II. Background on Demand Response Programs

"Demand response" applies rate design, incentives and technology to induce changes in customer demand. The Commission and the CEC have stated their common objective to adopt cost-effective demand response programs that improve system reliability and mitigate utility system costs. The Energy Action Plan II, signed by both agencies in October 2005, finds that energy efficiency and demand response should be "first resources" to be used by the utilities in resource planning and expresses the agencies' policy objectives:

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 ensure 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.

R.02-06-001, which has investigated demand response opportunities, found that demand response applications may also address certain market imperfections;

...demand-responsive capabilities are important regardless of the ultimate electricity market structure that emerges in the next few years. A perfectly functioning wholesale and/or retail electricity market is not a precondition for development of demand response. On the contrary, demand-responsive capability can be a tool in mitigating the effects of a dysfunctional market, as well as for controlling costs, even in a completely vertically integrated and regulated market.

The subject utility applications continue and build upon existing programs designed to reduce demand when energy prices are high or when supplies are tight. SCE, PG&E and SDG&E have had some types of demand responsiveness programs for many years. Their programs and our policy in support of them have evolved in recent years in response to the state's energy crisis and in recognition of the benefits of reducing demand where possible rather than increasing supplies that may impose environmental costs or hazards. Currently, each of the three utilities has a variety of demand response programs that employ various incentives and technologies. The programs are designed to motivate customers to reduce energy usage during periods when system demand is straining the system or supplies are expensive.

D.01-05-056 adopted utility programs for 2005 and described two types of demand response programs:

· "price-responsive" programs (in which customers choose how much load reduction they can provide based on either the electricity price or a per-kilowatt (kW) or Kilowatt-hour (kWh) load reduction incentive), and

· "reliability-triggered" programs (in which customers agree to reduce their load to some contractually-determined level in exchange for an incentive, often a commodity price discount).

It also stated, "Both types of programs motivate customers to reduce their loads in exchange for some type of benefit such as reduced energy rates, bill credits, or exemptions from rotating outages. Increasingly the line between these two types of programs has blurred. This blurring occurs because high market price forecasts often coincide with high temperatures and high system or local peak demands, which are two drivers of reliability concerns. When system demand is very high, reserve margins can be low, which puts the ability of the system to serve all the load online at risk in the event of an unexpected generation or transmission outage. When reserve margins fall below acceptable levels, reliability-triggered programs are called upon." The programs adopted here today include both types of programs.

One major element of demand response is metering technologies. The subject demand response applications do not consider the latest of these, which we refer to as advanced metering or Advanced Metering Infrastructure (AMI), which would provide the utilities and customers with time-sensitive usage information and permit the utilities to design rates that better reflect costs during various periods of use. All customers whose load exceeds 200 kW (who are the principal target group for the programs proposed in the subject applications) already have advanced (or interval) meters that can track energy usage by time. Installation of AMI for residential and small commercial customers is the subject of separate utility applications filed in March 2005.

Most recent work on demand response policy has occurred in R.02-06-001, which we closed by D.05-11-009. Recognizing additional work on demand response policies and practices is required, D.05-11-009 established procedures for review of various policy matters. Below, we refer to that process where it is relevant to the issues raised in this proceeding.

As a prelude to our discussion of the settlement, we observe that this Commission has stated its commitment to developing cost-effective demand response programs. The settlement does not necessarily propose programs according to their cost-effectiveness and defers more work on this issue to another proceeding or another phase of this proceeding, according to the process established in D.05-11-009. Many demand response programs are somewhat experimental in nature and may require change over the course of the funding cycle in order to make them more responsive to customer requirements and more efficient from the standpoint of net cost. We expect to hear from the parties and the utilities over the course of the funding if the programs we adopt today are not successful or cost-effective so that they may be modified or eliminated in favor of better programs. We also expect to see progress in the area of making the programs more cost-effective generally.