V. Energy Efficiency

A. Procurement Energy Efficiency Funding Levels for 2004-05

In D.02-10-062, we established policy priorities for resource acquisition for utility long- and STPPs. In that decision we identified energy efficiency as a priority resource and ordered utilities to include all cost-effective energy efficiency in their portfolio proposals.

"Utilities should include in their plans procurement of baseload energy reductions in the form of energy efficiency. Utilities should consider investment in all cost-effective energy efficiency, regardless of the limitations of funding through the Public Goods Charge (PGC) mechanism."

In D.02-10-062, we also ordered utilities to submit long-term procurement plans, with estimates of energy efficiency savings projections for the first year, five years, and twenty years. PG&E, SCE, and SDG&E filed their long-term plans with the Commission on April 15, 2003. Each plan included estimates of energy efficiency resources they propose to acquire for these time periods.

The following table shows utility projected procurement costs (in millions of dollars) for energy efficiency programs for the years 2004 through 2008.

B. Parties' Positions

No parties opposed utility energy efficiency procurement proposals. In its long-term plan testimony, ORA analyzed the cost-effectiveness of the energy efficiency component of the three utilities' long-term procurement plans over the first five years of the plan, finding each utility's proposal cost-effective. CEC's long-term plan testimony supported the inclusion of energy efficiency program elements in the long-term plan that go beyond the limits of PGC funding levels and recommended acceptance of utility energy efficiency proposals in its opening brief (p. 13). The "Joint Parties" recommendation (CEC, ORA, TURN, SCE, SDG&E, PG&E) also supports the additional proposed energy efficiency programs. NRDC in its long-and short-term plan testimony supports Commission authorization of utility energy efficiency procurement proposals and urges the Commission to allow utilities the flexibility to capture additional cost-effective efficiency resources that have been identified in potential studies. Finally, TURN urges the Commission to authorize only funding levels for energy efficiency resource acquisition in this proceeding, with specific program selection to be accomplished in R.01-08-028.

C. Discussion

Utilities approach the energy efficiency component of their long-term plans in different fashions. Both SDG&E and SCE worked directly with a contractor, Kema-Xenergy, to determine the potential for energy efficiency in their service territories, focusing on the several options for capturing the energy efficiency resource available in their territories. PG&E developed its long-term proposal based on forecasts of its net-residual short needs, matching these to programs that deliver energy savings and peak demand reduction measures with load profiles that reduce demand and save energy at times of forecasted need. We agree with NRDC and the City of San Diego that these approaches result in utility plans that capture "some," but not "all" of the energy efficiency potential identified in the latest studies of the available potential of energy efficiency in the utility service territory.²⁵ Nonetheless, each utility will need time to ramp-up enhanced existing and new energy efficiency programs. For this reason, we are inclined to accept utility long-term energy efficiency plan proposals as proposed.

The utilities' long-term plans identify procurement funded energy efficiency program activities for the five-year period 2004-2008. In this decision we authorize utility procurement energy efficiency budgets for the two-year period 2004 and 2005. We limit these initial procurement energy efficiency activities to this two-year period to ensure consistency across the Commission's entire portfolio of energy efficiency programs, with a specific goal of ensuring consistency with efficiency program activities authorized in this proceeding and those authorized in the Commission's Energy Efficiency R.01-08-028. Consistent with the July 3, 2003, Assigned Commissioner's Ruling (ACR), we choose this two-year program horizon as an interim-step to allow the Commission to review and address key issues identified in the ACR. Included among these are: long-term administration of Commission authorized energy efficiency programs; duration and cycle of these programs; energy efficiency goals; performance incentives and related issues. In this decision, we therefore maintain the status quo in term of program administration and other identified issues. By taking this approach, we balance the advantages of a multi-year (2-year) planning and budgeting cycles with the reality of the time needed by the Commission adequately deliberate on and resolve these questions. We refer parties to our discussion below of energy efficiency program administration and other key issues identified in the July 3 ACR. We also believe that this authorization is necessary prior to December 31, 2003, in order to ensure a timely and coordinated beginning to all 2004 energy efficiency programs.

In summary, we should authorize procurement energy efficiency budget levels for the utilities for 2004 and 2005 as follows: PG&E - $25 million for 2004 and $50 million for 2005; SCE - $60 million for 2004 and $60 million for 2005; SDG&E - $25 million for 2004 and $25 million for 2005.

