IV. Discussion

A. Modifications to the SPP's Basic Features

While we appreciate that WG3 has worked most diligently to produce a near-consensus pilot proposal, we will modify the SPP in some respects before approving it. Our modifications focus on the SPP Track B and SPP Track C pilots, customer participation in the SPP, and the SPP's information and technology treatments. As noted more specifically below, some of the required modifications will impact the timing of certain SPP elements and the SPP's cost.

There are some suggested revisions to the SPP and the overall Phase 1 approach that we do not adopt. For example, TURN, which generally supports the SPP, has raised a fundamental question about whether many residential customers consume energy at sufficient levels to make it cost effective for them to shift load. This is an important issue, but it is exactly the type of inquiry that cannot be assessed without obtaining additional empirical data of the type the SPP is designed to generate. And it is not a reason to disapprove the SPP as currently presented. If it develops that the SPP demonstrates that low usage customers cannot benefit from dynamic tariffs, that will be the time to focus on other alternatives for such customers. That said, we are not in any way ignoring those alternatives in this proceeding. Indeed we are prepared in this proceeding to seriously explore making more demand response available by aggressively advancing existing A/C cycling programs, and promoting new ones, as discussed below in connection with newly enacted Pub. Util. Code § 2774.6.

We also decline to broaden the dynamic tariff offerings included in the SPP to include an hourly pricing treatment beginning in October 2003, as proposed by ORA. While this idea may have merit in the future, it is simply too costly and speculative at this point to include this option in the SPP. Once a reliable hourly-price is available and we have more information about potential customer interest in such an option, it is possible we may revisit this decision and decide to test an hourly pricing option for small customers in Phase 2 of this proceeding.

1. The Track B Pilot Proposed by SF Co-op

As discussed, the Track B pilot sponsored by SF Co-op, is a strong community-based effort targeting low-income customers in an urban area suffering air quality problems due to aging power plants. Though a relatively small number of customers are included in Track B, we believe there is merit in testing this community-based approach because it will test the benefits of providing environmental education associated with peak power usage in areas suffering from poor air quality. SF Co-op also notes that Track B specifically addresses TURN's concern that residential customers may not have sufficient levels of consumption to cost effectively shift power, because Track B is designed to determine how environmental motivations, combined with low-cost information tactics, will affect household electricity use behavior.

We will hold the respondent IOUs responsible for ensuring that every SPP cell, not just that included in Track B, has a viable control group. And we are concerned that, while WG3 will include a control group of 100 customers from another similarly situated Bay Area community, the selected control group for Track B must be representative of the Track B participants. To that end, it must include similar households (including a sufficient number of low-income participants) who face the same environmental degradation and/or reside in transmission-constrained areas. We expect this concern to be addressed by PG&E.

There is some disagreement between SF Co-op and PG&E over pilot funding and SF Co-op's involvement in the pilot.¹⁵ While the Track B pilot was developed as part of the SPP, which will be undertaken by PG&E and the other respondent IOUs, SF Co-op believes that funding its collaboration with PG&E, particularly in the areas of properly developing and analyzing the pilot, is necessary to ensure the pilot is implemented cost-effectively. SF Co-op acknowledges that it will work under the project management and analytic guidance of PG&E, but it also believes that as a community-based organization, it has a unique capacity to develop, implement, and analyze the project, most notably its educational and information-gathering features. To that end, SF Co-op requests $142,000 for its role in pilot development, implementation and analysis, which it argues is less than 25% of the IOUs' proposed funding level.¹⁶ In response, PG&E notes that the IOUs are ultimately accountable for justifying the cost-effectiveness of implementing funds, including those related to PG&E's compensation of SF Co-op consultants who will be working on the Track B pilot under PG&E's project management. PG&E also notes that the current SPP budget includes at least $625,000 for the Track B pilot, and some portion of the evaluation budget for the entire SPP also covers Track B pilot evaluation. To the extent that SF Co-op's expertise will be used, the cost of funding those activities is included in the current budget at a figure of approximately $100,000. So this dispute essentially raises the question whether the Commission should authorize the $142,000 requested by SF Co-op or allow PG&E, in its capacity as project manager, to compensate SF Co-op's educational and implementation activities at the appropriate level.

