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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ALJ/MEG/tcg Mailed 4/25/2005

Decision 05-04-051 April 21, 2005


Order Instituting Rulemaking to Examine the Commission's Future Energy Efficiency Policies, Administration and Programs.

Rulemaking 01-08-028

(Filed August 23, 2001)





1. Introduction and Summary1

Today's decision builds upon Decision (D.) 04-09-060 and D.05-01-055 in establishing the goals, policies and administrative framework that will guide future energy efficiency programs funded by the ratepayers of the four largest investor-owned utilities (IOUs): Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), Southern California Edison Company (SCE) and Southern California Gas Company (SoCalGas).

By D.04-09-060, we established aggressive energy savings goals to reflect the critical importance of reducing energy use per capita in California. For the three electric IOUs, these goals reflect our expectation that energy efficiency efforts in their combined service territories should capture on the order of 70% of the economic potential and 90% of the maximum achievable potential for electric energy savings, based on the most recent studies of that potential. These efforts are projected to meet 55% to 59% of the IOUS incremental electric energy needs between 2004 and 2013. On the natural gas side, our adopted savings goals represent a 116% increase in expected savings over the next decade, relative to the status quo.2 We established a three-year cycle for updating our savings goals, in concert with a three-year program planning and funding cycle for energy efficiency ("program cycle").

Our next task was to develop an administrative structure for future energy efficiency programs designed to meet the objectives of the Energy Action Plan, including the load reductions reflected in our savings goals. To this end, in D.05-01-055 we returned the IOUs to the lead administrative role in energy efficiency program selection and portfolio management--a role that they fulfilled in California prior to electric industry restructuring.3 As part of our overall approach to quality control, we established an advisory group structure, competitive bidding minimum requirements and a ban on affiliate transactions. These safeguards were designed to ensure that the program selection process would not favor programs designed and implemented by the IOUs over those designed and implemented by third-parties. At the same time, we clarified our expectations that the focus for spending ratepayer dollars in the future would be to meet or exceed our savings goals by capturing the most cost-effective energy efficiency resources as possible over both the short- and long-term.

In addition, we established an administrative structure for evaluation, verification and measurement (EM&V) that created a clear separation between "those who do" (the Program Administrators and program implementers) and "those who evaluate" the program or portfolio performance. In particular, for program year (PY) 2006 and beyond, Energy Division will assume the 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 the Program Administrators and program implementers need access to market information to perform their responsibilities, we adopted a process that allows them to 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 Energy Division makes the final selection of contractors.

Per D.05-01-055, the Program Administrators will file their proposed PY2006-PY2008 energy efficiency program plans and applications for our consideration by June 1, 2005. Following a Commission decision on those plans, they will solicit competitive bids, make their final program selections, and submit them for our review in a second compliance filing, subject to advisory group review.

Today's decision updates the existing Energy Efficiency Policy Manual to reflect policy rules (Rules) that articulate our objectives for energy efficiency, and that provide guidance to the Program Administrators, program implementers and interested parties for the development of program portfolios for 2006 and beyond. Among other things, the Rules describe threshold requirements for cost-effectiveness, and discuss how to calculate and present cost-effectiveness results for our consideration. They also summarize our determinations in D.05-01-055 regarding competitive bidding, advisory groups, affiliate rules and other administrative structure issues. In addition, the Rules describe our expectations regarding the information that Program Administrators will file with their program planning applications and during program implementation. They also describe the process for updating the Energy Efficiency Policy Manual in the future, provide a guide to reference documents and include a list of common terms and definitions. (See Attachment 3.)

In addition to updating the Rules in the Energy Efficiency Policy Manual, today's decision addresses the threshold EM&V issues raised in workshops and establishes a process for developing specific EM&V protocols in the coming months. In particular, we define the metric for evaluating the performance of energy efficiency programs designed to displace or defer more costly supply-side resources ("resource programs"). We refer to this metric generically as the performance basis of a program or set of programs. For resource programs, the performance basis will be calculated on the basis of the net resource benefits (energy savings benefits minus costs) produced by the energy efficiency program(s), coupled with a minimum performance threshold tied to our adopted savings goals. This approach will encourage investments in cost-effective energy efficiency that are also designed to produce savings consistent with adopted resource planning assumptions. We prefer this approach to a performance basis that looks only at the level of kilowatt-hours (kWh), therms or kilowatt (kW) load reductions, as some parties propose. Ignoring the level of net benefits associated with program activities would, in our opinion, create a strong incentive for Program Administrators and program implementers to produce energy 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.

We also clarify that the cost-effectiveness tests used to evaluate the performance basis (as well as to evaluate program proposals on a prospective basis) should utilize non-price components of avoided costs, including environmental adders. These are real costs to all ratepayers that are avoided with the deployment of energy efficiency, and should not be ignored in the evaluation of resource benefits. For this purpose, we will use the avoided costs adopted for the evaluation of energy efficiency programs in our avoided cost rulemaking, R.04-04-025.

We reject, however, proposals by some parties to present value the future benefits of energy efficiency programs utilizing a "societal" discount rate that is, by definition, significantly lower than market rates. As discussed below, we view energy efficiency in today's policy environment as a viable resource alternative to more expensive supply-side investments. The discount rate should facilitate comparisons among alternative investments. We therefore direct that the IOUs' weighted cost of capital, as adopted by this Commission, be used in all cost-effectiveness calculations for energy efficiency.

