•	Though considerable work remains, replacing monopolies with consumer choice and competition in California was the right policy choice and its working.
•	"An indication of the competitiveness of California’s energy marketplace in recent months can be seen through a comparison of the number of times market prices have exceeded a calculated price of the most expensive resource needed to meet demand. For sake of simplicity, we assume here that the operating costs [of a power plant] would not exceed $100/MW. During 1998 and 1999, the weighted average energy cost exceeded $100 only about 1% of hours on an annualized basis. During the remaining 99% of hours, the wholesale energy market had functioned competitively."
ISO Response "The Summer 2000 Report to the Governor [of California] -- August 8, 2000
•	For the 12-month period ending June 30, 2000, competing electricity providers served almost 25 million MWHs of retail demand in California.  (About 16% of total.) (Source:  Data on California PUC Web Site)
•	The five issues driving California's problems:
1.	economic fundamentals--supply/demand imbalance and higher fuel costs

•	The overall electric market supply/demand balance for the West and California were forecast by the Western Systems Coordinating Council (WSCC) to be tight under normal conditions.  
•	The reserve margin between planned capacity resources and peak summer demand for California and northern Nevada was 12%, without load management and interruptions, and 17.7% allowing for the interruption of major customers.  
•	These estimates were developed in late 1999/early 2000 and assume a normal weather forecast and normal operating conditions. A typical industry standard is a 20% reserve margin to allow for major outages and extreme weather.
•	In 1993 (pre-restructuring), planners forecast a reserve margin of 19% to 24%.
•	The forecasts for the West overall and California allow for normal weather and electricity demand growth rates of about 2% per year.  BUT both weather and growth conditions are far above normal.

•	The electric demand forecasts made in 1999 for 2000, under even normal weather conditions, are now too low.
•	Gross Domestic Product grew at 6% per year in constant 1996 real dollars between the 2nd quarter of 1999 and the 2nd quarter of 2000.
•	Regional GDP growth estimates are not available.  But West region employment growth has been growing at 2.8% between June 1999 and June 2000, far above the average of 1.69% for the rest of the U.S.  California’s employment growth is 2.7% over this period.  This implies a West and California GDP growth of 8% per year or more.
•	In the short run, rapid increases in economic activity translate into electricity usage on almost a 1:1 basis – even with conservation, the longer term impact of this 8% per year economic growth is unlikely to be less than 4% over this period.  
•	This means electricity usage has grown at DOUBLE or QUADRUPLE the forecast under even normal weather. This demand increase alone would cut 4% to 8% off the 12% “no interruptions” reserve margin (cited above) down to 4% to 8% without hot weather or plant outages. 
•	
Western weather has not been normal, especially in the desert Southwest. 
•	For the “Four Corner” states of Arizona, New Mexico, Utah, and Colorado, the temperatures for May through July were the 2nd hottest in the 106-year record.  The combined California and Nevada temperatures were 4th hottest in the 106 year record.  
•	All the other western states except Washington were also significantly hotter than average – and Washington was average, not below average.
•	The result: The inland California demand has been higher and key traditional exporters of power to California--the Four Corner states--have had extreme demands of their own to serve.
•	Supply has not kept pace with demand; and the political gyrations have arguably made matters worse.
•	"In summary, the major cause of high wholesale prices this summer has been the absence of new investment in generation and transmission to meet the growth demand over the past decade."
•	"The price spikes occurring during May and June were triggered in large part by unseasonably hot weather, which – coupled with the significant economic growth that has occurred over the last two years – created record high electric loads for these months."
•	"While California has experienced robust economic growth during the past decade, there has been very little investment in new generation and transmission within California over the last 15 years.  As a result, the ample reserve capacity California has enjoyed in the past has shrunk to a dangerously low level.  During peak load days in May and June, reserve margins were further reduced by unusually high levels of generation unit outages and a decrease in available supplies of out-of-state energy. If supply had increased to keep pace with even a modest share of the growth in demand over the past decade, there would have been sufficient reserve margins an a sufficient number of new supply interests to allow competitive markets to moderate electricity price this summer."

Special Report on California Energy Market Issues and Performance: May-June, 2000; Department of Market Analysis California Independent System Operator, August 10, 2000

•	Between 1993 and 2000, California and northern Nevada have dropped over 8000 MW of peak capacity out of its supply plan for the year 2000.  This change likely reflects investor’s caution over the uncertain economics of investment in new generation and long-term capacity contracts.

