VI. PG&E Is Directed to Negotiate an Agreement With the CPA

The DRP provides a substantial amount of demand response MWs that can be called on by either the IOUs or DWR to address either economic or reliability concerns until May 2007. According to CPA, with continued marketing the DRP has the capacity to expand beyond its current level of 230-270 MWs, to as many as 500 MWs in 2005.¹⁹ In 2003 we recognized the DRP as an important program, and that it currently holds a unique place among demand response programs because of its capacity to include DA customers.²⁰ Given its importance in providing demand response capability for both economic and reliability reasons, we agree that it makes sense to ensure the benefits of the DRP program are not lost after the CPA's operating budget has been exhausted. Utilities regularly purchase and sell energy, so having a utility assume the CPA's role in operating and managing the program for the next two summers is something we must consider given the importance of demand response as a key part of the Energy Action Plan's loading order.

Since the CPA requested the Commission's assistance in continuing the DRP, Energy Division staff has been discussing continuation of the DRP with the utilities and the CPA. PG&E, the utility whose service territory has the majority of DRP's MWs, has been discussing operation of the DRP program with the CPA. We direct PG&E to continue its negotiations with the CPA to settle on terms of an agreement that would effectively enable PG&E to operate, manage, and maintain the CPA's responsibilities for the program. We believe that directing one utility to negotiate an agreement (as opposed to directing all three) is the most pragmatic means of transferring the responsibility of the program in as seamless a manner as possible. We select PG&E as the most appropriate choice from among the three affected utilities because the majority of MWs generated by the DRP are in its territory.

While the CPA has advised us that its operating budget will expire by November 30, 2004, its statutory authority²¹ remains unaffected, meaning that it still remains as a legally constituted entity, albeit without funding for its administrative responsibilities. The CPA will continue to legally exist, along with the CPA Fund which is also set forth in statute.²² The CPA fund is continuously appropriated by statute and is where the DRP Fund resides. As noted earlier, the DRP Fund currently carries a balance of approximately $2 million.

According to the CPA, it will secure a Fiscal Agent, most likely located in the state Business, Transportation and Housing Agency who will have signatory authority to approve payment from the DRP Fund to the CPA's DRP contractors and counterparties. Securing a Fiscal Agent is critical, as it will enable the program to have access to the DRP Fund and therefore continue after November 30. The CPA's Fiscal Agent will also have the signatory authority to finalize an agreement with PG&E. The CPA has indicated that it believes an agreement authorizing PG&E to run the DRP as the CPA's agent, under the ultimate direction of the CPA Fiscal Agent, is the best interim solution for continuing the program. We direct PG&E to file and serve by November 30, 2004 a term sheet, which would contain the general principles it has agreed to with the CPA for operation of the DRP post-November 30. We select November 30 as the deadline for this term sheet as we want to be informed of the CPA's key principles for the DRP's on-going management at the time that it transfers its signing authority to the Fiscal Agent.

We also direct PG&E to submit to the Commission for final approval its proposed agreement with the CPA. The proposed agreement shall contain the final terms agreed to by both PG&E and the CPA's Fiscal Agent, and shall at least reflect a commitment by PG&E to maintain and operate the DRP in a prudent manner, and in the interest of the ratepayers. We leave the specific details of this agreement to be developed between the CPA (and its Fiscal Agent) and PG&E, but we will consider an agency agreement or an agreement by PG&E to accept assignment of the CPA's contracts. The draft shall be served upon the service list for R.02-06-001 or its successor, and be subject to comment before the Commission determines if it is acceptable.

We also direct PG&E to submit a cost-effectiveness analysis of the DRP using the recently renegotiated terms of the Demand Reserves Purchase Agreement as described in this decision. D.03-06-032 recognized the DRP as a viable program as well as a cost-effective one based on the terms of the program in 2003. The contract between the CPA and DWR has since been amended and it is therefore necessary to update our understanding of the cost-effectiveness of the program using its latest terms. PG&E shall use the same cost-effectiveness methodology that was employed in D.03-06-032.

We advise the CPA, PG&E, and the parties to this proceeding that we take this action as an interim step to keep the program intact, and that all stakeholders will still have an opportunity to provide their input when the draft agreement is submitted. Ultimately we may determine that the proposed agreement is unacceptable and that other alternatives are more appropriate.

We also recognize that if PG&E were to assume the CPA's responsibilities for the DRP (either as an agent, or as an assignee of its contracts), it would in effect, be on "both sides" of the foundational contract, given its pending agency agreement with DWR to schedule and dispatch the program. There are likely conflicts of interest that need to be further explored, understood and ultimately resolved, that we are unable to address in this order. Directing PG&E to negotiate an agreement with the CPA provides the Commission the time to contemplate the appropriate role of the utilities in the DRP before a final direction is taken. We therefore direct Energy Division to suspend PG&E's advice letter filing seeking approval of its agency agreement with DWR and direct Energy Division, PG&E, and DWR to begin discussions on a revised agency agreement that addresses any potential conflicts of interest.