It should be clear that we are holding PG&E responsible for the success of the Track B pilot. There is no dispute between these parties as to PG&E's role as project manager. There is no dispute between them regarding SF Co-op's crucial SPP role. PG&E will compensate SF Co-op for these efforts. Thus we will not specifically authorize SF Co-op's $142,000 request.

2. The Track C Pilot

The Track C pilot consists of over 400 customers currently participating in the ongoing Smart Thermostat program being conducted in the Edison and SDG&E service territories under AB 970. Unlike others participating in the SPP, these customers will not be randomly selected. Essentially they will be "borrowed" from an existing experiment. There they are volunteers, compensated on an incentive basis, although the current incentive mechanism will be altered for purposes of SPP. Track C of the pilot will test whether these customers will give up the current guaranteed incentive payment in favor of CPP-V tariff option. Track C is one way SPP proponents propose to test enabling technologies in conjunction with CPP tariffs, and thus the proposal has great value. Track C also augments existing program infrastructure, thus minimizing incremental cost. We do have one concern about the validity of the results of the Track C pilot, given that the customer recruitment method will differ from that in Tracks A and B. To ensure valid results, we expect respondents to undertake additional effort in the form of alternative recruitment in order to make Track C a more representative sample and ensure adequate control groups for comparison purposes, or propose a method of validating these results.

3. Customer Participation in SPP

While randomly selected customers will have the opportunity to "opt out" of the SPP, the IOUs prefer that customers remain in the pilot for a minimum of four months prior to opting out.¹⁷ But this issue will not be decided definitively until the current customer focus group effort is completed. In its dissenting remarks in the WG3 Report, ORA proposed a $100 incentive payment to encourage participation. The IOUs now favor the payment of a $100 "appreciation bonus" at the end of the four-month commitment period, i.e, the end of the summer of 2003. This would not be an inducement to participate, but compensation for any inconvenience the customer experiences for being included in the pilot. We agree with this approach. Further, the IOUs are making efforts to minimize the number of situations where a customer opts out after a meter is installed.¹⁸

CCEA, which is actively participating in enrollment issues, notes that there are at least four enrollment goals the SPP must meet: 1) the SPP must enroll a representative sample of customers to maintain the integrity of the experimental design and ensure the validity of the experimental results; 2) the SPP must maintain a high level of customer satisfaction; 3) the SPP must promote retention of the participants for at least one summer; and 4) the SPP must minimize costs. CCEA suggests that the ideal way to achieve these goals is to select a statistically random sample and persuade those selected to participate voluntarily. This approach, combined with the "appreciation bonus," will enhance the voluntary aspects of this pilot's enrollment process, even though, technically speaking, the process allows the unhappy customer to "opt out." Those WG3 participants who are working on SPP enrollment issues should follow this approach.^{19 20}

4. Information Treatments

We are concerned that the SPP, as proposed, does not explicitly state what types of feedback will be made available to customers regarding the kW or dollar impact of their curtailment actions on either a daily or monthly basis. We are concerned that this omission may make it difficult, if not impossible, to evaluate whether or not the availability of explicit metering information or feedback has an effect on the level of demand response achieved. Accordingly we will direct the respondent IOUs to make a compliance filing discussing the feedback options they will provide to participating customers and how they will evaluate the impact of this feedback on kW reductions. We expect that at a minimum, the IOUs will give customers the opportunity to access this information through access to a web site or through some more informal mechanism such as the use of an on-site display of load shape data.

5. Technology Treatment Issues

WG3 proposes to offer control or enabling devices to customers on the experimental CPP-V rate using only one type of technology (smart thermostats) and only in Track C. We prefer that the IOUs offer customers a choice of control devices based on the appliances they have and how much they use them. We will direct the respondent IOUs to offer customers on the CPP-V rate in Track A a choice of load control devices based on an inventory of their own appliances. Thus, in addition to testing smart thermostats for heating, ventilation and air conditioning (HVAC) control in Track C, the experimental design should offer to provide load control enabling technologies to customers for at least the following additional appliances: pool pumps and electric water heaters.