•	California depends on gas-fired generation and gas prices have increased dramatically over the last year.
•	More than 50% of electricity currently generated in California is gas-fired (source California Energy Commission).
•	Gas prices have double since last summer.  (CEC, indexes reported in the trades, ISO "Special Report" released on August 10, 2000.)

2.	difficulty in siting plants/transmission lines and obtaining interconnection
•	"The Report [to the Governor] asserts that California supply conditions have been affected by restructuring and that somehow the restructuring choices have made California more vulnerable to supply shortages. This assertion is unfounded. … Only by immediate and sustained attention to streamlining approval and siting processes for both of these critical infrastructure elements will this significant shortage be addressed. " [[Note:  "The Report to the Governor" refers to the report done by Loretta Lynch, President of the California PUC and Mike Kahn, Chair of the Oversight Board]]
ISO Response "The Summer 2000 Report to the Governor [of California] -- August 8, 2000

3.	decision makers made big mistakes when designing the market (and they were warned)
•	over-dependence on spot market (PX); bet the farm that prices would always go down (lesson:  never let a regulator manage your portfolio). 
•	The result: California policymakers effectively replaced one monopoly (the utility) with another (the PX), and unnecessarily subjected Californians to the volatility and risks of a spot market.
•	Policy makers forced the utilities to buy almost exclusively from the spot market and discouraged customers from switching to competitors.  
•	The California PUC's 1995 Policy Decision that designed the market required the utilities to do all of their buying and selling through the California Power Exchange.
•	"SDG&E, he noted, buys its power from the state Power Exchange.  And Peace said the Power Exchange, or PX, is proving to be the most efficient buyer of power. We purposely designed it this way so the small ratepayer got the cheapest electricity (simply by staying with local utility)." 
Steve Peace, The San Diego Union-Tribune -- May 28, 1999, Friday 
•	"The PX is the biggest consumer protection we have," Peace said at a San Francisco conference in February.  The last thing the competitors want is a transparent market that gives consumers better knowledge about what the market is," Peace said. "The small rate payer automatically gets the PX price."
Steve Peace, CONTRA COSTA TIMES -- March 8, 1998 

•	Small users should not be in any hurry to sign up with a new electricity provider, Peace said. 'There are not going to be any great deals out there today that won't be there three months from now,' Peace said.  'They should wait and watch.'" 
L.A. Times, 3/31/98

•	In effect, policymakers placed the consuming public on variable rate mortgage.
•	[[Note:  Lynnette Barnes continues research of statements by Peace and others discouraging consumers from switching, asserting that small consumers were explicitly excluded from access to competition and choice, and that the no competitor could ever beat the PX.]]

•	Worse, when a majority of PUC Commissioners finally recognized the magnitude of the mistake and tried to give the utilities additional tools to begin protecting consumers from price volatility, the two Davis appointees resisted.  When that attempt failed, the Legislature stepped in to stop the PUC.
•	On May 4, 2000 a California Public Utilities Commissioner placed a decision on the Commission agenda which permitted the utilities to purchase energy through qualified exchanges other than the PX.
•	On June 8, the Commission voted out the decision, 3 to 2 (3 Wilson appointees voted yes, two Davis appointees voted no).
•	Both Davis appointees dissented strongly. 
•	In response, the Legislature enacted "budget control language" that prevented the Commission from implementing “the part of any decision authorizing electrical corporations to purchase from exchanges other than the PX” until the Commission investigates and summits a report o the legislature, by 2001, whether or not it is in the public’s interest for the utilities to purchase from exchanges other than the PX."     
•	On July 1, 2000, the budget passed, effectively nullifying the CPUC’s decision voted on June 8.
•	But the news is not all bad: As expected, customers do best when they make decisions for themselves. Some--businesses and families alike--ignored policy makers' unwise advice.  Instead, they protected themselves from possible price spikes by switching to competitors offering fixed prices. These customers aren't hurting.  If it weren't for the front page stories, these customers wouldn't ever know any prices spikes existed.  It is now very clear just how unwise the advice of some policy makers was.  And many others are catching on:

•	"A small California city that currently buys one-third of its electricity on the wholesale market has turned to Enron Power Marketing for protection from price volatility… Tom Habashi, director of Roseville Electric, said the contract “will give us some stability.”
MegawattDaily -- Thursday, August 8, 2000

•	Other good example is the University of California/California State University Contract

4.	mistakes made by the utilities in managing risk--even when policymakers finally realized their mistake (in July 1999) and allowed the utility to buy other than spot, the utilities failed to hedge.

