2. Background

The crux of the success of energy efficiency as California's resource of first choice lies in evaluation, measurement and verification (EM&V). EM&V is important for several reasons. First, it is necessary to determine whether and how well current individual programs are working. Second, EM&V is critical in considering how to improve programs and for development of new measures. Third, EM&V is used on a broad level to measure whether the investor-owned utilities (IOUs) are meeting, on a portfolio basis, the overall energy savings goals established by the Commission.1 Fourth, EM&V results are used to determine whether IOUs should receive rewards or pay penalties as part of the Risk Reward Incentive Mechanism (RRIM) adopted by the Commission.2 Fifth, robust EM&V is critical to ensure that the IOUs and the state can depend on energy efficiency as a resource.

Decision (D.) 05-01-055 returned the state's IOUs to the role of energy efficiency program administrators. That decision provided direction on how EM&V should be structured after 2005. In particular the decision found that credible and effective EM&V required a clear separation between "those who do" (the program administrators and implementers) and "those who evaluate" the program performance. Accordingly, the decision assigned to the Commission's Energy Division (ED) management and contracting responsibilities for all EM&V studies that will be used to (1) measure and verify energy and peak load savings for individual programs, groups of programs and at the portfolio level, (2) generate the data for savings estimates and cost-effectiveness inputs, (3) measure and evaluate the achievements of energy efficiency programs, groups of programs and/or the portfolio in terms of the "performance basis" established under Commission-adopted EM&V protocols and (4) evaluate whether programs or portfolio goals are met.

In recognition that IOU portfolio managers and program implementers need access to market information to perform their responsibilities, D.05-01-055 provided that the IOUs could manage "a limited subset of evaluation studies as long as there is no potential for conflict due to the nature of the study, and as long as ED makes the final selection of contractors."

As a further safeguard to ensure against conflict-of-interest in EM&V, D.05-01-055 prohibited entities from performing these types of EM&V studies at the same time they are under contract for program delivery work -- either as a non-IOU program implementer or subcontractor to an IOU implementer.

On July 7, 2009, an Administrative Law Judge (ALJ) Ruling sought comment on an ED "Straw Proposal" on EM&V issues for the 2010-2012 program cycle. The Ruling asked a number of questions about issues discussed in the Straw Proposal, including potential modifications to the overall goals of EM&V, respective scopes of EM&V responsibilities for Commission and utility staff, stakeholder input process and approval of EM&V projects, and several other issues.

Parties commented on July 27, 2009. In the July 7 Ruling, parties in this proceeding were given notice that the Commission may in this proceeding adopt changes that would modify D.05-01-055. To that end, the July 7 Ruling with its attachments was served on the service list in R.01-08-028 (the proceeding in which D.05-01-055 was issued).

In D.09-09-047, the Commission adopted energy efficiency portfolios for 2010 through 2012. The decision addressed certain threshold issues pertaining to EM&V issues for the 2010-2012 portfolios, including: 1) a preliminary budget for 2010-2012 EM&V of 4% of total energy efficiency expenditures or $125 million for 2010 -2012, 2) Commission core objectives for EM&V; and 3) a process for adopting detailed EM&V projects, refined EM&V budgets, and remaining EM&V policy issues in a subsequent EM&V Decision.

In anticipation of this subsequent EM&V decision, the Commission in D.09-09-047 ordered Energy Division and the IOUs to prepare an EM&V plan (the Joint Plan) to be jointly submitted to the assigned ALJ and issued for comment via Ruling. The Joint Plan stated that it was responsive to the Commission's stated desire "...to make near-term improvements in order to streamline EM&V processes, and enhance timeliness, transparency and consistency across EM&V work products" (D.09-09-047 at 301) and "to take a fresh look at several aspects of our EM&V activity in California for the upcoming program cycle, to reduce unnecessary burden on staff and other resources, and streamline our EM&V processes." (D.09-09-047 at 294.) However, ED and the IOUs were unable to agree on a number of items related to the EM&V plan.

In a November 20, 2009 ALJ Ruling, parties were asked to respond to a number of questions posed by ED on EM&V issues which were not resolved as part of the Joint Plan. The Joint Plan was presented in Attachment 1 to the ALJ Ruling. Attachment 2 to the ALJ Ruling listed a number of questions that need to be considered in the upcoming EM&V decision, along with recommendations of ED. The questions and ED recommendations are reprinted in Attachment 3 to this decision for reference.

D.09-09-047 also deferred other issues to a subsequent decision. Comments were filed on these issues in July and August 2009. In this order, we take up outstanding issues including: contractor firewalls; 2009 avoided costs; 2009 bridge funding reporting, budget allocation and EM&V; and Codes and Standards.

1 The most recent energy savings goals were adopted in D.08-07-047.

2 The structure of shareholder incentives is currently under review in Rulemaking (R.)09-01-019. As stated in D.09-12-045 at 4 in that docket, "We continue to believe that prospectively, reforms to the existing mechanism should be pursued that reasonably produce meaningful incentives to achieve the Commission's energy efficiency goals through simplified approaches designed to avoid the level of controversy over detailed technical methodologies that have characterized the RRIM process to date." While possible outcomes of that proceeding could include de-linking shareholder incentives from EM&V study results, in this decision we will not prejudge any potential outcomes in R. 09-01-019. Therefore, we continue to assume the current structure whereby EM&V studies directly impact shareholder incentives.

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