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

2. SM Page 2 SOUTHERN CALIFORNIA EDISON 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. SM Page 3 SOUTHERN CALIFORNIA EDISON PDR without settlement CAISO LSEDRP $CLAPMW PDR Energy $DLAP MW Schedule LSEDRP Retail Participant Curtailed Load DR Compensation Wholesale settlement ↑ or Retail settlement ↓

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

5. SM Page 5 SOUTHERN CALIFORNIA EDISON 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. SM Page 6 SOUTHERN CALIFORNIA EDISON Should financial settlements be required? Principles –Ownership –Cost causation –Fairness –Participants –Explicitly settle demand response Paradigm shift –Consideration in cost benefit analysis