8. Assignment of Proceeding

Susan P. Kennedy is the Assigned Commissioner and Meg Gottstein is the assigned ALJ in this phase of the proceeding.

Findings of Fact

1. The current Energy Efficiency Policy Manual needs to be updated to reflect the administrative structure adopted in D.05-01-055 and the energy efficiency goals articulated in the Energy Action Plan and in recent Commission decisions.

2. The policy rules contained in the Energy Efficiency Policy Manual (Rules) need to reflect the Commission's overriding goal for energy efficiency, namely, to pursue all cost-effective energy efficiency opportunities over both the short- and long-term. They also recognize that energy efficiency is critical to achieving reductions in environmental impacts, including greenhouse gas emissions, associated with the State's energy consumption.

3. The D.04-09-060 requirement that the IOUs meet or exceed our adopted savings goals, which represent aggressive "stretch goals" over the short- and long-term, reduces the potential for creating lost energy efficiency opportunities.

4. Focusing energy efficiency activities on programs that serve as alternatives to more costly supply-side resource options ("resource programs") is the most equitable way to distribute program benefits. By keeping energy resource procurement costs as low as possible through the deployment of cost-effective resource programs, over time all customers will share in the resource savings from energy efficiency.

5. Adding language to the Rules that would specify target market sectors to reach with program efforts, create minimum funding level requirements for specific programs or define program outreach methods would dilute efforts to attain the overriding goal for energy efficiency and unduly handicap the program planning process established in D.05-01-055. The appropriate mix of programs across market sectors and geography, as well as appropriate program design, will reveal itself during the program planning process and during program implementation as the IOUs focus on pursuing the most cost-effective programs that will meet or exceed the Commission's short- and long-term savings goals, while minimizing lost opportunities in the process.

6. As discussed in this decision, this is not the procedural forum for addressing issues related to the Commission's valuation of avoided costs. Nor do we have a sufficient record based on the comments for modifying the conversion factors (and associated MW goals) adopted in D.04-09-060.

7. Given concerns over near-term reliability issues, as we continue to refine our interim methodology for avoided costs and update our savings goals the Rules should explicitly encourage aggressive programs that target measures with most of their energy savings during peak time periods.

8. The Rules recognize that non-resource programs are also needed to support the savings goals, such as statewide outreach and marketing and support for codes and standards. To continue and build upon the success of the existing statewide marketing and outreach program, the IOUs should allocate a sufficient portion of portfolio funding to this effort.

9. The Rules recognize that encouraging the accurate reporting of emissions in California will support the Governor's and State's goals to reduce greenhouse gas emissions. To this end, the IOUs should explore with their advisory groups ways in which to co-brand with the California Climate Action Registry. This might include marketing and outreach efforts that provide information about the Registry to IOU customers and encourage larger commercial and industrial customers to participate in the Registry reporting protocols, for example.

10. The effect of solar water heating is indistinguishable from other efficiency measures that reduce natural gas or electricity consumption at the end user site (such as water heater wraps, pipe insulation, etc.). In contrast, photovoltaic and solar-thermal electric technologies generate electricity and therefore should be considered renewable technologies.

11. The potential studies that we relied upon in establishing the energy savings goals for energy efficiency included solar hot water heating as an energy efficiency measure.

12. A portfolio level approach to evaluating cost-effectiveness and performance basis is necessary to encourage innovation and allow for some risk taking on pilot programs and/or new measures in the portfolio. However, the results of cost-effectiveness tests should be considered when evaluating specific resource program proposals.

13. Exceptions to the portfolio-level approach for the Dual-Test threshold requirement are required for solar water heating and fuel substitution programs to ensure that (1) energy efficiency funds are not being authorized to fund non-cost effective solar water heating installations (e.g., by bundling a non-cost effective solar water heating installation with highly cost-effective energy efficiency measures) and (2) fuel substitution programs create resource value.

14. Considering the results of both the TRC and PAC tests of cost-effectiveness ("dual test") when evaluating all resource program proposals ensures that program administrators and program implementers do not spend more on financial incentives or rebates to participating customers than is necessary to achieve TRC benefits.

