10. Critical Peak Pricing

PG&E's CPP is a voluntary supplemental tariff offered to its residential and small commercial and industrial (C&I) customers with electric demands below 200 kW. The tariff will be available as the AMI modules are deployed and activated. PG&E designed the CPP rate as an "overlay" in addition to the default rate. PG&E intended it to be similar to the rate design used in the Statewide Pricing Pilot (SPP)28 research project, authorized in D.03-03-036.

Using an overlay maintains the existing inverted-tier rate structure for residential customers with the CPP rate in effect during the summer period (June 1 though September 30). It also preserves tiers 1 and 2 rate levels frozen by Assembly Bill (AB) 1X, and ensures that the rates remain revenue neutral between classes.29 To maintain revenue neutrality, 30 PG&E applies a CPP rate credit to approximately 95% of the customers' electricity usage during the summer period. In addition, PG&E applies a CPP customer participation credit to all electricity usage during the summer (other than critical peak periods) to make the CPP tariff more attractive by providing an opportunity for customers to reduce their bill. PG&E estimates that the target market (residential customers with significant air conditioning loads, with 700 kWh to 1,500 kWh summer monthly usage) would have the opportunity to save 10% or more by reducing their usage by 25% or more during CPP periods. (Ex. 6, p. 1-10.)

PG&E proposes that its CPP rate be in effect for most of the AMI deployment phase and until its subsequent test year 2010 general rate case. (Ex. 6, p. 1-1.) CPP rates and underlying tariffs would be updated annually to maintain revenue neutrality (adjusting for the amount of actual credits so that PG&E fully collects the authorized revenue requirement from within each rate class without inter-class revenue shifting) and recover the CPP participation credit and bill protection costs.

PG&E includes a bill protection provision to encourage more customer participation. This provision gives customers the opportunity to test the CPP rate and determine whether the new rate is appropriate for their home or business. Bill protection is provided during a customer's first year (summer season) of participating on the CPP rate. At the end of the summer season, PG&E would evaluate each customer's summer season bills and apply a one-time credit to the next bill, if the customer paid more in CPP charges than it received in offsetting CPP credits. PG&E proposes to maintain the one-year bill protection program for newly converted customers for the duration of the AMI deployment. (Ex. 6, p.1-9.)

PG&E proposes to start with a CPP rate proposal that can be monitored and changed as appropriate. PG&E requests $5 million for measurement and verification research to document the benefits and supporting data for the development and refinement of new demand response rates and programs for customers below 200kW. We agree with PG&E that it is important to monitor the CPP program effectiveness and understand how customers are responding to the new rate. No party contested the PG&E's request, we therefore adopt it. We direct PG&E to report on the acceptance and degree of success for the CPP rates in the next general rate case.

Dynamic rate offerings for the large commercial and industrial customers are beyond the scope of the AMI proceeding and are addressed separately in A.05-01-016.31 The following table shows PG&E's proposed CPP rates by customer class.

Table 3

PG&E's Proposed CPP Rates

Customer Class

CPP Rates

Non-CPP Credit

Participation Credit

Residential

$0.60/kWh

(2-5pm)

$0.02992/kWh

$0.01/kWh

(upper tiers)

Small Light and Power

$0.75/kWh

(2-6pm)

$0.02720/kWh

$0.005/kWh

(all usage)

Medium Light and Power

$0.75/kWh

(2-6pm)

$0.02320/kWh

$0.005/kWh

(all usage)

Notes:

DRA's CPP proposal is significantly different than PG&E's. DRA converts the tiers above tier 2 into Time of Use (TOU) rates with three time periods plus a CPP rate for the summer season. It also requires customers to elect to be on a TOU rate when only 3% of current customers are on TOU now. (DRA's Opening Brief p. 32.) DRA's CPP rate only applies to usage above 130% of baseline in combination with a mandatory switch to TOU rates. (Ex. 101, p. 3-1.) DRA targets consumption in tiers 4 and 5 - the highest tiers - where customers have the highest peak usage and therefore the most potential to drop load. DRA believes its rate proposal does not violate Water Code § 80100 by placing all impacts on tiers 3 and higher, unlike PG&E's proposal that addresses the total bill. DRA also suggests that targeting this smaller group means lower marketing costs. (DRA's Opening Brief, pp. 32 - 32.)