We will direct the respondent IOUs to offer these options to customers who have this equipment, as well as air conditioning, and integrate these additions into the existing sample design for Track A. We anticipate that offering these additional control options might have an impact on the starting date for these customers, and we understand that there will be a cost impact, which we intend to cap at $1 million. But, on balance, it is more important to ensure the testing of a full range of technological options for enabling demand response, even if this causes some slippage in our deadline and some cost impact.

6. Adoption of the Alternative Pilots

At this time we will not adopt either of the alternative pilots. We regard both alternatives as early stage proposals, which require more detail prior to adoption.

The IMServ-sponsored T&D Control Pilot, which would offer customers T&D credits for reducing T&D costs, is not confined to residential and small commercial customers who are the focus of this decision, but really addresses the combined WG2 and WG3 customer base. It is very large, arguably not a pilot. It requires more detailed development, and a commitment by this Commission to move towards a T&D incentive-based program, which we believe to be premature based on the state of this record.

We do see some merit in testing the demand response capabilities of a full scale system (comparable to that proposed by Invensys), with the following capabilities:

· Ability to control multiple customer appliance loads based on customer programming.

· Customer ability to override any price or emergency signal.

· Ability to receive and send signals related to pricing conditions, electricity load levels at the house, status of selected appliance loads (on or off), and load drops achieved.

· Capability of handling either pricing or load curtailment signals.

· Capability of confirming the level of load reduction achieved within 1 hour of a price or emergency signal (confirmation for both the operator of send of the signal and the receiving customer).

· Capability of using existing communication lines into the home to send and receive signals (e.g., existing cable or phone lines).

We will direct the respondent IOUs to develop a plan to evaluate the impacts of this type of control system by proposing a method to integrate the installation of these devices at a representative sample of homes during the later stages of this pilot. We envision the IOUs procuring this technology in the fall of 2003, integrating the system with the current utility billing system in the winter of 2003, installing the devices in the spring of 2004, and measuring the impacts of these systems in the fall of 2004. The IOUs should develop a draft plan based on this guidance by June 2003, seek comment on the plan from others participating in WG3, and then file and serve the final plan by July 1, 2003. The budget for the incremental costs of this plan should not exceed $1 million. We will direct the Energy Division to review this plan and budget and then make a recommendation to the ALJ on whether the utilities should proceed to implement the plan as presented.

7. SPP Timing Issues

We keenly appreciate the respondent IOUs' and other parties' efforts to develop and implement the pilot before the start of this summer (or by June 1, 2003), but we caution that it is more important to get things right - especially the decisions that must still be made about the design of the dynamic tariffs and the necessary customer education efforts. We would prefer that the IOUs consider offering SPP participants at least a one-month period to get adjusted to the new dynamic rates, perhaps through the presentation of an old bill and a new bill for the first month, than expecting customers to both understand and adjust to the new rates and enabling technologies on the day that the new meters are installed. Accordingly we ask that the IOUs make every effort to make the June 1 date, but we understand that July 1 may be more realistic. After they have analyzed the net effects of the SPP changes mandated in this decision, we will require the IOUs to file a compliance filing containing a revised pilot schedule.

B. Legislative Mandates

This decision also addresses the Commission's compliance with three legislative measures that address demand response programs and policy.

1. Public Utilities Code Section 393

Under this existing law, the Commission is required to conduct a pilot study of the residential and small commercial customers of each electrical corporation, where the rate level established in subdivision (a) of Section 368 is no longer in effect, to determine the relative value to ratepayers of various information, rate design, and metering innovations for helping residential and small commercial customers better manage their electricity use. (Pub. Util. Code §  393.)

