3. Overview of Policy Guidance

In this decision, we give multiple forms of guidance for the 2013-2014 energy efficiency portfolios. In this section, we provide the context and summary of the overall guidance consolidated into one place for ease of understanding the major changes we take today. This decision sets forth guidance for a "transition" portfolio, which is neither a "bridge" (such as the 2009 bridge year), nor a full portfolio cycle. We recognize that time is short for the IOUs to prepare entirely new portfolios through the normal process of issuing competitive solicitations for new third-party programs and government partnerships. Yet, we do not adopt the approach, as in 2009, of simply extending the current portfolio en masse. Thus, this decision directs specific changes across the four major program categories: statewide programs, third-party programs, government partnerships, and local programs.⁶

In general, this decision provides two types of guidance, relating to: (1) quantitative issues such as avoided cost, ex ante parameters, and energy savings goals; and (2) qualitative issues, such as portfolio design, program emphasis, research needs, stakeholder engagement, and the process for review and approval of ex ante parameters. The avoided cost updates and ex ante parameters adopted in this decision will have both direct and indirect influences on the IOUs' portfolio preparations. They establish the "rules of the road" with regard to the savings the IOUs can claim for specific measures and program activities and the benefits (i.e., avoided costs) that accrue from those savings. These rules directly influence the IOUs' decisions about which specific programs to pursue, expand or eliminate, as well as decisions about how to balance their overall portfolios to meet portfolio-level cost-effectiveness requirements. These same rules have an additional, indirect influence as inputs to the potential study on which the energy savings goals are based.

The potential study adopted in this decision estimates the available energy savings potential, on a measure-specific basis and in the aggregate, which IOU programs can target. The economic potential identified in the potential study is determined based on the avoided cost updates and ex ante savings parameters adopted in this decision, along with other inputs not specifically addressed in this decision.

We intend for the 2013-2014 portfolio to represent the beginning of a transition in the utilities' energy efficiency portfolios.⁷ This transition will be marked by a trending away from an emphasis on programs that deliver individual measures or types of measures with relatively short design lives to programs and initiatives that encourage utility customers to adopt more comprehensive "suites" of measures that are characterized by deeper, longer-lasting savings.

Several factors point to the statewide need to have more comprehensive energy efficiency measures. The factors include the California Air Resources Board's (CARB) Scoping Plan's reliance on large GHG emissions reductions from energy efficiency programs to meet California's GHG emissions reduction mandates set in Assembly Bill (AB) 32. In addition, our 2006-2009 evaluation results highlight the diminishing returns associated with reliance on single-measure programs. We need to deepen and improve the benefits of the utilities' energy efficiency portfolios.

We acknowledge that the guidance we give in this decision may present challenges, particularly with regard to cost-effectiveness tensions between resource programs (which provide direct energy savings) and non-resource programs (which do not provide direct energy savings). We observe that approximately 20% of the 2010-2012 portfolio budgets were allocated to non-resource programs. Non-resource programs, by definition, do not provide direct energy savings and only have costs, making them not cost-effective on their own. However, non-resource programs - which include marketing, education and outreach, emerging technologies, and workforce, education and training programs - frequently provide necessary support to resource programs. We "offset" this with resource programs accounting for the remaining 80% of the portfolio budget, leading to an overall cost-effective portfolio. We continue this model (though not necessarily this specific ratio) for 2013-2014. We note that some of the resource programs specified today have benefit-cost ratios less than one because they are testing new technologies or program delivery approaches or targeting hard-to-reach markets. The ultimate goal is that they will achieve net benefits over time, as markets develop and programs are fine-tuned. In addition, we expect some non-resource programs to produce resource savings over time, as methodologies to quantify and attribute energy savings are developed. It is paramount that we continue our practice of administering cost-effectiveness requirements on a portfolio basis when considering the large tranche of cost-effective measures that are poised to be absorbed into codes and standards updates.

In addition to continuing our practice of evaluating cost-effectiveness using a portfolio-wide approach, we take additional steps to manage this cost effectiveness challenge. These steps include: (1) directing the consolidation or simplification of some programs to reduce administrative costs, (2) adopting program changes to "bundle" packages of measures; and (3) identifying a process to consider revisions to the cost-effectiveness evaluation of certain market transformation-oriented programs. These steps complement the overall goal of finding new ways of expanding and/or quantifying benefits attributable to the programs.

