5. Discussion and Analysis

This section of the decision addresses the issues before the Commission as follows:

(1) Issues associated with the changes to the SDP program;

(2) Issues associated with program scale, the level of costs and the recovery of costs of the SDP program;

(3) Issues associated with the costs and benefits of the SDP program; and

(4) Timing issues associated with program implementation and subsequent evaluation.

For the sake of exposition, this decision will consider the issues related to costs - including level of costs, recovery of costs, and balance of costs and benefits - in a single section.

5.1. Proposed Changes to the SDP Program

As outlined above, the major change proposed to the SDP Program is the transition for a DR program that is triggered only in supply emergencies to one that is triggered for both economic circumstances and supply emergencies.

5.1.1. Positions of Parties

SCE argued in support of its proposed changes to the SDP program that the "new program is designed to retain the program's high satisfaction and participation to maximize its demand response capacity."36 Concerning the changes that make the SDP price-triggered, SCE argued that:

SDP offers a known and reliable response on very short notice. The resource is readily available on hot days when the California wholesale market prices are expected to be high and volatile. If approved, SCE's proposal will allow this flexible, limited-use DR resource to be competitively dispatched at the high cost hours of the year.37

SCE also contended that the "SDP program will preserve the emergency-based triggers in effect today."38 SCE argued that since the new program will be dispatched "more than it is today" it will maximize "the price-responsive benefit of the program."39

Concerning the proposed incentive schedule, SCE argued that "SDP incentive levels are outside the scope of consideration in the Application" because "they were agreed to in SCE's 2009 GRC [General Rate Case] Phase 2 settlement approved on August 20, 2009."40

Nevertheless, in support of the proposed incentive structure, SCE argued that "the rates proposed in this Application are what they would have been if the current program were to continue under the terms of the GRC Phase 2 all-party settlement."41 Finally, SCE linked the incentives to customer satisfaction, and stated that:

SCE's proposal seeks to maintain customer enrollment and satisfaction with the program. In anticipation of this SDP application, SCE filed its rate design window application to prevent additional unnecessary and confusing changes from the customer's point of view. By keeping SDP cost-effective incentives the same as they are today, the proposed SDP program can maintain customer satisfaction and enrollment levels despite other changes with the program.42

SCE further pointed out that the new SDP program "will use the same technology and existing infrastructure of the current program."43 On behalf of the customer override switch, SCE argued that "with more events and the same incentive levels, customer choice is critical to the transition."44 Therefore, SCE contended that the override switch is "a necessary feature in the SDP proposal."45 Moreover, SCE stated that the override option "aligns with future SCE load control programs," and that a "key feature of future enabling technology like the programmable communicating thermostat is that a customer may override an event."46 Although SCE stated that it expects that few customers will override events, SCE argued that the override option is "critical to preventing attrition."47

DRA requested that the Commission reject SCE's new proposed program in favor of the status quo with some proposed modifications. DRA recommended that the Commission reject SCE's proposal to make the override-enabled switch available to all that want one, but instead require that SCE limit the override-enabled devices to "newly enrolled SDP customers or customers needing replacement due to equipment failure."48 Concerning the air conditioning control devices, DRA argued that replacing current functioning switches will lead to stranded costs and is "both unnecessary and costly."49 Instead, DRA recommended that for those with existing air conditioning control devices, SCE should "accommodate override requests from these customers via email or telephone."50

DRA also recommended major changes to the incentives offered to customers concerning the SDP program. In particular, DRA proposed to limit incentives, so that legacy customers participating at the 100% cycling rate would have a $99 annual incentive, and $49 for 50% cycling. New customers with override features would be offered "$49 incentive for the 100% cycling strategy, and $27 for the 50% cycling strategy."51 DRA also recommended that SCE file a new application in 2012 to request funding for 2013 and 2014, and also include a report on "actual experience during 2011 and 2012."52

Finally, DRA recommended that "the Commission consider rejection of the application" and instead reconsider it "in the 2012-2014 demand response cycle application, should it [the Commission} determine that more comprehensive changes need be made than what DRA suggests here."53

5.1.2. Discussion

The position of the parties is best understood through tables that compare the status quo with the proposals of SCE and DRA.

Table 1 details customer incentives under all the three different programs.

