5. Next Steps

In D.01-05-064, the Commission established the broad policy guidelines that would govern the allocation of the 3 cent/kWh surcharge. These principles are equally applicable to the development of any real-time pricing proposal. As the Commission stated:


Today we adopt a rate design to achieve the following objectives: (1) reduce energy consumption and thereby reduce California's liability for exorbitant wholesale power purchases; (2) allocate these wholesale electricity purchase costs fairly among customers, consistent with statutory mandates; (3) protect the most vulnerable customers; (4) minimize the extent to which individual customers experience extreme hardship; and (5) provide customers with ways to manage their energy usage and reduce their energy bills.

The major focus of real-time pricing is clearly achievement of the last goal of providing customers with "ways to manage and reduce their energy bills," although any real-time pricing proposal must address the other criteria as well.

Applying all of the above goals to real-time pricing proposals means that any proposal adopted by the Commission should be "transparent," achieves real (not phantom) load reductions (and load shifting), meets revenue requirements (including CDWR's revenue requirements), avoids major rate shock to customers, and is equitable (in terms of avoiding cross-subsidies both between classes and across generations), and is administratively simple.

Real-time pricing should be transparent to customers, in that they know in advance how the prices will be calculated. This allows them to better plan and forecast periods when energy prices may be high and to respond accordingly. One of the concerns we have with the CEC's proposal is the "black box" nature of its real-time price calculation.

Real-time pricing should also accurately mimic the actual movement in energy prices over different time-periods. The calculation of the real time price should either be based on real prices (or if a forecasted price is used, it should be close enough to real prices to achieve the proper price signals).17 As noted in D.01-05-064 :


Reducing energy consumption at peak hours may also enhance system reliability when California is projected to face the severest shortages.

This does not necessarily mean that customers should always receive or pay the real-time price. As the Commission noted in D.01-05-064, given the dysfunctional nature of the current wholesale energy market, the pass through in rates of the full amount of current energy costs could cause economic hardships. Charging customers the real-time price at all times could also result in an over-collection of the utilities' revenue requirements.18

Real time pricing in a dysfunctional market may result in load shifting or load reductions. However, in a dysfunctional market a real time market-based price is unlikely to lead to an increase in economic efficiency or cost allocation. The price signal given by the real time price in a dysfunctional market may instead lead to less efficient decisions on the part of customers. It could also potentially lead to one set of customers, those who can participate in such load reduction incentive programs, to reap unreasonably large subsidies at the expense of those who cannot participate.

Real-time pricing proposals should also be administratively simple. This makes these programs not only easy to implement by the utilities but also easy to understand by customers. Ease of administration also argues for programs where customers are charged a real-time price based on actual usage, and not by a comparison of actual usage to either forecasted or historical load data. This latter approach is difficult and complex to administer and is subject to the potential for gaming and payment for load reductions that would have occurred anyway.

In reviewing the proposals before us, we are not sure that any of them fully address all of the above requirements. As previously noted, the CEC's proposal is administratively complex and could pay for load reductions that would have occurred even without the real-time pricing program. SDG&E's one-part pricing tariff, while simple to administer, could result in significant rate increases to some customers and result in an overcollection of SDG&E's revenue requirement. Another variant of a real-time pricing proposal that parties may want to consider would be a two-part tariff (as proposed by Prof. Borenstein) in which customers receive some portion of their load at fixed prices and some portion at real-time prices. For example, customers could receive the 50-60% of their energy usage currently being provided by retained generation at the cost-of-service for providing this generation, and then pay spot prices for the remainder of their usage. These figures could be adjusted over time to reflect the utilities' and CDWR's procurement of additional long-term contracts and variations in load over different time periods. Other variations of a two-part tariff could also be considered.

Finally, parties may want to consider real-time pricing proposals that contain such features as price caps, floors, and rate limiters. It was these types of mechanisms that the Commission utilized in assisting large customers in transitioning from fixed to time-of-use rates during the late-1980's to early-1990's. Similar features could be developed to address similar concerns in the movement toward real-time pricing.