15. EM&V expenditures represent a true cost of acquiring energy efficiency resources. Therefore, these costs should not be ignored when evaluating the cost-effectiveness of energy efficiency on either a prospective basis, or after the programs have been implemented. However, as we have also reasoned in prior Commission decisions, these costs should be considered on a portfolio-level basis, rather than program-by-program for both practical and policy reasons. Allocating EM&V costs at a total portfolio level (as in the past) will allow for economies of scale when designing EM&V by allowing for aggregation of studies.

16. All of the program administrators' costs related to energy efficiency programs, irrespective of their funding source (e.g., via base rates), should be included in the calculation of the TRC and PAC tests of cost-effectiveness on a prospective basis, in the reporting of estimated costs and cost-effectiveness for future program proposals and in evaluating the performance basis of programs after implementation. To do otherwise would inappropriately shield those costs from review during program planning and implementation. However, for the reasons discussed in this decision, EM&V costs should be allocated at the total portfolio level, rather than program by program.

17. It is reasonable to continue to use DEER as the primary source for energy savings and cost-effectiveness input assumptions for program planning, subject to an updating process and schedule that will be developed in the EM&V protocols.

18. A performance basis for energy efficiency resource programs that is based on net resource benefits is consistent with the expectation that ratepayer investments in energy efficiency should seek to maximize net resource benefits (resource savings minus costs). In contrast, adopting a performance basis metric based on kWh, therm or kW savings levels ignores the level of net benefits produced by the programs. This approach creates a strong incentive for program administrators and implementers to produce energy savings or demand reductions at any cost-even if the costs were higher than the supply-side alternatives these programs are designed to defer or displace. Moreover, adopting a performance basis that does not consider the avoided costs of energy savings or demand reductions fails to recognize that when and where those savings occur can produce very different levels of ratepayer benefits.

19. As discussed in this decision, relying solely on net resource benefits to assess the performance basis of resource programs may not necessarily encourage performance that is consistent with the kWh, therm and kW savings goals we have established for energy efficiency, and in turn, with the demand reductions that are incorporated into the IOUs' long-term procurement plans.

20. ORA's proposal to weight the ratios of actual versus targeted TRC cost-effectiveness results, peak kW savings and kWh savings is overly complicated, produces significant redundancy among the metrics included in the performance basis, and does not clearly promote performance that is consistent with the Commission's goals.

21. Staff proposes a performance basis that reflects net resource benefits, coupled with a minimum threshold based on Commission-adopted savings goals. This approach will encourage investments in cost-effective energy efficiency that are also designed to produce savings consistent with resource planning assumptions.

22. The specifics of how best to establish the minimum threshold should be addressed in a later phase of this proceeding, when we have an opportunity to evaluate all aspects of a risk/reward mechanism.

23. Weighting the TRC test of cost-effectiveness by two-thirds and the PAC test by one-third in the calculation of performance basis is preferred to an equal weighting of these two tests. As discussed in this decision, putting more weight on the TRC results reflects our policy that the TRC should be the primary test of cost-effectiveness for ranking and funding resource programs. At the same time, including the PAC test in the performance basis appropriately acknowledges the dual-cost issue unique to energy efficiency investments.

24. Non-price components of avoided costs (e.g., environmental adders) are real costs to ratepayers and should be reflected in the avoided costs used to evaluate energy efficiency programs and their associated performance basis.

25. The Societal-variant of the TRC test treats certain cost components as transfers, e.g., tax payments and interest payments. These costs should be treated as explicit resource costs, consistent with the way they are treated in evaluating supply-side options.

26. The risk factors and environmental benefits that NRDC refers to in justifying a lower societal discount rate for evaluating energy efficiency are already reflected in the avoided cost adders we use to value program benefits. Moreover, utilizing a lower societal discount rate for energy efficiency makes it difficult to compare energy efficiency with alternative investments that use a market rate to present value future costs and benefits. In using a lower societal discount rate and treating certain costs as transfers, the Societal variant of the TRC test does not adequately reflect our view of energy efficiency in today's policy environment, namely, as a viable resource to more expensive supply-side resources.

