DEEP DIVE: SDG&E's $11.3 Million Demand Flexibility Filing - Compliance, with Reservations

TL;DR

• What happened: SDG&E filed a compulsory demand flexibility rate application, requesting $11.3 million in cost recovery through 2036.
• The subtext: The utility is building a defensive record. SDG&E cites $2.4 million spent on an export pilot with zero enrollment, notes 80% of its customers take Community Choice Aggregator generation service (meaning most can't access full demand flexibility benefits), and repeatedly cites affordability concerns.
• Rate design: Opt-in only. Day-ahead CAISO pricing with price caps/floors. Location-based distribution adders across 10 circuit clusters. One-year minimum enrollment. Net Energy Metering, Net Billing Tariff, and conjunctive billing customers are excluded.
• The buried data point: Negative wholesale pricing hours jumped from 43 (2022) to 989 (2024), a 23 x increase suggesting California's solar surplus problem is intensifying faster than rate design can accommodate.
• Bottom line: This is demand flexibility designed not to scale. SDG&E has complied appropriately with CPUC guidance while constructing a paper trail that could justify minimal deployment for years.

Protests/responses are due March 5.

Application Summary

SDG&E filed a new application seeking CPUC approval for opt-in demand flexibility rates in compliance with a 2025 decision (D.25-08-049). The proposal would introduce rates that provide participating customers with day-ahead hourly price signals, Time-of-Use transmission charges, and location-based distribution pricing.

In theory, this offering would allow customers to shift electricity usage in response to granular price signals. SDG&E states that potential benefits include more efficient load shifting, opportunities for bill savings, and improved grid reliability. But it also expresses reservations about pursuing a complex new rate design at this time given affordability concerns, limited demonstrated customer interest, and the fact that about 80% of customers take generation service from Community Choice Aggregators that are not planning to offer complementary demand-flexible commodity rates.

SDG&E requests authorization to recover approximately $11.3 million in revenue requirements associated with planning, design, billing system modifications, customer protections, marketing, and implementation of the demand flexibility rates. Cost recovery will be phased in beginning as early as 2028 through 2031, with any post-2031 recovery addressed in future General Rate Cases.

SDG&E emphasizes that its prior export pilot saw no customer enrollment despite $2.4 million in spending, and that similar pilots at PG&E and SCE have not yet been fully evaluated, reinforcing the utility’s view that a cautious, affordability-focused approach is warranted.

Accompanying Testimony

Below are brief summaries of SDG&E's accompanying testimony.

POLICY

SDG&E explains that the demand flexibility rate application is filed to comply with D.25-08-049, but the utility is explicit that it does not view broad demand flexibility deployment as cost-effective or prudent under current affordability conditions. The utility emphasizes that most customers in its service territory receive generation service from CCAs that are not planning to offer demand flexibility commodity rates, meaning fewer than 20% of customers would see full demand flexibility benefits.

SDG&E also cites the lack of enrollment in its existing Dynamic Export Rate Pilot and the incomplete evaluation of PG&E and SCE demand flexibility pilots as reasons for caution. Nonetheless, the application proposes demand flexibility rates designed to meet Load Management Standards, provide hourly day-ahead price signals, and preserve customer protections while balancing implementation complexity, equity considerations, and revenue stability.

COMMODITY/GENERATION

This chapter describes the generation commodity components of the demand flexibility rates, which consist of Marginal Energy Costs and Marginal Generation Capacity Costs.

• Marginal Energy Costs are based on CAISO day-ahead Default Load Aggregation Point prices and incorporate distribution and transmission loss factors to reflect meter-level delivery costs.
• Marginal Generation Capacity Costs are calculated using a cost-of-new-entry framework based on four-hour lithium-ion battery storage, with values derived from the most recent Integrated Resource Plan inputs. Flexible capacity is valued at $0.00, reflecting SDG&E’s determination that existing resources are sufficient to meet ramping needs. The Marginal Generation Capacity Cost is applied using a Top 150-hour approach based on system load, intended to preserve price responsiveness while maintaining revenue stability. Non-marginal generation costs would be recovered through an Equal Percent of Marginal Cost factor applied to the Marginal Energy Cost component, embedding them in the hourly price signal.

SDG&E evaluated three approaches for applying the MGCC; the two Loss of Load Probability-based methods would have collected more than the entire $595 million commodity revenue requirement:

DISTRIBUTION & TRANSMISSION

SDG&E proposes location-based distribution pricing through circuit-level distribution capacity hourly adders that apply during forecasted top-200 circuit peak hours on a day-ahead basis.

• To simplify implementation, SDG&E clusters its 1,030 circuits into 10 groups based on residential/non-residential load mix, balancing locational pricing with billing system constraints. These adders are designed to recover peak-related distribution costs estimated at 6.2% of marginal distribution demand costs. Other distribution components, including monthly service fees and non-coincident demand charges, remain unchanged from existing default tariffs.

The following table illustrates how these adders vary by customer class and circuit cluster:

Adders apply during forecasted top-200 circuit peak hours. Rates vary up to 37% based on circuit cluster assignment. Source: SDG&E A.26-02-XXX, Attachment C.

• On the transmission side, SDG&E acknowledges it cannot yet implement the hourly transmission rates contemplated by the Guidance Decision due to billing system limitations. As an interim measure, it proposes time-varying base transmission TOU energy rates for residential, small commercial, and agricultural customers, with plans to implement hourly rates later. M/L C&I customers will continue paying existing non-coincident and on-peak demand charges, updated to reflect the utility's 2025 Transmission Cost Study finding that 8.1% of transmission costs are peak-related.

