3.3.3. Appropriateness of Including Transmission and Distribution Avoided Costs (and When They Should Be Included)

Another contentious issue related to the avoided cost calculation is the appropriateness of including as a benefit of demand response any costs of upgrades to electricity transmission and distribution systems that may be deferred or avoided through the use of demand response. In theory, the ability to reduce demand in specific locations could allow utilities to defer or avoid certain infrastructure investments, such as replacement or addition of substations or transformers that would otherwise be required to meet extremely high demand in those areas. In discussion of this issue in the record of this proceeding, most parties agreed that, at least in principle, demand response should be able to assist in avoiding some equipment upgrades. However, parties raised many questions related to the extent to which demand response can currently be dispatched locally to capture this benefit, as well as whether potential peak reductions due to demand response activities are considered in utility planning for such transmission and distribution upgrades.

The Consensus Framework proposed that the utilities develop a default method for estimating these transmission and distribution avoided costs, and proposes that the T&D benefit be applied only to programs that the utility or other entity performing the evaluation believes actually allow it to avoid upgrading its infrastructure. When the Consensus Framework was utilized in A.08-06-001 et al., the utilities used unclear, inconsistent and largely unexplained methods for determining the transmission and distribution avoided costs of their various demand response programs. PG&E, for example, provided an overall T&D avoided cost, but did not provide any analysis of the extent to which this benefit might be incurred by any of its demand response programs. PG&E instead provided a sensitivity analysis,¹⁷ calculating the SPM test results for each program with and without the avoided T&D costs. At the same time, SDG&E and SCE calculated an avoided T&D cost and applied it to several demand response programs, but provided little or no explanation as to how or why. Not only do these very different methods make comparisons among the utilities' final cost-effectiveness analyses difficult, they also apparently fail to show serious consideration of the requirement that these avoided costs only accrue to activities that are actually likely to help utilities avoid infrastructure investments.

In response to these concerns, the 2010 Protocols require the utilities to define exactly how each demand response program meets the criteria for application of transmission and distribution costs. Each utility will use the avoided T&D costs for its service territory contained in the Avoided Cost Calculator¹⁸ in applying T&D benefits to specific activities. Alternatively, if a specific demand response activity is designed to avoid T&D costs only in a constrained region, utilities may substitute the specific regional T&D costs avoided by that project as the T&D benefit for that activity. The protocols do not prescribe a specific method for the allocation of T&D avoided costs to individual demand response programs, but provide that unless a specific rationale is given for a particular program, the avoided T&D of any program is assumed to be zero.

¹⁷ See CLECA filing in A.08-06-001 et al., filed February 23, 2009, at 2-3, and PG&E Response filed March 5, 2009, at 2-3. These filings in A.08-06-001 et al. were transferred into the record of this proceeding through an ALJ Ruling issued on November 19, 2009.

¹⁸ The T&D values for each utility that are included in the avoided cost calculator have been adopted for use in previous Commission decisions, and may be updated through the workshop process specified in this decision for updating and validating the models and inputs in advance of the filing of periodic program and budget applications.