IV. The Settlements

The settling parties presented two documents, the original settlement filed December 2, 2005 and an amended settlement filed January 30, 2006. The amended settlement was filed in response to concerns raised by staff and the ALJ at the January 17 hearing. This order discusses the amended settlement only because it is the parties' final proposal to the Commission.

The amended settlement presents the usual recitations about how its terms represent a compromise of the parties' positions, how the parties do not intend for it to be precedential and that they will in good faith work to effectuate the terms of the settlement. Appendix A provides a copy of the amended settlement.

The following summarizes the elements of the amended settlement, first those that apply to all utilities and then those that are specific to each utility:

Cost Effectiveness Methods. The parties agree that a number of different methodologies could be used to evaluate the cost-effectiveness of demand response programs, that the adoption of demand response cost-benefit models should be deferred to another proceeding or another phase of this proceeding; that proposals for spending limits and incentives should be considered in a subsequent review of demand response program cost-effectiveness methods in R.02-06-001, pursuant to D.05-11-009.

Goals and Counting Rules. The parties agree that counting rules for demand response programs should be addressed consistent with the tasks outlined in D.05-11-009 and that demand response goals should be revised in a later phase or this proceeding or in another proceeding.

Collaborative Process. The parties agree that the utilities should be required to meet with intervenors and stakeholders at least twice a year in San Francisco to discuss program issues, including future program design; that each utility should meet individually with intervenors and stakeholders annually; and that parties eligible to receive intervenor compensation awards should be eligible to seek compensation for work in the design and implementation of demand response program portfolios.

Program and Budget Flexibility. The parties agree that the utilities may reallocate up to 50% of funds between programs within a budget category without having to file an advice letter provided no program is eliminated without prior authorization from the Commission; that motions or advice letters are necessary for fund shifting that exceeds the 50% threshold or to propose new programs that implemented within the 2006-2008 funding level; that unused funds would be carried over to the subsequent year and the utilities would file requests for incremental funding for new or existing programs by advice letter or application.

Lawfulness of Settlement Elements. The settlement provides that where the Commission finds an element of the settlement is unlawful, the parties agree that the unlawful element of the settlement would be removed from the settlement and all other settlement provisions would remain in effect.

Specific Programs Common to All Three Utilities.

1. DRP: The utilities would continue these programs until they expire in May 2007 and, no later than June 1, 2006, they would file advice letters or applications proposing new programs and budgets, following consultation with intervenors.

2. TA/TI: The utilities would require customers who take advantage of technology incentives to participate for one year in a demand response program within six months. Changes to the program would be made following consultation with intervenors.

3. Water Agency Programs: Parties agree that the utilities should convene meetings with interested parties to develop demand response programs for water agencies; that the utilities will file related program details and budgets by October 31, 2006.

4. 20/20 Programs: PG&E and SCE do not include budget amounts for the 20/20 program for 2007 or 2008. They will evaluate SDG&E's Commercial and Industrial 20/20 program for 2006 and if successful may file advice letters or applications to fund their own 20/20 programs.

5. SLRP: The settlement would eliminate the SLRP.

6. Loading Order: The settlement parties agree that issues relating to the loading order are outside the scope of this proceeding.

PG&E Programs

1. Air Conditioning Cycling Pilot: The settlement would require PG&E to implement a residential air conditioning cycling pilot in 2007 for up to 2,000 residential customers; the program would use AMI technology, would operate as a critical peak pricing program and would be evaluated at the end of 2008.

2. SF Power Small Customer Aggregation Pilot Program: The settlement parties agree that PG&E should provide SF Power with up to $500,000 to market a DRP program to small and medium sized commercial customers in the Bay Area with a goal of shifting two MW by the end of 2008; PG&E would evaluate the program at the end of 2008.

3. Adjustments to Budget and revenue requirements. PG&E agrees to reduce its total demand response budget to $108.7 million over the three-year program cycle. Table 1 of the attached settlement illustrates where the settlement would cut funding.

4. Cost Recovery. Demand response revenue requirements would be included in PG&E's rates using the annual electric true-up or other authorized proceeding, employing balancing accounts that cap expenses and provide for over- and undercollections of revenues.

SCE Programs

1. Adjustments to Programs, Budgets and Revenue Requirements. SCE would terminate its Energy Smart Thermostat program; reduce its DRP budget from $26.7 million to $200,000 and request a new budget when it proposes a new program; and limit fund shifting authority for the TA/TI budget to 25%; SCE's total demand response budget would be reduced from $132.7 million to $101 million, as shown in more detail in Table 2 of the attached settlement.

2. Cost Recovery. SCE would be permitted to recover demand response costs in the first rate change proceeding to occur after the issuance of this order and to make subsequent rate changes in the annual Energy Resource Recovery Account filing; and to track costs in a one-way balancing account.

SDG&E Programs

1. Information Technology (IT) System. SDG&E agrees to includes a showing in its 2008 cost of service proceeding describing IT costs and programs for the demand response program.

2. Programs, Budgets and Revenue Requirements. SDG&E will reduce its three-year budget by $3 million to $52.6 million, as described in Table 3 of the attached settlement; SDG&E agrees that its TA/TI funds may not be shifted as the settlement permits for other categories of funds.

3. Cost Recovery. The settlement describes the accounting for SDG&E's demand response programs.

Discussion. The Commission evaluates proposed settlement agreements pursuant to the standards set forth in Rule 51.1(e) of the Commission's Rules of Practice and Procedure (Rules). Those standards require that the "settlement is reasonable in light of the whole record, consistent with law, and in the public interest." We review the settlement with this in mind.

Overall, we commend the parties for their work to resolve the issues in this proceeding cooperatively. The settlement would resolve most issues outstanding in the proceeding. Those that it does not resolve would be addressed in future advice letter filings, applications or proceedings. We address several related issues below.