27. The speculative nature of any attempts to quantify spillover effects significantly reduces their applicability as an analytical tool at this time. Moreover, discounting the accounting of free-ridership through "spillover," as PG&E proposes, would make it particularly difficult to attribute indirect program benefits to education and information programs, without double-counting those benefits.

28. Historically, the largest true-up adjustment to the ex ante performance basis for resource programs has occurred when actual program costs and verified program participation were substituted for the ex ante forecasted values.

29. Historical data for the pre-1998 programs also indicate that, for the IOUs combined, adjustments made to the performance basis based on the results of the first-year load impact studies and the persistence studies generally cancelled each other out over time. However, these observed results may have been due to the policy environment during that time. Specifically, the close alignment of ex post and ex ante per unit savings may have been influenced by the fact that during these years, the program administrators and implementers knew they would be evaluated based on ex post performance, and therefore had the proper incentive to ensure quality control.

30. Looking forward, it is difficult to predict whether the same alignment between ex post and ex ante would occur if the performance basis was completely decoupled from ex post evaluation of per unit saving data.

31. On an ongoing basis, our adopted savings targets are likely to require program administrators and implementers to employ relatively new energy-efficiency savings measures and services for which solid ex ante information and data is not readily available or transferable. Adjusting the performance basis on the results of load impact studies is a necessary general policy to ensure quality control and to maintain the credibility of the energy efficiency programs.

32. The joint proposal of TURN, ORA and NRDC (Joint Parties) for performance basis true-up strikes a reasonable balance of our concerns: How to ensure quality control, maintain the credibility of the programs, and at the same time recognize the difficulty in tying the performance basis to true-up studies that are conducted many years after program implementation.

33. As recognized by the Joint Parties, it may not be necessary to true-up the performance basis using ex post load impact studies for some measures and/or programs, and the protocols should allow for appropriate exceptions.

34. Completed studies have shown that ex ante estimates of persistence studies have generally been reliable. The additional incentive obtained by tying the performance basis to the persistence studies over time does not appear to merit the lengthy and difficult administrative process necessary to create that incentive. Moreover, calculating the performance basis utilizing ex ante assumptions of savings persistence over time will simplify our oversight process and shorten the timeline for administrator and implementer compensation.

35. As discussed in this decision, the approaches we have adopted in our administrative structure decision, our adopted Rules and EM&V framework is the best way to maintain quality control and credibility of program results, while encouraging innovation in program design and delivery. These approaches to encouraging innovation are much more appropriate than entirely eliminating ex post true-ups, as some parties propose.

36. Counting only the installations in a given year in calculating the performance basis, regardless of the year in which any given installation was funded, is consistent with the approach we adopted in D.04-09-060 for the way the IOUs should account for progress towards adopted savings goals. Moreover, this approach avoids the need for an additional true-up process (between commitments and actual installations), thereby allowing for a more timely calculation of performance basis for a given program cycle. However, there are important transition issues to address in moving from counting "commitments and actuals" to "actuals only."

37. Allowing IOUs to include savings realized in 2006 and beyond from standard performance contracting or new construction programs from commitments made before 2006 would "double count" the savings accomplishments from those programs.

38. Since the Codes and Standards Advocacy program did not have energy savings targets tied to it in the past, the most expedient way to transition its performance basis calculation is to start afresh beginning in PY 2006. This will circumvent the need to trace back past case study analyses and attributing savings to these studies, and will ensure that the case study analyses conducted for this program are developed in accordance with adopted protocols. Moreover, this approach avoids any potential inconsistency between the year in which program investments are made and are considered in calculating performance basis, and the cessation of the shareholder earnings under the prior energy efficiency policy rules.

39. On a prospective basis (for program year 2006 and beyond), to ensure that Codes and Standards Advocacy program activities receive proper emphasis in the portfolio of programs, it is important to further develop the performance basis and associated EM&V protocols for estimating the savings associated with this program. Joint Staff, with input from technical experts and the public, should move forward on this effort in the coming months, as it develops the EM&V submittals described in Section 6 if this decision.

