III. Working Group 3's Recommendations

The WG1 principals assigned four tasks to WG3:

· Review the current literature and field experience to identify where significant information gaps exist relative to customer experience and response to dynamic tariffs or demand response programs.

· Recommend a strategy to fill these gaps including, but not limited to, additional market research, modifications to existing pilots of dynamic tariffs, or the design of new pilots to test dynamic tariffs.

· Propose an implementation plan and schedule to fill the gaps.

· Describe how the results from the pilots will be used to conduct further analysis in Phase 2, which is designed to assess whether these new dynamic tariffs and the infrastructure to support them are cost effective to both participating customers and all ratepayers.

In meeting its charge, WG3 presents a near-consensus proposal (the Statewide Pricing Pilot or "SPP") which integrates several pilot proposals presented over three months' time by various participants in the working group process. WG3 recommends that the respondent IOUs conduct market research to refine the dynamic rate and control technologies to be tested and then implement the SPP to test TOU and Critical Peak Pricing (CPP) tariffs for a representative sample of residential and small commercial customers on an opt-out basis. Most of the WG3 participants⁵ support the SPP "as is" or with minor modifications.⁶

There are two alternative or complementary pilot proposals. One is presented by Invensys, a meter service provider who proposes to test an advanced interactive technology treatment and dispatchable demand response offerings. The other is presented by IM Serv, which proposes to test the concept of providing customers with cash incentives (based on transmission and distribution (T&D) savings) for a combined integrated demand response/enabling technology and advanced metering open architecture solution directed toward reducing demand on constrained transmission and distribution circuits.

C. Summary of the Statewide Pricing Pilot

1. Research Objectives

The SPP is designed to address specific information gaps identified by WG3 after reviewing information gathered on over 100 experiments and programs conducted in California, other states, and internationally. This information shows that consumers do respond to time-varying prices by reducing usage during expensive time periods and shifting it to inexpensive periods. However, most of these studies occurred outside California and the bulk of them were conducted more than a decade ago. Much has changed since then in California, including the introduction of additional residential rate tiers and rate surcharges and a utility supply portfolio that combines utility-owned generation, long-term contracts signed by the Department of Water Resources (DWR), and spot market purchases. It also appears that customer demand response to time-differentiated prices varies by class (residential vs. small commercial), usage level, appliance holdings, climate, presence and absence of automated control capability, and program duration. However there is a general lack of information about small commercial customer response to CPP, and residential customer response to CPP without automated response technology.⁷ (WG3 Report, Section 2.1).

To address these significant information gaps, WG3 proposes a statewide pilot designed to gather specific information about price elasticities and customer preferences, testing the following features: California's current regulatory, energy, and economic climate; critical peak pricing with and without automated response; preferences of small commercial and residential customers; a variety of electricity usage levels, appliance holdings, and climate zones; and voluntary rates. Key issues to be addressed in the pilot are (1) the impact of new rates, information, and technology treatments on the average participating customer; and (2) customer preferences for rate and other treatment options and level of program participation. (WG3 Report, Section 2.7; Section 3.1.1.)

2. The Statewide Pricing Pilot's Basic Features

The SPP, which will run through the end of 2004, will measure the impact of three specific time-varying rates on customer electric consumption and coincident peak demand: TOU rates; fixed critical peak pricing rates (CPP-F); and variable critical peak pricing rates (CPP-V). TOU rates feature higher prices during one or two peak periods and lower prices during an off-peak period. CPP-F rates resemble a standard TOU rate on most days of the year, but have a fixed higher rate during ten to fifteen predetermined days of the year. Customers receive day-ahead notification for all CPP-F days. CPP-V rates differ from CPP-F rates in that the critical peak period may be called on the day of the event, and it is not confined to a fixed number of hours that are known in advance.

The SPP's primary target is residential customers, since earlier experiments show that they demonstrate much greater responsiveness to time varying rates than do commercial customers. However, the SPP breaks new ground by also including small commercial customers (WG3 Report, Section 3.1.2.2). Pilot participants will be drawn from four climate zones including customers of all three respondent IOUs. In one case, in response to SF Co-op's proposal, the pilot will include a module focused on a specific sub-population within the PG&E service territory.

The SPP will test three different rate structures: a static TOU rate, a CPP-F and a CPP-V. It will also, at a minimum, assess the impact of one information treatment and one complementary technology treatment. The specific characteristics of these treatment options will be refined based in part on input from ex ante market research, taking into account practical issues associated with implementation capabilities and schedule.