Section 393 requires that such study contain a review and net benefit comparison of several approaches, including the retrofit or replacement of existing meters with meters having real time capability; retrofit or replacement of existing meters with TOU meters that distinguish and measure peak and off-peak energy use; and the replacement of residential and small commercial meters with meters that facilitate the offering of hourly real time pricing. The study must answer discrete questions about the impact of varying degrees of enhanced usage data on customer usage behavior (Section 393(b)(1) through (6)). Finally, the study must meet certain conditions: participation must be limited to a small sample, comprising less than 3% of the electric utility's customers (Section 93 (c)(1)); participating customers must reflect a variety of climate zones and socioeconomic circumstances (Section 393(c)(2)); no customer is required to participate in the study (Section 393 (c)(3)); offerings must be identical among participating electric corporations, although some alternative offerings are allowable (Section 393 (c)(4) and the Commission may alter the pilot study if it finds that it is in the public interest to do so (Section 393 (c)(5)); and all interested energy service providers and equipment manufacturers are to be included in the design and implementation of the pilot study (Section 393 (c)(6)). Finally, Section 393 (f) prescribes technical specifications to be met in carrying out the study, including the requirement, rooted in customer privacy concerns, that information based upon customer data not be used for any commercial purpose without the express authorization of the customer (Section 393 (f)(7)).

The parties who participated in crafting the SPP believe that the proposed pilot generally fulfills the requirements Section 393 specifies for a dynamic pricing pilot. And while the SPP does not implement each feature of the legislation as written, these parties believe it does fulfill the general objectives of the legislation, consistent with the Commission's authority under the legislation to alter the pilot in certain circumstances.²¹ For the reasons stated below, we agree.

While the SPP does not test hourly real-time pricing, as mandated by Section 393 (a)(3), the absence of an hourly market makes such a pilot test infeasible at this time; the SPP does test CPP and TOU meters, the latter a requirement of Section 393(a)(2). The information treatments to be included in the SPP will generally provide valid randomized customer use data, as required by Section 393 (b).

The SPP, as approved, will meet most of the conditions outlined in Section 393 (c). The number of participating customers is limited and does not exceed 3% of the respondent IOUs' customers, as required by Section 393 (c)(1). The SPP participants will be selected from comparable geographic areas, from a variety of climate zones, and from a range of socioeconomic circumstances. There will be control groups. Thus the SPP meets the conditions required in Section 393(c)(2). No randomly selected customer who agrees to participate in the SPP (and who will receive an "appreciation bonus") will be required to participate in the pilot study beyond Summer 2003, due to the nature of the recruitment and opt-out features adopted in this decision, thus enhancing the voluntary aspects of pilot participation. (Section 393 (c)(3).) To the extent the SPP may be perceived to be less than fully voluntary, it is our judgment in authorizing this pilot, that the adopted enrollment approach is in the pubic interest (Section 393 (c))5)). The SPP offerings of the respondent IOUs are very similar and allow for comparison of data and results, as required by Section 393 (c)(4). Interested energy service providers and equipment manufacturers have fully participated in the WG3 process, have contributed meaningfully to the SPP, and have presented alternative pilots, although none of these alternatives is adopted in Phase 1. Although this outcome does not meet the literal terms of Section 393 (c)(6) requiring inclusion of such parties in the design and implementation of the pilot, nonetheless the Commission is authorized in Section 393 (c)(5) to alter the pilot study in this manner if it finds such an outcome is in the public interest. We have done so in this decision.

Section 393 requires that the study data be available to the public and that the data be provided in a way that does not reveal customer-specific information (Section 393 (e)). We will impose this condition on the respondent IOUs.

And, while the SPP does not meet all of the precise technological standards specified in Section 393(f), we believe it is in the public interest in this instance not to be quite as prescriptive, and to give WG3 some flexibility in this area. However, consistent with Section 393(f)(4), we will require that any meter installation done as part of the SPP not compromise customer or worker safety or the integrity or accuracy of the meter. And consistent with Section 393 (f)(8), in order to ensure customer privacy, we will mandate that information based upon customer data derived from the SPP not be used for any commercial purpose.