Table 1

Current SDP Program

Current Customer Incentives

SCE Recommended SDP Incentive

DRA Recommended SDP Incentives

Base Program

 

Without Override

With Override

Legacy Device

Override Device

50 % cycling

$27

$99

$49

$49

$27

67% cycling

$55

Eliminated option

Eliminated option

100% cycling

$99

$198

$99

$99

$49

           

Enhanced Program

         

50 % cycling

$55

Eliminated option, customers transitioned to Base 50% cycling

Eliminated option, customers transitioned to Base 50% cycling

67% cycling

$110

Eliminated option, customers transitioned to Base 50% cycling

Eliminated option, customers transitioned to Base 50% cycling

100% cycling

$198

Eliminated option, customers transitioned to Base 100% cycling

Eliminated option, customers transitioned to Base 100% cycling

Since 73% of customers currently choose the 100% cycling and Enhanced option, they maximize their SDP benefits, which would average $198.54 Thus, a consequence of the DRA-recommended incentive levels would be to decrease by $99 the average benefit received by 73% of the program participants.

Under the SCE-recommended incentive levels, these 73% of customers would receive the same average benefit for participating in the SDP. Thus, although the customers will need to accept the more frequent disruptions in service as the SDP transitions from a rarely-used emergency-triggered program into one that is used as a DR resource to manage grid loads and energy costs via service curtailments throughout the year, customers would continue to receive the same level of financial benefits.

Table 2 provides a summary of the program elements in the current program, in the SCE recommended revised SDP, and the DRA recommended program.

Table 2

Program Elements

Current Design

SCE Recommended Design

DRA Recommended Design

Curtailment event triggers

Emergency use only

Economic and emergency

Economic and Emergency

Estimated Frequency of Curtailments

Less than once a year

Program managed to produce multiple curtailments per year

Program managed to produce multiple curtailments per year

Event Duration

Maximum six hours per day

Multiple events may occur in a single day, each with potentially varying durations. However, in all cases, a customer will not be interrupted for more than six hours in a single day.

Multiple events may occur in a single day, each with potentially varying durations. However, in all cases, a customer will not be interrupted for more than six hours in a single day.

Local control technology options

Direct load control switch operated by SCE only

Two options:

· Direct load control by SCE

· Direct load control switch with customer override. Customers permitted to override up to five events per year.

Two options:

· Direct load control by SCE for all present customers and new customers opting for "no override program. Customers contact SCE and request override.

· Override switch an option for new customers

Load control options

· 50% cycling

· 67 % cycling

· 100% cycling

· 50% cycling

· 100% cycling

· 50% cycling

· 100% cycling

Factors determining level of customer incentive payments

Payments based on:

· AC unit tonnage

· Cycling choice

Credits apply to participants' summer bill statements as daily credit

Payments based on:

· AC unit tonnage

· Cycling choice

· Override option

Credits apply to participants' summer bill statements as daily credit

Payments based on:

· AC unit tonnage

· Cycling choice

· Override option

Credits apply to participants' summer bill statements as daily credit

A review of Tables 1 and 2 shows that there are major differences between the current SDP, the SDP recommended by SCE, and the SDP recommended by DRA. In general, the revised SDP recommended by SCE maintains incentives at the levels that customers currently receive, but promises that service curtailments will become more common as SCE uses the SDP as a price-responsive demand response resource, rather than as only an emergency triggered program. As part of SCE's recommended SDP, customers may choose an option that, for a smaller incentive payment, permits them to override a curtailment event.

DRA's recommended SDP has several major changes, all of which decrease the benefits that program participants receive. First, DRA's recommended program provides for a maximum incentive that is about 50% of what customers currently enjoy despite the fact that SCE will disrupt their service significantly more than it does under the current SDP.

Second, DRA envisioned saving a significant amount of the costs of new switches by requiring SCE to offer customers an alternative that enables customers to override a service curtailment by contacting SCE and having SCE remotely override the service curtailments. However, SCE has provided unrebutted and convincing evidence that it cannot accommodate more than a few override requests made during an event by e-mail or by a phone call through its current manual process. SCE's testimony made clear that its current VHF RF communications technologies is a "broadcast" technology, not a "point-to-point" communications technology, and "[t]here are technological limitations on how much data can be broadcast during any give timeframe."55 SCE argued that as a result, it "cannot adequately support sending unique messages to individual devices where there is a time-critical nature to the message."56 SCE estimated that given its current manual process it is able to accommodate "approximately 20 [requests] per hour in a given region."57 As a result of these facts, this decision concludes that the DRA proposal would have the consequence of denying an override option to participants currently in this program.

