6. TURN's Proposal to Link Dynamic Pricing and Resource Adequacy

Parties emphasized the important relationship between dynamic pricing and resource adequacy and other procurement policies. For example, DRA notes that high resource adequacy requirements and forward contracting for energy by utilities results in relatively low and non-volatile real-time spot energy prices. On the other hand, the Commission has been pursuing demand response and dynamic pricing, but stable energy prices will not result in much demand response. According to DRA, the Commission's decisions regarding a capacity market and the planning reserve margin will determine which fork the Commission is heading down.¹²⁷

In opening comments, TURN put forward a proposal that the planning reserve margin for a load serving entity (LSE) could be reduced if the LSE's customers are on dynamic pricing and are, therefore, willing to face high prices during scarcity conditions. In this case, the customers on the dynamic pricing rate should see a rate reduction that mirrors the lower planning reserve margin associated with their load.

DRA similarly believes it may be desirable for customers to have a role in determining the amount of resources procured on their behalf. To accomplish this, DRA supports investigating TURN's proposal to allow an LSE to procure a lower planning reserve margin for customers that are on CPP. DRA believes that TURN's proposal should be discussed in greater detail in R.08-04-012.¹²⁸

Discussion

Advanced metering creates a new opportunity for individual customers to choose the level of price volatility and reliability that they want to pay for. Already, some residential customers are choosing air conditioner direct load control programs, and some large customers are enrolled in interruptible programs, under which the customer is in some sense accepting a lower level of reliability in return for an incentive. Advanced metering enables a much wider variety of customer options.

Linking customers' rate choices back to an LSE's resource adequacy obligations could provide a basis to create something akin to a hedging premium. If an LSE does not have to purchase as much capacity for customers on dynamic pricing, then the LSE could pass that cost savings onto the customers that are on dynamic pricing.

We believe TURN's proposal deserves further consideration and recommend that TURN introduce its proposal in R.08-04-012.

¹²⁷ Capacity markets are being addressed in R.05-12.013 and the planning reserve margin is the subject of R.08-04-012.

¹²⁸ DRA Post-Workshop Comments, December 11, 2007, pp. 1-8.