Overview of California ISO Markets in 2003

1. 2003 State of the California ISO Markets ReportFederal Energy Regulatory CommissionMay 5, 2004Anjali Sheffrin, Ph.D.Director, Market AnalysisCalifornia ISO

2. Overview of Control Area for 2003 COI • 10.5 million households served in PG&E, SCE, and SDG&E • 25,000 circuit miles of network transmission.CA part of western interconnection (WECC) • 42,581 MW peak load in July, 2003* • 230,668 GWh annual energy • 42,000 MW of available generation capacity at peak after derates for hydro and outages • 5,670 MW net imports on peak Pac DC NP15 SF SP15 Path 15 ZP26 Mead Market Place McCullough LA4 LA2 Eldorado Path 26 Lugo Vincent Mohave Sylmar AZ3 Palo Devers Verde N.Gila *Integrated hourly peak Imperial Valley Miguel AYS Mexico

3. Current Markets Operated by CAISO • Real Time Imbalance Energy Market • Day Ahead and Hour Ahead Congestion Management (Zonal) • Ancillary service markets: regulation, spin, non-spin, replacement • Soft price cap at $250/MWh • Automated Mitigation Procedures (AMP) in place • Conduct test, bid at least 200% or $100/MWh above reference level for system AMP • Impact test – bid has at least 200% or $50/MWh impact on market clearing price • No day ahead energy market, Investor-owned utilities resumed purchasing energy for their own requirements in Jan 2003 AYS

4. Ample supply and moderate loads yielded market outcomes close to competitive levels. No mitigation of prices occurred using system AMP Average load up 1% in 2003, but second half of year up 3.7% due weather and a recovering economy Energy prices increased due to higher natural gas prices Real-time prices averaged $70/MWh (inc dispatches). Utility scheduled load within 1-2 % of actual load resulting in low reliance on real-time imbalance market Ancillary reserve service prices averaged $9.85/MWh, increase of 38% ; some instances of bid insufficiency Increases in real-time intrazonal congestion Long outages at Vincent and Sylmar substations, and insufficient transmission at Miguel due to new generation additions in Northern Mexico and Arizona Market Highlights for 2003 AYS

5. Total wholesale cost of serving load $12.1 Billion in 2003, v. $10.1 Billion in 2002; Increase in costs affected by natural gas pricesWholesale Energy and Ancillary Service Costs, 1998-2003 AYS

6. All-in price was $55/MWh in 2003 compared to $45/MWh in 2002; increase due largely to increase in gas pricesAll-In Price Index includes estimated bilateral , real-time,A/S 2002-2003 AYS

7. Real-time incremental energy prices increased from 2002, following natural gas prices; higher in Southern Calif. Monthly Averages, 2002-03 AYS

8. Peak real-time incremental prices higher in 2003 than in 2002Top 5%* of prices , 2001-2003 At least At least At least Number of Hours: $249/MWh $149/MWh $91//MWh 2001 8 2353 3194 2002 0 0 69 2003 0 25 309 • The California ISO’s market posts separate incremental and decremental prices. Highest 325 price hours are shown. AYS

9. Load grew approximately 1% in 2003 vs. 2002 Load Duration Curves, 2001-2003 AYS

10. Improved Forced Outage Rates of Existing Generation Equivalent Forced Outage Rate 1999- 2003 AYS

11. New Transmission Projects Generating Capacity Net Additions AYS

12. Net imports strong for second year in a row2001 through 2003 Average Annual Net Imports AYS

13. Competitive Market Outcomes in 2003 Price-to-cost markups 7% in NP15, 8% in SP15 Short-Term Markup Indices: SP15 (top) and NP15 (bottom) AYS

14. High RSI levels in 2003 indicate a healthy market with suppliers pivotal in fewer than 22 hours in the year Residual Supply Index = Total Supply – Largest Supplier Demand RSI_Duration Curve 1999 - 2003_ 2.4 2.3 2.2 2.1 2 rsi_1999 1.9 1.8 rsi_2000 1.7 RSI Index 1.6 rsi_2001 1.5 rsi_2002 1.4 1.3 rsi_2003 1.2 1.1 1 0.9 0.8 1 619 1237 1855 2473 3091 3709 4327 4945 5563 6181 6799 7417 8035 8653 AYS

15. SP15 Combined Cycle Net Revenue and Cost SP15 Combustion Turbine Net Revenue and Cost 100.00 $90.00 90.00 $80.00 80.00 $70.00 70.00 $60.00 60.00 $50.00 $/kW-year $/kW-year 50.00 $40.00 40.00 $30.00 30.00 $20.00 20.00 $10.00 10.00 0.00 $0.00 2002 2003 2002 2003 CC Cost CC Net Revenue CT Cost CT Net Revenue Net Revenue Analysis, 2002 and 2003- Profits from ISO spot markets for a new typical combined cycle generation unit fell 30 percent in 2003, combustion turbine unit profits stable*- A significant portion of fixed cost recovery would be from long-term bilateral contract. *Net revenue analysis based on units selling solely into ISO imbalance energy and ancillary service markets. AYS

16. Reduced ancillary service capacity resulted in higher prices and increased bid insufficiency in 2003 compared to 2002Monthly Weighted Average Ancillary Service Prices, 2002-2003 AYS

17. Interzonal congestion costs dropped 33% in 2003 v. 2002 levels2002 and 2003 Monthly Interzonal Congestion Costs AYS

18. Major paths with interzonal congestion costs2003 Interzonal Congestion Revenues on Selected Paths AYS

19. Real-time intrazonal congestion surged in August as new generation came online in Northern Mexico and Arizona, and overwhelmed local transmission facilities2003 Monthly Total Intrazonal Congestion Costs AYS

20. Effective Real Time Congestion Management Must-Offer Waiver Process Redesign Resource Adequacy Requirement Economic Evaluation of Transmission Expansion Major Market Issues AYS