Thus, the DRA-recommended SDP has the effect of halving the incentive payments received by 73% of the customers participating in the program58 while making it impossible for most of them to exercise customer choice pertaining to the SDP air conditioning program other than dropping out of the program. The DRA-recommended SDP would disrupt a program that by itself constitutes "80% of the state's entire reliability-based resource."59 In consideration of these facts, this decision finds the DRA-recommended SDP an unreasonable imposition on customers and inconsistent with California policy of encouraging the use of DR resources.

5.2. Program Scale, Costs and Cost Recovery for SDP

The parties in this proceeding also contested the level of resources that should be committed to the deployment of new load control devices and the overall size of the SDP and the size of the incentives awarded to customers.

5.2.1. Positions of Parties

SCE defended the SDP and seeks to maintain its scale. SCE argued that the SDP is a "large, valuable and successful program with high enrollment and satisfaction that has been approved and enlarged by this Commission over its 30-year history."60 SCE pointed out that its SDP "is the largest retail demand response program in the state and one of the largest in the country."61 The program includes "330,000 customers and represents 543 MW of demand response capacity."62

The costs of the SDP consist of the incentives paid to customers to join the program and the costs of administering the program itself, which include the operating costs of installing the new switch, marketing the program, and program administration. In the record of this proceeding, the costs of the incentives are confidential, while the incremental costs of operating this program are forecasted to amount to $8,298,160 for 2011 and $18,301,160 for 2012.63 As a result, the total costs of the program are confidential. It is important to keep in mind that the costs associated with the installation of new switches with override buttons, however, would only be fully incurred when a program participant requests the override button.

SCE argued that to maintain the scale of this program as it transitions to a DR resource that actively participates as a resource in the CAISO markets, the SDP requires a continuation of the current incentives paid to customers,64 an expansion in customer choice associated with the program,65 and an investment in new equipment that permits customers the choice to override a curtailment event.66

Specifically, SCE provided testimony that the proposed changes to the SDP -- the deployment of a new switch with an override button (when desired by a customer) and new marketing and educational activities (for the entire program) -- will add $8,298,160 in incremental costs for 2009-2011 and require $18,301,160 to extend the program for the year 2012.

In contrast, DRA opposed the scope and costs of SCE's program. DRA argued that "[t]he current SDP program already provides generous annual incentives."67 DRA argued that SCE's proposal is one "to raise incentives" and "would inflate the already high expectations of customers who participate in the program."68 In contrast, DRA praised Pacific Gas and Electric Company's SmartAC program, which provides customers "a one-time sign up bonus of $25, up to $50."69

DRA argued that SCE's proposal, which would collapse the standard and enhanced programs into a single program that would receive incentives at the "enhanced" level, is one that "could result in a windfall to current SDP customers at the expense of other residential customers."70 DRA opposed the SCE proposal because:

Under SCE's proposal, incentives to customers enrolled currently in the Base SDP program will see their incentives double if they choose to keep their existing switch - from $99/year on average to $198/year. Yet the increase is not supported by a correlating increase in available hours that a customer may be exposed to an event; they will still be at risk for a maximum of 90 event hours for the year. In the case of a currently enrolled customer on the Enhanced 100% cycling option, at the transition to the new SDP program, the same customer would receive the same amount of incentives, $198, if they choose the non-override option. However, in this case the same customer who was once exposed to an unlimited number of events under the Enhanced program is now transitioning into a program with a limited number of events - at a maximum of 90 hours per year. It would be logical to expect a correlating decrease in incentives should a customer be less exposed to risk. But that is not the case here.71

In response to DRA, SCE argued that DRA's proposed modifications to the current program would lead to "SDP incentives [that] violate the GRC [General Rate Case] Phase 2 Settlement and are not cost-based."72 DRA, however, argued that "[t]he GRC Phase 2 Settlement Agreement does not preclude the Commission's consideration of whether SCE's approved incentive levels are reasonable."73

Finally, DRA opposed SCE's plan to replace current program switches with switches with an override button whenever a customer requests. Instead, DRA would permit the installation of switches with an override button only for "new customers and legacy customers requiring switch replacement."74 DRA argues that this change in the program would reduce the costs that the SDP program would incur from $26,599,320 to $10,189,605 - a decrease of $16,409,715 in program costs of 2011 and 2012.