In 2013-2014, we direct the IOUs to continue the statewide programs and sub-programs established in D.09-09-047 with some modifications.⁸ Specifically, we establish a new statewide Lighting program and subsume the current statewide Lighting Market Transformation program as a subprogram within it. We eliminate the Heating, Ventilation and Air Conditioning (HVAC) and New Construction statewide programs, and distribute these programs (and associated sub-programs) within the Residential, Commercial, Codes & Standards, Emerging Technologies, and Workforce Education and Training statewide programs, as appropriate. We consolidate several sub-programs of the Residential statewide program, including the Business and Consumer Electronics and Home Energy Efficiency Rebates (HEER) sub-programs. We also establish Energy Efficiency Financing as a separate statewide program area.

We provide guidance on the Appliance Recycling Program, the Home Energy Efficiency Rebate Program, and the Business and Consumer Electronics program. For 2013-2014, the IOUs should substantially reorient the Appliance Recycling Program in order to reduce costs and free-ridership levels, to target the highest energy consuming appliances, and to broaden outreach approaches. In the Home Energy Efficiency Rebate program and the Business and Consumer Electronics program, the IOUs should more strategically support Title 20 codes and standards improvements. Consistent with the theme to transition away from shorter term savings, we give guidance to the IOUs to establish a statewide Lighting Program, which would result in the removal of both the Basic Compact Fluorescent Lamps and Advanced Lighting Programs from the Statewide Program on Residential Energy Efficiency for 2013-2014.

We give guidance to the IOUs to develop significant changes to their Residential New Construction program. First, we direct IOUs to propose Residential New Construction program incentive levels to improve the support provided by the program to Title 24 codes and standards updates. The California Energy Commission (CEC) aims to require "Zero Net Energy" (ZNE) homes (homes that produce all the energy they need) through Title 24 standards by 2020. We direct a review of Residential New Construction program and evaluation policies to support this more targeted program direction as needed. Lastly, Commission Staff should establish, and the IOUs should participate in developing, a Zero Net Energy Roadmap that will identify long-term measure improvements likely needed to achieve Zero Net Energy codes by 2020. In this decision, we also give guidance on expansion of programs targeting the water-energy nexus and how all of the overall program changes can interface with the Shareholder Incentive Mechanism currently being contemplated in R.12-01-005.

This decision gives guidance on marketing, education and outreach (ME&O). This decision directs the utilities to discontinue the use of the Engage 360 brand and develop a strategy and budget for transitioning toward the use of Energy Upgrade California as a statewide umbrella brand for energy information and encouraging demand-side management actions by residential and small business consumers. Flex Alerts should continue to be used to call for short-term conservation in emergency situations. The utilities are directed to utilize unspent funds from the Engage 360 campaign toward expenditures for Energy Upgrade California ME&O, web portal maintenance, and limited augmentation of programs related to Energy Upgrade California during 2012. Remaining statewide ME&O funds from 2010-2012 shall be returned to ratepayers. For 2013 and 2014, the utilities are required to file, by no later than August 3, 2012, a separate application that addresses their planned statewide ME&O activities and expenditures related to all energy education and outreach for demand-side programs, including energy efficiency, demand response, distributed generation, and any other programmatic efforts directed by the Commission.

While we continue to direct the utilities to retain strategic and promising non-resource activities, we also begin to blur this distinction in the 2013-2014 portfolio. We direct the utilities to design a portfolio that can both deliver resources savings and transform markets by finding the synergies between these approaches to maximize opportunities for customers and other actors in the market, and take greater advantage of financing tools, the expertise and commitment of third-party implementers and local governments, and the state's growing "green jobs" sector to offer utility customers cost-effective packages of high-quality energy efficiency measures.

To accomplish this transition, we need to expand programs that support this trajectory and combine, reduce, or eliminate those programs that do not. In making these hard choices, we rely on several themes to direct the utilities in how to refocus their portfolios:

· Continuing the implementation of the Energy Efficiency Strategic Plan;

· Leveraging ratepayer energy efficiency funds with expanded emphasis on financing;

· Expanding deep retrofit strategies for existing building stock, and collaborating with the California Energy Commission on AB 758;

· Increasing the delivery of energy efficiency programs by third parties and local governments;

· Coordinating and improving efficiency product development and adoption processes in the emerging technologies and the codes and standards programs; and

· Refining the process of freezing ex ante savings values and associated data systems, and focusing evaluation and research to provide regular feedback for program and portfolio improvements.