A static TOU rate can be implemented using manually read standard TOU meters, whereas a dynamic rate requires daily reads, and thus, remote meter reading capability. In testing three different rate structures, including both static (TOU) and dynamic (CPP-F and CPP-V) rate structures, the SPP will attempt to answer the question whether the incremental benefits of a dynamic rate are sufficient to offset the incremental costs when compared to both the existing rates as well as to a traditional static TOU rate (WG3 Report, Section 3.1.2.4).

The SPP will also provide data about the impact of information presented to participating customers, both general information and education about rates and other options available to the customer, and more specific and personalized information provided to the customer as input to the customer's ongoing usage decisions. In connection with the latter information type, the SPP will include a special feature suggested by SF Co-op, known as the "Track B pilot." One hundred electric customers residing in the Bay View, Hunters Point, and Potrero Hill districts of San Francisco (home to two aging power plants which generate above-average levels of air pollutants) will be randomly selected and provided with information about the economic and environmental consequences associated with peak power use, and informed of the potential to reduce reliance on a locally polluting power plant through adoption of the CPP-F tariff. These track B pilot participants will receive educational information regularly and periodically to reinforce this message, and will be contacted via various communication means when the critical peak periods are occurring. The SPP will include a control group of 100 electric customers randomly selected from another Bay Area community situated near a known and publicized environmental hazard, with similar socio-economic and demographic characteristics, and similar climatic and other demand-driving conditions. The Track B pilot will provide data about how environmentally oriented information, provided to a population with heightened sensitivity about air quality issues, may increase responsiveness to CPP-F.

Studies have shown that dynamic rates combined with enabling technologies can produce substantial load shifting but that substantial load shifting can also occur without such devices. Enabling technologies can be installed at the customer site to control automatically the operation or cycling of one of more domestic appliances in response to a price or emergency signal. These technologies "enable" the customer to respond to signals by pre-programming control devices that will reduce electricity loads even if the customer is not at home. The SPP will examine relative responsiveness to dynamic rates with and without such technology, with further details to be developed during ongoing working group discussions. One current idea under exploration is to offer CPP-V customers a choice of technologies including direct load control, timers for swimming pool pumps, and smart thermostat technology that is currently being tested by SDG&E and Edison under existing pilots. While several WG3 participants propose more sophisticated automated control technologies involving always-on gateway systems which would facilitate incentive-based systems, the majority of the WG3 participants agree that, at this time, the SPP should focus on dynamic rates rather than incentives because (1) this will reduce implementation complexity and allow the SPP to begin collecting Summer 2003 data, (2) such advanced technologies appeal to very high use customers and as less important to the general decision regarding wide scale deployment of advanced metering, and (3) the simpler technologies are sufficient to support the CPP-V rate being tested.

The 2,575 customers participating in the SPP are assigned to various tracks⁸ which are designed to simulate the effects of a large scale roll-out of time-varying prices. Track A is a random sampling of each respondent IOU's residential and small commercial customers from various climate zones; each customer is placed on a time varying rate or a control rate depending on their allocated cell. Those customers on a time varying rate could opt out at specified time(s). Track B is the SF Co-op pilot previously described, which also involves a random customer selection. In addition to those customers randomly selected, 400 of the 2,575 pilot participants are taken from the ongoing Smart Thermostat pilot being conducted in the SDG&E and Edison service territories under Assembly Bill (AB) 970 (Stats.2000, c.329). These customers have opted into the program, which provides them financial incentives in exchange for agreeing to raise their thermostat setting by a few degrees during critical peak periods. For these customers, the program would be changed so that the financial incentive is not given to them in the form of a cash payment, but is structured around a CPP-V price. While not randomly selected (and thus not providing usage change data that would be generalized to the population from which they are drawn), the analysis of these customers' usage changes would provide useful data about how "opt-in" customers respond to pricing incentives in the presence of enabling technology (WG3 Report, Section 3.1.2.5).

3. The Statewide Pricing Pilot Implementation Plan
and Schedule

At the present time, and continuing in varying degrees over the next

several months, several implementation activities are required. These include finalizing and obtaining approval for the conceptual pilot design and associated tariff design; completing the sampling plan and drawing the sample; designing and implementing the customer contact plan (notification of meter installation, pilot enrollment, etc.); acquiring and installing meters; undertaking customer education and notifying customers of their participation in the pilot; developing and undertaking customer surveys; developing data retrieval, data framing, and billing capabilities; educating employees; and evaluating the data, a process that will occur throughout the pilot. The evaluation plan is key to determining the extent to which customers respond to time varying prices, in the presence and absence of complementary information and technology treatments, and to assess how responsiveness varies with customer characteristics, weather and other determining factors. The pilot will also provide information about customer opt-out rates.