2. Senate Bill 1976

Noting the existing legislative requirement embodied in Pub. Util. Code § 393, a more recent legislative mandate (SB 1976) enacted in 2002, requires the CEC, in consultation with the this Commission, to report to the Legislature and the Governor by March 31, 2003, regarding the feasibility of implementing real-time, critical peak, and other dynamic pricing tariffs for electricity in California for a variety of customer classes (not just residential and small commercial classes), as strategies that can either reduce peak demand or shift peak demand load to off-peak periods (SB 1976, Sec. 2.) The record developed and the programs approved in this rulemaking (and the contemporaneous CEC rulemaking) will provide much of the data necessary to make this required report, and we will continue to work to meet our reporting obligation based on these interagency efforts.

3. Public Utilities Code Section 2774.6

Senate Bill (SB) 1790 approved by the Governor on September 15, 2002, added Section 2774.6 to the Pub. Util. Code. § 2774.6 requires the Commission, in consultation with the CEC, to develop a program for residential and commercial customer air-conditioning load control, as an element of each electric corporation's tariffed service offerings paid for with electric rates. The goal of the program is to contribute to the adequacy of electricity supply and to help customers reduce their electric bills in a cost-effective manner. The program may include peak load reduction programs for residential and commercial air-conditioning systems, if the commission determines that the inclusion would be cost-effective.

The funding levels of A/C cycling programs for Edison and PG&E are currently under Commission review in other proceedings. Edison currently has a program in place, and the funding level for the program, which will impact the program's pace, is under review in its Test Year 2003 general rate case. As a result of the Commission's mandate in D.01-04-006, PG&E has filed via advice letter a proposal for a limited participation A/C cycling program for residential and small commercial customers; that matter is currently pending. As noted previously, TURN is urging the Commission to order the IOUs to "ramp up" these efforts as a method of more effectively achieving a "quick win" in the demand response area. In general we agree with TURN's sentiments but had originally limited the scope of this proceeding to exclude A/C cycling programs, due to their being addressed in R.00-10-002. Now that that proceeding has been closed (D.03-01-080, issued February 4, 2003) , we plan, in Phase 2 of this proceeding, to review the contribution that cost-effective A/C cycling programs, as peak load reduction programs undertaken by respondent IOUs, can make in meeting the interagency demand response goals we have articulated in this proceeding. In this way, we also intend to continue complying with newly-enacted Section 2774.6 by augmenting our A/C cycling efforts.

C. Phase 1 Cost Recovery Issues

The WG3 report includes respondent IOUs' comprehensive cost recovery proposal for both large customer (>200 kW) and small customer (<200 kW) demand response programs adopted in Phase 1 of this proceeding. As such, the proposal is not confined to costs associated with the SPP, but also includes demand response tariffs and programs emanating from WG2 which will be addressed in our second Phase 1 decision. The proposal covers cost items directly related to assessing, acquiring, deploying, installing, operating and maintaining advanced metering technologies (including directly-related communications hardware, billing systems, and measurement data collection software enhancements), and all incremental costs of designing, implementing, and marketing all approved programs, tariffs, and pilot studies.²²

The respondent IOUs request authority to (1) establish regulatory accounts to record incremental one-time and ongoing program costs not currently covered in rates; (2) use established balancing accounts to recover under-collected revenues; and (3) use established balancing accounts to recover customer incentive payments.

Since many SPP-related activities are already underway in order to ensure that the pilot is underway by early Summer 2003, the respondent IOUs proposed in the WG3 Report that the Commission establish a cost recovery vehicle for one time and ongoing incremental operations and maintenance (O&M) and administrative and general (A&G) costs associated with work performed prior to issuance of this decision, authorizing each respondent to create a regulatory account (the Advanced Metering and Demand Response Account, of AMDRA) to record such costs, which would be capped at $1 million for the three respondents combined. Respondents requested that the AMDRA for such pre-decisional expenses be established by ruling issued prior to this decision (WG3 Report, Section 6.2.3).

