7 If Ratepayer Funding of Pre-Deployment Activities is Allowed, What is the Proper Scope of Pre-Deployment Activities and Funding?

How "pre-deployment" is and should be defined is an important consideration in this case. Because PG&E has already performed its system requirements analysis, request for proposals, evaluation of bidders, and conducted its due diligence, PG&E defines pre-deployment differently than San Diego Gas & Electric Company (SDG&E) and Southern California Edison Company (SCE) who also filed applications for AMI "pre-deployment" funds in March 2005. Because PG&E is farther along in its internal decision making process than the other utilities and believes its proposed investment to be essentially cost-effective on the basis of operational benefits, the activities it has defined as pre-deployment consist of preparing its existing legacy systems to accept data from its proposed AMI system, establishing and testing processes for meter and communication system installation and billing. PG&E witness Corey describes the funding that it requests as "specifically to test the incremental benefits of the technology, and to test the end-to-end data integrity, and to test the installation processes and the other business processes associated with deployment [of AMI]." (RT 75:22-25.) Likewise, witness Vahlstrom describes the activities to be performed during PG&E's defined pre-deployment period as follows:

"PG&E has long said that the intention of this test is not strictly to test the viability of the technology, but the processes of installing it and that all the hookups can be made properly through all of its systems, and that it will bill properly." (RT 54:18-22.)

PG&E's pre-deployment activities do not consist of a significant amount of testing that the AMI system selected physically works or meets the minimum functionality criteria. Under cross examination by ORA, PG&E witness Vahlstrom stated: "I would say the costs represented by meter deployment [testing] is a small percentage of the [$] 49 million [requested]." (RT 59:12-13.) Meter testing and functionality testing is an activity that both ORA and TURN argue is more appropriate for funding prior to a Commission determination that pursuing AMI is cost-effective for ratepayers. In essence, ORA and TURN argue that pre-deployment costs should, at most, be limited to costs associated with physical testing and minimum functionality analysis.

PG&E argues that the scope of pre-deployment activities it has proposed is appropriate and critical to allow PG&E to be in the position of having "a viable demand response tool in the summer of 2007," which it argues is required by the Commission's demand response goals. (PG&E Brief, p. 1.) PG&E states that the Commission has a clearly articulated goal of implementing the capability for customers to respond to price signals by 2007, citing the vision statement described in D.03-06-032, and that to meet that goal, it must complete its systems integration and testing work that it describes as its pre-deployment activities as promptly as possible. "PG&E believes there is a strong likelihood that the Commission will permit PG&E to move forward with its overall AMI Project. For these reason [sic] and others, there is virtually no risk associated with authorizing PG&E's pre-deployment funding request." (PG&E Brief, p. 5.)

TURN, on the other hand, argues that PG&E's justification regarding meeting the 2007 demand response goals "is unsupportable as a rationale for the level of spending sought for pre-deployment costs. TURN argues that in other proceedings (specifically A.05-06-006, PG&E's 2006-2008 demand response program application) that PG&E is seeking modification of the demand response goals the Commission has established in order to account for the lack of residential participation in demand response programs. TURN also points out that PG&E has adequate resources to meet its 2007 demand, it justifies its AMI deployment plans primarily on the basis of operational savings, not demand response savings, and modifying the timeline of deployment would not impact the program costs. (TURN Brief, p. 9.) Finally, TURN notes that even if PG&E's aggressive timeline were pursued, very little meter deployment would actually occur by 2007, limiting the demand response that could occur by 2007.

ORA also takes issue with PG&E's position that the Commission has indicated a "mandate" for the utilities to deploy AMI by 2007. ORA notes that the Vision Statement language relied on by PG&E explicitly does not prejudge the cost-effectiveness of specific proposals and states it should be viewed as a starting point. (ORA Brief, p. 5.)

7.3 Discussion

We believe that "pre-deployment" as PG&E has defined it is somewhat of a misnomer. While some metering testing and functionality analysis is included in the definition proposed by PG&E, a significant amount of the activities PG&E describes as being "predeployment" are logically more associated with "deployment" activities.

In reality, the real goal of this application, from PG&E's point of view, is simply not to allow its AMI deployment personnel and resources to sit idle while the Commission reviews A.05-06-028, its full AMI deployment application. PG&E wishes to continue making progress toward AMI deployment while the Commission completes its full review. This is a logical approach. TURN and others argue that PG&E could move forward at its own risk now, especially since it already has tracking mechanisms in place. However, in our view, it is reasonable for PG&E to expect some assurance of recovery for its costs, given that the Commission has encouraged PG&E to move forward with this project, as further detailed in the discussion in Section 7.2 below.