4. Statewide Pricing Pilot Costs

The total cost for the SPP, as proposed, is $9.6 million. These costs cover such items as project management, customer education, customer notification and contact tracking, meter hardware and installation; meter reading and communication; data retrieval, validation, and management; billing system interface development and implementation; information treatment; enabling technology treatment; and a variety of planning and evaluation activities. Some of these costs are fixed, while others are primarily variable.

WG3 estimates that the average variable cost per residential customer pilot participant will equal $2,500 and about $3,000 for each commercial customer participant, for a total variable cost figure of $7.1 million (WG3 Report, Tables 3-2 and 3-3).

The fixed costs of the SPP are $2.5 million. They include $800,000 for ex ante, concurrent and ex post market research activities; $300,000 for refinement of the sample design and the rate, information and technology treatments; $750,000 for impact evaluation activities; and $650,000 for project management activities to be undertaken by the three respondent IOUs. (WG3, Section 3.1.4.)

5. Market Research

Pilots of this size require a market research program in order to ensure that the pilot is understandable to customers and does not impose undue hardship on participants. Market research can provide unique insights into customer needs and preferences and help fine-tune rate treatments offered in the pilot. It can also determine the optimal amount of information that should be provided to participants, and the specific types of enabling technologies that should be utilized.

WG3 recommends that a limited amount of market research be conducted prior to the decision approving the SPP, given the lead time necessary to develop tariffs, choose samples and install meters and other enabling technologies and the narrow window of time prior to Summer 2003, when the SPP should be up and running. There are key questions to be explored during this period, including: How can the concept of time-varying pricing be explained to customers? What features of TOU and CPP pricing appeal (or do not appeal) to customers? How can time-varying options be designed to maximize customer acceptance? What should be the length, timing and number of peak periods? What combinations of peak and off-peak prices can customers cope with? Can customers respond to CPP pricing without enabling technologies? Is there any customer interest in day-ahead or hourly real-time pricing? What information treatments are desirable/acceptable? What types of notification procedures are desirable/acceptable? What minimum information should be made available to customers? Under the direction of the WG3 staff facilitator, this ex ante market research is underway now, employing approximately a dozen focus groups throughout the state. The estimated cost of the ex ante phase is $100,000.

Once the SPP is underway, additional market research will be conducted to determine whether rate features, information treatments, and technology treatments are working optimally. Using a variety of survey methods, this concurrent market research will also attempt to measure customer understanding of, and satisfaction with, the SPP; it will also determine problem areas and provide remedies where possible. (WG3 Report, Section 3.1.4.2.) The estimated cost of the concurrent market research phase is $500,000.

Finally, participating customers will be surveyed at the conclusion of the pilot (ex post market research) to obtain their views about the specific rate they were on, and the information and technology treatments they experienced (WG3 Report, Section 3.1.4.3). The estimated cost of the ex post market research phase is $200,000.

6. Cost-Benefit Analysis of the Statewide Pricing Pilot

WG3 believes that the real benefit of the SPP is the improved decision making that will result from the pilot's narrowing of the range of uncertainty about the net benefits of dynamic pricing. This value is estimated in the WG3 report to exceed, twenty times, the pilot's proposed $9.6 million cost. (WG3 Report, Section 3.1.5). However, in response to WG1's request that WG3 estimate the net benefits of the peak load reductions caused by SPP, WG3 indicates that the pilot is unlikely to show positive net benefits because communication and metering costs are higher by an order of magnitude during the pilot phase. Assuming gross SPP costs of $9.6 million, and gross benefits of $0.155 million⁹, as proposed, the SPP reflects an annual net cost of $9.4 million. (See WG3 Report, Section 3.1.5.3.)

D. Alternative Pilots

Two alternative pilots are presented by two parties who were active in the WG3 process.

1. The Invensys Pilot

The first proposal is presented by Invensys, and is designed to test the effectiveness of an advanced interactive technology treatment and Dispatchable Demand Response offerings. The pilot assumes that a subset of 20-35% of households in the state represent a target set that could represent substantial loads in a dispatchable demand response setting. The Invensys pilot has two options:

Option 1 is a stand-alone pilot that would supplement the SPP. It would include 3,000 "points" and test 37 participants per cell (based on 3 climate zones, 3 social demographic segments, 3 marketing programs, and 3 incentive treatments). Invensys envisions that it would undertake a turn-key program, including recruitment, installation, and operation. The pilot includes software program monitoring and "power plant" interface; consumers would have access to their home control and energy information through a variety of easy-to-use interfaces. The cost per pilot is $1,500 per "point," excluding additional program evaluation costs estimated to be $1 million to $3 million per pilot. Invensys estimates the average peak load reduction per qualified target home at 2.3 kilowatt (kW)
(a figure that requires verification), resulting in an estimated cost effectiveness for the pilot of $652 per kW, with an estimated customer churn rate of less than 2% per year. (WG3 Report, Section 3.2.2.)