Using the criteria we discuss here, we direct PG&E, Edison, SDG&E, and invite any other interested parties to file an RTP proposal in this proceeding on August 17, 2001.

5. Comments on Draft Decision

The draft decision was mailed on July 19, 2001 with comments due on July 26, 2001. Pursuant to Rule 77.7(f)(9) of our Rules of Practice and Procedure, we reduce the 30-day period for public review and comment because public necessity requires that we act on this matter prior to the 30-day period.

Findings of Fact

1. The receipt of TOU or RTP meters for customers with electric loads over 200 kW of peak demand is mandatory under ABX1 29.

2. CEC has chosen to use the $35 million allocated by the Legislature under ABX1 29 to install RTP metering systems for customers.

3. Customers receiving RTP meters under ABX1 29 who are not on a TOU schedule should be given the option of either enrolling in a demand reduction program or receiving service under TOU schedules to ensure that the state's metering investment delivers the benefit of reducing California's energy demand, especially at times of supply shortages.

4. RTP issues relating to SDG&E were transferred from A.00-10-045 and A.01-01-044 to this proceeding by ALJ Mark Wetzell on June 1, 2001.

5. The proposed RTP tariff contained in CEC's June 12, 2001 Petition to Modify D.01-05-064 contains a calculation of reference load that is overly generous and subject to extensive gaming.

6. Sufficient information is not available about the total cost of the CEC's program or its potential for intra-class subsidies for the Commission to determine that this proposal is reasonable.

7. The CEC's RTP is not a true RTP program.

8. Most of the claimed benefits from the CEC's RTP proposal likely can be achieved by the modified Demand Bidding Program the Commission adopted in D.01-07-025.

9. RTP should provide customers with an effective way to manage and reduce their energy bills.

10. RTP should be transparent to customers, in that they know in advance how the prices will be calculated.

11. RTP should accurately mimic the actual movement in energy prices over different time-periods.

12. RTP should achieve real load reductions and load shifting.

13. RTP proposals should be administratively simple and easy for customers to understand.

14. RTP should meet revenue requirements (including CDWR's revenue requirement), avoid major rate shock to customers, and be equitable in terms of avoiding cross-subsidies among classes.

Conclusions of Law

1. The CEC's May 17, 2001 petition to modify D.01-05-064 should be granted, in part, as follows:

2. The CEC's June 21, 2001 petition to modify D.01-05-064 should be denied.

3. PG&E, Edison, SDG&E, and any other interested parties, should file an RTP proposal in this proceeding no later than August 17, 2001 that meets the criteria discussed here.

4. In order to expeditiously implement ABX1 29, this order should be effective immediately.

INTERIM ORDER

IT IS ORDERED that:

1. The California Energy Commission's (CEC) May 17, 2001 Petition to Modify Decision (D.) 01-05-064 is granted, in part, as follows:

2. CEC's June 12, 2001 Petition to Modify D.01-05-064 is denied.

3. Pacific Gas and Electric Company, Southern California Edison Company, San Diego Gas & Electric Company, and any other interested parties, shall file an RTP proposal in this proceeding no later than August 17, 2001 that meets the following criteria:

a. Provides customers with an effective way to manage and reduce their energy bills;

b. Is transparent to customers, in that they know in advance how the prices will be calculated;

c. Accurately mimics the actual movement in energy prices over different time periods;

d. Is designed to achieve real load reductions and load shifting;

e. Meets revenue requirements, including California Department of Water Resources' revenue requirement, avoids major rate shock to customers, and is equitable in terms of avoiding cross subsidies among customer classes; and

f. Is administratively simple and easy for the customer to understand.

This order is effective today.

Dated ___________________, at San Francisco, California.

17 This leads to the related issue of whether customers should be charged under real-time pricing proposals at either the real price or the forecasted price. 18 This is true if the marginal cost of generation is higher than the average cost of generation.

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