IV. Program Obligations, Funding and Costs

A. Contracts

The operation of the DRP is governed by a set of contracts that the CPA has with several entities. There are a total of 20 contracts: (1) the Demand Reserve Purchase Agreement between DWR and CPA; (2) demand reserve provider contracts with eight aggregators (also called demand reserve providers); (3) a demand reserves provider contract with an end-user customer (the California State Water Project (SWP)); (4) demand reserve delivery agreements with five energy service providers (ESPs); (5) an agreement with the California Independent System Operator (ISO); and (6) agreements with four contractors, including the "Demand Reserves Power System Development and Operations Agreement" between CPA and APX.

1. Demand Reserves Purchase Agreement

The Demand Reserves Purchase Agreement governs the sale of power to DWR by the CPA, which the CPA provides through participating end-users that agree to curtail their power use.8 The Demand Reserve Purchase Agreement is a capacity plus energy contract and is in place until May 2007. The contract has been amended each year since 2002; the terms described here reflect the most recent agreement.9

End-users determine their participation in the program by selecting to be in one of three groups (Group A, B or C), each with different incentives and obligations.

The CPA is obligated to nominate an amount of load to DWR at the beginning of the month, organized according to the three groups. The following table indicates the commitment levels and capacity payment rates for each group:

 

Hours of Interruption Per Call

Capacity Payment CPA Charges DWR

Group A

Minimum of 1 hr., up to 3 hrs.

$10,000/MW-month

Group B

Minimum of 1 hr., up to 5 hrs.

$11,000/MW-month

Group C

Minimum of 1 hr., up to 8 hrs.

$12,000/MW-month

The capacity payments listed above are paid in June, July, August, and September. For the remaining months of the year, the capacity payment is $500/MW-month.

In addition to their monthly nominations, customers may increase their nominated amount two days ahead of each program day. The aggregators inform the CPA of these adjustments, which in turn informs DWR. This increase is called Additional Hourly Capacity. DWR pays for this capacity at a prorated calculation of the monthly capacity payments in the table above. The monthly nomination of load, along with the Additional Hourly Capacity, is effectively what the CPA is committing to deliver to DWR should the program be called. Whenever the program is actually called and load is interrupted, DWR pays the CPA $80 per MWh for actual interruption in addition to the capacity payments listed above.

Penalties for failure to perform include loss of capacity payments, loss of energy payments and payment of ISO imposed penalties for deviations from scheduled load. DWR imposes these penalties on the CPA, which in turn imposes the penalties on the aggregators. The aggregators, in turn, impose these penalties on their specific end-users who failed perform.

The DRP is limited to 24 hours of interruption per month and 150 hours per year, irrespective of the group a participant selects. All groups must be reserved one day in advance of interruption with the actual notification for interruption at least 3 and ½ hours ahead of the actual interruption. This allows the interruption to be scheduled in the ISO hour-ahead markets.

As noted in Section II.B, the utilities have pending agency agreements with DWR that would enable them to trigger the program if it is cost-effective to do so. The pending agency agreements enable DWR to call the program for reliability reasons or for testing purposes.

2. Demand Reserve Provider Contracts

The Demand Reserve Provider or aggregator contracts basically mirror the Demand Reserve Purchase Agreement between DWR and the CPA, and they all expire in May 2007. In order for the CPA to nominate the load it can deliver to DWR, the CPA must be informed by the aggregators regarding the amount of load they can deliver if called. Thus, the contracts between the aggregators and the CPA specify that the aggregators nominate their monthly loads (organized according to the groups their end-users select to be in), and inform the CPA of any Additional Hourly Capacity that could be provided. The Demand Reserve Provider contracts follow a standard form for the most part, and the only significant difference between these contracts and the CPA-DWR contract is the capacity payment rates:

Group A: $8,500/MW-month

Group B: $9,000/MW-month

Group C: $10,000/MW-month

The capacity payments listed here are paid in June, July, August, and September. For the remaining months of the year, the capacity payment is $330/MW-month.