D. Program Selection Criteria

At the July 16, 2003, PHC, we asked parties to comment on program evaluation and selection criteria for energy efficiency activities funded here. At that time, we suggested parties comment on whether these programs should be evaluated using four specific criteria: long-term energy savings, cost-effectiveness, peak savings, and equity among rate classes, or utilizing other criteria for selection of procurement energy efficiency programs, such as those subsequently adopted in D.03-08-067 in R.01-08-028.

14. Parties' Positions

Parties commenting on program selection criteria proposed several different approaches. SDG&E supports use of three selection criteria for evaluation of procurement energy efficiency programs: long-term annual energy savings, cost-effectiveness, electric peak demand savings. In its testimony, NRDC notes that all programs must be "cost-effective," and recommends three criteria, including long-term annual energy savings, electric-peak demand savings, and the addition of "equity between customer classes." The ORA testimony focuses on the need to have a consistent Commission energy efficiency portfolio and recommends use of the same criteria for procurement programs as those used to evaluate PGC funded energy efficiency programs, including proposers' demonstrated success in implementing energy efficiency programs.

15. Discussion

Utility long-term plan forecasts project expected energy savings and demand reductions from both procurement funded and PGC funded efficiency programs. As such, these programs, whether PGC or procurement funded, are part of a comprehensive portfolio of energy efficiency resource acquisition programs to be authorized by the Commission. Consistent with our desire to proffer a uniform energy efficiency portfolio, we agree with ORA's comments that the Commission should evaluate and select utility 2004 and 2005 procurement energy efficiency proposals using both the selection process and primary and secondary selection criteria adopted in D.03-08-067. These primary criteria include: cost-effectiveness, long-term savings, peak demand reductions, equity considerations, ability to overcome market barriers, innovation, and coordination with other programs.

E. Procurement Energy Efficiency Program Submissions, Evaluation and Selection

For 2004-2005 utilities submitted to the Commission a total of eighteen²⁶ procurement energy efficiency program proposals totaling $244,586,000 over the two-year period 2004-2005. Total projected energy savings and demand reduction from these programs are: 1,675,845 megawatt-hour (MWh) and 336.5 megawatt (MW). PG&E proposed a single program effort for a cost of $75 million over the two-year period. Projected two-year energy savings for PG&E are 466,883 MWh with projected demand reductions of 124.4 MW. SCE proposes 8 statewide procurement energy efficiency programs and 2 local programs at a two-year energy cost of $120 million with a two-year energy savings goal of 956,994 MWh and a demand reduction goal of 168.2 MW over the period. SDG&E proposes two statewide and 5 local programs for a total cost of $49,586 million over the two-year period. Projected energy savings over this period are 251,968 MWh and 43.9 MW in demand reductions.

The following table shows the projected incremental energy efficiency program costs, energy savings, and demand reductions from utility procurement programs in 2004 and 2005 as compared to estimated program costs, savings and demand reductions from proposed 2004-2005 PGC funded programs.²⁷

16. Projected Utility Energy Efficiency Procurement and PGC Funded Cost, Energy Savings & Demand Reductions for Procurement and PGC Funded Programs

2004-2005

	PGC Budget ( $million)	Procurement Budget ($ million)	PGC Energy Savings (MWh)	Procurement Energy Savings (MWh)	PGC Demand Reductions (MW)	Procurement Demand Reductions (MW)
PG&E	257,932,300	75.0	1,069,568	466,883	196.9	124.4
SCE	182,692,272	120.0	483,636	956,994	107.9	168.2
SDG&E	76,746,020	49.6	259,015	251,968	48.5	43.9
Total	517,370,592	244.6	1,069,568	1,675,845	353.3	336.5

Parties having a further interest in reviewing specific utility energy efficiency procurement proposals may view these on the Commission's website at http://www.cpuc.ca.gov.

To ensure consistent evaluation of the Commission's total energy efficiency portfolio being developed in both this proceeding and in R.01-08-028, the ALJ directed the utilities to submit in R.01-08-028 the 2004-2005 procurement energy efficiency proposals for evaluation at the time of Commission review and evaluation of PGC funded energy efficiency program proposals. The Commission reviewed these programs by using the process and criteria described above.

In this decision we authorize only the overall funding levels for procurement energy efficiency programs. We refer program specific review and approval, including required programmatic or budgetary modifications to utility procurement program proposals, to the Energy Efficiency R.01-08-028 where the Commission will select a balanced portfolio of utility and non-utility energy efficiency programs for 2004 and 2005. This Commission expects to authorize its portfolio of energy efficiency programs in R.01-08-028 before the end of 2003.

