Dorothy:
Thanks very much for the meeting yesterday.  From my perspective it was very 
useful.

Per yesterday's conversation.  More (much) to follow (soon).  This is what we 
gave the Govenor, Hertzberg, Burton, Brulte, etc., about 2 months ago (i.e., 
prior to Davis' 20-20 announcement, etc.)

You know how to get a hold of me.

Best,
Jeff
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Proposal to Alleviate California,s Electricity Shortage
Through Incentives to Reduce Demand

Objective
 Provide consumers with financial incentives to reduce demand in 
anticipation of Summer 2001 electricity demand

Proposal
 The California PUC should require the utilities to immediately conduct 
on-line auctions for demand reductions totaling at least 2,000 MWs
 Alternatively, DWR could run the auction and implement the buy-down 
program.  However, if it is determined that DWR requires additional authority 
to execute the auction, the State should avoid any further delays and direct 
the CPUC to order the utilities to implement the buy-down program immediately.

The Auction Process (assuming the utilities implement the program)
 Businesses and large consumers willing to commit to sustained reductions 
through November 1, 2001 would submit bids indicating the price they would be 
willing to receive for a given quantity of permanent reduction 
 If the &supply8 of available reductions offered in the auction exceeds 
2,000 MWs, the utility should accept them, or explain to the Commission why 
they chose not to accept them 
 Businesses should be permitted to include in their bids the continued 
payment of wages to compensate employees for hours of employment foregone due 
to demand reductions

A Single Price Approach
 A single price approach to a demand buy down program has two key 
disadvantages:
 First, customers who would be willing to reduce demand for a lesser price 
will be overpaid, much in the same way the single price auction in the PC 
overpaid lower cost generators.  The state would overpay for reduced demand 
under the single price approach.
 Second, the single price may not attract sufficient demand reductions.
 Further, the single price approach does not provide greater certainty 
regarding the cost of demand reductions.  By conducting an auction the state 
will be able to observe all bids and pay on an as bid basis, starting with 
the lowest bids necessary to provide the required demand reductions up to the 
cost the state is willing to pay.
 A single price approach, however, could work if targeted at customers who 
would not participate in an auction, i.e. residential customers.  A well 
publicized program of rebates to residential customers who use less than last 
year would further reduce demand in the state.  Thus the auction and the 
single price could be structured in a complimentary fashion.
 The costs of the incentive program should be paid for by all consumers, 
since all consumers will benefit from the decreased risk of service 
interruptions caused by the demand reductions
 If DWR implements the program, DWR, would recover its costs through rates, 
similar to the cost recovery mechanism used to recover power purchase costs.
 If the utilities implement the program, the California PUC would include 
program costs in rates collected from customers
 The auction should be conducted online which will increase transparency and 
reduce the time required to complete the process

Hazards to Avoid
 Avoid allowing lengthy utility and/or PUC review to delay implementation of 
the reductions
_ Any unnecessary delay increases the chance that California will fail to 
achieve the reductions needed to help avoid severe shortages in Summer 2001
_ There are numerous firms offering moderately-priced on-line auction 
services that can quickly provide auction services to the utility
_ The utility should immediately contract for on-line services and present 
the contract to the California PUC for prompt approval
_ The utilities should also include in their submittal to the PUC a simple, 
streamlined set of pre-qualification criteria that would apply to bidders
_ The pre-qualification criteria should be designed with the goal of making 
participation as easy and expansive as possible
_ Pre-qualification will encourage legitimate offers and reduce transaction 
time
_ Once the PUC has approved the auction process, the PUC should not apply any 
additional review to the auction results
_ Auction &pre-approval8 will ensure that the utilities are actively and 
constructively engaged

Actions
 Governor,s office directs PUC to initiate auction and residential program
 CPUC directs utility to submit auction proposal within 30 days
_ Establish abbreviated schedule
_ Provide parties with abbreviated opportunity to comment
_ Finalize decision approving auction proposal within 15 days of utility 
submission
 CPUC rules in advance that results of auction are prudent, and utilities 
conduct auction by May 1