UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION

California Independent System Operator )			Docket No. ER98-
Corporation					    )

PREPARED DIRECT TESTIMONY OF
SEABRON C. ADAMSON

Q. 	
Q.	Please state your name and business address.
A.	My name is Seabron C. Adamson, and my business address is 1030 Massachusetts Avenue, Cambridge, Massachusetts, 02138.

Q.	Please describe your present responsibilities at London Economics, Inc.
A.	I am the President of London Economics, Inc., the US subsidiary of the London Economics consulting group based in London, England. As such, I am responsible for the firm’s Cambridge office and direct London Economics’ projects in the US energy sector.

Q.	Please describe your educational and professional background.
A.	I graduated from the Georgia Institute of Technology in 1986 with a Bachelor of Science degree in Physics. A year later I received the Master of Science degree in Applied Physics from the same institution. From 1988 to 1990, I was employed as an engineer by Itek Optical Systems in Lexington, Massachusetts. In 1992, I received a Masters degree in Technology and Policy from the Massachusetts Institute of Technology, and joined London Economics in the UK later that year, as a Consultant. During my time in London I advised utility firms and regulatory and government agencies on the development of the competitive UK power market, and worked on electric restructuring projects around the world. I was promoted to Senior Consultant in 1994 and Managing Consultant in 1995. In 1996, I founded London Economics, Inc., the US subsidiary, as President, which is my current position. 
	
Q.	What is the purpose of your testimony?
A.	The purpose of my testimony is to describe the California Independent System Operator Corporation (ISO) volume estimates prepared by London Economics, Inc. for the ISO, and to provide an overview of factors affecting the volume of power traded through the ISO.

Q.	Please describe the ISO volume estimates and their purpose.
A.	This testimony is submitted in support of the Section 35 filing of the ISO Corporation, which seeks to set the initial level of the Grid Management Charge (GMC).  The ISO GMC will be levied on a volumetric basis. In order to determine the charge in advance, estimates of the total volume to be transmitted through the ISO are required. 

	Specifically, this testimony will describe: (1) the method used to develop the base volume forecasts; (2) the sources of data used in this analysis; (3) how participation by municipal and other publicly-owned utilities would affect ISO volumes; (4) how ISO volumes could vary by month and with weather conditions; (5) how existing contracts and wheeling transactions through California could affect ISO volumes; and (6) how this analysis has been used to develop conservative initial volume forecasts for the Section 35 filing.

Q.	Please summarize the conclusions of your analysis.
Our recommended case is based on the total of IOU projected demands for 1998 plus wheeling and existing contract volumes as shown in the table below. The 1998 recommended volume is 207,838 GWh. This forecast should provide a robust minimum level for ISO energy volumes excepting certain unlikely events: (1) total demand for electric energy falling in California in the next two years by a significant degree due to some unforeseen economic, environmental or other influence; (2) changes in state regulation which allowed the IOU UDCs (utility distribution companies) to withdraw from the ISO framework; (3) rapid unexpected development of self-generation or distributed generation by some customer groups. 

The recommended volume forecast is shown in Exhibit SCA-2. This ISO volume estimate is determined by the projected load served by the distribution customers of the current IOUs, which are required to buy power through the ISO, whether bundled from their local UDC or through other aggregators and scheduling coordinators. The recommended case volumes also include wheeling and existing contract volumes. This estimate was derived by: (1) reviewing and synthesizing forecasts of IOU demand from several sources (such as the California Energy Commission ER-96 report and the IOU’s Transmission Owner Tariff filings (PG&E Docket No. ER97-2358, SDG&E Docket No. ER97-2364, SCE Docket No. ER97-2355); and (2) extrapolating the growth rates for the period 1998-1999.

At a minimum, the volume of power traded through the ISO will be predominantly set by the demand of the current investor-owned utilities (IOUs) in California. All power, either for bundled UDC customers or direct access customers using the Grid, will be required to be scheduled through the ISO. While it is likely that some publicly owned utilities will choose to participate, they have not yet formally agreed to do so. Therefore, as a conservative case, the ISO volume forecasts should be based on IOU energy forecasts, adjusted for load growth and price changes. 