We expand upon several of these themes below.

3.1. Implementation of Energy Efficiency Strategic Plan

Many of the strategic directions emphasized in this decision - deep retrofits, financing, etc. - were first enumerated in the Strategic Plan. In D.07-10-032, the Commission adopted Big Bold Energy Efficiency Strategies (BBEES)⁹ and directed the preparation of a long-term strategic plan describing strategies for "achieving all cost-effective energy efficiency through 2020 and beyond" through these programmatic initiatives.¹⁰ D.07-10-032 also recognized that a "new approach that transcends regulatory, programmatic and jurisdictional constraints" is necessary to leverage the IOUs' program activities and maximize cost-effectiveness of ratepayer investments. The Strategic Plan provides a roadmap for achieving the state's aggressive energy efficiency goals:

The Commission recognized that California's very ambitious energy efficiency and greenhouse gas reduction goals require long-term strategic planning to eliminate persistent market barriers and effect lasting transformation in the market for energy efficiency across the economy.¹¹

The Big Bold Energy Efficiency Strategies became cornerstones for the 2008 energy efficiency goals, adopted in D.08-07-047, and incorporated into the California Air Resources Board's AB 32 Scoping Plan. In collaboration with the Commission, the California Energy Commission adopted the Zero Net Energy goals as planning targets for energy efficiency codes and standards regulations.¹² Because the state's GHG strategy and energy efficiency goals are now rooted in the Strategic Plan, it is even more critical that the IOUs' 2013-2014 portfolios align themselves with the Strategic Plan.

Since its adoption in 2008, we have pursued implementation of the Strategic Plan through, among other things: (1) guidance for the IOUs' 2010-2012 portfolios; (2) adoption of a lighting chapter,¹³ (3) development of Action Plans;¹⁴ and (4) coordination with the California Energy Commission, California Air Resources Board, and other agencies on statewide policies such as AB 758 (Skinner, 2009) and AB 32. The 2010-2012 portfolio included several new "market transformation" programs inspired by the Strategic Plan.¹⁵ The 2013-2014 portfolio will continue this trajectory with an even greater emphasis on deep and persistent energy savings.

In D.10-09-047, the Commission adopted a statewide goal to "achieve a 60-80% reduction in statewide electrical lighting energy consumption by delivering advanced lighting systems to all buildings."¹⁶ Lighting comprises one fourth of California's electricity use and over half the electricity savings achieved in the utilities' 2006-2008 portfolios. To tackle this challenge in the 2013-2014 portfolios, we expect the IOUs to take decisive steps, as directed herein, to phase out Compact Fluorescent Lamps, scale-up advanced lighting technologies and controls, revamp emerging technologies programs, and continuously improve their lighting portfolios to meet these aggressive targets.

By design, the Strategic Plan focuses on high-level strategies over long (10 - 20 year) timeframes. As a result, Commission Staff has engaged with key stakeholders to develop action plans.¹⁷ As described in Commission Staff's October 2011 progress report, action plans are currently completed for commercial Zero Net Energy, lighting, and HVAC; and underway for residential Zero Net Energy, research and technologies, and industrial.¹⁸

Though California has made significant strides to carry out the Strategic Plan, we must continue pursuing its vision on all fronts to achieve our climate and energy savings goals. Therefore, we set forth clear direction in this decision as to how we expect to build on progress made in the 2010-2012 portfolios and continue engaging market and other non-utility actors towards our long-term energy goals.

3.2. Financing

In addition to our desire to achieve deeper, more meaningful energy savings, peak use reduction and GHG amelioration, we must recognize that ratepayers' ability to support energy efficiency measures is not infinite.

The goal of having deeper energy efficiency measures can result in additional costs that some customers may not be able to afford. The current approach to energy efficiency does not yield the largest leverage of ratepayer dollars to achieve savings. In this guidance decision, we place greater emphasis on financing as a strategy to enable customers to deploy more comprehensive energy efficiency measures in an affordable manner.

