see

coming”

-Senator Mike Mansfield

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Resource Adequacy – Genesys Model

• The base case model assumes medium load growth and the PNW is surplus 1,000 aMW through 2011.

• Genesys predicts the LOLP in the PNW is less than 2% with or without resources from

California.

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Resource Adequacy – Genesys Model

• Under a high load growth scenario, the PNW region is deficit 1,000 aMW and imports from California become a critical variable in determining resource adequacy.

• With 4,000 MW of California generation available during the winter the LOLP in the PNW remains at 2%.

• Without this California generation, the LOLP jumps to 9%.

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Resource Adequacy – Statement of Problem

• Is 4,000 MW of generation available from California during the PNW winter peak?

• Is there sufficient transmission capacity to ship that generation north? In the winter of 2003, there was 3,675 MW capacity South to North on the AC Intertie and 3,100 MW on the DC Intertie.

• The conclusion of this report is that there is more transmission capacity available S to N than resources – did not spend a lot of time researching this issue.

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Data Gathering

• California Energy Commission – data for whole state but data is not as timely and inability to break it into smaller components

• State of California large and complex

• For this analysis, I focused on the CAISO – largest control area in the state.

• Analyzed data from the CAISO - particularly their Five-Year assessment issued in October of 2003 and updated assumptions based on newer information from the IOUs and IPPs.

• Report divided into 4 sections: resource problems in the state, IOU activities, legislative updates in California, and how these events impact the winter load/resource balance.

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Resource Problems in California – IPPs

• From 2001 to 2004, 10,797 MW of new generation came on line in the CAISO control area while 3,433 MW were retired.

• From 2000 to 2003, merchant developers indefinitely delayed licensing and construction of 23 plants that would have supplied another 5,046 MWs of power.

• The ‘pipeline’ of new power plants in California has slowed down dramatically.

• Calpine is one of the few IPPs that are still building power plants in California.

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Resource Problems in California – Calpine

• Calpine operates 39 power plants in California capable of generating 3,900 megawatts [2,500 megawatts since July 2001].

• Three projects under construction in California will bring the total to 5,800 megawatts. All three of these projects Pastoria phase II 500 MW, Metcalf 600 MW, and Otay Mesa 615 MW are in ISO’s control area.

• Reliance on Calpine for most new generation – highly leveraged [high cost of capital] and ability to continue to finance new plants is questionable. April 30th S&P credit rating of single B- with a negative outlook

• Calpine [NYSE Ticker CPN] is a $3 dollar stock with $17.7 billion in debt [as of 12/03] with a net profit in FY03 of $55.5 million.

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Resource Problems in California – Environmental Constraints

• On January 1st, 2004, the Bay Area implemented new Nox limits which affects both Hunters Point and Potrero power plants with 476 MW in combined generation.

• For the entire CAISO, there is 1,037 MW of capacity built in the 1960’s and 1970’s that may retire prior to January 1st, 2005 if the cost of Nox retrofits cannot be justified.

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Resource Problems in CA - Retirements

• Mohave [coal fired] will likely retire in December 2005 taking out over 885 aMW that served SCE customers. Loss of diversification of resources – one of three SW coal plants that are dedicated to serving loads in CA [the other two are Intermountain and Four Corners].

• CAISO [5 yr assessment Oct 10th, 2003] More than 3,870 MW of thermal generation is potentially at risk of retiring the next several years and this is not reflected in their 5-year assessment.

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Resource Problems in CA – reliance on natural gas

• Only 411 MWs of the new generation since 2001 is renewable.

• 56% of generation capacity in the CAISO is natural gas fired, followed by hydro [20%], and nuclear [8%].

• Generation run on natural gas subject to fuel shortages and pipeline outages [Federal Bill HR3609 – gas pipeline inspections]

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IOU Resource Activities

• After divesting all of their gas/oil thermal plants in the late 1990’s, on March 1st, SCE announced that they were exercising the option to purchase the 15% completed, 1,054 MW Mountainview power plant which will be commercial by the summer of 2006

• This action by SCE is not without its controversy. Calpine has petitioned to FERC to re-hear its decision citing utility self-dealing and non-competitive affiliate transactions at

the expense of ratepayers.• PG&E emerged from bankruptcy on April 11, 2004.

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Governor’s Position April 2004

• Wants the PUC to fully implement assembly bill [AB 57] enacted in 2002.

• The bill proposes that utilities be allowed to buy power wholesale in the form of long-term contracts through a competitive bidding process.

• The governor also asked the PUC revisit its January decision on resource adequacy requirements for the utilities and to accelerate the phase-in for a stronger reserve margin [from 6% to 15%] from 2008 to 2006.

• This report doesn’t access the impacts of this legislation – whether it will increase or decrease surplus power available for the PNW.

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CAISO’s 5 year winter outlook

• Published Oct 10th, 2003 – includes new generation of 2,222 MWs by the summer of 2007 [since August 2003], retirements of 2,325 MWs, and the loss of Mohave [accounted for in dynamic scheduling].

• Base analysis concludes before imports that there is a winter surplus [including reserve requirements but before imports] of 4,956 MWs in the winter of 05-06 - down to a winter surplus of 2,295 in the winter of 08-09 [see page 15].

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Updates to the CAISO’s 5 year winter outlook

• Analysis does not assume that the 3,870 MW of resources that have the potential to retire will be retired.

• Analysis also includes a base case of winter demand peak – the ‘high case’ adds on another 800 MW of peak demand

• Analysis does not include the 1,054 MW Mountainview Power Project that will be commercial by the winter of 2006

• Analysis also included 500 MW from Phase II of the Pastoria Project that won’t be commercial until July 2005.

• See the following table for the results of these calculations:

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Winter Surplus Available from CAISO

Update of Analysis of Load Resource Balance of CAISOExtreme Case Conditions

Winter 04-05 Winter 05-06 Winter 06-07 Winter 07-08 Winter 08-09 2003 Analysis Surplus before

Imports 4,956 4,046 3,317 3,123 2,295Potential

Retirements -3,870 -3,870 -3,870Base Case to High Demand -800 -800 -800 -800 -800Mountainview Power Plant

[SCE] 1,054 1,054 1,054Pastoria Project Phase 2 July 05 -500

Surplus/[deficit] 3,656 3,246 (299) (493) (1,321)

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Summary

• In the extreme case analysis – potential for deficits in the CAISO as early as the winter of 2006-2007

• BPA trading floor staff believe 4,000 MW of generation imports from California is a ‘stretch.’

• Assuming that even if California has a surplus, the generation units at the margin are older and are likely not available for immediate dispatch without advance contractual arrangements.

• Winter of 2000-2001, 2,000 MW were imported from California to the PNW and they believe that is closer to what maybe available.

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• “The longer you look at the energy crisis, the more amazing it seems. It brought the state to a halt, enraged consumers and arguably cost Mr. Davis his job. Yet nothing much has been done to stop the same thing from happening all over again.” – The Economist May 1st 2004