In response to comments on the draft decision, we also clarify that solar water heaters should be eligible energy efficiency measures in 2006 and beyond, under certain conditions. This is appropriate because the effect of solar water heating is indistinguishable from other efficiency measures that reduce natural gas or electricity consumptions at the end user site (such as water heater wraps, pipe insulation, etc.). In addition, including solar water heaters as an energy efficiency measure is consistent with the manner with which we established the energy efficiency savings goals, since the savings potential studies we relied upon included this measure in developing estimates of that potential. However, we also require that this new measure be cost-effective on a stand-alone basis to be eligible for funding. In other words, energy efficiency funds should not be used to encourage the deployment of non cost-effective solar water heating technologies by bundling them with cost-effective energy efficiency measures.

In terms of evaluating the performance of Program Administrators after program implementation, we adopt the recommendation of Natural Resources Defense Council (NRDC), Office of Ratepayer Advocates (ORA) and others that any incentives or performance awards to Program Administrators should be based on portfolio performance rather than on individual program performance. A portfolio level approach will encourage innovation and allow for some risk-taking on pilot programs and/or measures in the portfolio. However, calculating the performance basis at the program level is appropriate for measuring program implementer performance. In addition, we clarify that EM&V costs should be allocated at the total portfolio level, rather than program by program.

This decision also addresses the threshold issue of what assumptions used to calculate the performance basis (e.g., program costs, number and types of measures, first-year savings of measures and persistence of savings over time.) should be "trued up" on an ex post (post-installation) basis in order to evaluate the performance of the Program Administrators and program implementers after each program cycle. The parties to this proceeding agree that program costs and participation levels, including the number and type of measures or equipment installed, should be trued up based on ex post verification. They also agree that ex post measurement studies of per-unit lifecycle kWh, therm and kW savings should be used to inform and update ex ante (pre-installation) assumptions for future program years. They disagree, however, on whether the results of these ex post studies should also be used to adjust the performance basis of energy efficiency resource programs for prior years. In addition, parties disagree on how frequently these studies should be undertaken for either purpose.

As discussed below, we examine the historical relationship between ex ante assumptions and the results of ex post studies in considering the positions of the parties. We adopt an approach that strikes a reasonable balance of the following 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. As a general policy, we will require for PY2006 and beyond that per unit kWh, kW and therm savings be reevaluated through load impact studies to adjust the performance basis for prior program years. We will consider exceptions to this general policy for measures and/or programs for which there are well-established ex ante values with a high degree of confidence, and low external sources of variability that could influence energy savings. Savings persistence studies will not be tied to the performance basis, but will still be performed to inform future planning. However, we may revisit this policy and revise it if, at a future date, there is evidence that the results of the persistence studies are significantly different from the ex ante estimates.

We also adopt the consensus position of the workshop participants on how to evaluate the performance of non-resource energy efficiency programs. These include audits and targeted information programs to customers, advertising and marketing, and programs to support codes and standards. The performance basis of these and other non-resource programs will need to be further defined as we move forward with the development of specific EM&V protocols to identify measurable outputs and associated evaluation methodologies.

The next step for EM&V is to develop measurement and verification protocols consistent with today's decision, define a cycle for EM&V that is integrated into the program planning and resource planning process, and adopt specific EM&V plans and associated budgets for the PY2006-PY2008 programs. In today's decision we outline the goals, process and schedule for this next step. In terms of process, Energy Division and California Energy Commission (CEC) staff will develop the EM&V submittals required by this decision drawing upon IOU technical expertise and other resources as necessary. Energy Division and CEC staff (referred to as "Joint Staff" in this decision) will hold public workshops to obtain and incorporate feedback before finalizing the joint proposals. We require that the Joint Staff submittals be distributed for further comment as an attachment to an ALJ ruling, and we establish an expedited approval process for their consideration.

Recognizing that it will be difficult, if not impossible, for these submittals to be developed and commented upon in a budget vacuum, we establish an EM&V funding guideline of 8% of total energy efficiency program funds. We emphasize that this 8% level is to be used as a general guideline for the EM&V planning process, and represents an average annual percentage over the 3-year funding cycle. Before adopting a specific EM&V funding level for PY2006-PY2008, we will need to consider the costs of proposed EM&V activities within the context of available personnel and contracting resources, the cost and expected value produced by each program, among other factors.

As discussed in this decision, the EM&V plans and associated budget for PY2005-PY2008 will reflect decisions concerning the type and frequency of EM&V studies conducted for each program and the major study parameters utilized for each study (e.g., sample design, monitoring duration and schedule, approaches undertaken to evaluate and minimize bias, etc.) In today's decision we describe the types of protocols that the Joint Staff will need to develop for this purpose and include in the EM&V submittals. To further facilitate the development of these protocols and the EM&V plans for PY2006-PY2008, we provide guidance regarding the frequency and priority of EM&V activities.

We recognize that the timeline for completing the remaining EM&V filings is ambitious. However, an expedited schedule is required in order to put EM&V plans and associated protocols in place for the roll-out of PY2006-PY2008 programs. We expect Joint Staff to fully utilize the expertise of Energy Division's EM&V consultant(s), the IOUs and other EM&V experts as necessary to assist with the development of the EM&V submittals. We also call on all the stakeholders to work collaboratively in the months ahead. As we stated in D.05-01-055: "Working together, all stakeholders will benefit from the result of these efforts: The full recognition of energy efficiency as a viable resource that can be relied upon to reduce the demand for energy in California."4

1 Attachment 1 describes the abbreviations and acronyms used in this decision. 2 See D.04-09-060, pp. 2-3. 3 Accordingly, we refer to the IOUs collectively as "Program Administrators" throughout this decision. 4 D.05-01-055, p. 13.

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