40. For the reasons discussed in this decision, the transition approach adopted today for moving from counting commitments and actuals to counting actuals alone should not adversely affect the IOUs' ability to develop a portfolio of programs that will meet or exceed our adopted savings goals.

41. Reporting and tracking both installations and commitments for each program year will provide useful information for resource planning purposes and enable us to link program activities with a particular funding cycle, as needed.

42. The consensus workshop positions regarding the performance basis for non-resource programs provides a reasonable basis for further development, including the identification of outputs to be measured and evaluation methodologies. For the reasons discussed in this decision, we continue to distinguish between "resource" and "non-resource" programs at this time. However, because some programs may contain both "resource" and "non-resource" program elements (e.g., audit programs that include a direct install component), it may be reasonable to consider the direct install component as a resource program subject to the performance basis and EM&V protocols (including true-up requirements) associated with resource programs, and count the verified savings towards our savings goals.

43. In addition, it is reasonable to consider further whether the Codes and Standards Advocacy program should be reclassified as a resource program, as discussed in this decision. If acceptable EM&V protocols for estimating and verifying the savings from this program can be developed and approved during the development of EM&V protocols in the coming months, the IOUs should be allowed to begin counting the savings from these programs towards savings goals during the PY2006-PY2008 program cycle.

44. The development of specific EM&V protocols and a cycle for EM&V that is integrated into the program planning and resource planning process should:

45. In addition, EM&V efforts should be structured so that they can: 1) inform the program selection process, 2) provide early feedback to program implementers, 3) produce calculations of performance basis at the end of the funding period, and 4) feed back into the planning process for the program cycle.

46. As discussed in this decision, the schedule anticipated in D.05-01-055 for the filing of EM&V plans and associated budgets should be extended to allow for the development of EM&V protocols and other EM&V-related submittals.

47. It is difficult, if not impossible, to develop EM&V plans for the PY2006-PY2008 program offerings and associated protocols in a budget "vacuum."

48. Estimates of where evaluation budgets should be set have generally ranged from about ten percent to about two percent of the program budget, according to the Framework Study. For the California IOUs, EM&V expenditures have ranged from a high of approximately 14% over the 1993-1996 timeframe to a low of about two percent of the program budget. This range does not including the broader range of EM&V activities that will be needed in the future to meet our EM&V goals (e.g., updates to potential studies). Moreover, program evaluations during recent years have relied on deemed savings (ex ante ) estimates or adjustments to deemed savings, a practice that requires less EM&V expenditures than those required true-ups based on ex post load impact studies.

49. A planning figure for EM&V of 8% of total program funding is a reasonable range to adopt for the PY2006-PY2008 program cycle, based on the above considerations and comments on the draft decision.

50. Various EM&V protocols need to be developed in conjunction with the development of EM&V plans for the PY2006-PY2008 program cycle, as described in this decision.

51. EM&V protocols associated with early replacement programs should recognize that there is still capital value to that equipment for the remaining useful life-even if the customer can save energy by replacing it sooner.

52. Because the energy savings from the LIEE programs will also be counted towards the Commission-adopted goals, per D.04-09-060, the EM&V protocols associated with LIEE programs will need to be more closely coordinated with the EM&V protocols being developed in this proceeding.

53. Further guidance regarding the frequency and priority of various EM&V activities, as provided in this decision, should serve to facilitate the development of EM&V plans and protocols for PY2006-PY2008 energy efficiency programs.

Conclusions of Law

1. Today's adopted updates to the current Energy Efficiency Policy Manual, as reflected in Attachment 3, are reasonable and should be adopted.

2. The performance basis for resource and non-resource programs described herein is reasonable and should be adopted.

3. To transition effectively from counting savings from "commitments and actuals" to "actuals only" towards the adopted savings goals and in calculating the performance basis, savings resulting from program commitments or (in the case of Codes and Standards Advocacy program investments) made prior to 2006 should not be counted towards the savings goals established for 2006 and beyond. The language in D.04-09-060 should be clarified to address this transition.