5.2.2. Discussion

On the issue of the scale and scope of the SDP, SCE and DRA have presented a clear policy choice.

On this issue, this decision finds that SCE has the better argument. SCE seeks to maintain the scale of the current SDP, in both membership and incentives offered, while transitioning it to a program that actively participates in the CAISO market. SCE's program is consistent with the statutory vision that the electric infrastructure will permit the "[d]evelopment and incorporation of cost-effective demand response, demand-side resources, and energy-efficient resources."75

DRA, in contrast, seeks to reduce the scale of the incentives offered to customers to participate in the SDP. As noted previously, under the DRA's proposal, 73% of current program participants would experience a 50% reduction in the incentives payments they receive.

As a result of these considerations, this decision declines to adopt the reduction in incentives that DRA recommends for the SDP. The SDP is a critical component of California's DR program, and there is no compelling reason to reduce the incentive payments to the 73% of the program's participants that now receive the maximum benefit, particularly at a time when the operations of the SDP will lead to multiple service curtailments for the first time in the experience of many customers. It is not conceivable that this program will remain a popular choice if it were revised to reduce the incentives to customers and increase the frequency of service disruptions.

DRA's analysis of the SDP is unconvincing. For example, DRA argues that the terms of the current "enhanced" program permit unlimited number of curtailments to a customers air conditioning load during the summer and that imposing service disruptions will not affect service participation. DRA's argument ignores the fact that the experience of customers over the last decade has created the expectation among customers that their air conditioning service will be disrupted rarely if at all. As noted by SCE, in the past five years, "only five events affected the entire service territory."76 SCE observed further that "many current SDP customers have not been dispatched at all until 2010."77

DRA's argument that under SCE's proposal incentive payments are increasing without a "correlating increase in available hours that a customer may be exposed to an event"78 is unpersuasive. DRA's argument cites a number of disruptions that "may occur" under the terms of the SDP, but ignores the fact that such disruptions have almost never occurred. Moreover, with SCE's new program, disruptions in service year will routinely occur multiple times per year as part of an actively managed DR program. Thus, even if this is not a dramatic change in the terms of the SDP, it will be a major change in the operations of the SDP and in a customer's experience of the program.

This decision finds SCE's proposal to install a device with a button79 that can override a service curtailment as a reasonable approach to providing customers with choice and control over their participation in the SDP. By providing a device with an override button to desiring customers who have safe access to the button, SCE has offered choice to all its customers. SCE's argument that offering customers the ability to obtain such a device is critical to maintaining the high levels of support for the SDP is persuasive. The availability of such a feature, even when not selected, effectively communicates to the customer that the SDP is a program to maximize customer choice and not a program to shift control of a customer's air conditioning unit to the utility.

We also do not adopt DRA's proposal to limit the deployment of the new device to situations where the customers do not currently have a device. As noted above, the current communications technology deployed by SCE does not permit customer choice without such a switch. As a consequence, DRA's proposal would result in very different choices available for new customers enrolling in this program and those currently enrolled. This would have the consequence of narrowing the choice of those customers who have faithfully participated in this DR program in favor of those signing up now. Such an outcome is inconsistent with the Commission's obligation to ensure that all customers face similar choices concerning service wherever possible. Although DRA rightly notes that it is not possible to know whether the override option is necessary to ensure current levels of program participation, it is clearly neither prudent nor in the consumer interest to deny the customer such an option and then see what happens.

In summary, SCE's proposal to maintain incentive payments to program participants at current levels and to deploy switches with override buttons to all participants in the SDP who desire such a device (and are willing to receive lower benefits) is reasonable.

5.3. SDP Program - Costs and Benefits

The methodology for assessing costs and benefits was not an issue in this proceeding. In preparing Ex. SCE-2, SCE followed the guidance contained in an August 27, 2010 Ruling by Administrative Law Judge (ALJ) Hecht that was issued in R.07-01-041 and requested by DRA in this proceeding. SCE's calculations show a Total Resource Cost (TRC) benefit-to-cost ratio of 1.02.80 According to this ratio, the benefits from the revised SDP, including deploying new devices with override buttons, slightly exceed the costs of the program - including both the incentives paid to customers and the costs of otherwise running the program.

