4. The Parties' Positions

As we would expect when considering a significant change in rate design, the December 8, 2004 Ruling and ensuing utility applications generated a significant amount of customer comment, almost all of it negative. We briefly summarize the positions of each affected customer type that participated, as set forth in their testimony, under cross-examination, and in briefs.

4.1 Commercial/Retail Building Operators

The BOMA⁷ argues there is no evidence CPP will be effective in reducing peak demand. BOMA points to a Working Group 2 Evaluation (Dec. 21, 2004) that found voluntary CPP yielded disappointing results. BOMA believes that in order to be effective, CPP must induce new investment in building controls but the prohibition on commercial sub-metering (found in Tariff Rule 18) impedes progress in this area for building owners because it prohibits exposing tenants to time of use (TOU) rates. BOMA is concerned that the utility proposals are not cost based and will result in a wealth transfer from peaky users (office buildings) to flat profile users (grocery stores, hotels, etc.), and from inland users to coastal users. BOMA notes that peaky load curves are inherent for office buildings, and not a sign of inefficiency. BOMA points out that many BOMA SF buildings have won Flex Your Power and Energy Star awards for their energy efficiency. Finally, BOMA argues that PG&E faces no emergency capacity shortage and should not have a default CPP implemented to address a Southern California problem.

The Indicated Commercial Parties (ICP)⁸ believe any critical peak pricing program should be voluntary, not mandatory. ICP believes implementing a mandatory rate for Summer 2005 will hamper subsequent program modification and will worsen California's business reputation. They argue that the proposed bill impacts are so small that they will not induce behavioral changes. For example, ICP argues that for SDG&E, very few customers will have bill impact greater than 2%. ICP states that since a typical 300-500 kW customer's bill is $200,000, the bill would be raised at most by $4,000, less than the cost of training a building manager how to respond. ICP believes that if the Commission decides to pursue a new default tariff, ease of use is critical to success which means making the program uniform statewide with respect to trigger events, duration of periods, maximum number of events, notice timing, CPP price, crediting back and accounting, and any hedging premium cost.

Costco Wholesale (Costco) states that although the utilities' proposals differ from each other in important ways, but all would impose inequitable penalties without being effective in lowering demand. Since customers can't make meaningful critical peak period demand reductions, many will "opt out" and thus contribute nothing to demand reduction.

For example, Costco argues that SCE's program is confusing, but apparently would force Costco to reduce critical peak usage by 17% (far in excess of anything possible) in order to stay bill-neutral at a given facility. According to Costco, if it didn't opt out, its bill might increase by up to $380,000/year at that facility. SDG&E's proposal would require Costco to reduce critical peak period load by 7% (also in excess of what Costco states it can achieve) to stay bill-neutral. Costco's exposure under the SDG&E tariff is much less -- $13,000 - as a result of the more moderate CPP rate. To opt out would cost $91,000. Because PG&E's proposal doesn't apply to the tariff schedule that Costco takes service under, it has no impact on Costco. Costco states it has already done a lot to reduce its usage by employing energy efficiency measures, setting store thermostats high, minimizing use of outdoor and indoor light during peak periods, and installing ice storage as a peak shifting technique for new construction. Costco believes additional changes would compromise food safety.

Costco suggests that if the Commission wants to reduce demand it should eliminate any bill increase to customer that lowers its demand by 3% in critical peak periods, limit each event to four hours, and provide positive incentives, such as assistance to invest in ice storage. "Customer-specific revenue neutrality for 3% load reductions would ensure that customers are protected from the increased default CPP rate if they contribute pro rata to the Commission's established goal of a 3% reduction in critical peak period demand for 2005. [Footnote omitted.] Such a clear incentive would increase participation in the Default CPP Program." (Costco Opening Brief, p. 13.)

Wal-Mart⁹ does not believe the utilities' proposals meet the December 8, 2004 Ruling's goal of "predictably and systematically" moving large customers' usage out of their critical peak period. Wal-Mart would reject the utility proposals, finding them watered down from what the Ruling required, and order them to file new ones. Wal-Mart recommends the adopted rates be permanent rather than just for one summer because customers need time to plan, develop, and implement price-responsive measures, otherwise, the rates will be only punitive. Wal-Mart prefers SDG&E's approach of a totally new tariff, rather than a rider over the pre-existing tariff.