The energy rate paid by the CPA to the aggregators is $80 per MWh, the same rate that DWR pays to the CPA.

Penalties for failure to perform include loss of capacity payments, loss of energy payments and payment of ISO imposed penalties for deviations from scheduled load. The aggregators, presumably collect penalties from their end-user participants depending on the specific terms of the contracts they have with those entities. Consistent failure to perform by an aggregator enables the CPA to remove that aggregator from the program.

3. Demand Reserves Provider Contract
With State Water Project

The CPA typically does not interact with end-users, as it relies on the aggregators to enroll end-users that are interested in participating in the DRP. The one exception to this is the SWP. The CPA contracts directly with the SWP because its contribution of 200MW exceeds the total MW provided by all the aggregators combined. The terms of the contract between SWP and CPA are virtually the same as the Demand Reserves Provider contracts.

4. Demand Reserves Delivery Agreements

These are agreements between ESPs and the CPA. The purpose of these agreements is to address the demand response reduction provided by Direct Access (DA) end-user participants in the DRP. The agreements are designed to ensure that the ESPs of DA customers are willing and able to move the power (made available by the customer's reduction in demand) to the IOU who would be triggering the program. Unlike the CPA's contracts with the aggregators, the contracts with the ESPs are unique from each other, each reflecting the varying circumstances of the customer and the ESP. Further these contracts expire at the end of 2004, and must be renewed by the CPA or its successor in order for DA customers to participate in the program in 2005.

The ESPs receive no compensation for entering these agreements, but participate so that their end-use customers have the opportunity to participate in the program. Thus the end-users and the aggregators benefit from these agreements.

5. CPA - ISO Contract

The CPA has a contract with the ISO that requires the CPA to follow the terms and conditions of the ISO tariff with respect to load that CPA brings to participate in the ISO ancillary service market.

The technical requirements and specifications are designed to allow the ISO to use the load so nominated as non-spinning reserve under Western Electricity Coordinating Council (WECC) reliability criteria. Failure to perform results in loss of payments from the ISO and penalties outlined in the ISO tariff.

The DRP currently is not operating the component known as Non-Spin Ancillary Services as the technical details of how this particular product will be provided are still in the design phases with the IOUs and other parties.

6. CPA - APX Contract

APX is a consulting firm that provides software communication and scheduling coordination services to the CPA for the DRP. Specific services provided by APX include software development and maintenance for the program, meter reading for verification of demand response load reductions, meter registration for end-use customers, scheduling coordination services for direct access customers, and notification services when the program is dispatched. APX is also responsible for maintenance and management of the DRP website which is the systems backbone of the program, collecting and summarizing performance of all the meters registered to participate, and providing settlement calculations. APX is compensated directly by the CPA for development costs and all other fees charged by APX are based on program enrollment. The contract with APX runs through until May 2007.

7. Management and Administrative Contracts

The CPA has contracts with three individuals for managerial, legal, and administrative services for the DRP. These services include management of the CPA's DRP contracts, management of APX, marketing the program to potential aggregators, verification of meter information for purposes of invoicing DWR, communication with utilities, aggregators, DWR, and ESPs, resolving disputes and contract renegotiations. These contracts are in effect until May 2007.

1. Aggregator Payments

The largest costs for the DRP are the payments due to the aggregators for demand response provided under the contracts. These costs will fluctuate depending on the amount of MWs that the aggregators can nominate. The CPA's current and forecasted estimates for these costs for the remainder of the program are as follows:

2. Administrative Costs

The administrative costs for the program are largely based on the contract with APX (which has both development costs (at least through 2004) and operational costs that fluctuate based on participation levels), the management services contracts, and marketing costs. The CPA's current and forecasted estimates for these costs for the remainder of the program are as follows:10

Year

Payments to APX

Program Mgmt.