4. For the reasons discussed in this decision, solar water heaters should be eligible measures for energy efficiency funding in 2006 and beyond, under the cost-effectiveness conditions described in the Rules.

5. Consistent with today's direction, Joint Staff with input from IOU technical experts and other experts as necessary, and with public inputs, should develop EM&V plans and associated EM&V protocols, including an integrated EM&V cycle.

6. The expedited review process for EM&V submittals described in this decision is necessary and reasonable to ensure that final EM&V budgets and associated evaluation plans for PY2006-PY2008 can be adopted in a timely manner for the roll-out of programs during the program cycle.

7. In order to proceed expeditiously with the planning process for the PY2006-PY2008 program cycle, this order should be effective today.



1. The Energy Efficiency Policy Manual presented in Attachment 3, including the policy rules (Rules), terms and definitions contained therein, is adopted. This document may be updated in the future as provided for in the Rules.

2. Pacific Gas and Electric Company, San Diego Gas & Electric Company, Southern California Edison Company and Southern California Gas Company, collectively referred to as the "investor-owned utilities" or "IOUs", shall develop their energy efficiency program portfolios for 2006 and beyond in compliance with the Rules contained in the Energy Efficiency Policy Manual (Attachment 3).

3. As discussed in this decision, Energy Division shall clarify the energy efficiency reporting requirements to ensure that all costs associated with energy efficiency are reported, including those IOU costs recovered in base rates. All energy efficiency-related costs shall be reported in estimates of program or portfolio cost-effectiveness on a prospective basis during the program planning cycle, as well as in calculations of the performance basis after program implementation. Energy Division shall also ensure that both installations and commitments are reported for each program year for energy efficiency activities beginning in 2006.

4. Energy Division shall independently review the cost-effectiveness calculations presented by the IOUs in their program year (PY) 2006-PY2008 program applications and compliance filings. Energy Division may solicit the services of a consultant (or consultants) and/or staff or services from other agencies through interagency agreements to assist in this effort, the cost of which shall be paid for out of energy efficiency program funds. Upon completion, this review shall be made available to the program advisory groups and distributed to the service list for comment by ruling of the assigned Administrative Law Judge (ALJ), in the applicable program planning docket.

5. Programs that are designed to defer or avoid more costly supply-side alternatives are referred to as "resource programs." These include programs that offer financial incentives (e.g., rebates) to customers to encourage them to install energy efficient measures or equipment. The performance basis for resource programs shall reflect the net resource benefits (energy savings minus costs) of the programs, utilizing a weighted average of the Total Resource Cost (TRC) and the Program Administrator's Cost (PAC) tests of cost-effectiveness. As discussed in this decision, the TRC net benefits shall be weighted two-thirds and the PAC net benefits shall be weighted one-thirds in that calculation. The value of the energy savings for both the TRC and the PAC tests shall be calculated using the avoided costs that are adopted in R.04-04-025, including the non-price components (e.g., environmental adders). The TRC and PAC net benefit calculations shall be conducted utilizing the IOUs' weighted cost of capital, as discussed in this decision. The savings and resource benefits counted towards the performance basis shall reflect installations in a given year, regardless of the year in which any given installation was funded. However, for the reasons discussed in this decision, savings resulting from commitments made prior to 2006 will not count towards the savings goals or in the calculation of performance basis for 2006 and beyond.

6. The performance basis for resource programs shall include a minimum performance threshold that is tied to Commission-adopted kilowatt, kilowatt-hour and therm savings goals. The specifics of how best to establish that threshold is deferred until a later phase of this proceeding, when there is an opportunity to evaluate all aspects of an energy efficiency risk/reward mechanism.

7. The performance of the IOU program administrators after program implementation shall be based on portfolio performance. Calculating the performance basis at the program level will be appropriate for measuring program implementer performance.

8. As discussed in this decision, the performance basis for resource programs implemented in 2006 and beyond shall be subject to the following:

9. The performance basis for non-resource programs will be measured based on the workshop consensus positions presented in this decision. These programs include statewide marketing and outreach, support for codes and standards, training and education, among others. As described in this decision, Energy Division and California Energy Commission staff ("Joint Staff"), after obtaining appropriate technical expertise from IOU technical staff and other experts, as necessary, shall further develop each performance basis, so that measurable outputs and evaluation methodologies can be specified in EM&V protocols.

