Review of CAISO Wholesale Electricity Market Trends

1. Review of CAISO Wholesale Electricity Market Trends Anjali Sheffrin, PhD. APEX Sydney Conference California Electricity Wholesale Market Trends October 13, 2008

2. California operates within the Western Electric Coordinating Council California’s current peak load is about 60,000 MW, with CAISO peak of 50,270 MW Western Electric Coordinating Council is an interconnected region and has a peak of about 160,000 MW

3. The California market has been stable and competitive for 6 years. • Market prices within competitive ranges for the past 6 years. • Significant market improvements include: • Significant forward energy contracting • Local and regional requirements as part of annual resource adequacy • New generation investment keeping up with demand • Increased generation availability • Current market design deficiencies • No centralized day-ahead energy market – no price transparency • No nodal pricing – real-time congestion cost socialized • No meaningful participation by final demand • Locational Marginal Price market design will address the first two deficiencies and provide a better market framework for demand participation.

4. Forward energy contracts and a resource adequacy framework keys to maintaining competitive outcomes. • Forward Energy Contracting • California Energy Crisis of 2000/2001 primarily due to lack of hedging spot market exposure. • Since the crisis, fixed-priced forward energy contracting by load serving entities has reduced their spot market exposure. • Annual Resource Adequacy (RA) Framework • Implemented by the California Public Utilities Commission in June 2006. • Provides formal mechanism for ensuring sufficient capacity is available (year ahead on locational basis, month ahead on system basis) to meet monthly peaks. • California Public Utilities Commission (CPUC) evaluating alternatives for a long-term RA framework.

5. Wholesale markets were stable and competitive. Average Monthly Spot Markups and 12-Month Competitiveness Index, 2003-07 • Average monthly price-to-cost markup for spot bilateral purchases has stayed below $10/MWh for most of the last two years • 12-Month Competitiveness Index for spot bilateral purchases was below $4/MWh in each month of 2007

6. Grid improvements and local area requirements under Resource Adequacy have reduced cost of managing real-time congestion costs. • Reliability Management Costs – Variable cost of CAISO out-of-market generation dispatches to manage local reliability constraints decreased due to adoption of local generation requirements under Resource Adequacy.

7. Long term bilateral contracts have driven new generation investment but not in locations required New generation in Southern California largely offset by retirements and load growth. Major gains in Central & Northern California. System-wide

8. Contract provision to replace power has delivered significant declines in forced outage rates for generation fleet. • Generation forced outage rate in 2007 was the lowest in seven years. • Contributing factors for decline include: • Availability incentives of serving energy contracts. • 15,000 MW of new generation and retirement of older plants. • Greater coordination and planning of generation maintenance plans.

9. Market Redesign and Technology Upgrade (MRTU) has been delayed one year • MRTU solution is locational marginal pricing. • Aligns market rules and prices with grid operating requirements (reliability) and produces transparent prices that inform investment decisions. • Complements long-term procurement and transmission planning processes resulting in locational efficiency and timely investment. • Feb 1, 2009 start up. • Delay due to delay of software delivery, functionality, integration and adequate time for testing by market participants. • Other markets ERCOT, MISO,PJM have faced similar delays.

10. Major topics among USA and Canadian ISO/RTO’s • Generation queues increased dramatically - especially with renewable technologies • Incentives to promote transmission investment • Consolidation into central planning • Market based incentives – adder to rate of return • Resource adequacy evolution: Some are starting from resource requirements with a gradual evolution to central markets • Mandatory reliability standards and compliance • General standards for electricity markets including increased participation of demand response • Changes in how credit worthiness is assessed and how unsecured credit is assigned

11. 1. Active projects in the queue today exceed the CAISO all-time system peak of 50,270 • MW.188 interconnection requests active today • Total 62,608 MW • 131 renewable projects total 42,526 MW • Interconnection requests for renewable projects are growing year to year: • January 2006 5,700 MW • January 2007 11,000 MW • January 2008 42,526 MW • Renewable generation is typically located in areas with inadequate transmission infrastructure.

12. Problem Inefficient serial study approach Weed out non -viable projects Fragmented transmission planning Solution Study projects in groups Allocate network upgrades prorate Feed projects with Interconnection Agreements into the CAISO transmission planning process Increase financial commitments and consequences for delay or withdrawal Accelerate site control requirements Require binding financial commitments for signing interconnection agreements Centralize transmission planning Rate of return adders for transmission investment 2. The reform proposal seeks to resolve flaws in an innovative manner.

13. 3. Evolution of resource adequacy towards central capacity markets designs at different points in U.S. Markets • NYISO – Monthly central markets • PJM – Long term forward central market • NE-ISO – Long term forward central market • CAISO – Resource adequacy requirements toward standard tradable product • MISO - Defining resource adequacy requirement • ERCOT – Energy only market with high bid caps

14. 4. FERC adopted mandatory Critical Infrastructure Protection Standards (CIP) • Eight reliability standards for Critical Infrastructure Protection (Order No. 706, RM06-22) • Operators of the bulk electric system to protect critical cyber assets. • “Cyber Assets” are programmable electronic devices and communications networks including hardware, software and data. • Final standards developed pursuant to the NERC standards development process. • Violations will be subject to fines.

15. 5. FERC has standardization of ISO/RTO’s along general principles • Adopted criteria for: • Responsiveness to stakeholders • Demand response (i) accept bids from demand response resources in their markets for ancillary services on a basis comparable to any other resource; (ii) permit aggregators to submit bids for demand response on behalf of retail customers; and (iii) adopt “scarcity pricing” to raise bid caps during periods of operating reserve shortage. • Market monitoring – Guarantee independency of ISO market monitors • Long-term contracting – Provide a bulletin board for market participants to post offers to buy or sell electricity in long-term contracts.

16. 6. ISO/RTO’s reviewing their unsecured credit limits (UCL)

18. Summary & Conclusions • California market has been stable and competitive. • Increased standardization has occurred • Mandatory reliability standards with fines for noncompliance • Generals principals for market designs