DISCUSSION

The original program as presented to the Commission had some characteristics of Demand Response.

In its proposed decision regarding the subject Agreement, the Commission declined to grant approval on the grounds that the proposal did not comport with the "legalistic" interpretation of a demand response project. Upon further review of the proposal the Commission reversed its assessment and approved the proposal in Decision D.04-06-011. The Commission found that Celerity's program was directed at customers who could perform load reduction or who have existing diesel back up generators. The Commission also highlighted one of the key elements of the Celerity proposal to be the conversion of existing diesel units to duel-fueled units that primarily burn natural gas. Thus in D.04-06-011, the Commission concluded that the program, with its operational characteristic of duel-fuel units and load-reduction arrangements, is consistent with spirit and intent of the Demand Response Vision Statement (D.03-06-032) and authorized SDG&E to complete contract negotiations with Celerity.

Resolution E-3926, which approved SDG&E's demand reduction contract with Celerity, characterized the original proposal as a "dispatchable network of a variety of demand reduction resources, including load shedding or load transfer arrangements and customer-owned generation."¹

The current program operates less like demand response then originally proposed and now operates as a distributed generation program.

Energy Division, through a series of informational requests, has learned from representatives at both EnerNOC and SDG&E that the current program does not utilize load reduction as originally proposed to and contemplated by the Commission in D.04-06-011 or as approved in Resolution E-3926. All current program participants are back-up generation participants that provide capacity to the grid when the program is dispatched. During discussions with SDG&E and EnerNOC, Energy Division learned that EnerNOC does not envision load reduction demand response resources as participants in the expansion of the program. This means that the program no longer has characteristics of a demand response resource but operates like a supply-side resource program.

In a letter from Celerity to SDG&E dated April 4, 2005, Celerity explained that plans to retrofit the diesel units to natural gas with bi-fuel equipment that would meet ATCM requirements was not possible as there was no commercially available technologies that could achieve the level of natural gas fueling needed to meet ATCM requirements. Celerity therefore pursued re-permitting the diesel units and retrofitting them with emissions reduction equipment. EnerNOC has continued this practice.

Thus what was originally proposed to the Commission as a demand response resource utilizing load reduction and dual-fuel fired back-up generators has become a diesel-fired back-up generator supply-side resource.

PG&E proposed a similar back-up duel fuel fired generator program in September 2006 when the Commission sought proposals to expand demand response programs following the summer 2006 heat wave. The Commission rejected PG&E's back-up generator program in D.06-11-049 citing TURN's argument that counting a back-up generator program as demand response would, "turn the Commission's preferred resource loading order on its head."² The Commission further stated that its objective in funding demand response programs is to "reduce system demand, not substitute system electricity with electricity generated by off-grid natural gas facilities"³ Also, in D.05-01-056 the Commission found that back-up generation is not a true demand response resource.

Because the program as it exists now no longer has any characteristics of a demand response resource, Energy Division concludes that consideration of its expansion via an advice letter is not appropriate and therefore recommends that the Commission reject SDG&E's advice letter filing. The program operates as a distributed generation resource and thus its expansion should be evaluated according to the Commission's rules for long term procurement. Energy Division therefore recommends that SDG&E be authorized to seek approval for expansion of the program by filing an application under their AB 57 procurement plan and serving that application on R.06-02-013.

SDG&E argues that the Commission should reject the findings of Draft Resolution E-4103 and approve the expansion of the SDG&E- EnerNOC contract because SDG&E followed proper procedure and the terms of the contract have remained unchanged.

SDG&E argues that Energy Division's rationale for denying the expansion of the contract, that it does not utilize demand response measures as originally contemplated, is inappropriate because the Commission's original approval of the Agreement occurred in a procurement docket, not a demand response docket. SDG&E states that it does not seek Commission approval to count the program toward it demand response goals. SDG&E also argues that it seeks to simply expand the capacity of the current contract but not change the nature of the Agreement as originally approved in D.04-06-011. In support of its position SDG&E states that Ordering Paragraph (5) of Resolution E-3926 approved the original Agreement and authorized SDG&E to seek expansion of the current Agreement through the advice letter process.