10. As described in this decision, Joint Staff shall develop a joint proposal for EM&V plans and associated budgets for the PY2006-PY2008 program cycle, after obtaining appropriate technical expertise from IOU technical staff and other experts, as necessary. The scope of this task is expanded to include the development of EM&V protocols for both resource and non-resource programs and an integrated EM&V cycle consistent with today's direction. In developing the EM&V plans and associated protocols, Joint Staff should assume an EM&V budget of approximately 8% of total program funding for the PY2006-PY2008 program cycle for planning purposes. Joint Staff shall discuss their draft EM&V submittals in public workshops to obtain and incorporate feedback before finalizing them.

11. As discussed in this decision, the EM&V protocol submittals for the PY2006-PY2008 program cycle shall include the following information:

12. Joint Staff shall proceed with the development of EM&V protocols and detailed EM&V plans and budgets as described in this decision. Joint Staff shall submit detailed EM&V plans and associated budgets by November 1, 2005 for Commission consideration. We adopt the expedited review process described in today's decision for the interim steps leading up to the development of detailed EM&V budgets and plans, which includes the review and approval of EM&V protocols.

13. In developing its recommendations for the EM&V plans and associated protocols, Joint Staff shall take into consideration the guidance provided in today's decision regarding the frequency and priority of various EM&V activities.

14. As discussed in this decision, the Rules do not prohibit early replacement programs, but appropriate EM&V protocols still need to be developed to specify how to quantify savings from them. Joint Staff shall present its recommendations on EM&V issues related to early replacement programs, including the issue of lost capital value discussed in this decision, as part of the EM&V protocol submittals required by this decision. In addition, as part of those protocol submittals, Joint Staff shall present recommendations on whether the Codes and Standards Advocacy Program should be classified as a "resource program" after carefully considering (1) whether this program can be held up to a level of review for cost-effectiveness and associated resource savings that provide credible and objective information on savings impacts, and (2) whether the associated protocols can produce results that meet the needs of the ISO and resource planners. Joint Staff shall solicit input from the IOUs and other technical experts on this issue as soon as possible, so that Joint Staff can develop its recommendations and obtain public input on those recommendations during the expedited approval process described in today's decision.

15. As discussed in this decision, Joint Staff, after obtaining appropriate technical expertise from IOUs and other experts as necessary, shall also coordinate the study parameters for the 2005 load impact study being performed for the Low Income Energy Efficiency (LIEE) Program with the EM&V efforts underway in this proceeding. In the May 2006 filings for the 2006 Annual Earnings Assessment Proceeding (AEAP), the Joint Staff shall submit to the assigned Administrative Law Judge (ALJ) a joint proposal for the LIEE performance basis and associated EM&V protocols, after obtaining public input on their joint proposal. The ALJ shall issue the joint proposal for comment via ruling to the service lists in the applicable AEAP docket, in this rulemaking (or successor proceeding) and in the low-income assistance rulemaking, R.04-01-006.

16. All EM&V-related submittals by Joint Staff required by this decision shall be served as an attachment to an ALJ ruling on the application dockets for the PY2006-PY2008 program plans.

17. In order to address the transition issues discussed in this decision, the language of the first full paragraph on page 33 of Decision (D.) 04-09-060 shall be modified as follows (deletions are noted in strikeout; additions in italics):

18. The Assigned Commissioner or ALJ may, for good cause, modify the due dates established by this decision.

19. This proceeding remains open to address ongoing issues related to energy efficiency policies and programs.

This order is effective today.

Dated April 21, 2005, at San Francisco, California.

Comr. Grueneich recused herself from
this agenda and was not part of the
quorum in its consideration.

Gottstein Attachment 1

Gottstein Attachment 2

Gottstein Attachment 3

Gottstein Attachment 4

Gottstein Attachment 5

Gottstein Appendix A to Attachment 3

Gottstein Appendix B to Attachment 3

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