The combined design aims to promote efficient utilization of SDG&E's distribution and transmission systems by sending time-differentiated and location-based price signals.

CUSTOMER PROTECTION

This chapter outlines SDG&E’s proposed customer protection framework, focused on price limits rather than bill credits or after-the-fact bill protections. The utility proposes ceilings and floors on marginal energy prices, along with inherent limits on generation and distribution capacity charges, to reduce exposure to sustained high prices while maintaining incentives to shift load.

SDG&E argues that price limits are simpler to implement, easier for customers to understand, and less likely to create cost shifting between participants and non-participants. The chapter also includes analysis of estimated bill impacts and revenue effects to demonstrate compliance with CPUC requirements for stability and fairness.

SDG&E's own analysis of historical CAISO prices shows the $0 floor would be triggered far more often than the $750 ceiling, and that negative pricing is accelerating rapidly:

Source: SDG&E testimony, Table JDT-4 (CAISO prices, SDG&E area)

IMPLEMENTATION

SDG&E describes how the demand flexibility rates would be implemented across all customer classes except streetlighting, with participation offered on an opt-in basis. Eligibility exclusions include customers on Net Energy Metering, Net Billing Tariff, and conjunctive billing (which SDG&E deemed overly complex and cost-prohibitive with limited incremental customer benefit) as well as grandfathered TOU rates.

SDG&E details enrollment and unenrollment rules designed to limit rate arbitrage, including a minimum one-year stay consistent with Electric Rule 12. Hourly prices would be posted day-ahead on SDG&E’s website and the MIDAS platform, and customers would have access to hourly usage data through existing portals.

Total implementation costs are estimated at $9.5 million, which SDG&E proposes to recover through the Public Purpose Program rate component. The resulting rate impact is minimal.

MARKETING, EDUCATION, & OUTREACH

This chapter presents a phased Marketing, Education, and Outreach strategy aimed at building awareness and supporting customer understanding of demand flexibility rates while avoiding direct outreach to ineligible customers (those on Net Energy Metering, Net Billing Tariff, conjunctive billing, or grandfathered rates) and deferring targeted outreach to equity and access customers until pilot results confirm they would benefit.

SDG&E proposes research-based messaging, customer segmentation, and multi-channel outreach, with particular attention to affordability, accessibility, and coordination with CCAs. The Marketing, Education, and Outreach plan emphasizes clear explanations of demand flexibility concepts, behavioral guidance for enrolled customers, and flexibility to adjust messaging based on Demand Flexibility Pilot results, the 2025 Low Income Needs Assessment, and SDG&E's Measurement and Evaluation findings.

MEASUREMENT & EVALUATION

SDG&E proposes a two-year Evaluation, Measurement, and Verification plan to assess customer response to demand flexibility price signals, enrollment trends, load impacts, and bill effects. The evaluation will rely on interval usage data, customer surveys, and comparisons between demand flexibility participants and non-participants across customer classes. An external evaluator will be retained through a Request for Proposals process to conduct evaluation activities and administer customer surveys. Results from the Evaluation, Measurement, and Verification process are intended to inform future refinements to demand flexibility rate design.

COST RECOVERY

SDG&E requests authorization to establish a Demand Flexibility Balancing Account to track incremental capital and O&M costs associated with implementing the demand flexibility rates.

The Demand Flexibility Balancing Account would be a two-way, interest-bearing account recorded on SDG&E's financial statements that would record authorized revenue requirements and actual costs, ensuring that over- or under-collections are returned to or recovered from ratepayers in a timely manner.

Annual reconciliation of the Demand Flexibility Balancing Account balance would occur through SDG&E's Annual Regulatory Account Balance Update. SDG&E proposes to use the account until demand flexibility costs are incorporated into base rates in a future General Rate Case, at which point SDG&E may propose to close the Demand Flexibility Balancing Account and roll ongoing revenues and expenses into the appropriate account.

REVENUE REQUIREMENT

SDG&E presents a forecasted incremental revenue requirement of approximately $11.5 million over the 2027–2036 period to support demand flexibility rate implementation (though Table DS-3 totals to $11.3 million, creating an unexplained $200,000 discrepancy with the narrative).

The revenue requirement includes:

• Capital costs for computer software;
• Ongoing O&M;
• Overhead allocations;
• Escalation;
• AFUDC (Allowance for Funds Used During Construction i.e., interest capitalized on capital spending while assets remain in construction work in progress);
• Working cash;
• Taxes;
• Franchise fees and uncollectibles; and
• Authorized return.

All costs are identified as incremental to amounts authorized in SDG&E's most recent General Rate Case and would be recovered in accordance with the proposed cost recovery mechanism.

INSTANT ANALYSIS

This filing is a compliance-driven proposal rather than an affirmative push for widespread demand-flex adoption.

SDG&E repeatedly voices skepticism about customer uptake, cost-effectiveness, and timing, and builds a record that prioritizes affordability caution over experimentation. The utility appears to be positioning demand flexibility rates as a narrow, optional tool for sophisticated customers, not a mass-market reform.

The biggest constraint: with about 80% of customers taking generation service from CCAs that do not plan to offer demand flexibility commodity rates, the practical impact of the proposal is inherently limited. SDG&E leans on this fact to justify a restrained design, modest expectations for enrollment, and a heavy emphasis on customer protections and revenue stability.

From a policy perspective, the application is loyal to the CPUC's design parameters: day-ahead CAISO pricing, marginal cost recovery, and location-based signals, while minimizing exposure to downside risk. Price caps, opt-in enrollment, one-year lock-ins, and a balancing account all work to contain volatility and prevent cost shifting.