Costs of education programs: The utilities propose and the settlement incorporates large budgets for customer education programs. Some of these programs are likely to be effective, for example, in cases where simple information to customers motivates significant energy savings during key times of day or year. In the case of other programs, the utilities are unlikely to ever be able to demonstrate any benefit. We are especially concerned about generalized advertising, such as that provided by Flex Your Power Now, and programs designed to educate people who do not control a building's energy use such as students. PG&E's PEAK project, for example, would provide information to elementary and secondary school students at a cost of more than $200 per student, (which is nearly equivalent to the cost of eight full days of instruction paid to public schools by the State of California). It is a program for which there will be no measurable results and which appears to be more appropriately managed as an energy efficiency program. Such customer education programs - which are in addition to the customer education that must be undertaken for specific rate design and technology-based programs - comprise almost 16% of PG&E's total demand response budget, almost 16% of SCE's budget and more than 20% of SDG&E's total budget. We understand that these programs, even if effective, are difficult to evaluate. We do not determine here whether or how to assess the programs using traditional cost-effectiveness, leaving those issues to a broader inquiry. We do, however, expect the utilities to carefully evaluate these programs from the standpoint of effectively communicating critical information and to terminate those that do not produce results.

Overhead Costs: It is difficult to tell in some cases how the utilities will allocate administrative costs to programs. We expect the utilities to keep administrative overheads to a minimum and we will not authorize allocation of corporate overheads or other indirect costs to these programs if they are already included in utility rates.

SLRPs: The amended settlement proposes that SLRP should be eliminated because so few customers have subscribed and other programs are better suited to related customer needs. The SLRP was created in compliance with Section 740.10, which provides that "Each public utility electrical corporation shall develop and offer its customers...(a program that) shall identify specific periods coincident with morning or evening system peak conditions.... "The statute identifies the program as the SLRP. It does not provide for any exemptions from its provisions or sunset dates. We find that it would be unlawful to permit the utilities to eliminate the SLRP. We therefore decline to adopt this portion of the settlement. Consistent with the settlement provisions, this part of the settlement is therefore eliminated from the settlement leaving all other provisions of the settlement as filed.

Cost of AC cycling program/PG&E: In the early 1990s, PG&E conducted a residential AC cycling program, which it abandoned because it was not cost-effective. The settlement would create a pilot program, although at a cost of $500 per customer. Considering that AMI metering costs will likely not be included in this program budget - and that the payment to the customer is only $30 per year, we are concerned about how the parties arrived at a budget that is so high. We are also concerned about the program's cost-effectiveness since a single residential customer's energy reductions are very unlikely affect offsetting savings in the near term. We consider this a pilot program that we will terminate after this funding cycle unless PG&E can demonstrate cost-effectiveness. In addition to the ex post evaluation proposed for the PG&E AC Cycling pilot, an evaluation plan shall be developed prior to deployment that sets up specific evaluation criteria and targets that define program success.  The pilot shall be implemented in phases designed to allow incremental, statistically valid estimation of cost-effectiveness and off-ramps for the pilot should those estimates indicate lack of cost-effectiveness. We expect PG&E to work with CEC and Commission staff on this effort.

Intervenor compensation: Several sections of the settlement provide that intervenors will be eligible for funding of certain activities relating to ongoing development and management of demand response programs. While we appreciate the need to have intervenors involved in a collaborative process, we must reserve the right to assess whether requirements for eligibility and compensation are consistent with statutory requirements and our rules. We have some concerns about making commitments regarding intervenor compensation in this proceeding in advance of pleadings that demonstrate contributions to Commission decisions. The Commission has interpreted its authority to award compensation to intervenors liberally and we will continue to provide compensation where intervenors can demonstrate that their work has contributed to the outcome of a formal Commission decision. Our policy with regard to intervenor compensation is outside the scope of this proceeding. To the extent the settlement anticipates intervenor compensation that is consistent with existing policy and law, we support it.

Cost-benefit issues: The assigned ALJ to this proceeding required the utilities to evaluate the potential costs and benefits of their proposed programs as part of their showings. The utilities filed responsive testimony. The settlement defers analysis of each program's possible cost-benefit ratio and related methodologies to the procedure for such review set up in D.05-11-009 in R.02-06-001. We agree that this is an appropriate way to handle this issue under the circumstances and leave these applications open for review of these matters.

Program Goals and Measurement and Evaluation (M&E). D.05-11-009 establishes a process for developing M&E protocols and program goals that will affect the M&E activities set forth in the amended settlement and adopted herein. CEC and Commission staff should coordinate these efforts and recommend to the Commission's Executive Director a process to assure effective and efficient evaluation of demand response programs. We anticipate that this work be coordinated with energy efficiency M&E work as demand response and energy efficiency efforts become more integrated. The current oversight of M&E by the Working Group 2 Measurement and Evaluation subcommittee shall continue for the programs and budgets approved in this order until the process described herein is in place. We intend to address these matters in these consolidated proceedings.

Collaborative Process. The amended settlement anticipates the utilities will meet with interested parties at various intervals and we encourage cooperative work on these demand response programs. We also expect the utilities to be responsive to the CEC and Commission staff's requests for information and to report to them of program progress, worthwhile ideas for program modifications and budget changes. We anticipate that our advisory staff will be conducting meetings and workshops from time to time in order to stay informed about the progress of demand response programs and opportunities for improvements.

We herein find the amended settlement filed in this proceeding to be in the public interest and consistent with the record of the proceeding. We find it to be lawful except for that provision that would eliminate the SLRP. We therefore eliminate the related settlement provision. Each utility shall file applications to determine demand response budgets and programs for 2009-2012 no later than June 1, 2008 or as otherwise required by this Commission.