II. Background

Decision (D.) 03-03-036¹, our Interim Opinion in Phase 1 Adopting a Pilot Program for Residential and Small Commercial Customers, details much of the history of this rulemaking. We do not repeat that discussion here, except to highlight several key points.

We began this rulemaking² in June 2002, as a policymaking forum to develop demand response as a resource to enhance electric system reliability, reduce power purchase and individual consumer costs, and protect the environment. At the outset we recognized the need for a strategic approach to the orderly development of demand response capability in the California energy market. To that end, we have coordinated this rulemaking exercise with decision makers from the California Energy Commission (CEC) and the CPA based on an interagency working model developed by the assigned Commissioner.³

That model relied upon three working groups. Of particular significance to this decision are the efforts of Working Group 1 (WG1) and Working Group 2 (WG2).⁴ WG1 is comprised of agency decision makers (assigned Commissioner Michael Peevey, CEC Commissioner Arthur Rosenfeld, and CPA Director Sunne W. McPeak, also known as the "Working Group 1 principals"), supported by the assigned ALJ and advisory staff from the CPUC, CEC and CPA, and has been responsible for shaping the rulemaking record and providing policy guidance to the parties throughout the proceeding. WG 2 is comprised of active parties who are interested in developing demand response approaches for large customers. It represents a diversity of interests, including the investor owned utilities, municipal utilities, ratepayer advocates, large customer associations, various demand response vendors and consultants, energy service providers, utility workers, and the California Independent System Operator (ISO). This group, whose meetings were facilitated by agency staff supporting WG1, has developed the specific proposals we consider here.

As this decision recognizes, a robust and sound policy framework is essential as the foundation for the future development of statewide demand response programs. At the same time, the WG1 principals appreciate the need for swift action to take advantage of the real opportunity to achieve significant levels of demand reduction by Summer 2003. Balancing these factors, WG1 directed WG2 to delve into the practicalities of program and tariff development for large customers, rather than pursue additional pilot programs for such customers in Phase 1, and formalized WG2's mission as "expanding demand response capabilities by developing a tariff or set of tariffs to be used for large customers with average monthly demands of 200 kW and above."⁵

WG 1, meanwhile, focused its efforts on the development of a long-term vision for the development of demand responsiveness in California by setting a framework, developing goals, and focusing on how demand response can and should be integrated with the IOUs' overall procurement responsibilities.

All working group meetings were publicly noticed and meeting agendas were publicly available at least 48 hours prior to each meeting. The WG2 facilitators made meeting minutes available to all participants.⁶ At the WG2 meetings, the facilitators encouraged broad participation in an environment where stakeholders representing a variety of views were free to provide their opinions, make proposals and presentations, share their practical experiences, and work toward collective solutions. The group's initial focus was on taking advantage of the advanced meters already installed at customer sites with monthly demands of more than 200 kW, paid for through appropriations in Assembly Bill 29 of the First Extraordinary Session of 2000-2001 (AB29X) (Stats. 2001, 1^st Ex. Sess., Ch. 8, Sec. 10.2, effective April 12, 2001). The participants attempted to develop consensus around a set of "quick win" dynamic pricing proposals designed to take advantage of these existing meters and produce demand response by the Summer of 2003, but the diversity of opinion on key issues complicated this task and ultimately worked against the development of consensus.

Several parties have participated actively in the workshop process and have filed written comments on WG2 issues throughout Phase 1. These include respondents PG&E, SDG&E, and Edison (the "respondent IOUs"); the Office of Ratepayer Advocates (ORA); The Utility Reform Network (TURN); the California Consumer Empowerment Alliance (CCEA); the City and County of San Francisco (CCSF); the Department of General Services (DGS); the Alliance for Retail Energy Markets and the Western Power Trading Forum (AreM and WPTF); the Association of California Water Agencies (ACWA); the Building Owners and Managers Association of California (BOMA); the California Large Energy Consumers Association (CLECA); the California Manufacturers & Technology Association (CMTA); the Demand Reserves Providers (Ancillary Services Coalition; Celebrity Energy; DBS Industries; Robertson-Bryan, Inc.); and IMServ.

Working Group 2 has filed four reports. The first, filed on November 15, 2002, contained six demand response offerings (four tariffs and two programs) to be implemented by Summer 2003. The second report, filed on December 13, 2002, supplemented the first by addressing implementation details.⁷ After the WG1 principals expressed concern that the proposed offerings were inadequate to meet WG1's demand response goals,⁸ the respondent IOUs significantly revised their proposals, and withdrew some of those proffered earlier. As a result, on January 16, 2003, WG2 filed its third report containing a proposal sponsored by the respondent IOUs for a statewide critical peak pricing (CPP) tariff. On January 27, 2003, the active parties filed written comments addressing all of the third report and those elements of the first two reports not superseded by the third filing. Since agency staff suggested incentives might be needed to achieve the quantitative goals proposed for demand response programs, the ALJ permitted WG2 to hold another noticed workshop focused on transitional incentives, and on March 11, 2003, WG2 presented its fourth and final report addressing this limited issue.⁹ The record in Phase 1 with respect to WG2 issues was then submitted. By that time, the WG1 principals had held five noticed workshop meetings,¹⁰ and WG 2 had held thirteen noticed workshop meetings.¹¹

The Commission has held no hearings in Phase 1, but has proceeded via notice and comment rulemaking, with WG1 providing specific policy guidance to the active parties at key points through formally noticed meetings and rulings. Following this direction, and working through WG1 staff facilitators, the parties developed the proposals we address in Phase 1. Our decision making record in connection with WG2 issues consists of respondents' formal demand response programs/pricing options filed in compliance with the OIR; the official transcripts of five formally noticed WG1 meetings; the rulings following those meetings and written comments thereon; and the four WG2 reports and related rulings and written comments.