5. Evaluation of the Settlement Agreement

Because the proposed settlement agreement is not an uncontested "all-party" settlement, we evaluate 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 others 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 that 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 opposes adopting on 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 have 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, 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 large 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, we decline to adopt the proposed settlements as presented.

Instead, we offer our preferred implementation approach which uses 2006 and 2007 as transition years for all three utilities from a voluntary program, to a default critical peak pricing rate. The Settling Parties in each settlement have 20 days from the date of the proposed decision to notify the Commission whether they accept the modified terms described below.² In the event that the Settling Parties do not accept the preferred terms, we will close these applications without adopting 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.

Our preferred approach is as follows. During 2006, the utilities may, but are not required to, implement the settlement rates and allow customers to voluntarily enroll under the terms and conditions described in the draft tariffs. (Exhibit 1019 for PG&E, Exhibit 1026 for SCE, and attached to the settlement for SDG&E.) For SCE, bill protection should be adopted consistent with the terms and conditions established for PG&E. Because each utility currently offers a voluntary critical peak pricing rate, each utility may modify its existing voluntary rates, terms, and conditions to conform to those in Exhibit 1019 for PG&E, Exhibit 1026 for SCE, and attached to the settlement agreement for SDG&E, except as further described herein. Given the timing of this decision and how quickly the summer months are approaching, each utility is granted the flexibility to decide whether to modify its existing program for this summer or not. If a utility decides to offer the settlement rates for Summer 2006, it shall file an Advice Letter to implement those changes, consistent with this decision.

We accept the limitations on customer eligibility set forth in both settlements with two exceptions. To the extent that customers enroll in a utility Demand Bidding Program, they will be returned to the critical peak pricing tariff if they do not submit a bid for more than one summer season. This requirement will limit gaming by customers seeking to remain on a TOU rate. It is also unclear why customers who take service under net metering tariffs should be excluded from eligibility for the critical peak pricing rate. The utilities did not identify particular conflicts between the two rates. In fact, these customers are metered on a time differentiated basis, it appears to make the most sense for customers that have installed onsite generation that produces at peak times to receive a rate that values peak production higher than at all other times. Therefore, net metered customers should also be considered eligible customers.

During 2006, the utilities, consistent with the plans described in A.05-06-006 et al. and as further directed herein, will engage in extensive educational contacts with eligible customers to inform them that effective January 1, 2007, that customer's rate will convert from their standard TOU rate to the default critical peak pricing tariff set forth in the draft tariffs, with the option to switch back to a TOU rate at the end of the 12-month bill protection period if so desired. In addition, no later than the effective date, the utilities must provide a bill analysis to each eligible customer that shows what the customer paid under its other applicable tariff for the relevant period (summer for PG&E and SCE and year for SDG&E), and what that customer would have paid had it been taking service on the critical peak pricing rates. The bill analysis should also provide information about what the customer's bill would be under the critical peak pricing rate if it reduced its critical peak usage by 5%, 10%, and 20%. The bill analysis should also include information about representative years (i.e., minimum number of calls, average year number of calls, maximum year number of calls, based on forecasts). The utilities should work with the Commission's Energy Division and California Energy Commission (CEC) staff to identify the specific requirements for the bill analysis.

According to the information supplied by SCE and PG&E in Exhibit 1027, their existing annual budgets include sufficient funding to accomplish this education effort, but SDG&E would require a budget augmentation to accomplish this objective.

In a proposed decision issued February 14, 2006, the assigned ALJ proposes to adopt a settlement related to the utility 2006-2008 demand response program plans in A.05-06-006 et al. That decision includes significant budgets for technical assistance and incentives ($28 million for PG&E, $20 million for SCE and $23 million for SDG&E). Based on the record in that proceeding, both SCE and SDG&E included funding for technical assistance and incentives to implement their default critical peak pricing tariff in the settlement. (See generally, A.05-06-006 et al.: RT 66:21-67:26.) According to the record of A.05-06-006 et al., PG&E's budget for critical peak pricing in A.05-01-016 et al., included its required funding for technical assistance and incentives for the default critical peak pricing tariff. (See generally, A.05-06-006 et al.: RT 65:11-27.) Therefore, no incremental funding for technical assistance and incentives should be required. As part of its comments on the proposed decision, each utility should provide an updated budget estimate for 2006-2008 to implement the terms of this decision.

Because we adopt 12-month bill protection, an affirmative written commitment to the critical peak pricing tariff, like that incorporated into the SDG&E settlement, is not required for any customer prior to the effective date of the conversion to the default rate. During the bill protection period, all eligible customers must remain on the critical peak pricing tariffs, receiving billing information under both the critical peak pricing rates and the TOU rate. By implementing the rate in this manner, we are able to lower costs to implement the critical peak pricing rate because the utilities will not have to process rate changes, either into or out of a critical peak pricing rate, during the 12-month bill protection period.

Under this preferred approach, both 2006 and 2007 will be used to educate customers and allow them to make investments and changes in plant or work processes to allow them to more effectively reduce their demand during critical peak time periods. D.06-03-024 was recently adopted and it authorizes a budget for technical assistance and incentives which will support customer transitions from TOU rates to critical peak pricing rates.

By October 31, 2007, each utility shall present a new bill analysis to the customer that includes the bill comparison between the critical peak pricing rate and the TOU rate, and under the same reduced usage levels described above, that also shows a comparison of the customer's usage during the critical peak events called in the prior year, to the customer's usage during critical peak periods the previous year. At the same time, each eligible customer must be provided with the opportunity to convert to whatever standard TOU rate is in place at the end of the 12-month bill protection period. Without written confirmation of the customer's desire to convert to a TOU rate, the utility should retain that customer on the critical peak pricing tariff. New customers should be enrolled on the critical peak pricing tariffs, and should be eligible for a 12-month bill protection period before choosing whether to convert to a TOU rate.

On balance, we believe that adopting the settlement rates under the alternative schedule and preferred approach described above satisfies public policy objectives more effectively than do the settlements. Several of the modifications that we make, such as a later effective date and expansion of 12-month billing protection upon conversion to all eligible customers, specifically address the concerns identified by customer participants early in the case about needing lead time to prepare for a change in the tariff. Because of these changes, we can also remove the requirement of written customer authorization to enroll on the critical peak pricing tariff. By educating customers about how their peak electricity consumption impacts their bills more directly, we expect to see increased responsiveness on the part of customers to critical peak calls. Adopting critical peak pricing as the default rate for all eligible customers, after a reasonable transition period, allows us to move towards our goal of improving price responsiveness of all customers.

² This notice can occur in comments on the proposed decision.