The Commission is interested in exploring additional energy efficiency financing program options to achieve the following potential major benefits:

· Overcoming the "first cost" of energy efficiency upgrades;

· Leveraging ratepayer funds by bringing in additional private capital;

· Increasing sales of energy efficiency products and services;

· Reaching a broader set of customers and market segments;

· Encouraging customers to invest in projects that will achieve deeper energy savings.

Given this context, this decision offers the following guidance for 2013-2014. The Utilities should propose financing program offerings for 2013-2014 at a level of at least $200 million over the two-year transition period. The financing proposal must include at least the following components:

1. Continuation of and improvement to the on-bill financing (OBF) programs currently in the utility 2010-2012 portfolios for non-residential customers.

2. Continuation of successful financing programs that were originally supported by American Recovery and Reinvestment Act stimulus funding in 2011 and 2012 and implemented by third parties, local governments, and/or via the California Energy Commission.

3. A set of new financing programs to be designed in 2012, and then offered consistently on a statewide basis, in pilot form in 2013, and on a larger scale in 2014.

For the third set of efforts above, Southern California Gas Company (SoCalGas) and San Diegao Gas & Electric Company (SDG&E) are directed to hire, on behalf of all utilities, an expert financing contractor to assist the utilities, Commission Staff, California Energy Commission Staff, and stakeholders in designing at least four new financing programs to address particular market needs identified below. The contractor shall be hired as soon as possible in 2012, to conduct working groups and help launch statewide pilot programs in 2013, to be scaled up further in 2014. The minimum new programmatic areas to be addressed, in addition to continuing OBF and successful existing American Recovery and Reinvestment Act (ARRA)-funded programs, are as follows:

Residential Market

1. A credit enhancement strategy for the single-family residential market.

2. A financing program strategy designed specifically for the multifamily residential market that includes both credit enhancement and an on-bill repayment (OBR) option and/or tariff-based energy efficiency improvement reimbursement mechanism that may require legislative change to fully implement.

Non-Residential Market

3. A credit enhancement strategy for the small business market.

4. An on-bill repayment strategy for all non-residential customers.

We do not require the utilities, at this time, to propose an on-bill repayment program for all residential customers, though we encourage them to propose any financing strategies they feel make sense within existing statutory constraints. The requirements we do impose are intended for using 2012-2014 to design and test scalable strategies for bringing much larger amounts of private capital to the overall California market by 2015. Activities in 2013 and 2014 programs should be explicitly designed to gain program experience and data, particularly with respect to debt repayments and project energy savings, which will attract additional capital resources from interested financial institutions and other businesses. To that end, we also require the utilities to develop a database (or contribute to some larger database effort) and protocol for sharing data.

3.3. Deep Retrofit Strategies and AB 758

We expect programs that embrace comprehensive retrofit strategies to be a hallmark of the 2013-2014 portfolios. The Strategic Plan sets bold retrofit targets for the existing building stock, including (a) 40% consumption reduction in residential dwellings by 2020 and (b) 50% of commercial buildings meeting Zero Net Energy by 2030. These goals will require immediate action to drastically increase the uptake and scale of deep retrofit projects across the building sector. The 2010-2012 portfolios made notable steps towards this undertaking, but more needs to be done to expand deep retrofit programs in multifamily and non-residential buildings, streamline program designs, address cost-effectiveness issues, and incorporate financing into retrofit project transactions. We take steps to address these challenges in this decision.

In 2009, the Legislature passed AB 758, which authorizes the California Energy Commission to develop a comprehensive statewide program, in collaboration with the Commission, to achieve greater energy efficiency in all residential and non-residential buildings in California. In 2010, the California Energy Commission initiated its rulemaking to promulgate the AB 758 program, and the Commission began an investigation of ratepayer-funded financing options to implement the program. As directed by the Legislature, the California Energy Commission utilized Federal stimulus money from the American Recovery and Reinvestment Act to fund AB 758 program development. Deep retrofit strategies are a major emphasis, with $100 million allocated to Energy Upgrade California and an additional $50 million in State Energy Partnership (SEP) funds allocated to comprehensive residential retrofit pilots. We are committed to working with our sister agency to develop and implement the AB 758 programs to meet our shared goals for retrofitting existing buildings. We give guidance in this decision on strategies for how to continue these efforts.

