IV. Policy Issues and Standard of Review
As the events of July 2006 suggest, utility demand response programs are a key element of a broader and integrated approach to system management that engages customer's system demand during periods of critical need and potential system instability. Although there is much work to be done, the utilities and their customers continue to identify ways to improve existing demand response programs and propose innovative new ideas.
Our informal investigation of the July 2006 heat wave suggests utilities, energy providers and consumers alike contributed to the successful management of the state's energy system during that time. The need for the extraordinary efforts undertaken to prevent a system compromise during July, however, motivates us to pursue demand response programs that are more aggressive, more successful, and more inventive as part of a broader effort to assure system reliability and reasonably priced energy.
We anticipate the program modifications we adopt today will improve system reliability in 2007 and beyond. Some programs will be more successful than others. Most can be funded by redeploying previously authorized demand response money. We believe the costs associated with changes adopted here are in the public interest because we believe the cost of a vulnerable statewide electrical system would be unacceptably high to most of California's energy customers, particularly business customers. We take swift action in this proceeding because many of the program modifications the utilities propose will require significant advance marketing, and in some cases implementation, in order to have commitments of energy and capacity by summer 2007. Additionally, several relevant policy issues arose during this abbreviated proceeding and the parties articulated some broad areas of concern. Some of the program modifications we adopt today implicate Commission policy to some extent. However, we have declined making major policy determinations here. Instead, we intend to revisit these major policy issues in a forum in the near future that will permit more deliberation and the presentation of better information and analysis.
We commend the utilities and all of the participating parties to this proceeding for their expedited work on these demand response matters, and for the many insightful assessments they provided, as well as some innovative ideas.
The following discussion addresses a several policy issues that parties highlighted at the workshop and in comments.
A. Demand Response Program Goals
In 2003 a working group including CPUC and California Energy Commission (CEC) participants developed a vision for demand response: "All California electric consumers should have the ability to increase the value derived from their electricity expenditures by choosing to adjust usage in response to price signals, by not later than 2007." 3 The document also laid out objectives, goals, principles and a timeframe for achieving that vision. In D.03-06-032, the Commission endorsed several aspects of the vision statement, including a goal of achieving price-sensitive demand response capacity of 5% of annual system peak demand by July 1, 2007 and interim year MW targets for each of the IOUs. The adopted goals were specified to be above and beyond any "demand response achieved through the emergency programs..."4
In June 2004, the Administrative Law Judge issued a ruling recognizing that the 2004 targets for price responsive demand would not be met and modified those targets for that year only.5 The Commission has not subsequently modified the original MW targets and goals. In January 2005, the Commission approved budgets for 2005 demand response programs and provided clarification on the issue of counting different types of demand response programs toward the goals.6 In this decision, the Commission distinguished between "price-responsive" and "reliability triggered" programs.7 It clarified that only price-responsive programs would be counted toward the demand response goals. To provide clear guidance to the IOUs, we distinguished as "price-responsive" those programs designed to be triggered in anticipation of high peak demand on the next day ("day-ahead" programs). Programs in which events were triggered due to same-day reliability needs ("day-of" programs) were defined as "reliability" programs.8
In D.05-11-009, we identified a number of future activities related to demand response.9 Among those activities were the need to develop appropriate measurement and evaluation (M&E) protocols and cost-effectiveness methodologies for demand response programs and tariffs. We directed agency staff to develop a set of draft M&E protocols and to hold a workshop with interested parties on development of cost-effectiveness tests. A workshop was held on March 21, 2006 and the draft Protocols were distributed to the service lists of R.02-06-001, A.05-06-006 et.al. and A.05-01-016 et.al. on April 3, 2006. Agency staff reported at the September 6, 2006 workshop in this proceeding that a proposed Order Instituting Rulemaking on demand response measurement and evaluation and cost-effectiveness was under development.
Our immediate need to augment demand response resources of both types should not be interpreted as abandoning the price-responsive goals. Had those goals been met, the reliability benefits provided by new price-responsive tariffs and programs would likely have made our recent orders directing the IOUs to procure new peaking generation, expand direct load control and otherwise augment demand response programs unnecessary. However, we acknowledge that a number of the mechanisms envisioned in the demand response vision statement-particularly development of transparent and robust day-ahead and real-time energy markets and the installation of advanced metering infrastructures for all customers-have not proceeded as quickly as we had anticipated. We have also learned a great deal from the various evaluation efforts that have accompanied demand response program implementation over the past four years, particularly concerning the measurement of demand response impacts and the difficulties of quantifying those impacts for settlement and resource adequacy purposes as well as for meeting the price-responsive goals.
