Pasadena Water & Power 2009 Integrated Resource Plan Advisory Group Meeting #5 December 17, 2008

1. Pasadena Water & Power 2009 Integrated Resource PlanAdvisory Group Meeting #5December 17, 2008

2. Agenda • Status Update and Summary of Findings • Results of Phase 2 Analysis • Phase 2 Portfolios and Evaluation Criteria • Portfolio Screening and Hybrid Portfolio Development • Reliability and Regulatory Risk Evaluations • Comprehensive Portfolio Ranking • Recommendations and Consensus Building • Pace Recommendations • Key Decision Points • Near-Term Implementation Steps • Planning for Tonight’s Public Meeting • Next Steps The Power of Integration

3. Phase 2 – Evaluating Tradeoffs (environment, cost, risk) Stakeholder Advisory Group Stakeholder Advisory Group Develop Assumptions Configure Alternate Portfolios Develop Reference Case Perform Portfolio & Risk Analysis Prepare Report Final Set of Data Inputs Final set of portfolios Portfolioanalysis(best guessassumptions) PortfolioRiskAnalysis Recommendedresource plan The Power of Integration

4. Status Update • Tentative Schedule for Remaining IRP Process • December 17: AG and Public Meetings to present Phase 2 conclusions and recommendations • January 12: Draft IRP Report Released • January 23: Advisory Group Meeting #6 • January 24 (Saturday): Public Meeting #4 • Late January/Early February: Presentations to EAC and MSC • Early February: Written Comments due on Final Report • Mid-late February: Request EAC Support • Early March: Request City Council Approval The Power of Integration

5. Summary of Findings • Phase 2 analysis is complete • Key conclusions and recommendations are: • Carbon reduction and renewable portfolio standard (RPS) requirements are uncertain, but PWP could meet a 33% RPS and at least a 25% carbon reduction without significant changes to the existing portfolio • A 33+% RPS and about a 25% carbon reduction is achievable at little or no additional cost from the current portfolio by pursuing economical energy efficiency and demand response programs (31 MW), solar PV and other local renewables (24 MW), landfill gas (15 MW), geothermal (15 MW), solar thermal (10 MW), and wind (10 MW) by 2020 • Opportunities to achieve higher carbon reductions and RPS levels appear feasible, in exchange for higher costs and risk exposure • Higher levels of carbon reductions may be achievable at about a $2.50/MWh (levelized NPV) increase for every 10% increase in carbon reductions, if IPP power can be sold off under carbon accounting rules at a reasonable price • PWP needs to invest in local infrastructure, which could include new local gas-fired generation or transmission system upgrades (or both), in order to mitigate exposure to reliability risks in the existing portfolio The Power of Integration

6. Pace recommends four specific alternatives for final consideration Recommended Portfolios Incremental Changes to Existing Portfolio (MW) Performance Across Key IRP Objectives and Considerations The Power of Integration

7. Recommended Portfolios (cont.) • Pace recommends four specific alternatives for final consideration • Reduce GHG emissions by about 30% by 2020 through modest additions of renewable energy and other clean resources. This option seeks to minimize the upward pressure on PWP’s costs, but may not address reliability concerns and PWP’s ability to satisfy emerging environmental obligations. • Reduce GHG emissions by about 40% by 2020 through a diverse mix of renewable energy, other clean resources, and efficient new natural gas-fired generation inside Pasadena. This option attempts to balance environmental, cost and reliability objectives without subjecting PWP to extreme risks. • Reduce GHG emissions by about 60% by 2020 through completely displacing existing coal resources and replacing them with efficient new natural gas-fired generation and modest additions of renewable energy and other clean resources. This option addresses reliability risks, but at higher cost and the risk that full coal displacement is infeasible. • Reduce GHG emissions by about 75% by 2020 through completely displacing existing coal resources and replacing them with a diverse mix of renewable energy and other clean resources. This option provides the highest GHG emissions reductions, but is the most expensive of the four options and may not adequately address reliability concerns associated with continued reliance on the aging local generating units. The Power of Integration

8. Summary of Key Decision Points • Minimum Environmental Performance: Portfolio options break down into low, medium, and high emission reduction targets • If the low reduction is considered a “non-starter” because it is deemed insufficient for likely carbon limits, then Portfolio 1a can be eliminated • What additional cost to move to higher emission reduction targets is palatable to customers? • IPP Sale Feasibility: Uncertainties regarding the sale of IPP power may dictate how much is removed from the portfolio, and the level of emission reductions that is achievable • If no more than a 35 MW displacement is considered feasible, then Portfolios 6 and 8 can be eliminated • Reliability: What local infrastructure investments provide acceptable reliability? • If new local gas-fired generation is considered essential to providing an acceptable assurance of reliability (rather than extending the life of existing local units plus potential transmission system upgrades), then Portfolio 8 can be eliminated The Power of Integration