3.4. Expansion of Local Government and
Third-Party Delivery

In D.05-01-055, the Commission established the current standard for funding third-party program implementation: the IOUs will identify a minimum of 20% of funding for the entire portfolio that will be put out to competitive bid to third parties for the purpose of soliciting innovative ideas and proposals for improved portfolio performance.¹⁹ That standard was upheld for the 2010-2012 program cycled by D.07-10-032.²⁰

This decision directs IOUs to expand their commitment to third-party program implementation, but declines to set a specific numerical target. The Commission supports expanding the number and quality of energy efficiency programs implemented by third parties, but believes the process of soliciting those programs has not consistently led to the stated purpose - the development of innovative ideas and proposals which improve portfolio performance. As such, we believe it prudent to move forward incrementally by extending existing, effective third-party programs, gathering information to better inform future decision making, and directing IOUs to propose a reformed third-party solicitation process to be used for new solicitations beginning in 2013.

Looking forward to 2015 and beyond, the Commission will consider more sweeping policy changes in support of third-party administered and implemented programs. In procuring supply side resources, it has been the Commission's policy to rely on "competitive markets first." As California energy efficiency markets continue to mature, we may determine that a "competitive efficiency first" standard would help California achieve its energy efficiency objectives while delivering ratepayers greater value. We hesitate in making such significant changes to the third-party programs for the 2013-2014 Transition Period because we recognize the substantial logistical challenges. However, moving forward, we put stakeholders on notice that we will be seriously considering substantial new third-party energy efficiency opportunities.

In D.05-01-055, the Commission also directed the IOUs to initiate energy efficiency partnerships with local governments. Having continued this practice in the 2010-2012 portfolios we now have two portfolio cycles and almost seven years of experience with increasing levels of local government. In this decision, we consider the expansion of these local government partnerships and of regional partnerships, and direct certain research and planning activities during 2013-2014 in order to be better informed in the next portfolio cycle.

With regard to government partnerships, we direct the IOUs to continue successful partnerships and expand any partnerships that cost-effectively achieve deep retrofits.

3.5. Codes and Standards and Emerging
Technologies

The energy efficiency potential study performed to develop utility goals for the 2013-2014 portfolio indicates that the current utility programs have diminishing potential as (1) markets get saturated with the energy efficiency products that are in the existing programs, and (2) measures with remaining potential are adopted into state and/or federal codes and standards and are therefore generally no longer eligible to be included in the utility rebate and incentive programs. Consequently, much of the future efficiency potential identified in the study resides in codes and standards and emerging technologies.

These trends suggest that the transition and future portfolios should place a greater emphasis on both ends of the product development and adoption cycle. At the "front end" of the cycle, we need to improve our processes for identifying and fostering emerging technologies that show promise of producing cost-effective energy savings at scale. At the "tail end" of the cycle, we need to identify strategies for ensuring that the utilities are targeting the right measures for codes and standards adoption and for increasing compliance levels for measures that are adopted into codes and standards.

3.6. Energy Upgrade California

This decision provides guidance on several improvements to the Energy Upgrade California whole house program, with the intention of ensuring that the program continues to achieve an average of 20% energy savings per home.²¹ We expect to make a long-term commitment to the Energy Upgrade California program because we see it as a key market transformation component in California's energy efficiency portfolio. To that end, we direct the IOUs to propose a step-wise declining incentive structure over a ten-year period starting with the 2013-2014 period for Energy Upgrade California.

We emphasize the need for deeper and more integrated contractor and technician training in the Energy Upgrade California program. We direct the IOUs to explore ways to better integrate plug load and appliance education into the Energy Upgrade California program, and to adopt appropriate market transformation targets for 2013-2014. We provide direction on appropriate local government roles in the Energy Upgrade California programs, and direct the IOUs to work with local governments to ensure that local outreach capacities and networks established with American Recovery and Reinvestment Act funding are continued. We direct the IOUs to propose a statewide multifamily program as part of Energy Upgrade California during the 2013-2014 transition period.