J.C. Penney¹⁰ agrees with Wal-Mart's position. California Retailers Association (CRA)¹¹ brief echoes many of the concerns raised by BOMA, Costco and Wal-Mart in testimony.

CHA/CSHE¹² recommends that the Commission exempt hospitals and health care facilities from mandatory application of CPP tariffs, without an additional hedging premium. They prefer that existing time-of-use schedules remain the default for customers above 200 kW with positive financial incentives offered to customers with high demand elasticity to encourage any desired load shifting. "CHA/CSHE believes that the first step in the process to develop a new rate design for the large customer class is to realign all customers' rates more closely with cost of service. Inter-class subsidies should be addressed in the cost allocation proceeding of a General Rate Case (GRC), which needs to precede any efforts to move forward with a CPP or a Real Time Pricing rate structure." (CHA/CSHE Opening Brief, p. 5.)

4.2 Large Manufacturing and Industrial Customers

Electricity costs are very significant part of operating costs for California Large Energy Consumers Association (CLECA)¹³ members who have already made major investments in response to utility rates and interruptible rates. These prior efforts will make it difficult to make additional demand response available for Summer 2005.

In critiquing the utility proposals and the general concept of a critical peak pricing default tariff, CLECA focuses on two principles:

· Equity: don't attempt to get more reductions from customers whose loads are not peaky;

· Effectiveness: will the program work to reduce load?

CLECA argues that because 29% of peak load is from air conditioning, and 11% is from commercial lighting, customers under 200 kW and between 200 and 500 kW are more likely the drivers of high peak demand than industrial customers. CLECA suggests that more demand reduction is achievable by focusing on users of air conditioning and commercial lighting between 200-500 kW now that they all have interval meters. CLECA also suggests that the Commission consider targeting customers with loads of less than 200 kW, agreeing with SDG&E that price signals achieve the most response when implemented across all customer groups. CLECA supports PG&E's exemption of non-firm and interruptible customers because reliability programs are the "last bastion of defense against the curtailment of load."

CLECA sets forth certain rate designs elements that any default tariff should adhere to. For example, the rates should be:

· Based on cost of service with marginal generation capacity cost reflected in summer on-peak, partial-peak and winter partial-peak demand charges rather than in both demand and energy charges.

· Credit customers in the same billing cycle, to the demand component of energy charges during all TOU periods.

· Triggered locally, rather than statewide.

California Manufacturers and Technology Association (CMTA)¹⁴ opposes implementation of a new default tariff for summer 2005, arguing that implementation will do more harm than good. CMTA emphasizes that stability and predictability in rate design should be emphasized because this allows for real long-term shifts in physical plant and operating practices. According to CMTA, most customers need at least six months to respond to new programs. For large customers, energy efficiency expenditures are often part of an annual program and budgeting process.

If the Commission does implement a new default tariff it should apply only to firm bundled customers who are not participating in other demand response or reliability programs and have loads between 200 and 500 kW since many DA contracts already provide market price signals and provide a reliability benefit. CMTA states that customers with load greater than 500 kW:

· have minimal air conditioning load, and thus contribute less than average to system peak;

· have generally been on TOU rates for 20 years, which, because of the predictability and stability of the rates have sent stronger price signals than the CPP rate would;

· have already made very significant efficiency gains; and

· cannot easily shift or curtail load.

If the Commission wishes to pursue a default tariff with a CPP type structure, CMTA recommends that whenever possible, programs should be uniform across California and called only when needed based on an ISO Alert for that zone. CMTA opposes calling the program for testing or information gathering purposes and would cap the number of events per season at not more than 15. CMTA encourages the Commission to set rates at no more than peak market prices, currently about $0.25/kWh and establish a reasonable opt out rate if one is adopted. CMTA considers even PG&E's proposed $0.001/kWh premium to be onerous. CMTA would have any credits from the higher critical period price returned to customers during other on-peak periods.

CMTA suggests that the rate be a rider, like PG&E and SCE have proposed, rather than an entirely new rate because a rate rider is more logical for customers to understand. In addition, CMTA believes that revenues collected during a CPP event should be returned to customers in a manner that minimizes customer bill impacts and maintains customer revenue neutrality.