	This conservative approach is consistent with the financing needs of the ISO. The California ISO Corporation is a non-profit organization without shareholder equity or existing retained earnings. It is completely dependent on the Grid Management Charge to meet its operating costs and debt service requirements. A completely debt-financed organization will require certainty that the product of its charges and volumes will be sufficient to cover its operating costs, and debt service requirements, and that loan covenants with its lenders can be met.
Components of 1998 ISO Volume Forecast (GWh)	
SCE	78,427	
PG&E	83,094	
SDG&E	17,718	
Total IOU	179,239	
Existing Contracts	26,269	
Wheeling	2,330	
TOTAL	207,838	

Q.	How were the demand growth rates used in this analysis determined?
A.	The annual average growth rates used in our analysis were published by the California Energy Commission in the Electricity Draft Report 1997. These range from 1.6% for the PG&E service territory, to 2.3% for the SDG&E service territory, and 2.2% for the SCE service territory.

Q.	What other assumptions were used in making the forecasts?
A. 	The forecasts of demand prepared by the IOUs and referred to above include the impact of anticipated price changes on the demand for electricity using an estimate of the price elasticity of demand for electricity. Hence, I made no further adjustments for this effect as this would have meant performing the same operation twice.

A 10% minimum price reduction has been mandated by legislation in California for residential and small commercial customers. Simultaneously, the three California IOUs can recover their retail stranded costs through the Competition Transition Charge (CTC), but only over a fixed transition period. CTC payments are defined as the difference between PX prices and the capped retail rates. Due to the magnitude of the stranded costs to be recovered through the CTC mechanism and the short-time horizon of the forecasts, we have assumed that CTC payments will be large enough to push retail rates up to the rate freeze levels over the transition period. Therefore, we have not included any increase in stimulated demand from further price decreases beyond those mandated in AB 1890. This is consistent with the conservative nature of the forecasts.

Q.	What exhibits are included in this testimony?
A.	Exhibit SCA-2 presents the recommended base ISO volume forecast to be used as the denominator in calculating the GMC in this filing. Exhibit SCA-3 illustrates the monthly pattern of average daily energy demand which might be expected. Exhibit SCA-4 presents the distribution in daily energy demand which might be expected in the summer and winter months. Exhibit SCA-5 presents estimates of purchases made by municipal utilities from outside California. Exhibit SCA-6 illustrates the effects of underlying demand growth over a longer period.  Exhibit SCA-7 shows the relationship between temperature and demand for SDG&E in 1995. Exhibit SCA-8  presents the average temperature in San Diego by month, with upper and lower bounds forming a 95% confidence interval for the period 1974-1997.  Exhibit SCA-9, Exhibit SCA-10 and Exhibit SCA-1 derive the percent deviation from mean of demand in each month in 1995 for PGE, SCE, and SDGE.  

Q.	What are the significant factors affecting ISO volumes?	
A.	Changes in ISO transmitted volumes are a function of: 1) the level of participation by publicly-owned utilities in the California ISO, since these entities are not required to participate; 2) the growth in demand over the succeeding years; 3) the manner in which certain wheeling and contractual transactions are scheduled; and 4) variations in temperature from month to month which affect electrical demand.  Over the next few years, the participation of California’s major publicly owned utilities is the most significant driver of total ISO volumes.

Q.	What sources of data have been used in this analysis?
A.	Data on daily load of the IOUs was obtained from the California Energy Commission. Basic energy demand forecasts for the IOUs were taken from the IOUs’ transmission owner tariff (TO Tariff) filings to the Commission of March 31, 1997 (PG&E Docket ER97-2358, SDG&E Docket No. ER97-2364 and SCE Docket No. ER97-2355). Projected growth rates for each of the utilities were provided by the California Energy Commission. Weather data was obtained from the California Energy Commission (daily data) and the Western Regional Climate Council (monthly data).
 
Data on municipal utility existing contracts was compiled from the California IOUs using sources indicated in Exhibit SCA-5. This data was checked using estimates from the EIA Electricity Trading Database.

Q.	How will volumes transmitted through the ISO change from month-to -month?
A. 	Demand in California varies by season, and usually peaks in August and July. Exhibit SCA-3 shows that February is the lowest, followed by April and then November. This variation will give rise to a significant swing in ISO operating revenues over the year, as the Grid Management Charge will be fixed on a per MWh basis. This analysis is based on 1996 data from the three major California IOUs filed with the California Energy Commission. 