Following this Phase 1 decision, respondents propose that one-time and ongoing incremental O&M and A&G costs authorized by the Commission be estimated and planned for the next five years. As proposed, the Commission would remove or increase the previously approved $1 million cap and allow the IOUs to record additional one-time and ongoing incremental capital, O&M, and A&G costs for approved tariffs and programs, the SPP and any preparatory work necessary to implement future decisions issued in this rulemaking. Each year's recorded O&M and A&G costs would be recovered in the subsequent year via an annual advice letter filing, which effectively adds these costs the IOUs' annual revenue requirement, using adopted cost allocation and rate design parameters.

Respondent IOUs propose that all capital additions be treated as authorized additions to plant and associated annual depreciation expense as authorized additions to the revenue requirement. They note that authorized capital expenditures can be rewarded on a cost-per-customer basis (e.g., advanced meters), or a total estimated basis (e.g., billing system addition or measurement data collection software).²³ Commission authorized programs that require IOU incentive payments will be recorded in the appropriate regulatory account. Finally, the parties propose that revenue shortfalls (due to events such as load shifting, load reduction, or bill credits) resulting from programs offered to bundled service customers should be recovered from all bundled service customers through each IOU's existing balancing accounts (SDG&E's ERRA; PG&E's ESPBA²⁴ and TRA mechanisms; and Edison's PROACT).²⁵

We declined to establish AMDRA via ruling issued prior to this decision. While we appreciate the fact that parties felt some lead time activities were required in order to launch the SPP during Summer 2003, we were unwilling to authorize recovery of any such expenditures incurred prior to this decision, even on a capped basis, in the interests of affording the full Commission the opportunity to completely review the SPP's proposed program and tariff features prior to authorizing any cost recovery. The fact that we have modified the proposed SPP in certain respects underscores the essential dilemma posed by respondent's request for approval of cost expenditures incurred prior to issuance of this decision.

Nonetheless, in this decision we will approve the establishment of AMDRA to allow the respondent IOUs to record and recover the incremental, one-time set up and on-going O&M and A&G expenses incurred to develop and implement the demand response programs adopted for both small (<200kW) and large (>200kw) customers in Phase 1 of this proceeding.

We will also adopt the IOUs' cost recovery proposals relative to capital additions, which means that all Phase 1-related capital additions will be treated as authorized additions to plant and associated annual depreciation expense as additions to revenue requirement.

Commission authorized programs that require IOU incentive payments will be recorded in the following regulatory accounts: ERRA for SDG&E, the EPSMA and TRA for PG&E; and the PROACT for Edison.

Revenue shortfalls due to events such as load shifting, load reduction, or bill credits associated with Phase 1 authorized programs, will be recorded in the ERRA for SDG&E, the EPSMA and TRA for PG&E, and the PROACT for Edison.

In all respects our disposition of these cost recovery issues is limited to Phase 1 programs. Further, in no event are the respondent IOUs authorized to spend more than $12 million in connection with the programs authorized in this decision. This amount reflects the additional costs required to implement our mandated changes to the $9.6 million SPP, specifically 1) the additional technology treatments added to Track A; 2) the full-scale system technology testing to be integrated into the SPP; and 3) the $100 per customer appreciation bonus.

D. SPP Tariff Design Issues

Following issuance of the WG3 Report, the ALJ asked the parties to provide additional information about the range of expected bill impacts (in $ per month) for residential customers who participate in the SPP.²⁶ Respondents were to provide these estimates assuming no actions by the customers, and then assuming a 30% reduction in usage or shift from on peak consumption to the off peak period. Respondent IOUs provided this information in a supplemental response on January 21, 2003.²⁷

Using a database of typical PG&E residential customer usage characteristics, the IOUs prepared illustrative bill impacts for a representative range of "low," "typical," and "high" usage residential customers. Currently residential customers are billed for electric energy using a five-tiered rate design, and the rates in tier five are significantly higher than those in tier one. This current rate design complicates the rate design process for pilot residential CPP and TOU tariffs. For this reason, the IOUs' bill analysis used two distinct approaches: the "clean sheet" method and the "supplemental adjustment" method. Both approaches have pros and cons.

