Southern California Edison Well-Positioned to Respond to California's AB 32 GHG Goals

What today makes up Southern California Edison's (SCE) renewable energy portfolio?

Edison is the nation's leading purchaser of renewable energy. We're buying and delivering to our customers about 12.5 billion kilowatt-hours per year. In 2007, that represented about 16 percent of our customers' energy needs. We've been doing this for 20 plus years, and we're very proud of our track record. We buy more renewable energy than any other state in the United States, except for California. We're not merely following the trend of "being green," we're blazing the trail on behalf of the energy industry. We're very proud of what we have, but want to build on that and take it to the next level.

The portfolio includes several basic technologies: geothermal, small hydro, solar, wind, and biomass. The largest portion of our portfolio is geothermal, which encompasses about 62 percent. The next chunk, at 21 percent, is wind; 8 percent is biomass; 5 percent is solar; and 4 percent covers small hydro. The vast majority of that comes from purchased power versus owned facilities.

With all the focus on renewable energy in the last couple of years, and with the Scoping Plan for AB 32 weeks away from being released, what's on the near horizon for the renewable portfolio of SCE?

We have been active in the market place several times since 2002. We've executed approximately 42 contracts, which represent about 20 billion kilowatt-hours per year. We've been very active in trying to grow that portfolio, all in an effort to reach the state's goals for renewable energy, which are currently set at 20 percent by 2010. We've been very successful in the contracting aspects of that.

There are some challenges, however. The PUC report to the Legislature summarized it consistently with our experience, but they, obviously, are looking across all of the utilities. There are a couple of keys risks in being able to turn contracts into megawatt-hours. One key risk identified in that report was the extension of the federal tax incentives, predominantly the Investment Tax Credit (ITC), and the Production Tax Credit (PTC). There's been recent legislation to extend these incentives so hopefully that has mitigated a large portion of this risk for near term solar projects in particular.

The other significant challenge and risk for turning this into reality is transmission. The California ISO has a transmission inter-connection process that is recognized as facing significant challenges in meeting the goals of timely inter-connecting. They've proposed, and we're supportive of, reform of that inter-connection process. That process is in place, but it's yet to be seen how quickly it will clear the queue out and get generators inter-connected.

What will be the mix of the future portfolio for SCE? How will it be different than the mix in the portfolio today?

Out of those 42 contracts that we've executed, there have been some in each one of those renewable categories. Geothermal provides a sound base for us, and we think it will continue to build a sound base. We have executed a number of new geothermal projects. Some of the larger projects we're working on now (and where you'll probably see growth in the overall percentage of our portfolio) is with wind. We have a number of wind projects that we're very proud of. One of the largest is the Alta Wind Project in Tehachapi. We're in the process of building out approximately $2 billion of transmission infrastructure to support renewable resources in general in Tehachapi, but predominantly wind and solar. The other wind project that we just announced a few weeks ago is a project for up to 900 megawatts of wind from north-central Oregon.

We don't target a specific technology. We look at what we call "least cost, best fit": we go to the market and tell them to give us proposals. Project developers will tell us different technologies that may or may not have different delivery characteristics. We choose the combination that meets the portfolio fit at the least cost to our customers.

Who are you project partners in wind, solar, and geothermal as of late?

We should be careful how we use the term "partner." These are power purchase agreements. We're partners in the sense of collaboration and in trying to move renewable energy toward reality for the benefit of Californians, but there is no shared ownership or anything of that structure in these deals. That's very different than a number of other industry players in the marketplace. Some market participants insist on an ownership option or at the end where the off taker can buy into the project. Ours is a contracted model. We did the 900-megawatt transaction with a project called Caithness Shepherds Flat (which is an affiliate of Caithness Energy). They've been in business with us for many, many years and they are one of the premiere developers in the industry. The Alta Project is a combination of energies, one of which is TerraGen, which is a relatively new entity, but they've acquired some of the Caithness assets and more recently the Allco Tehachapi assets. We consider them a very good partner. Our geothermal contracts are predominantly with Calpine at The Geysers and Ormat, which are recent entities that we have contracted with.

Congress had a lot of trouble passing a bill to extend the ITC and PTC before they finally did so in the recent bailout bill. What was the risk had they not been extended?

Since Congress has passed and the president has signed legislation extending the tax credits, a significant amount of this risk has been mitigated. It is important to note that the Production Tax Credit has only been extended for one year for wind projects so there is still uncertainty for a large number of these projects. If the PTC is not extended beyond 2009, the risk is that it would potentially put some wind projects in suspension. It really boils down to the individual developer and how much development capital they are willing to put at risk and their assessment of the possibility of the PTC being further extended. The pro-forma position in our agreement is to have termination rights under the contract if the tax credits are not in place at certain points in time. We negotiate that individually. So it's conceivable that the uncertainty beyond 2009 could result in some wind contract terminations. Obviously that's not what we want as an end point as we're trying to reach our renewable goals.

Given that the AB 32 Scoping Plan's targets and implementation would be a challenge for California, especially the energy industry, what's your take on the draft of that plan and on Edison's capacity to deliver on those requirements?

Edison agrees with the goals of AB 32. We think it will best be achieved if all the electricity retail providers in California-that includes all the investor owned utilities, public utilities, electric service providers, and community choice aggregators-are subject to similar requirements in all the key areas, including energy efficiency, renewables, and other related climate change requirements and programs. That has to be the cornerstone in implementation of AB 32.

Part of the challenge is the trade-off between mandated programs and cap and trade. One of the key elements in there is the 33 percent renewables. We think there may be cheaper ways to accomplish the same goals without having a mandated program. All the IOU's have a challenge with the 20 percent, and if we don't solve the challenges and hurdles in the industry to meet 20 percent, I don't know how we're helping the goals in carbon reduction.

In presenting that argument, what is the typical rejoinder from those who have been involved in shaping the implementation plan?

Making sure the rules are fair across all market participants. There are some challenges in the rules. The commission suggested moving from a system of combining options and pre-allocations to a full option within five years. We believe that's too short of a time for those affected entities to economically move toward cleaner fuel and process options. It's a matter of making sure that we all work together and that we keep our eye on the end objective, which is reducing carbon emissions. We have to take a look at those that are most impacted and make sure that all the segments contribute equally, the same as participants within the segments should not be singled out for a unduly portion of reductions.

Energy efficiency is obviously an area that can be immediately addressed to reduce emissions. What is Edison doing in the way of efficiency today?

As I mentioned, California and SCE have been leaders in not only renewables, but also in energy efficiency over the last 20 plus years. We have some of the most aggressive goals and accomplishments. We've saved 5 billion kilowatt-hours over the last five years through our energy efficiency programs. I believe that we're number one in the nation for energy efficiency programs. We've been doing our part out there for energy efficiency for many, many years. These programs do not just happen over night, and that's part of the challenge in changing customer attitudes as well.

You've had a long career in energy and utilities. Has this been the most exciting couple years of your career, trying to adjust to the change of the whole portfolio of energy?

It's certainly been a lot of fun and it's been very challenging. Earlier in my life I was involved in some of the early demonstration projects of natural gas vehicles, particularly in the transit market. Those times were trying and challenging as well. Natural gas powered transit buses are very common these days, and when I look back over my career I'm pretty proud of the role I played early on in that development cycle. Here at Edison, I feel proud-although my years have been fairly short term here so far-that we have a 20-year history that I get to build upon, setting the stage for the next 20 to 30 years as we execute these agreements. It's very challenging some days, but I know we will get there. We are doing everything we can to do so.