F. Cost-Recovery Mechanism for Procurement Energy Efficiency Activities

17. Parties' Positions

Each utility proposes somewhat different mechanisms for cost-recovery of procurement related energy efficiency activities. PG&E proposes the establishment of an Incremental Procurement Energy Efficiency Balancing Account (IPEEBA) to record the costs of authorized incremental energy efficiency programs as these costs are incurred.²⁸ PG&E would request recovery of these costs in subsequent ERRA proceedings. SCE proposes to record expenses for procurement authorized energy efficiency programs directly in its ERRA, and request approval of these during its October annual ERRA filing.²⁹ SCE testifies that such an approach is reasonable as such expenses directly benefit bundled service customers who take generation and procurement related services from SCE. SDG&E, in its testimony, proposes that incremental procurement energy efficiency costs be subject to recovery through a non-bypasssable charge to all customers and requests the Commission establish a balancing account for costs and revenues recorded in the balancing account.³⁰

In its long- and short-term procurement plan testimony, NRDC supports utility cost-recovery for the actual costs incurred for procurement energy efficiency programs provided that these programs meet Commission rules for cost-effectiveness and rigorous evaluation, measurement and verification. The Joint Parties' recommendation also endorses utility cost-recovery for incremental procurement energy efficiency programs identified in their long- and STPPs plans.

18. Discussion

In deciding which of the proposed cost-recovery mechanisms best serve the needs of providing utilities cost-recovery in an expeditious and fair manner, we are cognizant of the fact the SCE's proposal, if adopted, holds the potential for increasing recorded costs in the ERRA account to a degree that could trigger the adjustment mechanisms within that account. Both PG&E and SDG&E propose the establishment of balancing accounts to record energy efficiency costs and revenues outside the ERRA. SDG&E also proposes that these costs be funded through a non-bypassable surcharge on all customers.

After reviewing the various proposals, we find that SDG&E's proposed approach to implement a non-bypassable surcharge on all customers to pay the costs of energy efficiency program funding authorized in this proceeding provides a simple to understand, fair, and expeditious mechanism for providing utilities cost-recovery for procurement related energy efficiency activities. Moreover, this approach provides symmetry to the current Commission approach for funding Public Goods Charge programs as enunciated in Public Utilities Code § 381. In authorizing a non-bypassable surcharge to pay the costs of procurement efficiency program, the Commission remains mindful of the need for continued coordination of procurement efforts related to cost-recovery with related issues that may arise in R.01-08028. We therefore order the respondent utilities to establish a one-way Procurement Energy Efficiency and Balancing Account (PEEBA) to track the costs and revenues associated with authorized programs in this proceeding. Costs associated with these accounts should be submitted simultaneously with utility monthly ERRA filings to the Energy Division for review on a monthly basis. Further, within 20 days of this decision, we order the utilities to file advice letters establishing the methodology and surcharge rate for incremental procurement energy efficiency programs for program year (PY) 2004 and 2005.

G. Performance Incentives for Procurement Efficiency Activities

1. Parties' Positions

In D.02-10-062, we expressed our preference to adopt a uniform incentive mechanism to provide an opportunity for utilities to balance risk and reward in the long-term procurement process. We directed SDG&E to sponsor, in coordination with the other utilities, an all-party workshop to develop an incentive mechanism proposal for utility electric procurement, including the energy efficiency component. SDG&E held several workshops on the issue resulting in the identification of key principles for an incentive mechanism. No consensus was reached by the utilities on specific incentive proposals and no proposals have been filed for our review.

2. Discussion

We intend to address in detail an approach to incentive mechanisms in our long-term policy decision forthcoming as soon as possible after January 1, 2004. In the meantime, we put parties on notice that any discussion of incentive mechanisms, whether supply-side or demand-side, will be carefully coordinated by the assigned administrative law judges (ALJs) and Commissioners in rulemaking proceedings relevant to particular resources (for example, energy efficiency incentives in R.01-08-028 or demand response incentives in R.02-06-001). The ALJs and Commissioners in these and other related proceedings may hold joint workshops or PHCs to begin to develop proposals for a variety of incentive mechanism options. Through careful coordination, we can ensure that any incentive mechanisms considered for specific resource types are consistent with our overall procurement goals and incentive policies established in this proceeding. To that end, any notices of PHCs or workshops to address any incentive-related issues will be sent to the service lists in all related proceedings, to encourage participation by all interested parties in this coordinated effort.