The utilities raise a number of issues concerning the goals in their August 30, 2006 filings. A number of parties echo those concerns in their comments. These issues include the measurement and counting issues identified above, concerns about the "day-ahead" and "day-of" distinction, and the exclusion of reliability programs toward the goals. PG&E and SDG&E propose modifying the existing demand response goal to include reliability programs. SVLG and CLECA/CTMA agree, observing that demand response programs identified as "reliability" programs have been more successful than price responsive programs in terms of participation by and responsiveness of customers. DRA does not support counting reliability programs toward the utilities' price responsive goals, but could support a short-term change to the price responsive goals if the utilities petition the Commission to change the goals. DRA does, however, recommend that reliability programs should be the
focus of this proceeding.10 We acknowledged these concerns with the goals in D.06-03-024 and directed that they should be revised in another proceeding. At this time, we find no compelling reason to address these goals in this decision.
PG&E worries that it will be faulted for pursuing reliability programs rather than price-responsive programs.11 The August 8, 2006 assigned Commissioner Ruling and the subsequent rulings addressing reliability needs for summer 2007 direct the IOUs to propose augmentations to their entire demand response portfolio, including both their price-responsive and reliability demand response tariffs and programs. This blending of the demand response categories reflects our heightened concerns for system reliability in summer 2007. The proposals include a broad portfolio of options, and, as with any other activity, we expect that the IOUs will pursue those options we approve with the same degree of effort whether or not they will be counted toward a goal. We dismiss the premise that the IOUs would fail to exercise diligence in pursuing all potential demand response resources. Agency staff have previously been directed to prepare a proposed rulemaking on demand response measurement and evaluation protocols and cost-effectiveness methods. We will, in the interest of clarity, direct agency staff to address the issue of revising the existing demand response goals in the upcoming proposed rulemaking.
B. Cost-Effectiveness Tests
Parties to this proceeding have expressed concern about issues of cost-effectiveness with regard to the program augmentations we consider here as well as with existing demand response program activities. We have directed agency staff to hold workshops on cost effectiveness methods, elicit comments on draft measurement evaluation protocols, and recommend further action to the Executive Director of the Commission. Agency staff have made that recommendation and are drafting a proposed rulemaking for consideration by the Commission.
Following our direction in D.03-06-032, representatives from each of the IOUs and agency staff have been conducting measurement and evaluation studies on the demand response programs approved in these proceedings. Those studies have been very valuable to the utilities, other parties and the Commission as we work to improve program offerings to increase demand response and lower costs. These efforts should be continued.
In D.06-03-024, we authorized the Working Group 2 Measurement and Evaluation subcommittee to continue its work in providing oversight of demand response evaluation, and we continue that authorization for the program augmentations we approve here under the more appropriate name of the Demand Response Measurement and Evaluation Committee.
Because we believe it to be very important to fully monitor and evaluate the progress of these programs, we direct the IOUs to provide all data and background information used in monitoring and evaluation projects to Energy Division and the CEC, subject to appropriate confidentiality protections. In addition, we direct the IOUs to provide appropriate subsets of these data to vendors and academic researchers selected by the Commission or the CEC, such as the Demand Response Research Center, to conduct additional monitoring and evaluation projects, under appropriate confidentiality protections, as needed.
C. Use of Demand Aggregators
The Commission directed the utilities to identify opportunities to enhance their demand response programs by encouraging the participation of third-party demand aggregators. As one aggregator points out in relation to a particular program, "Aggregators can enlist customers who may be discouraged from participating due to program complexity, the short notification window, or the stringent penalties for non-performance..."12
TURN proposes that the utilities make better use of third-party contractors to implement demand response programs. TURN believes the utilities are not in the business of designing demand response programs and that third-party providers may be more creative and cost-effective in their efforts. SLVG makes similar comments.
We agree with the parties who suggest demand aggregators may encourage innovative and less costly demand response programs. We direct utilities to cooperate with demand aggregators to improve their demand response programs. We address several proposals below and state our intent to motivate utility use of third parties where sensible.
3 The document "California Demand Response: A Vision for the Future (2002-2007)" is included in D.03-06-032 as Attachment A. http://www.cpuc.ca.gov/PUBLISHED/FINAL_DECISION/26965.htm
4 D.03-06-032 at 8.
5 "Administrative Law Judge's Ruling Approving 2004 Schedule and plan for the Statewide Pricing Pilot and Establishing Process for Evaluation of Proposed 2005 Price Responsive Demand Programs", June 2, 2004. http://www.cpuc.ca.gov/word_pdf/RULINGS/37089.doc
6 D.05-01-056.
7 In "price-responsive" programs, 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. In "reliability-triggered" programs, customers agree to reduce their load to some contractually-determined level in exchange for an incentive, often a commodity price discount. (D.05-01-056, p. 4.)
8 D.05-01-056 at 7.
9 "Decision Closing This Rulemaking and Identifying Future Issues Related to Demand Response, D.05-11-009, November 18, 2005. http://www.cpuc.ca.gov/PUBLISHED/FINAL_DECISION/51376.htm
10 DRA Opening Comments at 9.
11 PG&E Reply Comments at 8.
12 EnerNOC at 13.
