II. Background

In June 2002, the Commission instituted Rulemaking (R.) 02-06-001 to provide the forum to formulate comprehensive policies that will develop demand flexibility as a resource to enhance electric system reliability, reduce power purchase and individual consumer costs, and protect the environment. The desired outcome of this effort is that a broad spectrum of options will be available to customers who make their demand-responsive resources available to the electric system. Thus far the Commission's rulemaking effort targets the investor owned utility (IOU) service territories of respondents Pacific Gas & Electric (PG&E), San Diego Gas & Electric (SDG&E), and Southern California Edison Company (Edison), though it may be expanded in the future to include other small and multi-jurisdictional IOUs.

The Commission set as its first task the consideration of a strategic approach to the orderly development of demand responsiveness capability in the California electricity market (OIR, mimeo., p.3), and stated that it intended to coordinate this effort with related efforts of the California Energy Commission (CEC)1, the California Consumer Power and Conservation Financing Authority (CPA), and other involved or interested state agencies.

The Phase 1 prehearing conference (PHC) was held on July 16, 2002, at which time Commission decisionmakers shared the dais with decisionmakers from the CEC and CPA. At the PHC, a procedural framework to further the cooperative strategic policymaking among the three agencies was discussed. The administrative law judge (ALJ) issued a ruling on August 1, 2002, soliciting written comments on the proposed framework, and the Assigned Commissioner's Ruling and Scoping Memo provided the final details for the interagency working model.

That model is essentially a collaborative interagency process, using three working groups. The first, Working Group 1 (WG1), comprised of agency decisionmakers (assigned Commissioner Michael Peevey, CEC Commissioner Arthur Rosenfeld, and CPA Director Sunne W. McPeak, also known as "the WG1 principals"), and supported by the assigned ALJ and advisory staff from the CPUC, CEC, and CPUC, has been responsible for shaping the rulemaking record by providing overall policy guidance to parties at key points in the proceeding. The second, Working Group 2 (WG2), is comprised of active parties who are interested in developing demand response programs for large customers (>200 kilowatts in average monthly demand). The meetings of this group are facilitated by agency staff supporting WG1 decision-making activities. The third, Working Group 3 (WG3), is comprised of active parties who are interested in developing demand response programs for small commercial/residential customers. Like WG2, the meetings of WG3 are facilitated by agency staff supporting WG1 decision-making activities.

The Commission will issue two Phase 1 decisions. The instant decision addresses proposals for residential and small commercial customers emanating from WG3; a second decision, to be issued separately, will address tariff proposals emanating from WG2, relating to large customers.

Recognizing the importance of coordinated policy setting, as opposed to ad hoc program development, the Assigned Commissioner opted to focus heavily in Phase 1 on strategic planning, and the development of a robust policy framework as a foundation to future development of demand response programs (Scoping Memo, p. 6). However at the same time, there was a need for early action, requiring both WGs 2 and 3 to delve further into practical issues of tariff and/or program development. Early in the process, WG1 decided to focus on an exploration of the advantages and disadvantages of further pilot programs versus larger-scale program and tariff development and its timing. The assigned commissioner deferred infrastructure development and full-scale deployment options and issues to the next phase of this proceeding.

The record in Phase 1 with respect to WG3 issues was completed on January 23, 2003 when the last set of written comments was filed by WG3 participants. By that time, the three interagency WG1 principals had held noticed workshop meetings on August 26, 2002; September 16, 2002; October 15, 2002; and December 10, 2002. WG3 held eight seven noticed workshops between September 19, 2002 and November 26, 2002.

Several parties have participated actively in the workshop process and have filed written comments on WG3 issues throughout Phase 1. These include respondents PG&E, Edison, and SDG&E, as well as the Office of Ratepayer Advocates (ORA), The Utility Reform Network (TURN), the California Consumer Empowerment Alliance (CCEA), the California Farm Bureau Federation (Farm Bureau), the Coalition of California Utility Employees (CUE), Consumers Union, IMServ NA (IMServ), Invensys Home Control Systems (Invensys), the San Francisco Community Power Cooperative (SF Co-op), and True Pricing, Inc. (True Pricing).

On December 10, 2002, WG3 filed its Report: "Proposed Pilot Projects and Market Research to Assess the Potential for Deployment of Dynamic Tariffs for Residential and Small Commercial Customers" (the "WG3 Report"). Parties filed written comments on this report on December 30, 2002. On January 10, 2003, the ALJ issued a ruling seeking further detail on some aspects of the December 30th Report, and parties provided written responses to that ruling on January 17, 2003. The respondent IOUs filed supplemental comments addressing expected bill impact issues on January 21, 2003. Two parties, SF Co-op and PG&E, filed supplemental written comments relating to one aspect of the WG3 Report on January 22 and 23, respectively.

No hearings were held in connection with the development of the WG3 Report. Though the Commission has categorized the proceeding as ratesetting and has acknowledged that hearings may be necessary during later stages of the proceeding, Phase 1 has proceeded as a classic notice-and-comment rulemaking. The OIR required filings from the respondent IOUs detailing their existing demand response programs and pricing options, but these filings neither framed the issues in this rulemaking, nor constituted the starting point for record development. Rather, WG1 provided specific direction to the parties at critical points in time through formally noticed meetings and rulings. The parties then took this direction, working with staff facilitators in WGs 2 and 3, and developed the proposals we address in Phase 1. Our decision-making record in connection with WG3 issues consists of respondents' formal demand response program/pricing option filings; the official transcripts of four formally noticed WG1 meetings; the rulings following those meetings and written comments thereon; and the WG3 report and related rulings and written comments.

For purposes of this decision, demand response is broadly defined as the ability of an individual electric customer to reduce or shift usage of demand in response to a financial incentive.2 Over the years the Commission has encouraged various forms of customer load reduction for small commercial and residential customers, including direct load control (air conditioners, water heaters, pool pumps), programmable/smart thermostats, Time of Use (TOU) rates, and efficiency investments (e.g., appliances, building upgrades, etc.) (see, OIR, mimeo. p. 3). In this rulemaking we explore a variety of programs, in conjunction with those listed above, designed to increase electric system demand-responsive capability.3

Specifically we seek to determine whether residential and small commercial customers will alter their usage patterns in response to a financial signal that is keyed to system conditions. And, if they do so, how will that change manifest itself? And finally, what are the societal costs and benefits of any such behavioral change? Well-informed decision-making requires such an informed assessment of customer response to dynamic rates.4

1 See, Informational and Rulemaking Proceeding on Demand Response Rates, Equipment, and Protocols, CEC Docket Number 02-Demand Response-01, issued July 9, 2002. 2 See, Glossary of Retail Electricity Rate Terms contained in the Report of Working Group 3 to Working Group 1, R.02-06-001, p.14. The Glossary is attached to this decision as Attachment A. 3 This proceeding is focused on the electric system, although the working groups have been authorized to explore metering cost/benefit issues relative to the dual-fuel respondent utilities during the pendency of this proceeding (ALJ's Ruling Following the First Meeting of Working Group 1, mimeo p. 15). 4 A dynamic rate is a rate in which prices can be adjusted on short notice (typically an hour or day ahead) as a function of system conditions. A dynamic rate cannot be fully predetermined at the time the tariff goes into effect; either the price or the timing is unknown until real-time system conditions warrant a price adjustment. Examples: real-time pricing (RTP). Critical peak pricing (CPP). See, Glossary of Retail Electricity Terms, Working Group 3 Report, p. 14.

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