Q.	How will volumes transmitted through the ISO change from day-to-day and across each of the seasons?
A.	As one would expect, the day-to-day variation in volume is much larger than the seasonal variation, on a percentage basis.  Exhibit SCA-4 shows variation in daily demand for the three IOUs for the summer and winter of 1996. Basic data was supplied by the California Energy Commission for 1996. The standard deviation of the sample of summer weekdays was over 9% of the average daily energy demand of 590 GWh. The standard deviation in winter is substantially lower than in the summer months.
	 
Q.	What variability in ISO transmitted volumes can be expected and how can this be estimated?
A. 	The single largest driver of current IOU demand is temperature. I have used daily historical load and temperature data for 1994 and 1995 (provided by the California Energy Commission) to derive a statistical relationship between temperature and load in three California regions. I corrected for year-on-year growth and differences between weekdays and weekends. Exhibit SCA-7 shows the relationship between demand and temperature in San Diego (SDG&E service territory) for 1995. I have assumed a functional form for the relationship between demand and temperature for each of three IOU service territories that includes an inflection at a critical temperature. The inflection temperature is 60OF in San Francisco and 65 OF elsewhere. I found these temperatures best fitted the underlying data. The downward sloping portion of the curve at temperatures below 65 OF is consistent with a modest increase in heating load below that temperature. The steeper upward slope at temperatures above 65 OF is principally a result of increasing air conditioning load with rising temperatures.
	
	Based on these estimated relationships I then derived expected variation in monthly ISO volumes using 23 years of monthly temperature data from the Western Regional Climate Center to derive the expected variation in ISO volumes. As an example, Exhibit SCA-8 shows the mean and distribution of average monthly temperatures for San Diego for the period 1974-1997. The central line is the mean average monthly temperature, while the top and bottom lines correspond to two standard deviations above and below the mean. If the average monthly temperatures are normally distributed, these two bounds should contain 95% of the data points - i.e., for January the average monthly temperature should fall between 53 degrees and 62 degrees 95% of the time. 

	By combining these data, I calculated the average percentage deviation from the mean volume in each month for SCE, PG&E, and SDG&E. These are shown in Exhibit SCA-9, Exhibit SCA-10, and Exhibit SCA-1.  These exhibits show how variable IOU demand is likely to be in each month, if past temperature-demand relationships hold into the future. The coefficient of variation is defined as one standard deviation in monthly demand divided by the mean monthly demand, expressed as a percentage.
	
Q.	How much power is wheeled through California?
A.	Although the volumes of power delivered to and from California are very large, the volumes wheeled between the Northwest to the Southwestern states are relatively modest. Estimates made by the California IOUs of their through-California wheeling transactions range from 550 GWh for SCE to 650 GWh for SDGE and 1,130 GWh for PG&E.

 I undertook an order of magnitude calculation of this volume using the Energy Trading Database produced by the Energy Information Administration as a consistency check on these estimates, as follows. I assumed that the volume of energy wheeled from the states of Arizona and New Mexico to purchasers in Oregon and Washington (and vice versa) was equal to the energy traded under short and long-term firm and non-firm contracts between utilities in these regions. On this basis, I determined that total energy traded between the Northwest to the Southwest was 1082 GWh and total energy traded from the Southwest to the Northwest was 833 GWh. These sum to 1915 GWh, which corresponds closely with the IOU estimates. It is less than 1% of all electrical energy traded in California. 

Q.	How will publicly owned utility transactions with utilities outside California affect ISO volumes?
A.	We have used estimates prepared by the IOUs to calculate the level of municipal and other publicly-owned utility purchases under existing contracts from outside participants, which will be charged for use of the IOU grid. This is shown in Exhibit SCA-5. 

Q.	Should municipal utility demand be included in the ISO volume forecasts?
A.	No, because they have not yet formally agreed to sign a contract with the ISO.

Q.	Please discuss the sensitivity of these forecasts to changes in electric prices and other changes in assumptions.
A. 	Economists denote the responsiveness of demand to changes in price by the term elasticity of demand with respect to price. Electric demand over the short-term is not particularly sensitive to changes in prices. In the short-term a response to price is limited to changes in consumption using existing capital stock. In the long-term a response will include changes in capital that allow substitution with alternative sources of energy. I cite three studies from the 1980s, which provide long-term estimates. Beierlein-Dunn-McConnon (1981), Nguyen and Chern (1985) and the California Energy Commission (1995).  These studies provide long-term estimates of -0.05, -0.36 and -0.50 respectively.  So there is some variety among different studies. However, the effect on demand is still small. First, demand is still price inelastic by any of 
these estimates. Second, the price cut affects only residential and small commercial customers, accounting for approximately 38% of all IOU demand in California. Third, our period of concern is the next few years which is before the long-term response will have fully played itself out. I use each of the estimates of price elasticity above and calculate the % change on demand following a 10% price fall:
1) 	[10% * -0.05 * 0.38] = -0.095%
2) 	[10% * -0.36 * 0.38] = -1.37%
3) 	[10% * -0.50 * 0.38] = - 1.90%