Option 2 proposes that 300 points be added as cells to the SPP. This would test enabling technology for a dispatchable incentive. As with Option 1, Invensys would provide a turn-key program, including recruitment, installation and operation. Option 2 differs from Option 1 because it represents a limited test of dispatchability, and focuses instead on supplementing the SPP tariff with a technology treatment. The Invensys pilot differs from the SPP in that (1) it tests dispatchable demand response programs using a fully functional advanced technology platform; and (2) it includes additional load types over HVAC and a platform capable of later including appliance loads.

2. The T&D Control Pilot

A second pilot proposal, known as the T&D Control Pilot Proposal, is submitted by IMServ. The IMServ pilot is not meant to replace other pilots, but to complement them. It would test the concept of providing incentives (based on T&D savings) for a combined integrated demand response/enabling technology and advanced metering open architecture solution directed towards reducing demand on constrained transmission and distribution systems. Pilot features include: wider participation, including direct access customers; a focus on reducing T&D constraints, which may not coincide with critical peak generation; a focus on developing sufficient information for a full-scale effort in Phase 2 of this proceeding featuring open architecture meters that could be accessed through multiple technologies such as radio and telephone; and customer-specific solutions ranging from web-based information and feedback systems to advanced automated facility load controls. The pilot's target population includes both direct access and utility customers, located in areas where there are critical T&D constraints. Such customers could be above and below 200 kW.

IMServ asserts that long-run program costs will approach revenue neutrality since the program's emphasis is to reduce T&D costs. The cost of the pilot will be controlled by the cost benefit ratio (still undetermined) of program cost to expected benefit. T&D benefits must be developed by the local utility. While it has not engineered a typical system, IMServ calculates that an advance meter with a web-based customer information system could cost $1,000 to $3,000 with additional operating costs (WG3 Report, Section 3.3.10)

E. Dissenting Viewpoints

Four parties, TURN, ORA, PG&E, and SCE, took advantage of the opportunity to submit dissenting viewpoints in the WG3 Report.

1. TURN's Concerns

TURN¹⁰ does not support universal deployment of advanced meters, but believes there may be specific applications of dynamic pricing and advanced meters that provide meaningful demand reduction and participant savings for small customers. However, it feels that inquiry has been sacrificed in this rulemaking for an "all or nothing" approach. Nonetheless TURN does not oppose the SPP and hopes that it will produce meaningful data that will steer decisionmakers in the correct direction. If the SPP results show that only specific advanced metering and dynamic pricing applications are cost effective, decision makers should not leap into a multi-billion dollar decision to invest in system deployment. Further, in Phase 2 the Commission should evaluate alternative methods of cost recovery for advanced metering.

TURN believes that most small customers will not benefit from TOU pricing, arguing that smaller customers that might benefit from time-differentiated pricing due to their load shapes don't have enough load to shift to pay for the meters. In addition, TURN states that metering costs are traditionally allocated mainly to small customers as customer costs, which utilities prefer to recover as fixed customer charges - further dampening customer incentives to shift load. TURN acknowledges that the preliminary business case presented by PG&E during WG3 meetings is not part of our Phase 1 decision-making process, but believes that still preliminary analysis demonstrates nothing more than the notion that universal deployment is very uncertain at this point.¹¹

TURN believes that WG3 has ignored many tools already available to achieve demand response. In particular it notes that for close to 25 years, inverted tier rates have significantly reduced overall energy usage by sending a significant conservation message. Inverted tier rates may also provide associated peak demand reductions, which TURN regards as a more valuable resource than mere load shifting.