Program Marketing

June '04 - May '05

$1.37 million

$396,000

$40,000

June '05 - May '06

$1.71 million

$420,000

$60,000

June '06 - May '07

$2.1 million

$480,000

$20,000

The DRP currently has two sources of revenue to cover its expenses: DWR and the IOUs.

1. DWR

As described earlier, the Demand Reserves Purchase Agreement requires DWR to compensate the CPA for demand response reductions it provides. Each year DWR provides to the Commission its estimated annual revenue requirement to cover the costs of the energy supply contracts that it signed, including the costs of paying for the Demand Reserves Purchase Agreement with the CPA. Upon the Commission approval of its annual revenue requirement, DWR collects its revenues through a component in the IOUs' rates. For the 2005 calendar year, DWR estimates that it will need approximately $16.9 million to pay for the Demand Reserves Purchase Agreement.11

DWR's Actual Annual Costs for the DRP

2. IOUs

For 2003 and 2004, the utilities provided a total of approximately $2.7 million to the CPA to cover a portion of the CPA's initial upfront costs for the DRP.12 When the DRP initially started in 2002, the CPA incurred significant start-up costs for front-end software development by APX and did not have the revenues to offset those costs since participation was just beginning to build. The funding authorized by the Commission in 2003 enabled the program to continue functioning.

The utilities have proposed that they continue a level of funding for the DRP for its remaining years.13 The Commission will determine in R.02-06-001 whether any funding from the utilities is necessary, and if so, the appropriate amount.

By its second year of operation (June 2003 - May 2004) the program's participation levels had reached the point where its generated revenues offset its operating costs, and as of October 2004, the program has actually accumulated a reserve of about $2 million. That reserve is kept in the DRP Fund, which is a sub-account of the CPA Fund.14

The CPA anticipates that the program can continue to attract more participants to the program in 2005, thereby increasing its capacity to 500 MWs15 and sustaining that amount into 2006. It also anticipates launching its non-spin ancillary services product in 2005. Given those assumptions, the CPA anticipates that for the June 2005 - May 2006 year, its revenues will be at least $19.2 million (assumes discontinuance of utility funding for administrative expenses), while its expenses will be approximately $18.2 million, creating a gross margin of $917,000.16 For the June 2006 - May 2007 year, the CPA anticipates $24.2 million in revenues and $22.9 million in expenses, creating a gross margin of $1.3 million for that year.17

8 As explained, CPA contracts directly with only one end-user, the State Water Project. Most participating end-users contract with one of the eight aggregators with whom CPA has contracts. 9 The terms of the Demand Reserves Purchase Agreement were recently renegotiated in 2004. CPA signed the revised agreement, known as the "Second Amended and Restated Demand Reserves Provider Interagency Agreement "during the summer. DWR has verbally agreed to its terms, but has not yet signed the revised agreement. 10 CPA's DRP pro-forma Financial Model submitted to Energy Division on November 2, 2004. 11 DWR's Determination of Revenue Requirement for the period January 1, 2005 through December 31, 2005, dated November 4, 2004. 12 D.03-06-032 authorized $1.6 million (for both 2003 and 2004) for the utilities to reimburse the CPA for its DRP administrative expenses. The utilities book these costs to their Advanced Metering Demand Reduction Memorandum Accounts (AMDRMA). For 2003, the utilities paid $1.2 million, and for 2004, the utilities will pay approximately $1.5 million according to invoices provided by PG&E to Energy Division on October 27 and 28, 2004. 13 Utilities' October 15, 2004 filings for demand response programs and budgets for 2005 and beyond. 14 Section 3370 of the Public Utilities Code created the CPA fund in the State Treasury for purposes of implementing CPA's programs. 15 CPA's draft Business Plan, dated October 4, 2004, submitted to Energy Division on October 21, 2004. 16 CPA's DRP pro-forma financial model submitted to Energy Division on November 2, 2004. 17 CPA's DRP pro-forma financial model submitted to Energy Division on November 2, 2004.

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