Energy Division agrees that the Commission approved the Agreement in a procurement docket. However, SDG&E's characterization of the Agreement in that proceeding, and the Commission's subsequent understanding of the Agreement, was that the program is a demand response program. As already noted in the Background section of this resolution, the Commission approved the Agreement because it contained elements that could be considered demand response. The decision specifically found the program to be "directed at customers who have conventional load-reduction arrangements or who have existing diesel back-up systems to provide power..."⁴ In SDG&E's advice letter filing (AL 1673-E) which sought approval of the specific contract terms, SDG&E described the program as consisting of two components; "1) it takes existing backup generation units and converts them to significant demand reduction resources . . .and 2) it provides for demand response where the customer is able to drop load without using backup generation."⁵ Resolution E-3926, which subsequently approved AL 1673-E, noted that the program consisted of two components; 1) back up generation and 2) demand response without using any back up generation.⁶

As noted earlier, Energy Division has concluded that the program does not currently employ, nor plans to employ, the demand response elements that were originally proposed. The program has changed from a combination demand response and back-up generation program to an exclusively back-up generation program. Energy Division also repeats here recent Commission policy that programs that employ backup generation do not qualify as a demand response resource.⁷ Because the program operates as a generation resource and by Commission policy is not a demand response resource, an expansion of its capacity through an advice letter is no longer appropriate and must therefore meet or exceed the requirements of AB 57 regarding not only cost but need as well.

Through its comments on the draft resolution, SDG&E attempts to make a showing that expansion of the back-up generation utilized per the Agreement is cost-effective compared to bids received in the 2008 Local Peaker RFO which has been approved in a proposed Commission decision⁸. Energy Division reiterates that the advice letter-resolution process is not the proper venue for debating the cost-effectiveness of the expansion of the Agreement, and therefore maintains that the proposed expansion of the Agreement be properly vetted by serving an application in R.06-02-013.

SDG&E characterizes Energy Division's requirement that SDG&E re-file its proposal as an application under the Commission AB 57 procurement plan as "overly burdensome" and a "waste of Commission resources", because the program has been previously approved and SDG&E has simply followed the Commission's earlier directive to file an advice letter should SDG&E seek to expand the Agreement.⁹

The use of an advice letter as the procedural vehicle to expand the Agreement was based on the premise that the program was a demand response program. Demand response is the second-highest priority resource in the Energy Action Plan II loading order and can therefore be afforded procedural flexibility such as advice letter filings. Because the Agreement is no longer a demand response program, it must be evaluated like a conventional supply-side resource. If as SDG&E argues in its comments that "the price for this product is more than reasonable," then an application in the proper proceeding need not be overly burdensome.

EnerNOC raises several procedural issues and further argues that requiring SDG&E to seek approval via an application will jeopardize timely implementation of the expanded program.

EnerNOC argues that because no party filed a protest or response to SDG&E's Advice Letter 1896-E there is no basis for its rejection EnerNOC also appears to imply that because the Commission previously ordered SDG&E to file an advice letter for expansion of the Agreement, that the contract expansion had already been approved by the Commission. Commission rules on advice letter procedure allow Energy Division the discretion to accept or deny an advice letter regardless of whether comments or protests have been filed. The mere submittal of an advice letter does not mean that whatever is requested is automatically approved. .

EnerNOC also argues that requiring SDG&E to file an application in the procurement proceeding will jeopardize the ability of EnerNOC to implement the expanded program by summer 2008. EnerNOC also voices concern that R.06-02-013 is closed for submittal of additional applications.

The question of grid reliability and the necessity for the expansion of the contract are matters to be explored in the proper proceeding not an advice letter process. Energy Division has inquired into EnerNOC's concern that the proceeding no longer is accepting applications and found that SDG&E may indeed file an application as directed in this resolution.

¹ Resolution E-3926 at page 1 (April 21, 2005).

² Decision 06-11-049 at p. 58 (November 30, 2006),

³ Id.

⁴ D.04-06-011 p.39 (emphasis added.)

⁵ SDG&E Advice Letter 1673-E p.1 (March 3, 2005)

⁶ Commission Resolution E-3926 at p.4

⁷ See California Public Utility Decision(s) D.06-11-049 and D.05-01-056.

⁸ Proposed decision issued on August 16, 2007 in A.07-05-023.

⁹ SDG&E, Comments of San Diego Gas & Electric Company to Draft Resolution E-4103, August 23, 2007, p. 2.