CMTA offers several utility specific critiques. For example, CMTA finds that SDG&E's 5% hedging premium is much too high. Because of the way the SDG&E rate is structured, if less than 12 events are called, the program will result in an undercollection in the revenue requirement, which CMTA finds problematic. CMTA would also like to see cancelled CPP events counted towards the cap on the number of called events which neither SDG&E or SCE do. Regarding SCE's proposal, CMTA argues that the critical peak price proposed by SCE ($1.00/kWh) is excessive and not connected to market prices. Because of this, the bill impacts of SCE's proposal on individual customers are excessive. CMTA provides the example that even if some customers reduced their demand by 5% during critical peak periods they'd still see bill increases. CMTA also finds fault with SCE retaining a 6 hour peak period, rather than a shortened 3 hour period like SDG&E and PG&E. CMTA argues that PG&E's proposal isn't revenue-neutral.

SVMG¹⁵ proposes that the utility's annual generating costs be divided into three buckets: (1) the highest 1% of on-peak hours: (2) the remaining hours designated "on-peak" - about 18% of the year (noon-6 pm weekdays); and (3) the remaining 81% of the hours of the year. SVMG proposes that all annual capacity costs be included in and recovered through charges to the 1% bucket. Under SVMG's proposal, each cost bucket is divided by the anticipated number of kWh for the hours specified, which determines the generation cost per kWh for critical
peak, on-peak and off-peak. SVMG would trigger CPP events based on a CAISO system peak forecast of 97% of its highest peak estimate made before the summer season begins.

Energy Producers and Users Coalition (EPUC)¹⁶ focuses on the lack of rationale for requiring SCE and PG&E to implement CPP rates for Summer 2005. Specifically, EPUC argues that industrial customers who may not be able to shift load will be "singled out for punitive rate treatment vis-a-vis other customer classes." EPUC doesn't believe a showing has been made that the proposed CPP program will result in meaningful load reductions, while eliminating existing non-firm and interruptible programs could be detrimental to system reliability.

Although EPUC recommends against instituting default CPP for Summer 2005, if the Commission does implement default CPP for summer of 2005, then it should also expand non-firm and interruptible programs and exclude customers larger than 500 kW from participation. EPUC submitted 5-year average data that shows that large customers (on Schedules E-19 and E-20 for PG&E and Schedules GS-1, TOU-GS-2, and TOU-8 for SCE) generally have flat demand curves, compared to residential customers. To EPUC this data calls into question the efficacy of CPP rates in getting large customers to actually suspend their core business activity to remove power from the peak, and equity given that large customers do not drive peak demand.

4.3 Agricultural Interests

As a preliminary matter, Agricultural Energy Consumers Association (AECA)¹⁷ supports PG&E's proposal, which exempts agricultural customers, "given the lack of significant air conditioning load and the general unsuitability of a CPP Program rate for this customer group." (Ex 1, p. 3-11:7-8.) If implemented, AECA prefers PG&E's approach of crediting off-peak usage within the same 24 hour period on CPP days. AECA argues that agricultural activity cannot be put off to another time of the year, irrigation users are often constrained as to when they are allowed to pump, so they cannot switch out of the peak period, and irrigation must often be operated for 24 hours straight without interruption.

AECA notes that given these constraints, the only way a farmer can move off the peak period is to invest in new pumps and equipment, which does not make financial sense when a program is only called the day ahead, although AECA concedes that it might make sense if the rate were more like a time-of-use rate. AECA also points out that unlike a commercial building, farming is not amenable to centrally controlled instantaneous energy management because turning pumps on and off must be done in the field rather than near a phone. AECA opposes SCE's approach of crediting only on-peak charges arguing that by lowering rates on non-critical days, demand on those days is encouraged, and might boost demand, resulting in more critical days being triggered. In addition,
AECA suggests that instead of calculating any hedging premium by comparing the customer's load profile against others within the rate class as SCE did, the comparison should be against an overall customer load profile that encompasses all customer classes so that a customer class that has moved its load substantially off peak will not be penalized. (AECA Opening Brief, p. 5.)

