3.3.1. Choice of a Consistent Model for Avoided Costs
In previous cost-effectiveness analyses of demand response activities submitted by the utilities, each utility has used its own model for estimating the avoided electricity costs of demand response. Similarly, most of the potential methodologies presented throughout this proceeding, including the Consensus Framework, would allow the utilities to calculate avoided costs using their own, usually proprietary models and, in many cases, confidential data sources. Utility responses to data requests sent by Energy Division and filed in this proceeding in late 2008 include a "benchmarking" exercise in which each company provided an analysis utilizing its own avoided cost model, using a standard set of inputs, to highlight any differences in the models' outputs.13 This benchmarking exercise showed that even using similar (and in many cases identical) inputs, the three utilities' models produced very different results for quantities such as the avoided cost of generation capacity, gross margins (net energy revenues), and the combustion turbine capacity factor.
As described above in our discussion of the need for a consistent overall framework for the cost-effectiveness analyses, we find that the lack of consistency and transparency from these differing models more than undermines any potential increase in accuracy that they may provide. In order to improve consistency and transparency, we adopt a single model that utilizes the Avoided Cost Calculator adopted for Distributed Generation in D.09-08-027, for the calculation of avoided electricity costs by the utilities, and any other LSE that uses this framework. Not only is this approach of requiring a single model consistent with the approach adopted in D.09-08-026 for estimating avoided electricity costs of distributed generation, but this decision adopts the Avoided Cost Calculator developed by Energy and Environmental Economics, Inc. (E3) and adopted in that decision, with minor modifications specified in the protocols. As provided in Section 1.B of the attached 2010 Protocols, cost-effectiveness calculations shall utilize the Avoided Cost Calculator.14 Consistent with all previous versions of the cost-effectiveness protocols, the Avoided Cost Calculator calculates separate values for the avoided generation capacity costs (the cost of building a peaker plant), the avoided energy costs (the cost of running a peaker plant), and the avoided Transmission and Distribution (T&D) costs (the cost of delivering electricity to the end-user).
13 See: Response of Pacific Gas and Electric Company to Administrative Law Judge's Ruling Requiring Additional Information on Cost Effectiveness Methodologies, filed October 31, 2008; Response of San Diego Gas & Electric Company to Energy Division DR-02, Dated October 31, 2008, filed November 3, 2008; and Response of Southern California Edison Company to Administrative Law Judge's Ruling Requiring Additional Information on Demand Response Cost-Effectiveness Methodologies, filed November 3, 2008.
14 The Avoided Cost Calculator is available at the following site: http://www.ethree.com/public_projects/cpucdr.html.
