1. An Overview of Demand Response in California July 2011

2. What is Demand Response (DR)? 2  DR is set of action taken to reduce electric loads when:  Contingencies, such as emergencies or congestion, occur that threaten the supply-demand balance -OR-  Market Conditions occur that raise electric supply costs  The goals are to improve electric grid reliability and lower use of electricity during peak demand  DR is high priority electricity – second only to Energy Efficiency in the Energy Action Plan’s “loading order”

3. Evolution of Demand Response  Until 2005, most of the demand response (DR) was provided by Large Industrial customers in response to a California Independent System Operator (CAISO) emergency  After the 2006 summer heat wave, the CPUC expanded the DR customer base to provide price-responsive DR before a CAISO emergency:  Utilities offered a wide variety of DR programs such as Air Conditioning (AC) cycling, programs providing energy payments only, and programs that provide both capacity and energy payments  Beginning in 2007, several established third-party aggregators were allowed to participate directly in the utility programs and through bi-lateral DR contracts with the utilities  Beginning in 2009, the CAISO started considering DR as a generation resource similar to a Combustion Turbine (CT) and developed specific products in the wholesale markets suitable for DR which are still waiting approval from FERC  As early as 2012, a limited roll-out for HAN devices are expected to enable additional DR options for residential customers 3

4. Demand Response Rulemaking CPUC instituted four phases for R.07-01-041:  Phase 1: Load Impact Protocols (D.08-04- 050)  Phase 2: Cost-Effectiveness Protocols (D.10- 12-024)  Phase 3: Transition of Emergency-triggered programs to Price-responsive programs (Settlement: D.10-06-034)  Phase 4: Direct participation of DR in the CAISO’s wholesale markets (Open) 4

5. Examples of DR Triggers  CAISO or IOU forecasts indicate that the CAISO system load will meet or exceed certain MW threshold (e.g., 43,000 MW for PG&E)  CAISO issues - or IOU expects the CAISO to issue - a Stage 2 or Stage 3 emergency or local transmission emergency  IOU expects to require the dispatch generation facilities with heat rates of 15,000 BTU/kWh or greater for the day-ahead or hour-ahead market  An actual or anticipated localized emergency (e.g., loss of generation or transmission resources)  Average forecasted peak temperature of San Jose, Concord, Redding, Sacramento, and Fresno meets or exceeds 94 degrees Fahrenheit on a program day (example for PG&E territory) 5

6. Load Duration Curve During 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 1 262523784 1,0451,3061,5671,8282,0892,3502,6112,8723,1333,3943,6553,9164,1774,4384,6994,9605,2215,4825,7436,004 6,265 6,5266,787 7,048 7,3097,5707,8318,0928,3538,614 Hour Hourly Ave. Demand 50,085 MW Peak 7/24/06 Greater than 45,000 MW 57 hours or 0.65% Winter Peak 33,275 MW 12/14/05 6 2006 Heat Wave: September 2005 to September 2006

7. Types of Demand Response  Load response for reliability purposes:  Direct load control, partial, or curtailable load reductions (e.g., Air Conditioning Cycling)  Complete load interruptions  Use of AutoDR technologies  Price response by end-use customers:  Time Varied Rates: Real-Time Pricing (RTP), Critical Peak Pricing (CPP), Time-of-Use rates (TOU)  Demand Bidding Programs  Capacity Bidding Programs  Aggregator Managed Programs  Programs that bid directly in the CAISO’s wholesale markets 7

8. Potential Penalties for Non-compliance  Time-Varied Rates  No penalty, just pay higher cost for energy during peak  Interruptible Tariffs  Capacity payment and penalty for non-compliance  Incentive-Based Programs  Price-responsive  If no capacity payment – no penalty  With capacity payment – penalty for non-compliance  Emergency-triggered  Capacity payment and penalty for non-compliance 8

9. Ex Ante Load Impact for Utility Demand Response Programs 2012 (MWs) 2013 (MWs) 2014 (MWs) 5% DR Goal (MWs) Emergency-triggered Programs869900933N/A Price-Responsive Programs2,2812,4672,4102,500 1 Total3,1503,3673,343 N/A [1] 5% of an assumed 50,000 MWs of system peak demand – illustration purposes only. 9

10. 10 DR Budget Request 2012-2014 Cycle (a) Total authorized funding from DR cycle and SmartAC proceedings (b) Includes SCE request to apply $20M in unspent funds approved in 2009-2011 DR cycle IOU Budget Request for 2012-2014 Authorized Budget for 2009-2011 Increase In Budget Request PG&E$228.0M $186.9M a 22.0% SCE $249.0M b $233.6M6.6% SDG&E$68.1M$ 55.1M23.6% Total$545.1M$475.6M14.6%