Energy Sector Outlook and Priorities at the California Public Utilities Commission

1. Energy Sector Outlook and Priorities at the California Public Utilities Commission Commissioner Timothy Alan Simon California Public Utilities Commission The Energy Bar Association Eighth Annual Western Chapter MeetingSan Francisco • February 27, 2008

2. California Energy Action Plan Objectives:A Loading Order for preferred energy resource procurement. Natural Gas Policy: As the Natural Gas Commissioner at the CPUC, I preside over most gas proceedings and have taken a leadership role on the NARUC Natural Gas Committee as Co-Vice Chair. I also serve on the NARUC Natural Gas Speculation Task Force. Infrastructure Investment and Workforce Development: Capital investment in long term utility infrastructure projects (i.e. transmission), economic stimulus, and green collar job opportunities are critical. Top Energy Policy Priorities Office of Commissioner Timothy A. Simon

3. The Energy Action Plan Loading Order • Loading Order: The EAP established a clear set of program priorities as a guideline for energy resource procurement: • Energy Efficiency: weatherization and audits • Demand Response: advanced metering infrastructure • Renewables: increasing PPAs and project financing • Adequacy, reliability, and infrastructure • Electricity market structure • Natural gas supply • Investment in transmission and distribution infrastructure as well as new sources of energy supply is required to help fulfill these priorities and policy goals. Office of Commissioner Timothy A. Simon

4. AB 32 is fundamentally changing the energy industry, from energy production to utility procurement practices. AB 32 emissions reductions will necessitate more capital investment and result in job opportunities in the areas of construction, plant operations, maintenance, weatherization, auditing, smart appliances, and other technological innovation. As I recommend in my concurring opinion on D.08-10-037, we should consider reinvesting emissions allowance auction revenue in emissions-reducing technologies and a green workforce development program. The Impact of Assembly Bill 32 on Capital Investment in the Energy Industry

5. Investing in GHG Emissions Reductions Through Biofuels • Biofuels/Biomass: I support investment in biofuels research, development, and demonstration as part of our effort to meet ambitious RPS targets. • Biomass facilities currently contribute approximately 2% of the State’s electricity mix, with 1000 MW of generating capacity. • Governor Schwarzenegger’s Executive Order S-06-06 sets a target requiring that 40% of California’s use of biofuels should come from biofuels produced in-state by 2020. • Executive Order S-06-06 initiated the Bioenergy Interagency Group and contemplated increased biofuel development through a CPUC proceeding. • SDG&E’s proposed Wastewater Biomethane Demonstration project was denied without prejudice in my recently adopted Emerging Renewable Resource Program (ERRP) Decision. • The California Energy Commission has taken a lead role in researching and promoting biofuels in the Bioenergy Interagency Group. I would like the CPUC to take a more prominent role in biofuel policy development.

6. Current Natural Gas Market Fundamentals • Natural Gas prices have declined dramatically over the past year, with the NYMEX Henry Hub price recently falling below $5.00 per MMBtu and still trending downward in a relatively cold winter. • Shale Production:The U.S. is enjoying growth in unconventional natural gas production through increased shale exploration. • Rig counts for conventional gas have decreased, while those for shale, tight sands, and coalbed methane are on the rise. Capital Expenditures for independent producers is being better targeted to maximize output. • Natural gas storage supplies are expanding currently (13% increase over the past year), while Canadian imports decrease. • Prices should remain low until production slows due to continued oversupply. I participate in the NARUC Speculation Task Force, which recently voted out a key speculation resolution.

7. The Ruby Pipeline • Recent CPUC Decision (D.08-11-032): voted out 5-0, approving natural gas transportation arrangements for PG&E from Opal, Wyoming to Malin, Oregon. • Current Status: This Decision is still pending on rehearing. El Paso recently filed for approval at FERC. • Ruby Precedent Agreement: $3.5 billion infrastructure project with negotiated Ruby Precedent Agreement for 375,000 dekatherms of firm pipeline capacity rights for PG&E’s Core Gas and Electric Fuels Departments. • Most Favored Nation clause in the Precedent Agreement gives PG&E lowest rate available as anchor shipper at $0.68 per dekatherm, or 5% below the Initial Recourse Rate (IRR). • The Ruby Precedent Agreement is an excellent deal for California ratepayers and provides much needed access to prolific gas supplies in the Rocky Mountain Basin.

8. California’s Natural Gas Storage • Storage Capacity: California has many natural geological advantages that facilitate natural gas storage. Total firm storage inventory capacity is estimated at 219 billion cubic feet (Bcf) statewide. • Pending Storage Cases: • Sacramento Natural Gas Storage Application: Would give SNGS 7.5 billion cubic feet of working inventory and allow interconnection with PG&E and Sacramento Municipal Utility District. • Controversy lies in the fact that a residential community has been developed over the storage field (3000 feet below). • Gill Ranch Storage Application: Will examine whether existing supply in the Gill Ranch gas field is still economically recoverable. This will help determine whether the field should be used primarily for gas production (in accordance with PU Code Section785), or storage.

9. Liquefied Natural Gas • Current domestic unconventional natural gas oversupply is having a rather favorable impact on market prices and storage supplies, and LNG development seems less likely than 6 months ago. • Nevertheless, we should remain open to long term LNG terminal permitting and imports for additional future supplies as market conditions change. • Natural gas is an essential component of our carbon-constrained energy portfolio, and I support market mechanisms and strategies that create opportunities for LNG importation. • Costa Azul and Yokohama site visits • Permitting concerns in California and status of West Coast LNG projects

10. Proposed West Coast LNG Terminals – Sept 2008 • Current market outlook could slow progress • Need a long-term view

11. Other Assorted Works in Progress • Sunrise Powerlink(Voted out December 2008): • Interconnection w/geothermal and solar resources in Imperial Valley • Source of green collar jobs in economically depressed region of the State (27% unemployment in Imperial Valley) • Edison Integrated Gasification Combined Cycle (IGCC) Study • CPUC approved $17 million for IGCC/Hydrogen Energy Study • Carbon Sequestration/Storage for Enhanced Oil Recovery • Gasification of petroleum coke for hydrogen development • PG&E WaveConnect Stage 1 Funding Approval • Tehachapi Wind Farm (pending)