•	"Because of inadequate forward market purchases by the UDCs for the summer of 2000, price caps were one of the few short-term options for market power mitigation available to the ISO."
Special Report on California Energy Market Issues and Performance: May-June, 2000; Department of Market Analysis California Independent System Operator, August 10, 2000

•	"Of concern are reports within the industry that one of the big three, SDG&E, used little or no hedging as a tool to offset risks of price volatility.  'I can only say that we spoke to a number of folks in our market and encouraged them to hedge because of what was predicted down the road for summer,' a PX representative said.  The Cal-ISO’s warning of possible power shortages came true with the unofficial early arrival of summer in May.  Heat burned the region, and prices spiraled upward."
MegawattDaily -- Thursday, August 11, 2000

•	NOTE:  Portland desk is putting together a chart showing that the power transacted for in the PX's forward market was very significantly less than what the utilities could have transacted.  Should have it first thing Monday morning.

5.	California's restructuring plan gave the utilities the incentive to adopt bidding strategies designed to force down PX prices in order recover the costs of their uneconomic assets. But this bidding strategy of "underscheduling" load has had the perverse (and unintended) effect of causing significant price spikes in the ISO's real time markets.  In short, "strategic bidding" by the utilities has made the problem of high prices worse.

•	“Edison in the middle of July—12th, 13th, 14th—dramatically underscheduled the demand on their system maybe by as much as 40% projecting what the next day’s use would be.”
Steve Baum, CEO, Sempra Energy, RESTRUCTURING TODAY--Wednesday August 9, 2000

•	The result:  bad decisions, regulatory barriers and economic fundamentals are the culprits
•	the fundamentals have put upward pressure on prices
•	the mistakes made by policy makers and utilities have 
•	stifled competition and restricted choice 
•	unnecessarily exposed consumers to price risks that could have been avoided
•	The answer lies in giving consumers more choices--including demand responsiveness--and increasing supply competition.
•	“There is adequate ability in the market to provide financial hedges for customers but you’ve got to have some way of letting the customers reach that market….It’s foolishness to expect the utility to go back and build some highly sophisticated trading operation in a market where there are companies that specialize in that.” 
•	“In the end the consumer shouldn’t be shielded from the realities of the marketplace in the sense of information.  “The whole idea of deregulation is to put the consumer in touch with the market. Get the utility out of the way so it’s just a delivery service provider…" 
Steve Baum, CEO, Sempra Energy, RESTRUCTURING TODAY--Wednesday August 9, 2000

•	"The [ISO] Department of Market Analysis has identified the [following] measures, which include offering real choices to retail customers to protect themselves against high prices, as crucial to helping promote a more competitive wholesale electricity market in California.

•	Promoting robust retail competition by removing key regulatory barriers. 
•	Accelerating the permitting and sitting of generation and transmission projects.
•	Placing a priority on developing load responsive programs and removing barriers to [utilities'] ability to hedge.
Special Report on California Energy Market Issues and Performance: May-June, 2000; Department of Market Analysis California Independent System Operator, August 10, 2000

•	Re-regulation is not an option, since it will only increase threats to reliability

•	“The calls to go back to the good old days are based on ignorance and wishful thinking. Wishful thinking doesn’t solve problems in the power market."
Steve Baum, CEO, Sempra Energy, RESTRUCTURING TODAY--Wednesday August 9, 2000
•	"Severin Borenstein, director of the University of California Energy Institute and professor of business at UC-Berkeley’s Haas School of Business, said it can’t be quantified how long it takes for a market to mature, but that calls to abandon deregulation are a bit premature…You can’t put the genie back in bottle.  That makes no sense.”
MegawattDaily -- Thursday, August 11, 2000

•	"As the California Public Utilities Commission has rightly decided, we can't go back to price fixes.  What's more, imposing a rate freeze in the summer would ensure high rates in the winter; we'd be robbing Peter to pay Paul. The main reason that a return to PUC price-setting isn't in the cards is because it would thwart investment in new plants.  Before deregulation, California had no such investment.  Now, the state has $10 billion and counting."
The San Diego Union-Tribune Editorial -- July 20, 2000, Thursday 

•	"[T]here are uncertain reliability costs associated with implementing lower caps, with the ISO having to make out-of-market purchases at whatever price is necessary to maintain system reliability.  This also creates a tremendous incentive for in-state resources to export outside of the ISO control area during high demand periods in order to sell this energy back into California through out-of-market transactions."

Special Report on California Energy Market Issues and Performance: May-June, 2000; Department of Market Analysis California Independent System Operator, August 10, 2000