9. Action Items and Final Portfolio Selection • A final selection among these alternatives requires specific decisions about the preferred balance between greater GHG emissions reductions, higher costs, and infrastructure improvements to reduce reliability risks • Several key Action Items are recommended to select the best portfolio • An evaluation of PWP customers’ appetite for paying premiums for environmental stewardship • An evaluation of the potential sales, GHG accounting treatment, and price for power sales from IPP • An evaluation of whether new local gas-fired generation or transmission system enhancements (or both) is the preferred approach for ensuring reliability • An evaluation of the availability of low cost geothermal and landfill gas renewable energy projects to achieve potential cost reductions The Power of Integration

10. Near-Term Implementation Steps • Regardless of the long-term GHG emissions reduction that is chosen, PWP should immediately commence with the following short-term implementation steps that are common among all of the long-term strategies: • Continue securing contracts for power from a diverse mix of new renewable energy sources, balanced among landfill gas, geothermal, wind and solar projects • Expand PWP’s already aggressive energy efficiency programs • Develop demand response programs and rates to provide customers with economic incentives to reduce their peak electricity consumption • Develop a new “feed-in tariff” program in which PWP will offer to purchase power, at a fixed price, to any qualifying renewable energy project within the City in order to facilitate the development of local renewable energy sources • Evaluate innovative new financing approaches and electric rate structures in order to spur more PWP customers to install solar photovoltaic projects inside Pasadena The Power of Integration

11. Results of Phase 2 Analysis The Power of Integration

12. Ranking IRP Objectives—PWP Stakeholder Surveys The Power of Integration

13. PWP Customers’ Opinions on Climate Change Issues The Power of Integration

14. Action Item Projected Impacts on Residential Customer Bills The Power of Integration

15. Action Item Projected Impacts on Commercial Customer Bills The Power of Integration

16. How We Have Addressed Shortcomings in the 2007 IRP The Power of Integration

17. 1 2 3 4 5 6 7 8 9 10 Total MW Added 30 40 40 56 150 95 101 131 90 250 IPP Replacement 47 108 108 108 108 108 Phase 2 Portfolios: Capacity Additions (MW) *All capacities are incremental over existing portfolio The Power of Integration

18. CO2 Reduction Strategy Concepts • Naming Convention has changed from “30/60/80” to “Low/Medium/High” • Uncertainty surrounds actual year-to-year CO2 reductions and accounting methodologies that will be employed to account for market purchases and market sales • Rather than peg each portfolio at a specific reduction target, we have grouped them as follows: • Low: Illustrates reductions on the low-end (<30%) of AB 32 scoping plan requirements and generally corresponds with a 33% RPS • Medium: Illustrates a range (35% - 60%) of reductions more in line with a scenario where AB 32 mandates are imposed disproportionately on a utility like PWP; higher reductions correspond with higher displacement of IPP • High: Illustrates a high level of environmental leadership by achieving reductions approaching the state’s long term goal (80% reduction by 2050) in an accelerated manner The Power of Integration

19. Criteria for Portfolio Evaluation and Ranking • Emissions Reductions: % reduction in CO2 emissions in 2020 from 2008 baseline • Cost: NPV of levelized cost of generation (including net market transactions) for each portfolio in $/MWh • Price Risk: Adverse cost increase (95% confidence) after statistical uncertainty analysis performed for fuel prices, load, and capital costs • RPS 2020: % of net energy for load from qualified renewable sources • Reliability: Qualitative assessment of the reliability risks of continued reliance on the aging local generating units or replacing them with modern, efficient generation • Capital Charges: Fixed costs for all new capacity additions ($ millions) levelized over 20 year study period • Spot Market Dependence: Total market sales minus total market purchases as a % of total PWP net energy for load • IPP Sale Feasibility: Adverse impact of reduced sale revenue for power from IPP • Carbon Price Risk: NPV of levelized cost of generation under high CO2 price scenario • Regulatory Risk: Qualitatively assess risks relating to RPS, emission reductions requirements CO2 emissions accounting rules The Power of Integration

20. 1 2 3 4 5 6 7 8 9 10 Total MW Added 30 40 40 56 150 95 101 131 90 250 IPP Replacement 47 108 108 108 108 108 Summary Metrics for All Evaluated Portfolios The Power of Integration