5.3.1. Positions of Parties

Concerning the cost-benefit ratio of 1.02, SCE argued that:

This ratio shows an optimal balance between ratepayer funding and the DR potential that the funding is meant to support. The key is to maximize enrollments though optimized customer incentive levels while maintaining cost-effectiveness. Not paying for override features or reducing incentives would technically improve the cost effectiveness. However, this would result in lower enrollments and reduce the overall value of the program.81

Clearly, the estimation of the benefits and costs of a SDP carries uncertainty. On this issue, SCE argued:

Although the proposed program is different from the current one, it is an existing program and SCE understands where the cost-effectiveness of the program lies. Most of the benefits of the SDP program are not dependent on variable weather or events, but rather on capacity. If anything, the program changes are likely to increase the cost-effectiveness of program because the CAISO will have more flexibility to call the program.82

DRA argued against this approach, stating:

A TRC cost effectiveness ratio of 1.02 is unacceptable. SCE should be ordered to raise its demand response cost-effectiveness rations based upon lessons learned from program experience, not continually show the Commission that it can manage programs that are just "barely" cost-effective (i.e., a ratio of 1.0 means the costs equal the benefits of the program). What this actually shows is SCE's approach to raise incentive levels just enough so that the TRC ratio hovers above 1.0.83

DRA concludes:

The Commission should acknowledge the cost effectiveness of the proposed SDP program is marginal, and should reject it on this basis. ... The Commission should not allow SCE to offer marginally cost effective DR programs and should disregard SCE's threats that consumers may leave SDP en masse.84

5.3.2. Discussion

The SDP as proposed by SCE offers benefits in excess of the costs, and therefore benefits all ratepayers. Proceeding with this new program is in the public interest.

DRA rightly points out that the benefit/cost ratio provides only a sliver of benefits in excess of costs. There are, however, several reasons why this does not present a problem presently. First, a large element of the "cost" of the SDP is the incentives paid to customers for participation. It is both fair and reasonable that those who permit the disruption of their service in order to reduce peak demands should benefit from their action. Moreover, it does not seem fair or reasonable to design an SDP with a high benefit/cost ratio, under which the ratepayers who do nothing to reduce their electric usage receive benefits made possible by the actions of others who consent to the disruption of their service.

Second, since California energy policy adopts a "loading order" that sets a priority on investment in energy efficiency and demand side resources,85 a policy of requiring a high benefit/cost ratio for the approval of a DR program would be inconsistent with this policy. In particular, it would create an evaluation "hurdle" that would discourage the deployment of demand side resources, disqualifying projects that produce benefits in excess of costs.

Third, since a large portion of the "cost" of an SDP reside in the incentives paid to customers for participating in the program, it is possible to manage these costs over time by modifying the incentives paid to those who participate in the program. Although the total amount of incentive payments forecast for this program is confidential, in its Opening Comments on the Proposed Decision, DRA points out that customer incentives paid in 2009 and 2010 were public information in A.11-03-003 and amounted to over $60 million in both 2009 and 2010.86 SCE, in Reply Comments of the PD does not respond to the disparity in confidential treatment of incentive payments between this application and A.11-03-003, but objects to DRA's citation to the record in A.11-03-003.87 Even though this decision treats the projected incentive payments for future years as confidential, SCE's own filings make it appropriate to reveal that the incentive payments are much larger than the operating costs of this program. Since these incentive payments are so large, if the costs and benefits of the SDP fail to follow SCE's forecast, it should prove possible in future years to alter the incentives in ways that ensure that the benefits exceed costs. Indeed, DRA's recommended modifications to the SDP rely on reductions in the customer incentives (while assuming continuing levels of participation in the program) to produce a higher benefit/cost ratio.

In summary, there is at this initial stage no need to require that the program produce benefits far in excess of program costs.

5.4. Timing of Program Changes and Subsequent Evaluation

During the course of the proceeding, issues arose concerning the timing of the transition to the new SDP and to the timing and use of subsequent information resulting from the implementation of the SDP program.