TURN also believes that air conditioner (A/C) cycling programs have provided some of the most reliable demand reduction in the nation. Edison has had a successful program for many years. The Independent System Operator has always dispatched it before other demand response programs, especially those based on price response. According to TURN, A/C cycling programs on average result in 2.3 kW/unit of reliable demand response compared to current forecasts of 0.9 kW/unit in demand reduction in SDG&E's more expensive Smart Thermostat Program. In response to WG1's desire that WG3 develop some alternatives to a Summer 2003 "quick win," TURN states that the greatest potential lies in requiring the utilities to ramp up their existing A/C cycling programs (WG3 Report, Section A.1.3). We note that A/C cycling programs were originally not part of the scope of this proceeding, since they were being addressed in our interruptible rulemaking (R.00-10-002). Now that that proceeding has been closed, it may be appropriate to revisit A/C cycling's contributions to demand response here. In addition, we note that due to Edison's existing large A/C cycling program, we already have a great deal of information about customer response to A/C cycling programs. Our focus in this proceeding and this decision is on gathering further data on customer response to various programs and tariffs as yet untested in California.

Finally, TURN believes that the Commission should address meter ownership/cost recovery issues and evaluate the elimination of the incumbent utilities' competitive advantage regarding meter installation in Phase 2 of this rulemaking. By ALJ Ruling in Application (A.) 99-06-033, the Commission has requested parties' views on whether the latter issue should be moved to Rulemaking (R.) 02-06-001.

2. ORA's Concerns

ORA¹² supports the SPP, but suggests that its "voluntary opt-out" feature be changed by offering customers a monetary incentive to participate. It believes that an incentive of $100 would add about 3% to the cost of the SPP and would still preserve the statistical and legal integrity of the test. Such a payment should not affect customer behavior once customers are on the tariff.

ORA also recommends that the SPP be modified to include an hourly pricing treatment beginning in October 2003, in coordination with the IOUs' efforts in WG2 to develop a production scale hourly pricing tariff. Hourly prices should not be ruled out for residential customers because forecasts of wholesale prices over the next four or five years indicate that price variation by TOU period in California will not be much higher than they were in Puget Sound's territory. However, there may be temporary price spikes hidden by the level of aggregation in TOU, and even CPP, rates. ORA notes that studies indicate TOU rates only capture about 10% of real-time price variation, whereas a day-ahead hourly price can capture 60 to 70%. For this reason, hourly pricing should be given serious consideration (WG3 Report, Section A.2.2.1).

3. PG&E's Concerns About the Invensys Alternative Pilot Proposal

The Invensys technology treatment is virtually identical in concept to that proposed in the SPP, except that Invensys proposes to dispatch loads other than air conditioning using a prototype "gateway" technology; however, for a variety of reasons, PG&E does not support the Invensys alternative.¹³ First PG&E is concerned about the additional cost of the alternative, as it is interested in keeping pilot costs to a minimum while maximizing the information the pilot produces. Key to this is keeping the number of pilot customers and technology treatments to a minimum. Second, the alternative focuses on the dispatch and direct IOU control of many customer loads. Thus the alternative would not focus on gaining insight about customer response to dynamic pricing, but would require more complex rate structures and incentive payments. Third, PG&E believes that no CPUC-ordered demand response pilot of this type should be implemented based on the deployment or selection of a single manufacturer's technology. A proper technological assessment is required before such a decision. In sum, PG&E maintains that the alternative pilot will not add significant value to what the SPP will provide, and the complications of implementing the pilot will jeopardize the goal of having a pilot in place to collect Summer 2003 data (WG3 Report, Section A.3.1).

4. Edison's Concerns About Both Alternative Pilot Proposals

Edison¹⁴ believes that the Commission lacks the information to determine whether the Invensys-proposed technology treatment is superior or inferior to any of the other alternatives, and that making a vendor-specific award is imprudent in the absence of a technological assessment. And while Invensys claims that its implementation costs are less than those associated with the IOU pilots, there is no information supporting this claim. Also the IOU pilots are intended to provide the data necessary to measure and evaluate load response base on a variety of conditions; thus the pilot technology options proposed by the IOUs are not necessarily representative of the technologies that could be implemented on a wider scale. The IOU pilots focus on A/C load since that remains the largest contributor to peak demand. Finally, Edison argues that there are numerous rate treatments that could be considered, including a reward system such as that proposed by Invensys, but that rate treatments should be limited in order to limit pilot costs (WG3 Report, Section A.4.1).

Edison also opposes the IMServ T&D Control Pilot proposal that would offer customers T&D credits for reducing T&D costs. Edison believes the alternative proposal is insufficiently detailed; that currently it is premature and inappropriate to work towards developing a T&D incentive-based program, since the another Commission proceeding (R.99-12-025) is delving into related T&D issues; and customers who reduce demand or move demand off-peak already benefit from reductions in distribution costs due to reduced peak or non-coincident demands (WG3 Report, Section A.4.2).