21. Cost vs. CO2 Emissions ComparisonUncertainty around Natural Gas Prices, Load, Power Prices and Capital Costs • Portfolios with higher emission reductions generally have higher costs The Power of Integration

22. Cost vs. Risk ComparisonUncertainty around Natural Gas Prices, Load, Power Prices and Capital Costs • Uncertainty and price risk generally are higher for more costly portfolio options • This is due generally to the replacement of IPP power and the increased reliance on intermittent resources and uncertain capital costs of new generation options The Power of Integration

23. Cost vs. CO2 Emissions ComparisonUncertainty around Natural Gas Prices, Load, Power Prices and Capital Costs • Portfolios with higher emission reductions generally have higher costs Portfolio 10 a candidate for elimination because it has highest cost Similar emission reduction targets for portfolios 8, 9, and 10 Portfolio 7 a candidate for elimination because it has highest cost Similar emission reduction targets for portfolios 5, 6, and 7 The Power of Integration

24. Low Emission Reduction Portfolios • Low emission reduction portfolios perform very similarly on emissions, cost, and risk metrics Portfolios 1,2,3, and 4 are candidates for elimination Combined to create one “hybrid” portfolio that includes LFG, geo, wind, solar, PV, feed-in, DR: “Portfolio 1a” Adding more renewables locally can improve emissions reductions and potentially reduce reliability risks LFG/Geo are lowest cost The Power of Integration

25. Initial Evaluation for Higher Emission Reduction Options • Portfolio 1a was created as a “hybrid” from portfolios 1, 2, 3, and 4 • Portfolios 7 and 10 are candidates for elimination given their costs, relative to achieved emission reductions • Portfolios 5, 6, 8, and 9 are candidates to explore further • In addition to metrics outlined above, they warrant investigation around sale of IPP power and resource availability The Power of Integration

26. Action Item Uncertainty around IPP Sale Can Alter Portfolio Attractiveness Medium and high emission reduction portfolios all reliant on sale of all or part of the power generated from IPP (coal) Zero price for sale of IPP Portfolio 5 is less exposed to the risk of zero revenue from power sale because only 47 MW sold, as opposed to 108 MW in portfolios 6, 8, and 9 The Power of Integration

27. Action Item Availability Affects Emissions Reductions Targets In addition to the risk associated with the sale of IPP power, Portfolio 9 is heavily reliant on low-cost LFG and Geo, which have uncertainty associated with their general availability and with regard to transmission to PWP If 75 MW are unavailable, costs for portfolio 9 would be increased and emission reductions decreased 9a: No LFG or additional 50 MW of Geo The Power of Integration

28. Summary of Higher Emission Reduction Options • Portfolio 7 and 10 highest cost for given emission reductions: candidates for elimination • Portfolio 9 raises feasibility questions, is exposed to risk surrounding IPP sale, and also may not adequately address reliability concerns: candidate for elimination • Portfolio 5 not fully exposed to IPP sale risk and is low cost, but may not adequately address reliability concerns tied to reliance on aging local generation • Portfolio 6 addresses reliability concerns with new local gas-fired generation, but has higher costs and more exposure to market volatility and IPP sale price • Combine strengths of Portfolios 5 and 6 to create Portfolios 5a and 5b The Power of Integration

29. Hybrid Medium Emission Reduction Portfolios • Preserve Portfolios 5, 6, and 8 as best performing in the medium and high emission reduction target categories • Develop hybrid portfolios, recognizing the strengths of several portfolios and other practical considerations • Due to IPP contract structures, removal of 35 MW is more feasible • Diversifying the mix of resource additions reduces risks • Local resources directly address reliability concerns *All capacities are incremental over existing portfolio The Power of Integration

30. Final Portfolio Summary • Portfolios 1a, 5, 5a, 5b, 6, and 8 were selected based on full analysis of all uncertainty criteria *All capacities are incremental over existing portfolio The Power of Integration

31. Overview of Reliability and PWP Local Generation Issues • “Provide Reliable Service” is a priority objective for the IRP planning process (ranked #1 by the IRP Advisory Group and #1 and #4 in PWP questionnaires) • Reliability depends critically on PWP’s local generating units • PWP has a single point of connection with the California power grid (Goodrich) • PWP’s imports at Goodrich are limited to 215 MW, so local units must be used when customer demand exceeds this level (PWP’s peak load exceeds 300 MW) • PWP has identified a need for 200 MW of local generation to satisfy its reliability criteria • PWP operates the local units approximately 50% of the hours during the year to comply with various reliability criteria, including the 215 MW import limit • Continued reliance on the aging Broadway 3 and Glenarm 1&2 units (110 MW) places PWP’s service reliability at increasing risk in the future • The units are old (30-40 years), inefficient and increasingly difficult and expensive for PWP to keep operating • Significant capital investments are required to extend the units’ operating lives (estimated by PWP at $20 million over the next 10 years, $65 million over the next 20 years; these costs have been incorporated into Pace’s economic analysis and results) • PWP may need to upgrade its transmission system, such as the single Goodrich interconnection and its cross-town tie lines, in order to mitigate reliability risks relating to long-term reliance on the aging local units The Power of Integration