The clean sheet method creates pilot CPP and TOU tariffs using only baseline and non-baseline rate tiers. The supplemental adjustment approach maintains the existing five-tiered rates, but applies an on-peak surcharge and off-peak discount adjustment to these rates. Both rate design approaches attempt to achieve revenue neutrality for the average residential customer. The benefit of the clean sheet approach is that it simplifies rates as part of the pilot design. The benefit of the supplemental adjustment approach is that it maintains the effects of existing tiered prices for residential electric usage, while providing a method of implementing the same CPP and TOU rate design for the SPP across all three IOUs' service territories. Both approaches are designed to minimize bill impacts due to a rate change from the existing rates to two time period TOU and CPP experimental rates, assuming no change in electricity consumption (however the supplemental adjustment approach is slightly more successful in doing so). Both approaches also seek to provide customers at least a 10% bill reduction assuming a 30% shift or reduction in consumption from the peak periods. However, both approaches have certain disadvantages.

The clean sheet rate design approach results in bill reductions for high usage participants (and bill increases to low usage participants) prior to any change in consumption. This is because the TOU rate calculation averages the five tier rates, while seeking to maintain revenue neutrality for the "average" residential customer. The Respondent IOUs assert that this outcome generally conflicts with longstanding regulatory and legislative policy under which high usage residential customers pay significantly higher rates than low usage customers. They argue that the baseline statutes and AB1X together effectively dictate that the residential rate design have an inverted tier rate design with at least three tiers. They also maintain that if a clean sheet approach is adopted for the pilot, most high-usage customers would have a strong preference for the TOU rate, just because it would lower the average rate that they would otherwise pay, without necessarily affecting their usage in response to the new prices.

The IOUs maintain that the supplemental adjustment approach would avoid the effect of eliminating or reducing the current tier structure, but could result in differences in the precise ratios between effective on-peak and off-peak TOU prices, depending on the level of each participant's usage. This might reduce the clarity of the CPP and TOU price signals between customers with different usage levels, and could somewhat complicate future analysis of the SPP results. The supplemental adjustment approach also greatly complicates the presentation of bills to customers, since they would not be able to calculate their bills independently, and some components of their bills will not appear accurate mathematically. The respondent IOUs are in favor of the supplemental adjustment approach because it reduces the need for another control rate²⁸ in the pilot; simplifies incorporation of any rate changes in each IOU's default residential tariffs that might occur over the course of the pilot; and complements the conservation price signals that are provided by each IOUs' current tiered rates.

We do not necessarily agree with the respondent IOUs' argument that longstanding regulatory or legislative requirements constrain us from adopting the clean sheet approach. Like inverted tier rates, TOU rates with CPP components are also aimed at producing conservation. But in addition to encouraging overall conservation, TOU and CPP rates offer a more refined method to encourage conservation during particular time periods when energy is more costly to deliver. Furthermore, this is a pilot program, essentially an experiment, involving a small number of randomly selected customers. The tariff design adopted in this context does not represent a change in existing Commission rate design or a deliberate departure from existing policy. Given these realities, we opt in favor of the clean sheet approach to tariff design because it allows a test of the CPP and TOU tariffs using a more simplified rate design, thus making the choices for and impacts on customers more clear than they would be otherwise.

While opting for this approach, we will require that the tariffs for all SPP participants, both residential and small commercial²⁹, be designed to meet the following principles:

First, the tariff should be designed to be revenue neutral for the average residential and small commercial customer.³⁰

Second, the approach should be designed to minimize bill impacts due to a rate change from the existing rates to pilot rates, assuming no consumption change.³¹ The bill impact to participating customers should not exceed ± 5 % of their current average bill, assuming no change in consumption.

Third, the tariff should provide the customer a meaningful incentive for shifting load, consistent with respondent IOUs' claim³² that the clean sheet approach seeks to provide customers at least a 10% bill reduction assuming a 30% shift or reduction in consumption from the critical-peak or on-peak periods.

We will require respondent IOUs to file advice letters containing such tariffs for the residential and small commercial customers participating in the SPP, consistent with this direction and with Attachments C and D.