In addition, PG&E's business case preparation and deployment planning has been in full swing for more than a year, with PG&E conducting its request for proposals, evaluating the bids submitted, and selecting finalists. It would be unfortunate to slow PG&E's progress now and, in essence, punish them for being further ahead in their effort, simply because their requested expenditures do not meet a strict definition of "predeployment." Therefore, we have considered the reasonableness of all of PG&E's requested $49 million budget.

7.4 Conclusion

We agree with PG&E that their application for AMI "predeployment" expenses is consistent with a number of policy directives from this Commission and the California Energy Commission (CEC) in the past several years. In addition to the vision statement described in D.03-06-032 and cited by PG&E, the Energy Action Plan (EAP) of 2003, adopted by both agencies, also pointed to implementation of dynamic pricing. In particular, the first action item under the section titled "Optimize Energy Conservation and Resource Efficiency" in the EAP states: "Implement a voluntary dynamic pricing system to reduce peak demand by as much as 1,500 to 2,000 megawatts by 2007." Implicit in this statement is the need for the utilities to install technologies to enable consumers to voluntarily respond to such a dynamic pricing system. The fact that we may be behind in the timetable established in 2003 only means we should place a stronger emphasis on authorizing PG&E to move forward as soon as possible.

In addition, the EAP II, adopted by the Commission on August 25, 2005 contains even more explicit reference to AMI deployment. Section 2, titled "Demand Response," states the following:

"California is in the process of transforming its electric utility distribution network from a system using 1960s era technology to an intelligent, integrated network enabled by modern information and control system technologies. This transformation can decrease the costs of operating and maintaining the electrical system, while also providing customers with accurate information on energy use, time of use, and cost. With the implementation of well-designed dynamic pricing tariffs and demand response programs for all customer classes, California can lower consumer costs and increase electricity system reliability. To achieve this transformation, state agencies will provide that appropriate, cost-effective technologies are chosen, emphasize public education regarding the benefits of such technologies, and develop tariffs and programs that result in cost-effective savings and inducements for customers to achieve those savings. "

EAP II also states that the first key action for demand response is to "issue decisions on the proposals for statewide installation of advanced metering infrastructure for small commercial and residential TOU customers by mid-2006 and expedite adoption of concomitant tariffs for any approved meter deployment." In addition, while EAP II does not commit us to approving PG&E's particular proposal in A.05-06-028, we agree with PG&E that it does strongly suggest an inclination for the Commission to adopt some form of AMI deployment, perhaps only partial, on the basis of a further cost-effectiveness analysis.

In addition, it is worth noting that although PG&E's policy arguments for approval of its AMI predeployment expenses largely rest on the demand response benefits of AMI, PG&E's case, as presented in A.05-06-028, asserts that the majority of the benefits of the deployment would be operational. That is, deployment of AMI would actually be nearly cost-effective from a utility operations point of view with the potential to save the utility costs over time. The various versions of PG&E's AMI business case that have been submitted in R.02-06-001 over time have shown steady progress in improving the cost-effectiveness of AMI such that less of the benefit would need to be covered by demand response peak demand cost savings.

With this in mind, and although we have not yet thoroughly evaluated PG&E's cost-effectiveness claims in A.05-06-028, our sense is that PG&E's AMI deployment, if approved, will have at least some significant benefits to the utility beyond demand response. Therefore, and for all the reasons stated above, we will approve PG&E's request for $49 million in pre-deployment expenses for AMI, as reflected in more detail in section 8 below.

We remind PG&E that this authorization, while separate from the issues to be decided in A.05-06-028, nonetheless sets the Company on the path of designing and building systems that will one day become new infrastructure. Therefore, we advise once again that we wish to promote open architecture standards, uniform business practices, and data exchange standards. The CEC hosted a technical conference, and there have been follow-up meetings on these subjects. In a ruling of November 24, 2004, the Assigned Commissioner and Administrative Law Judge stated:

"This delay will have the added benefit of allowing the California Energy Commission to host a technical conference to begin the process of developing open architecture standards for advanced metering infrastructure. In particular, we are focused on the need for a reference design that will accomplish uniform business practices and data exchange standards. Free flow of data (subject to security and privacy concerns, of course) is crucial to the economics of the investment we are considering and the long-term viability of the systems the utilities will consider installing. Ideally, we would like to see national standards for data exchange so that providers of advanced metering communications infrastructure will see the same standards in all venues where they seek to market. This uniformity helps lower costs to consumers everywhere." ³

Energy Action Plan II, adopted by this Commission on August 25, 2005, also emphasizes customer access to energy use information to allow participation in demand response programs regardless of retail provider. This key action is greatly enhanced by open architecture standards, uniform business practices, and data exchange standards cited in the November 24^th 2004 ACR.