5.4.1. Positions of Parties

SCE argued that it "needs a decision this year to have the SDP program ready for summer 2012. SCE explained:

To successfully transition the SDP program, SCE needs ample time for both customer education and system enhancements. In SCE's proposal, SCE described that it plans to begin its customer education and outreach campaign after the summer season of 2011 concludes so that customers are aware of the program changes and can make choices about override or cycling options. In addition, SCE needs to make system enhancements to SCE.com as well as the billing customer service, and load control systems to effectuate the program modifications and customer choice options.88

Furthermore, SCE contended that should this application be consolidated with the 2012-2014 DR Application, "SCE would not be able to timely implement these customer conversion activities or the systems enhancements necessary to enable customer choices and revised program dispatch rules.89 SCE further contended that such delay in consideration of the application "will further delay SCE's ability to comply with Commission guidance and state policy of increasing price responsive DR and the integration of DR resources into the CAISO market."90

SCE, however, supported filing an update to its SDP request when it has more information concerning the operation of the newly modified program. SCE stated that it

... understands that it will have better information in 2012 than it does today for 2013 and 2014, and therefore supports the concept raised by DRA to file an update to the SDP request in 2012 ... [A] reasonable compromise is to allow SCE to file an update in the fourth quarter of 2012.91

DRA, however, has argued that:

DRA continues to recommend the Commission consider rejection of the application for reconsideration in the 2012-2014 demand response cycle application, should it determine that more comprehensive changes need to be made that what DRA suggests here. If a new application is necessary, the Commission may issue an expedited proceeding (or separate track within the 2012-2014 DR cycle application) in which a decision may be timely issued before the 2012 summer season.92

Concerning the updating of the 2012-2014 DR application, DRA agreed with SCE that "[i]t would be a reasonable compromise to allow SCE to file an update in the fourth quarter 2012."93

5.4.2. Discussion

SCE has presented sufficient information to demonstrate the reasonableness of proceeding at this time with the SDP as proposed. The SDP not only complies with previous Commission decisions, it advances the statutory goal of expanding the use of demand side resources to meet California energy needs. It is not in either the ratepayer or the public interest to delay consideration of this matter to the 2012-2014 cycle.

The filing of updated information in the fourth quarter of 2012 will assist the Commission in exercising oversight as this major demand side management program transitions to a resource that the CAISO can dispatch based on its price and the savings it produces for California.

36 SCE Brief at 5.

37 Id. at 7, footnotes omitted.

38 Id.

39 Id. at 8.

40 Id. at 10.

41 Id. at 12.

42 Id. at 12.

43 Id.

44 Id. at 13.

45 Id. at 14.

46 Id. at 15.

47 Id.

48 Id.

49 Id. at 6.

50 Id. at 3-4.

51 Id. at 4.

52 Id. at 4

53 Id. at 3.

54 SCE-1 at 9, Table II-1.

55 SCE-3 at 3.

56 SCE Reply Brief at 4.

57 SCE-3 at 3.

58 SCE-1 at 9.

59 SCE Opening Brief at 2, calculation contained in Appendix A. The calculation is based on utility reports filed at the Commission.

60 SCE Opening Brief at 16.

61 Id. at 2, footnotes omitted.

62 Id. at 3, footnotes omitted.

63 SCE-1 at 30.

64 SCE Opening Brief at 10.

65 Id. at 13.

66 Id. at 14.

67 DRA Opening Brief at 14.

68 Id.

69 Id.

70 Id. at 16.

71 Id. at 14, footnotes omitted.

72 SCE Opening Brief at 11.

73 DRA Reply Brief at 2.

74 DRA Opening Brief at 4.

75 Pub. Util. Code § 8360(d).

76 SCE Opening Brief at 3.

77 Id.

78 DRA Opening Brief at 14.

79 A device with a button will only be installed in those situations where a customer has safe access to it.

80 SCE Opening Brief at 18.

81 SCE Opening Brief at 18, footnotes omitted.

82 Id.

83 DRA Reply Brief at 8.

84 Id. at 10.

85 § 454.5(b)(9)(C).

86 DRA Opening Comments on PD at 2.

87 SCE Reply Comments on PD at 1.

88 SCE Opening Brief at 18-19, footnotes omitted.

89 Id. at 19.

90 Id., footnotes omitted.

91 Id. at 20.

92 DRA Opening Brief at 3.

93 DRA Reply Brief at 12.

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