32. Reliability Risks Associated with the Aging Local Units • Pace reviewed PWP operating criteria and projected load data to assess the potential reliability risks of continued reliance on the 110 MW of aging local generating units • PWP studies indicate the need to initiate rolling blackouts when customer loads exceed 253 MW and the 110 MW of aging local units is unavailable • Pace’s analysis indicates this has a 2.04% probability of occurring (179 hours/year) • An accepted industry planning standard is 0.027% probability (1 day in 10 years) • Achieving the industry standard requires at least a 76.2% probability that each of the three aging local units will be available when called to meet PWP customer’s electricity requirements • PWP is currently studying potential options to upgrade its transmission system; however, that study assumes that the existing local generation capacity continues to be maintained indefinitely. The Power of Integration

33. Action Item Reliability Conclusions and IRP Implications • All portfolios are constructed to achieve an 18% target reserve margin, but are expected to have differing impacts on reliability risks • Portfolios 5b and 6 directly address reliability concerns by adding modern, efficient facilities inside PWP’s transmission-constrained area to replace the aging local units • Portfolios 1a, 5, 5a and 8 may not adequately address reliability concerns because they assume that life extensions of the aging local units and/or transmission system upgrades can provide adequate assurance of reliability • Costs that need to be considered when evaluating these options • $86 million capital cost for new 65 MW gas-fired generation to be spent before 2014 • $65 million for life extension of existing generation facilities to be spent before 2028 • Transmission system enhancements, estimated to cost $50 million by 2014, may be required even if new local generation is added; actual costs could easily be higher • Pace is unable to offer a definitive recommendation on the best option for ensuring reliability, but we rank Portfolios 5b and 6 higher because they directly address PWP’s reliability concerns with investments in new local generation The Power of Integration

34. Cleanest resources serve native load All generation and purchases count Action Item Regulatory Risk: GHG Emissions Accounting • The treatment of CO2 emissions associated with market sales can significantly impact the accounting of emission reductions • Accounting rules are uncertain with regard to the “netting off” of market sales for emission reduction purposes • Range of potential outcomes should be considered if rules are uncertain The Power of Integration

35. Regulatory Risk: Envisioning a “High CO2” Scenario • Test portfolios under a scenario with stricter CO2 policy and a higher price for carbon • High case represents a potential policy calling for 60% to 80% emission reductions below 2005 levels by 2050 • Reduction targets from 2005 emission levels are assumed in the ranges as follows: • 5% to 15% by 2020 • 15% to 30% by 2025 • 35% to 45% by 2030 • The High Case is aggressive enough to knock out 45% of the least efficient coal plants nationwide The Power of Integration

36. Regulatory Risk: Impacts of a “High CO2” Scenario • High CO2 prices negatively impact all portfolios; those that hold IPP face relatively higher costs • Portfolio 5b has an emission rate lower than market, and therefore benefits more in high CO2 case from market sales Portfolios that hold onto less of IPP perform relatively better under high CO2 scenario The Power of Integration

37. Regulatory Risk Conclusions • PWP faces significant regulatory uncertainty, especially with regard to future state and federal environmental policy on renewable requirements and CO2 emission reductions • Portfolios were qualitatively ranked in accordance with the flexibility that each provides with regard to the ability to adjust to changing regulatory conditions • Portfolios that are not aggressive or possibly too aggressive with regard to environmental actions are deemed to have the most exposure to a changing regulatory climate • Portfolio 5b has additional flexibility to alter the operations of the combined cycle unit in order to meet certain reduction targets The Power of Integration

38. Final Portfolio Cost and Environmental Trade-offs Are higher emission reductions feasible and worth the extra cost? Potential transmission upgrades (if required) for portfolios that do not add new local gas-fired generation The Power of Integration