For other customers, the Competition Transition Charge (CTC) will probably prevent the energy component of the total bill from falling significantly, if at all, over the transitional period for stranded cost recovery, as discussed above. 
	
The volume estimates are also sensitive to changes in underlying load growth in California. Over the 1998-1999 time horizon, however, this effect is limited. Exhibit SCA-6 shows the net effect on IOU volumes (assumed to make up the majority of ISO volume) for two load growth trajectories, for the period 1998-2010. The Base curve is drawn at the California Energy Commission projected growth rate for the IOUs (weighted average of 1.9%). The High curve represents IOU demand if the underlying growth rate was 0.5% higher. While the compounded effects are significant over the longer term the immediate effects over the next few years are small.

Q.	Please discuss the longer-term factors affecting ISO volumes, as this will affect the ISO’s financing arrangements.
A.	Unless there is some significant change in electric demand or regulation, the ISO should be assured of a minimum volume purchased from existing IOU customers. While the addition of load from publicly owned utilities could increase this volume by up to approximately 20%, the ISO will not be able to rely on this volume for financing purposes unless secure contracts are in place. 

	Over time, fluctuations in compounded growth in underlying electric demand will have a significant effect. Absent a major shock, however, the basic existing level of demand should still hold. For example, while total electric demand in the United States fell in 1973 during the oil crisis and the subsequent recession, it soon recovered and has continued to rise with GDP. 

The only explicit major new risk is that of changes in regulation which would allow the current customers of the Pacific Gas and Electric Company, the Southern California Edison Company and the San Diego Gas and Electric Company to bypass the ISO.

Q.	Does this conclude your testimony?
A.	Yes, it does.

Exhibit SCA-2: ISO volume forecasts, GWh
	1998	1999	
SCE	78,427	80,212	
PG&E	83,094	84,419	
SDG&E	17,718	18,128	
Total IOU	179,239	182,759	
Existing Contracts	26,269	26,269	
Wheeling	2,330	2,330	
TOTAL	207,838	211,358	

Sources:	March 31, 1997 TO Tariff Filing and IOU estimates

Notes:	1998-1999 IOU growth rates from CEC ER96, Draft June 1997. These load growth estimates are preliminary and the total volume estimates for 1999 are indicated only for purposes of comparison.

Exhibit SCA-3: Average daily demand by month, GWhs, 1996

Source: California Energy Commission

Exhibit SCA-4: Daily load variation for PGE, SDGE, SCE - summer and winter 1996

Source: CEC data for 1996

Exhibit SCA-5: Municipal utility existing contracts

*adjusted for 6% distribution losses

Exhibit SCA-6: Effects of different underlying growth rates on IOU demand

Exhibit SCA-7: Relationship between temperature and demand for SDG&E, weekdays 1995

Note: Temperature at San Diego airport. SDGE demand.
Source: CEC

Exhibit SCA-8: Typical average daily temperatures for each month for San Diego, 1974-1997

Notes: Temperature Based on dry bulb temperature taken hourly at San Diego airport. Central line is mean monthly temperature. The upper and lower bounds delimit a 95% confidence interval if the mean monthly temperatures are normally distributed.
Source: Western Regional Climate Council.

Exhibit SCA-9: SCE: % deviation from mean of total demand in each month

Note: Temperature data is the average monthly temperatures at Los Angeles airport 1974-1997.
Source: Western Regional Climate Council.

Exhibit SCA-10: PG&E: % deviation from mean of total demand in each month

Note: Temperature data is the simple average of the average monthly temperatures at San Francisco and Sacramento airports 1974-1997.
Source: Western Regional Climate Council.

Exhibit SCA-11: SDG&E: % deviation from mean of total demand in each month

Note: Temperature data is the average monthly temperatures at San Diego airport 1974-1997.
Source: Western Regional Climate Council.