California Elects to Extend Its DRAM Pilot

Although two administrative law judges had recommended that a pilot demand response auction mechanism (DRAM) not be continued beyond its current term, the California Public Utilities Commission has opted to extend the measure for at least one more year. It therefore directed the state’s three largest electric utilities — Pacific Gas & Electric Company, San Diego Gas & Electric Company, and Southern California Edison Company – to conduct another auction for demand response resources in 2018, for delivery in 2019.

From the commission’s perspective, it is appropriate to hold another DRAM solicitation so as to augment business opportunities for third-party suppliers of demand response. The commission stated that it had established the DRAM three years ago as a means of testing the potential for incorporating demand response into electric resource planning.

The commission explained that it had envisioned the DRAM as a tool for facilitating the bidding of demand response supply resources into the state’s electric market. That is, it elaborated, the DRAM had been set up as the sole process for bidding demand response into the market. It works by having third-party DR suppliers bid into the day-ahead energy markets overseen by the California Independent System Operator (CAISO). The equivalent capacity from the winning bidders is then acquired by the electric utilities. Under the pilot DRAM set up at the end of 2014, the three utilities were required to pursue DR solicitations in three phases, first for just part of 2016, then for all of 2017, and finally for a two-year period encompassing both 2018 and 2019.

But participation in the final twoyear auction had lagged, with several demand response providers noting that inadequate funding had made them leery of expanding their DR resources. The commission conceded that because the DR auction budget authorized for the third solicitation had to be divided over two years of contract deliveries, there had been a distinct “flattening” of growth in capacity procured through the auction for those years. The commission related that the two-year solicitation had succeeded in acquiring only 203 megawatts of demand response for delivery in 2019, well below the procurement ceiling of one gigawatt the commission had anticipated. It therefore concurred with certain energy market observers that the third auction of the DRAM pilot suffered from a flawed design and provided little insight into whether further progress can be made in the third-party DR supply business.

In determining that a separate, single-year DR auction for 2019 should be held, the commission posited that one more solicitation would advance the policies and goals on which the pilot DRAM had been premised, which were to gain experience in the CAISO market and explore whether a competitive procurement mechanism for supply-side DR resources outside of traditional utility operations is feasible and viable. The commission listed several specific factors that weighed in favor of approving one more DR auction under the DRAM pilot:

• a lack of alternative opportunities for growth in DR supplied by third-party providers;
• the propriety of offering additional support to the development of a market for competitive demand response;
• a perceived need for more data on whether the DR market may be consolidating; and
• time to assess and evaluate the propriety of making the pilot DRAM permanent.

The commission’s decision did not have the backing of all of the utilities, however. San Diego Gas & Electric Company was particularly vocal in protesting the order for one more DR auction. The utility argued that any determination on extending the DRAM for another auction cycle should have been based solely on a clear need for additional demand response resources. Instead, the company claimed, the commission appeared to have based its directive on a perceived need for further business opportunities for third-party DR providers.

The utility’s opposition notwithstanding, the commission concluded that by maintaining the auction process, new DR providers will have a greater incentive to enter the market and invest in demand response resources. To leverage such participation even more, the commission created two new working groups. The first was tasked with identifying and developing new DR opportunities. The second was charged with examining possible barriers to demand response efforts and offering suggestions on eliminating or minimizing such barriers.

As to the DRAM budgets approved for the three utilities, the commission required Pacific Gas & Electric Company and Southern California Edison Company to each procure $6 million of DR capacity in their respective service areas for delivery in 2019. Because it has a much smaller territory and customer base, San Diego Gas & Electric Company was ordered to solicit only $1.5 million in demand response for 2019. Re Role of Demand Response in Meeting the State’s Resource Planning Needs and Operational Requirements, Decision 17-10-017, Rulemaking 13-09-011, Oct. 26, 2017 (Cal.P.U.C.).