39. Final Portfolio Ranking • Portfolio 1a has lowest emission reduction, but at lowest cost and price risk; since it holds all of IPP, it is significantly exposed to the impact of higher CO2 pricing and may not adequately address reliability concerns • Portfolio 5 may not adequately address reliability concerns and requires the most capital investment, but achieves nearly 50% emission reductions • Portfolio 5a achieves moderate emission reductions, mitigates risk of IPP sale and has low market risk but may not adequately address reliability concerns • Portfolio 5b achieves moderate emission reductions at relatively low cost, but directly addresses reliability concerns due to the addition of new local gas-fired generation • Portfolio 6 achieves significant emission reductions and addresses reliability concerns, but at a higher cost and with exposure to market and IPP sale uncertainty • Portfolio 8 achieves the highest emission reduction, but at highest cost, exposure to IPP sale uncertainty and may not adequately address reliability concerns The Power of Integration

40. Pace recommends four specific alternatives for final consideration Recommended Portfolios Incremental Changes to Existing Portfolio (MW) Performance Across Key IRP Objectives and Considerations The Power of Integration

41. Recommended Portfolios • Pace recommends four specific alternatives for final consideration • Reduce GHG emissions by about 30% by 2020 through modest additions of renewable energy and other clean resources. This option seeks to minimize the upward pressure on PWP’s costs, but may not address reliability concerns and PWP’s ability to satisfy emerging environmental obligations. • Reduce GHG emissions by about 40% by 2020 through a diverse mix of renewable energy, other clean resources, and efficient new natural gas-fired generation inside Pasadena. This option attempts to balance environmental, cost and reliability objectives without subjecting PWP to extreme risks. • Reduce GHG emissions by about 60% by 2020 through completely displacing existing coal resources and replacing them with efficient new natural gas-fired generation and modest additions of renewable energy and other clean resources. This option addresses reliability risks, but at higher cost and the risk that full coal displacement is infeasible. • Reduce GHG emissions by about 75% by 2020 through completely displacing existing coal resources and replacing them with a diverse mix of renewable energy and other clean resources. This option provides the highest GHG emissions reductions, but is the most expensive of the four options and assumes that maintaining reliability does not specifically require adding new local gas-fired generation to replace the aging local units. The Power of Integration

42. Summary of Key Decision Points • Minimum Environmental Performance: Portfolio options break down into low, medium, and high emission reduction targets • If the low reduction is considered a “non-starter” because it is deemed insufficient for likely carbon limits, then Portfolio 1a can be eliminated • What additional cost to move to higher emission reduction targets is palatable to customers? • IPP Sale Feasibility: Uncertainties regarding the sale of IPP power may dictate how much is removed from the portfolio, and the level of emission reductions that is achievable • If no more than a 35 MW displacement is considered feasible, then Portfolios 6 and 8 can be eliminated • Reliability: What local infrastructure investments provide acceptable reliability? • If new local gas-fired generation is considered essential to providing an acceptable assurance of reliability (rather than extending the life of existing local units plus potential transmission system upgrades), then Portfolio 8 can be eliminated The Power of Integration

43. Recommended Action Items to Finalize Decision • Determine how much PWP’s customers are willing to pay for environmental stewardship • Determine how much IPP power can be sold, at what price, and under what terms • Determine whether new local gas-fired generation or transmission system upgrades (or both) is the preferred approach for ensuring reliability of service • Track key regulatory risks (RPS requirements, GHG accounting rules) and how they will affect different portfolios • Confirm the economics of landfill gas and geothermal resources, evaluate bids on these technologies, and pursue when price is attractive The Power of Integration

44. Near Term Implementation Steps • Regardless of the long-term GHG emissions reduction that is chosen, PWP should immediately commence with the following short-term implementation steps that are common among all of the long-term strategies: • Continue securing contracts for power from a diverse mix of new renewable energy sources, balanced among landfill gas, geothermal, wind and solar projects • Expand PWP’s already aggressive energy efficiency programs • Develop demand response programs and rates to provide customers with economic incentives to reduce their peak electricity consumption • Develop a new “feed-in tariff” program in which PWP will offer to purchase power, at a fixed price, to any qualifying renewable energy project within the City in order to facilitate the development of local renewable energy sources • Evaluate innovative new financing approaches and electric rate structures in order to spur more PWP customers to install solar photovoltaic projects inside Pasadena The Power of Integration

45. Appendices The Power of Integration

46. Portfolio 1a: Low Diverse The Power of Integration

47. Portfolio 5: Med Remote Renew The Power of Integration

48. Portfolio 5a: Med Diverse Renew The Power of Integration

49. Portfolio 5b: Med CC Renew The Power of Integration

50. Portfolio 6: Med CC The Power of Integration