R.07-01-041, Phase 4 (Direct Participation) Financial Settlements

1. R.07-01-041, Phase 4 (Direct Participation)Financial Settlements By G. Muir Davis January 20, 2011

2. Issues • Without the retail settlement • Undercuts CPUC’s policy preference for cost causation • Sends incorrect price signals, resulting in inefficient wholesale market outcomes • DRP will be overpaid for curtailment leading to DR that is more costly than other supply options • Unfair: LSE would be charged for power it doesn’t consume • Creates unequal playing field • ESPs state they will charge their Retail Participants directly for the PDR • IOUs would not. • This will make LSE customers more attractive to DRPs than ESPs’ customers • Demand response should be treated comparably to other wholesale resources • Supply-side resources must pay for their fuel • Retail settlement limited to PDR? • RDRP • Non-integrated demand response

3. PDR without settlement CAISO Schedule PDR Energy $DLAP MW $CLAPMW LSE DRP Wholesale settlement ↑ or Retail settlement ↓ LSE Retail Participant DR Compensation DRP Curtailed Load

4. Potential PDR settlement diagrams CAISO Schedule PDR Energy $DLAP MW $CLAPMW LSE DRP Wholesale settlement Curtailed Load Wholesale settlement ↑ or Retail settlement ↓ LSE Monthly Bill Retail Participant DR Compensation DRP Curtailed Load Curtailed Load Retail Participant to LSE Compensation DRP to LSE Compensation

5. Settlement Prices • Wholesale Options • DLAP • CLAP • Retail Options • Retail G (generation component) • Retail T (full tariff) • Settling Parties • DRP to LSE • Retail Participant to LSE • DRP to CAISO to LSE

6. Should financial settlements be required? • Principles • Ownership • Cost causation • Fairness • Participants • Explicitly settle demand response • Paradigm shift • Consideration in cost benefit analysis