4. Principles for Tariff and Program Design

This portion of the working group agenda involved three different levels of discussion:

1. CEC recommendations⁷ on development of "default" tariff options for various customer classes, such as:

· For large (>200 kW) customers: time of use, critical peak, and real-time pricing

· For small customers: flat rate, time of use, and critical peak pricing

2. Recommendations⁸ from all three agencies on basic rate design principles, including:

· Administrative simplicity

· Producing real peak demand reduction

· Protecting consumers

· Considering whether installing the infrastructure to support dynamic tariffs is likely to be more cost effective in new rather than existing buildings

· Developing customer control strategies that are less draconian or primitive than the current use of 100% load drops during rotating outages

· Allowing for customer access to usage and price information

· Providing customers choice in rate structures to manage bills (rates as "tools" not "weapons")

Finally, staff presented principles related to achieving revenue neutrality and ensuring that the new tariffs reflect the costs of serving customer classes. These are listed below.

· Dynamic tariffs should reflect the underlying costs of serving customers in different classes

· Tariffs should result in equitable cost allocation between classes

During the working group meeting, there was also significant discussion on the issue of how any given rate design could achieve revenue neutrality. There is general consensus that the current rate designs for particular customer classes do not reflect the underlying costs of serving those customers, because a substantial portion of rates is collecting revenues designed to repay historic utility procurement costs or Department of Water Resources emergency purchase costs incurred during 2000 and 2001. Thus, in order to achieve revenue neutrality by customer class and minimize cross-subsidization, a significant question exists as to whether any new rate options should be designed by utilizing existing total revenue requirements or whether new component-based revenue requirements should be developed that distinguish between current generation procurement costs and historic sunk costs of procurement incurred by utilities and the Department of Water Resources. We invite parties' (especially the utilities') comments in response to this ruling on the "pros and cons" of the two approaches.

Following discussion of these general principles, consensus emerged that could logically lead to the conclusion that the reports generated by Working Groups 2 and 3 should address the following issues:

· A summary of the tariff forms recommended and their expected load impacts

· A summary of nontariff program options designed to achieve similar demand reduction objectives

· Design principles used to construct the tariffs or programs.

· Metering and communication requirements to support the tariffs

· Need for additional building controls and or intelligent systems to enhance customer response

· Information sources/systems for customers needed to support the tariffs or programs, including program/tariff marketing efforts required to recruit customers

· Potential need to upgrade utility billing system capabilities to support the tariffs or programs

· How these options support customer preferences or customer choice

Though formal assignments for Working Groups 2 and 3 were not discussed at the policy group meeting, Working Group 1 suggests that the following deliverables for those groups could also flow logically from the matters discussed. We seek parties' written comments on the proposed assignments detailed further below.

Specific Guidance to Working Group 2 (Large Customers)

1. Design at least one dynamic tariff (beyond time of use) ready for implementation after issuance of a PUC decision at the end of Phase I. This would represent our best bet for a "quick win" suggested by several parties. This plan should include all of the following:

· A complete proposed tariff design, including source or proxy for dynamic prices

· An implementation plan, including schedule, for rollout to customers with ABx1 29 meters already installed, including any needed utility marketing efforts and customer education programs

· A recommendation as to whether the tariff should be voluntary or mandatory

· An indication of any necessary coordination with other entities, such as the CAISO

· A plan for deployment of any additional infrastructure required, including utility back office systems

· An estimate of administrative costs

· A complete benefit-cost analysis

· A plan for evaluating the results of tariff deployment

2. An analysis of how any existing pilot efforts could be improved to provide more information for further program or tariff development. This activity should include:

· Specific changes suggested to existing efforts

· Implementation plan for achieving those changes

· Any other relevant information on the benefits and costs of the changes

3. Recommended next steps for large customers, to be addressed in Phase II of this proceeding

Specific Guidance to Working Group 3 (Small Customers)

1. Identification of where significant information gaps exist in knowledge of small customer response to demand response programs or dynamic tariffs and a recommendation for how to fill these gaps through either pilot programs or other approaches.

2. Design of pilot programs or tariffs to fill in information gaps identified during the working group process. These pilot(s) should achieve the policy goals and design principles adopted by Working Group 1.

Recommended pilot activities should include:

· A complete program or tariff design

· An estimate of the expected change in peak reduction and energy savings

· An implementation plan, including schedule, for rollout to customers, including any needed utility marketing efforts and customer education programs

· A plan for deployment of additional utility infrastructure required and a proposal to recover these costs

· An estimate of administrative costs

· A complete benefit-cost analysis for each program or tariff recommended

· A plan for evaluating results of each recommended pilot

3. An analysis of how any existing pilot efforts could be improved to provide more information for further program or tariff development. This activity should include:

· Specific changes suggested to existing efforts

· Implementation plan for achieving those changes

· Any other relevant information on the benefits and costs of the changes

4. Recommended next steps for developing more demand responsiveness in the small customer sector, to be addressed in Phase II of this proceeding

⁷ We concur with the CEC that the types of dynamic tariffs listed above should be discussed and analyzed by the working groups but believe it is premature to specify which tariff forms should be considered the default tariff for any specific customer class. We expect the working groups to make recommendations on both the form, specific tariff values and default status of all tariffs recommended in their report.

⁸ Item 6 is entitled "Design Principles for a Demand Responsive Electric Grid" and was prepared by CEC staff. Item 7, prepared by CPUC staff, describes "Past CPUC Principles Regarding Real Time Pricing Programs." Item 8, a discussion of "DR Programs that Enhance Reliability..." was prepared by CPA staff.