Is Demand Responsiveness Coming to California?

Yes, according to a press release and an order instituting rulemaking from the California Energy Commission yesterday. The Energy Commission?s plan is to work in conjunction with the California PUC, which has itself initiated an order instituting rulemaking to craft ?policies to develop demand flexibility as a resource to enhance electric system reliability, reduce power purchase and individual consumer costs, and protect the environment.?

The Energy Commission?s press release states that

The program?s goal is to provide all Californians within the next decade with access to advanced electricity metering systems, rate structures that reflect time-of-use rates, and technologies that allow them to respond to changing prices. An example of responsive technology is a thermostat that receives price information from the utility and can automatically raise air conditioning temperatures during times of high prices.

These objectives, and the Energy Commission report on which this rulemaking process is based, are a good, if slow, start. It?s taken almost two years to get to this point, where the two main electricity regulatory bodies acknowledge, and are willing to make policy based on, the idea that consumer responsiveness can discipline the ability of sellers to raise prices. This idea is crucial to creating functioning electricity markets, and contributes to the reasons why a phased wholesale-then-retail approach to competitive markets is less likely to succeed than an integrated wholesale-and-retail liberalization.

While the CEC and the CPUC are saying the right things, finally, about demand responsiveness, it remains to be seen how, and how quickly, they will act on these statements. Will metering become another object for state subsidies, a version of the “pay to conserve” policy that dominates California? Will metering and demand responsiveness go the way of consumer direct access, which the PUC abolished to make sure that the CA Power Authority has a monopoly so it can pay for those pricey long-term contracts? Will the CPUC be flexible enough to allow utilities to offer portfolios of contracts to their consumers from which they can choose?

More generally, how will they encourage utilities to think more openly and broadly about the value propositions to their customers? Utilities will not buy into customer or third-party control of metering until that mental/cultural umbilical cord between load and revenue is broken, or, as Vernon Smith put it when I saw him last week in Washington, utilities have to wrap their minds around the idea that they could make more money by selling less power. This is a huge (yes, I’m going to use the word) paradigm shift for people who have traditionally seen the only way to raise their profits as serving more load (of course, it’s by regulatory design that the umbilical cord exists), and controlling the meter is a big part of that culture. And I haven’t seen any evidence that the regulatory agencies in California will be effective in facilitating that culture shift, and in themselves thinking more broadly about the value propositions that they as regulators present to the variety of customers they purport to serve.

See also my earlier post on real-time pricing, in which I cite the invaluable work of Severin Borenstein on this topic. His work has played an important role in bringing this policy change to the embryonic beginnings that the CEC and CPUC have initiated. I strongly hope that they can follow through and create a set of flexible, market-based institutions that will unleash the value potential of California’s electricity market.