3. Demand Response Goal Setting

This section of the August 26^th meeting focused on steps required in order to set goals, both quantitative and qualitative, for achieving demand response. Staff from all three agencies presented options⁶ for consideration, including a comparison of "resource planning" and "price-it-right" approaches to setting quantitative goals. While the "resource planning" approach would rely on setting objective targets at the outset and then designing programs and tariffs to meet those targets, the "price-it-right" approach would focus on setting electricity prices accurately and allowing demand response to emerge naturally at whatever level is economic for customers.

Staff also identified a set of primarily qualitative policy objectives. Those objectives include the following:

· Lowering overall electricity costs while maintaining reliability

· Giving customers accurate price signals that reflect underlying costs of electricity delivery

· Increasing customer options for managing bills

· Reducing billing and metering costs

· Reducing probability and duration of wholesale price spikes

· Mitigating potential market power

· Increasing statewide consistency

· Increasing environmental quality

· Increasing reliability overall

· Diversifying portfolio of contracts to manage price risk

The primary consensus agreements reached during this portion of the agenda include the following:

· Preference for a blended and iterative approach to setting quantitative goals, combining resource planning and "price-it-right" elements

· Recognition that 10% of peak demand levels occur during 2-2.5% of the hours

· The need for staff to compile more information about what is known about tariff and program designs, demand elasticity, and general experience by customer class

· Recognition that setting quantitative demand response targets will be necessary to ensure actions taken in this proceeding are consistent with other goals set in:

¬ The CPUC's procurement proceeding

¬ The CPA's reserves rulemaking (initial proposal of 5-10% of peak demand desirable through demand response)

¬ The CPA's investment plan (1900 megawatt (MW) target in 5 years)

¬ The CPUC's interruptible proceeding (established a 2500 MW target)

¬ The FERC Standard Market Design Rulemaking

In order to move forward to set more concrete quantitative goals at the next policy group meeting, staff supporting Working Group 1 will compile research, analysis and recommendations relating to this topic. This research will include at least the following sources:

· CEC's March 15, 2002 demand response workshop materials

· Filings from August 9, 2002 on existing/planned programs and tariffs in California

· Abstracts volunteered by the California Consumer Empowerment Alliance (CCEA) at the August 26 meeting

· Information presented at the September 9 and 10 experiential workshops in this proceeding

· Specific information about goals and targets included in adopted policy documents of the three agencies, including the CPUC's D.02-04-060, the CEC's Energy Outlook 2002-2012, and the CPA's Energy Resource Investment Plan.

This information will be compiled by October 1, 2002 for public distribution.

In the interim we expect the Working Groups (2 &3) to develop estimates of the range of demand response (in MW) that could be achieved by customer class in 2003 and by 2005 as a result of implementing their proposed approaches. We expect these estimates to be produced after the working groups have developed an initial set of options for analysis. These estimates could be produced using historic price elasticities, estimates of projected customer participation for a given tariff and the expected price change seen by customers (for the current rate to the proposed tariff, as appropriate).

Working Group 1 will use these estimates to develop at least rough Demand Response goals (in MW) later in this proceeding after receiving input from the parties, and following further deliberation.

Taking this approach to setting quantitative goals necessarily implies a top-down analysis informed by experience from other jurisdictions, as well as some from California. In addition, we will need to refine our goals periodically as we gain more experience about customer reaction through pilot programs and tariffs developed in the first phase of this proceeding.

Overall demand response goals set by this policy-working group will be developed in parallel with the activities of Working Groups 2 and 3. To the extent possible, those working groups should design tariff and program implementation plans that are flexible enough to accommodate a range of numeric goals that will be set later by the policy group.

To assist in this goal-setting process, if parties have other recommendations for information sources to use as the basis for setting goals, we would appreciate hearing about them in comments on this ruling. In addition, parties should feel free to comment on the overall approach and suggest any improvements or alternatives.

Finally, during the course of this proceeding, Working Group 1 will work to provide a longer-term perspective on California's demand response efforts. This multi-year review will provide a context for evaluating when particular pilots and programs should be phased in. This will also make it much easier to evaluate the appropriateness of specific tariffs (or pilots) proposed for adoption during Phase 1. To that end, the staff supporting Working Group 1 should begin drafting a vision of the future role, look, and multi-year evolution of demand response in California, which can be released for comment by parties and thereafter incorporated in our decisionmaking process.

⁶ See, Item 3, "Goal Setting" prepared by CPUC. Item 4 was prepared by the CPA, and Item 5 by the CEC.