3.7. Ex Ante Savings Values and Utilization of
Evaluation Results

Given the challenges associated with the ex post results of the 2006-2008 portfolio cycle, and in particular the impact of the evaluated results on the utility Risk Reward Incentive Mechanism earnings, the Commission has expressed the desire and intent to develop a process of freezing the parameters used by the utilities to plan their portfolios and the savings calculations embedded in them. As we learned in trying to implement this approach in the 2010-2012 portfolio cycle, in which the ex ante parameters were not frozen until July 2011 (nearly two-thirds of the way through the portfolio cycle), the ex ante freezing process can be every bit as contentious as the use of ex post evaluation results. Simply put, the shift from ex post to ex ante only shifts the debate to a different point in the process.

To help clarify roles and further articulate our expectations, this guidance decision provides detail on how we envision the ex ante freezing process to work in this and future portfolios, for all three types of savings calculations (i.e., "DEER"²² measures, non-DEER workpapers, and custom projects). We expect that the clarifications herein will eliminate ambiguity and produce consistent compliance with the non-DEER workpaper and custom project ex ante review requirements adopted in D.11-07-030.

Our experiences in the 2006-2008 and 2010-2012 portfolio cycles suggest that a tighter and more predictable feedback loop is needed between evaluation findings and program design and improvement. The ex ante freezing process improvements referenced above represent one piece of this puzzle. We identify several other portfolio improvements that support this goal, including modifying the current evaluation plan in collaboration with the utilities (rather than developing a new plan for the 2013-2014 portfolio) and directing the IOUs and Commission Staff to make improvements to the data systems which link ex ante claimed savings estimates and evaluation updates.

⁶ Statewide programs are implemented consistently statewide, in terms of the program's name, design, incentive structure, etc., with restrictions to limit variation among the IOUs. (The IOUs may, and often do, contract the delivery of these programs to other firms.) Each statewide program has one or more sub-programs targeting specific measure groups, market segments, or program strategies. Third-party programs are those that the IOUs competitively bid to outside firms, which then deliver these programs under performance contracts. Pursuant to D.05-01-055, the IOUs must devote at least 20% of their portfolio budgets to competitively bid third-party implementers. Government partnerships are implemented through state, regional or local government entities; these are typically acquired through open solicitations, as well. Finally, local programs are those that an individual IOU implements exclusively in its service territories, and include such programs as On Bill Financing. The 2010-2012 portfolio budgets are allocated approximately as follows: statewide programs 60%, third-party programs 20%, government partnerships 10%, and local programs 3%. This decision does not speak to local programs, other than On Bill Financing.

⁷ See the Phase IV Scoping Memo.

⁸ Unless otherwise specified in this decision.

⁹ BBEES are programmatic initiatives to accelerate market transformation toward greater adoption of energy efficiency. They are (1) all new residential construction will be Zero Net Energy (ZNE) by 2020; (2) all new commercial construction will be ZNE by 2030; (3) the HVAC industry will be re-shaped to deliver maximum system performance by 2020; and (4) all eligible low-income customers will have an opportunity to participate in the Energy Savings Assistance Program and will be provided all cost-effective energy efficiency measures in their homes by 2020.

¹⁰ D.07-10-032 at 6.

¹¹ Strategic Plan at 1.

¹² CEC 2007 Integrated Energy Policy Report.

¹³ See D.10-09-047.

¹⁴ These are available on the Commission's webpage at http://ww.cpuc.ca.gov/PUC/energy/Energy+Efficiency/eesp/index.htm.

¹⁵ These include Energy Upgrade California, HVAC quality installation and maintenance, Lighting Market Transformation, and Integrated Demand-side Management, among others.

¹⁶ D.10-09-047 at 3.

¹⁷ Action plans are project-management tools that identify key actions required to achieve near-term milestones, secure leaders to implement these actions, and track and report on progress. (D.10-09-047 at 6).

¹⁸ D.09-09-047 directs Commission Staff to prepare a progress report. The report is available online at http://www.cpuc.ca.gov/NR/rdonlyres/5D0472D1-0D21-46D5-8A00-B223B8C70340/0/StrategicPlanProgressReportOct2011.pdf.

¹⁹ D.05-01-055 at 94.

²⁰ D.07-10-032 at 74.

²¹ D.09-09-047.

²² DEER stands for Database of Energy Efficient Resources. The DEER website is located online at http://www.deeresources.com/.