Like AECA, California Farm Bureau (Farm Bureau)¹⁸ supports PG&E's exemption of agricultural customers even though most agricultural customers' loads are less than 200 kW so very few are subject to the default CPP proposals. Like BOMA, Farm Bureau points out that adoption of a default CPP provides no certainty of demand reduction (because CAISO doesn't consider demand response to be a resource), thus it provides no reliability benefit and no benefit from reduction in procurement requirements. Farm Bureau argues that part of the problem the Commission seems to be addressing is apparently a transmission shortage, so direct access customers should also participate in a program, if adopted.¹⁹

Farm Bureau identifies the lack of time to decide whether to opt out and pay a hedge premium as problematic, and states that customers need more time than is provided under the utility proposals to decide whether or not to stay on the CPP rate or pay a premium to remain on the old rate. Farm Bureau considers the hedge premium to be a penalty to force customers to stay on the new default rate.

California League of Food Processors (CLFP)²⁰ explains that at harvest time, food processors operate 24/7 at full capacity and CLFP is concerned that adoption of a CPP default rate could temporarily shut down food production, which would not be recoverable for the industry. Because of the way accounts are structured, there are hundreds of food processing loads less than 500 kW and could be affected, even if the applicability were narrowed to 200-500 kW.

4.4 School Districts

Los Angeles Unified School District (LAUSD)²¹ argues it must be exempted from a new default tariff because of budget and operating constraints it faces. LAUSD indicates that 85% of its schools are on non-traditional schedule, i.e., open all summer and provide significant afternoon after school programs. LAUSD states that it cannot pass on increased energy costs, turn off lights, or run schools at night. Its alternative would be to shut schools. LAUSD believe it should be exempted from CPP because if SCE charges $1/kWh for energy it could face increased costs of $432,000/year, but the hedging premium is also not affordable.²²

4.5 Transit Systems

Bay Area Rapid Transit District (BART)²³ seeks an exemption from a default critical peak tariff if one is adopted for customers of its size. BART's demand is about 84,000 kW, thus it would exempt from PG&E's proposal (which limits the applicability of the tariff to customers with less than 500 kW in load), but BART is participating in the event that the Commission considers adoption of SCE's or SDG&E's proposals, which have no upper demand limit on customer applicability.

BART notes that 3 to 6 pm, the focus of PG&E's proposals, corresponds to BART's peak usage (the evening rush hour) and would likely be called on high-pollution ("Spare the Air") days, when trains are in especially high demand. BART states that, on an energy-equivalent basis, BART moves people at about 250 miles per gallon (mpg), about 10 times as much as cars while substantially relieving road congestion.

4.6 Petroleum Producers and Transporters

While the California Independent Petroleum Association (CIPA) and California Oil Producers Electric Cooperative (COPE)²⁴ appreciate the sentiment and concept of CPP, they believe there is danger that implementation will curtail business activity of oil producers because a significant proportion of oil operations require constant energy use and cannot be cycled. CIPA/COPE recommends that the Commission consider adopting different rates for different customer types and keeping rates voluntary. CIPA/COPE also suggests that if capacity concerns are in Southern California, PG&E customers should not be required to participate. CIPA/COPE also states that if demand reduction is a goal, more effective distributed generation efforts (through R.04-03-017) would be useful. CIPA/COPE believes their industry is particularly well suited to employing distributed generation.

Kinder Morgan Energy Partners L.P. (KM)²⁵ opposes adoption of the proposed default tariffs and encourages the Commission to focus on expanding existing interruptible demand programs.

4.7 Generation Interests

Independent Energy Producers Association (IEP) seeks to call attention to an inadvertent impact of default CPP. IEP notes that some electric generators take electric service for start up power and by establishing a CPP default tariff the Commission might discourage generators from starting up during peak periods. IEP recommends that generators should be exempt from any default CPP tariff.

Western Power Trading Forum (WPTF)²⁶ agrees with the December Ruling's concerns about supply capacity adequacy and with pursuing aggressive CPP approaches but it echoes concerns voiced by IEP, that any adopted default CPP tariff should exempt generators.

4.8 Demand Response/Advanced Metering Companies

The California Consumer Empowerment Alliance (CCEA)²⁷ supports the principle that CPP tariffs should be entirely voluntary, including with customers having the option to return to their previous time-of-use tariff, with no additional premium. CCEA suggests that the costs associated with switching tariffs exceed the economic impact of switching for the vast majority of customers and thus if CPP were to make CPP the default tariff many more customers would remain on the tariff than if they had to opt-in. CCEA cites market research conducted on residential customers in the Statewide Pricing Pilot that estimated that 67 to 92 percent of customers would participate in a default CPP rate program, while only 10 to 34 percent would participate in an opt-in program.²⁸ CCEA also recommends that any rates adopted be cost based.