Customers have a voluntary choice under PG&E's proposal of remaining on the CPP (even if they activated the bill protection feature in the first year). We find that if consumers make an informed choice they will assume the risk of higher bill in subsequent years even if they did not reduce demand during the first summer's CPP periods. Therefore, we direct PG&E to inform customers in writing that if they remain on the CPP in subsequent years they may see higher bills without bill protection.

PG&E's proposed CPP is consistent with the rates offered in the SPP. We also have more information about customers' acceptance to this type of rate design32 and the most likely estimated level of demand response.

DRA's CPP rate proposal is significantly more complex because it overlays a TOU rate to the inverted residential rate structure and then adds a CPP rate. We are concerned about the necessity of convincing customers to both participate in a CPP rate and switch full-time to TOU rate with an underlying inverted tier rate structure. We also disagree that PG&E's voluntary program conflicts with AB 1X. Further, we have no record to indicate the likelihood of customers' accepting DRA's proposal for a CPP rate. DRA's proposal may easily discourage customers from switching. The likely key to successful demand response is a clear financial incentive (coupled with an effective informational message) and single focused rate proposal. We therefore will not impose TOU as a requirement for CPP rates.

Neither DRA nor TURN address PG&E's CPP rate proposal for small and medium commercial customers. Also, no party objected to PG&E's proposal to exclude agricultural customers from CPP rates. We will therefore adopt these features of PG&E's CPP proposal, consistent with our adoption of PG&E's residential proposal.

PG&E designed the CPP rates (Table 1) by allocating a summer season (June 1 through September 30) revenue responsibility of $45 per kilowatt-year (kW-year), divided by the number of CPP hours. PG&E proposes a maximum of 15 CPP events per summer season with a 5-hour duration limit per event (2 p.m. and 7 p.m.) so there are 75 CPP hours33 for residential customers and 60 CPP hours for the small C&I customers (4-hour duration limit per event.) PG&E determined the $45/kW-year based on the $52 per kW-year avoided cost of generation (discussed below in Demand Response).

We find that PG&E made the most persuasive proposal for a CPP rate design and we will therefore adopt it. PG&E's proposal consists of a CPP proposal applicable to all residential customers and all small commercial and industrial customers with less than 200 kw demand on a voluntary basis. We are greatly interested in the effectiveness of the CPP tariff, especially during the early years of AMI deployment. Therefore, we will direct PG&E to report annually to DRA and the Energy Division within 60 days of the end of each CPP season the best estimate of demand response achieved during each CPP event, if any, including the number of customers (by class) on the CPP tariff and the participation rate of those customers during CPP events. We also direct PG&E to ensure that customers are clearly informed in writing of the billing risks in subsequent years when there is no bill protection. This customer notice should be reviewed and approved by the Commission's Public Advisor.

28 The SPP was a pricing research project designed to estimate the average impact of time-varying rates on energy use by rate period for residential and small commercial and industrial customers.

29 A portion of AB 1X is codified as Water Code § 80100. "In no case shall the commission increase the electricity charges in effect on the date that the act that adds this section becomes effective for residential customers for existing baseline quantities or usage by those customers of up to 130 percent of existing baseline quantities, until such time as the department has recovered the costs of power it has procured for the electrical corporation's retail end use customers as provided in this division."

30 Revenue neutrality means that PG&E has the same opportunity to recover its authorized base margin and reasonable energy procurement costs after implementing the CPP rate design as it did before offering the new tariff option.

31 Ex. 6, p. 1-1.

32 Customer Preferences Market Research (CPMR): A Market Assessment of Time-Differentiated Rates Among Residential Customers in California, Momentum Market Intelligence, December 2003.

33 There are 5 hours between 2 p.m. and 7 p.m. Multiplying 5 hours by 15 events results in a total of 75 hours. (5 x 15 = 75 hours.)

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