5. Evaluation of the Settlement Agreement

Because the proposed settlement agreement is not an uncontested "all-party" settlement, the proposed decision evaluated it under the standards set forth in Rule 51.1(e) of the Commission's Rules of Practice and Procedure. Rule 51.1(e) requires that the "settlement is reasonable in light of the whole record, consistent with law, and in the public interest."

5.1. Reasonableness in Light of the Whole
Record

The Settling Parties in both settlements state that the settlements are reasonable in light of the whole of the record. In the PG&E/SCE settlement, the parties state that the outcome is reasonable because it constitutes compromises among the utilities and the various commercial, industrial, and agricultural customers that would be affected by the tariffs. The parties state that "the cost estimates presented for a PG&E opt-out CPP program versus the cost estimates included in the CPP settlement for PG&E's opt-in CPP [critical peak pricing] program indicate that the latter is significantly more cost effective." (PG&E/SCE Motion, p. 4.)

In the SDG&E settlement, parties state that because all testimony has been served, parties are well aware of each other's positions, and that the settlement is "the best possible implementation of D.05-04-053 in that it addresses the concerns of the customers subject to the Tariff, substantially complies with the directive in D.05-04-053, and maintains the Commission's positive momentum in achieving demand response objectives." (SDG&E Motion, p. 4.)

TURN is the only party to oppose the settlements. TURN argues that it is not reasonable to approve the settlements because it is unlikely that customers who contribute disproportionately to peak demand will remain on the rates proposed in the settlements, the settlement rate designs may increase on-peak use on non-critical peak pricing days, the settlements unfairly shift costs onto bundled customers, and adopting the settlements may not promote installation of energy efficiency and load shifting measures. TURN did not present testimony in this proceeding to provide an analysis of how the settlements result in the outcomes it predicts. TURN does point us to its testimony in A.05-06-006 et al. and its conclusion that, "given the evidence of the relative dearth of participation in voluntary programs, TURN suggests that it would be more cost-effective to institute a default CPP tariff in combination with technical assistance/technical incentive payments to assist customers with achieving demand response, rather than to continue with both voluntary CPP and other voluntary programs." (TURN Comments, pp. 7-8.) TURN also reminds us of the forecasted load reductions by PG&E in this phase of the proceeding of 21-35 megawatts (MW) under the settlement rates, versus approximately 50 MW under a default rate, and that SCE and SDG&E did not offer projections of load reduction under the settlement rates. TURN discusses how "structural winners," those customers who received reduced bills without reducing their usage, are the only customers likely to opt-in to a voluntary rate, or stay on a default rate that has no penalty from opting out, and are unlikely to result in much, if any, load reduction. TURN discusses how SDG&E's rate design results in non-critical peak pricing day rates that are below SDG&E's marginal cost of energy, which would promote increased usage on those days.

SDG&E responds to TURN's argument by pointing out that because the rates are designed to be revenue neutral by customer class, any slight deviation from the estimated marginal cost of energy is minor (less than 5%) and could be adjusted for in subsequent rate design proceedings. SCE also responds to the argument by TURN that lower rates during non-critical peak pricing periods would result in higher usage. SCE replies that "TURN's arguments regarding load impacts are contradictory. On the one hand, TURN devotes an entire section of its comments to espousing its belief that the proposed CPP rates will not promote significant demand response, despite customers generally facing CPP pricing $0.50-$0.75/ [kilowatt-hour] kWh above non-CPP on peak prices. Yet TURN argues in the same section that the corresponding minor offset in all remaining on-peak hour prices could lead to significant increases in on-peak consumption. It is inconsistent for TURN to suggest that no load reduction will result from significantly higher prices, but load increases will occur as a result of relatively minor price decreases." (SCE Reply, p. 4.) PG&E also takes exception to TURN's comments that only structural winners will enroll on the settlement critical peak pricing rates. PG&E refers to Exhibit 1018, "which shows that customers who faced increased total charges on CPP absent CPP usage reductions still signed up for PG&E's current voluntary CPP tariff. Moreover, those customers as well as structural winners for the PG&E CPP tariff, have already succeeded in reducing their electric usage during CPP hours." (PG&E Reply, p. 6.)