4.9 CAISO

The CAISO's focus in these proceedings was to ensure that the existing interruptible programs be protected and expanded where appropriate. The CAISO also recommended that the appropriate trigger for a CPP event be an ISO Alert Notice and that an event be triggered for the 2:00-6:00 p.m. period, rather than any of the time periods recommended by the utilities.

4.10 Small Customer Interests

ORA starts from the premise that CPP is a form of dynamic pricing that may produce reliability benefits, but it should not be seen per se as a reliability program, because there is no guarantee of how customers will respond. ORA views CPP as a step between TOU and Real Time Pricing (RTP). ORA would exclude DA customers from default CPP, since they procure their own generation, but would not exempt non-firm customers.

ORA believes the utilities want reliability impact from CPP, but the relationship between critical and non-critical on-peak prices in their proposals is arbitrary, not cost-based, and constrained by bill impacts. As ORA points out, a bigger critical to non-critical price differential would have more demand impact, but its bill impacts would be severe. ORA prefers CPP prices to TOU prices because CPP prices are dynamic, whereas TOU prices are static and have diluted price signals. ORA suggests that this is an excellent time to introduce CPP pricing, not because it will guarantee load reductions this coming summer, but because we need to begin the transition to dynamic pricing now.

ORA believes CPP rate design should be cost-based and revenue-neutral, and based on generation marginal capacity revenues. For firm customers, the current generation summer peak demand charge should be eliminated, since those revenues will be collected through the CPP energy rate. For non-firm customers, splitting the current summer on-peak energy charge into CPP and non-CPP on-peak charges should produce the CPP rate. Customers will pay the generation demand charge and receive a per kW discount.

ORA recommends that CPP triggers match forecasts that drive procurement decisions and rate design assumptions with other triggers, like ISO Alerts or temperature triggers supplementing the procurement drivers. ORA finds SDG&E's proposal to base the trigger on its estimation of system reserve requirements instead of on ISO Alerts the best proposal presented.

ORA recommends that the principles underlying the voluntary CPP tariff in the SCE GRC settlement be used to design the default tariff. For both PG&E and SCE firm customers, ORA would divide the marginal generation capacity revenues (with no equal percentage of marginal cost scaling) by super-peak energy usage and add this to the peak generation energy charges. The generation energy charge would be calculated on a residual basis to recover total allocated generation revenue less the marginal generation capacity revenues with no generation demand charge. For non-firm customers, TOU peak energy charges would be subdivided into peak and super-peak components based only on the marginal energy cost differentials in the two periods. All marginal capacity costs are recovered in demand charges as they are currently recovered in existing TOU rates. ORA finds SCE's design problematic because during CPP events, customers would be paying the marginal generation cost twice, in both the CPP energy charge and in the generation summer peak demand charge. ORA recommends adopting SDG&E's proposal for Summer 2005 but using (for SDG&E only) principles described above for subsequent rate design.

The Utility Reform Network (TURN) concedes that because this proceeding focuses on large customer rates within existing cost allocation, the utility proposals do not affect residential or small commercial customers. However, TURN offers its observations concerning some of the global policy issues related to dynamic tariffs, rate design, and demand response that it believes could influence the Commission's treatment of rate design for its constituents. TURN would rather see the Commission focus on improving existing energy efficiency and demand response programs, than pursue these rate design applications. TURN is concerned that rushed implementation without significant lead time may produce more harm than good in the long run.

If the Commission does adopt a default critical peak pricing tariff, TURN suggests that any revenue shortfalls and program costs should be shared by all retail (bundled and direct access) customers, and should be allocated using a generation allocator because all customers benefit from reliability improvements, which is what TURN sees as driving this proceeding. TURN also argues that there is no basis provided thus far to exclude customers over 500 kW from participation, if the Commission goes forward. In fact, TURN argues, even CLECA's witness stated that historical value-of-service analyses have shown commercial load to be less price elastic than industrial load. (RT 416, Barkovich.)