5.2. Consistent with the Law

The parties to the PG&E/SCE settlement state that the settlement "is consistent with all applicable statutes and prior Commission decisions. In particular, although D.05-04-053 directed the Utilities to file opt-out critical peak pricing showings, it did not preclude presentation and consideration of other critical peak pricing approaches." (PG&E/SCE Motion, p. 4.) The parties to the SDG&E settlement identify Ordering Paragraphs 3, 4, 5, and 8 as the key ordering paragraphs from D.05-04-053 and then state how the settlement meets each criteria.

TURN argues that the PG&E/SCE settlement is not consistent with the law and Commission policy because the "voluntary nature" of the settlement's critical peak pricing rate conflicts with the explicit order of D.05-04-053 to implement default tariffs. TURN acknowledges that SDG&E's settlement rate is called a default tariff; however, TURN points out that "the terms of the settlement do everything possible to ensure that any customer who may be disadvantaged by the tariff will opt-out with no cost and as little administrative burden as possible." (TURN Comments, p. 6.)

5.3. In the Public Interest

The parties state that the SDG&E settlement is in the public interest because "it strikes a balance between moving forward with the Commission's demand response objectives while providing Customers with a gradual introduction to new pricing structures. The Settlement Agreement also provides for SDG&E to educate Customers on all of the demand response programs available, thus furthering the important public interest goal of cultivating demand response programs" and ensuring that no customer unwittingly fails to choose to remain of the default tariff. (SDG&E Motion, p. 6.) The parties state that the PG&E/SCE settlement "is a reasonable compromise of the respective Settling Parties' interests and litigation positions" and that the Commission should therefore find the settlement in the public interest.

5.4. Discussion

For the reasons stated above, the settling parties urged the Commission to expeditiously grant the motions approving the settlements. TURN opposed adopting the settlements.

Evaluating these settlements is difficult. The Settling Parties in each one represent all the parties who participated actively in the proceeding through preparation of testimony prior to the settlements being filed. The parties negotiated in good faith to recommend a critical peak pricing structure that they believe complies with the intent of D.05-04-053, but incorporates the realities of large customer capital and investment patterns, and resistance to change.

TURN, the only opponent to the settlements, conducted cross-examination on the settlements, but did not present its own affirmative testimony. Some of the points raised by TURN in its comments on the motions to adopt the settlements relate to its broader concerns and appear to be related to its understanding of the Commission's policy direction with respect to demand response programs generally, and applicability of critical peak pricing rates for small customers specifically. Neither of those issues are part of this proceeding, which is designed to implement the guidance found in D.05-04-053.

However, as explained in the proposed decision, we share several of the concerns raised by TURN in its comments about the limited amount of demand response expected from the proposed rates and the relative value of a voluntary or default critical peak pricing tariff. We agree with TURN that a default tariff, coupled with education, technical assistance, and technical incentives, will result in the most demand response from those customers whose load profiles cause them to place a disproportionate amount demand on peak, where demand reduction is most valued and needed. The Settling Parties likewise stressed the importance of education and assistance to customers before implementation of a new rate. For these reasons, the proposed decision declined to adopt the proposed settlements as presented.

Instead, the proposed decision offered our preferred implementation approach using 2006 and 2007 as transition years for all three utilities from a voluntary program, to a default critical peak pricing rate. This proposed decision declines to adopt the proposed settlements presented by the parties. The proposed decision identified our preferred approach to critical peak pricing tariffs allow for implementation of the settlement tariffs as voluntary rates, effective in Summer 2006, with conversion of all eligible customers to the critical peak pricing settlement tariffs, effective January 1, 2007. The preferred approach provided for bill protection for the first 12 months a customer is on the critical peak pricing tariff, at which point the customer can choose to convert to a standard time of use (TOU) rate. The preferred approach required the utilities to provide all eligible customers with a bill analysis at the end of the 2006 critical peak period that reflects the customer's actual usage during Summer 2006 under the adopted critical peak pricing rates (as compared to the otherwise applicable TOU rate), and the bill impacts if the customer were to reduce its critical peak period usage by 5%, 10% and 20%.

The Settling Parties in each settlement had 20 days from the date of the proposed decision to notify the Commission whether they accepted the modified terms described in the proposed decision. The Settling Parties do not accept the preferred terms, therefore, we will close these applications without adopting new critical peak pricing rates, and instead direct the utilities to incorporate default critical peak pricing tariffs for large customers into their next comprehensive rate design proceeding or other appropriate proceeding if directed by the Commission.