3. Past Experience and Current Administrative Structure
The proposals submitted by the four separate Coalitions are in large part reminiscent of the administrative structures (or components thereof) that we have either implemented or attempted to implement in the past for ratepayer-funded energy efficiency since the early 1990s. It is therefore instructive to review our past experience with the issues related to administrative structure for energy efficiency and examine how we arrived at the current structure. We divide this discussion into three distinct "eras" of program administration. The discussion that follows is not intended to provide a detailed description of how each administrative function was carried out during these three eras, but rather to highlight the key features with respect to Program Choice and Portfolio Management and the context in which these functions were (and are now) performed. We also describe the use of various advisory groups during these eras, since all of the proposals recommend that one or more variation of these advisory groups be incorporated into the future administrative structure. Throughout the discussion, we use the terms and definitions presented in Attachment 1.
3.1. Pre-Restructuring ("Collaborative")
Era: 1990-1997
Prior to electric industry restructuring, the IOUs were responsible for resource procurement on behalf of their customers, subject to Commission oversight. That is, the IOUs were responsible for investing in and building new generation plants, dispatching their existing generating plants, purchasing power from other utilities or third-party generators (referred to as "qualifying facilities" or "QFs"), and purchasing natural gas supplies to meet customer demands for energy. During the aftermath of the 1970s energy crisis, California was viewed as a leader in the nation in requiring IOUs to investigate and implement demand-side management (DSM).15 However, by the mid-1980s, efforts to develop demand-side alternatives languished significantly in California, in large part because of excess generating capacity in the State. In July 1989, the Commission and CEC convened a joint en banc hearing to consider ways to revitalize energy efficiency in California.
In the notice announcing the hearing, the Commission cited the shrinking of the capacity surplus, the air quality consequences of inefficient energy use, and recent dramatic improvements in energy-efficient technologies as grounds for reinvigorating DSM activities. The purpose of the en banc was to address the central questions of how energy efficiency and other DSM programs should fit into utility resource procurement, and how regulation could encourage desirable investments in demand-side resources. The administrative structure in place from 1990 through 1997 grew out of recommendations offered in response to the en banc by a group of interested stakeholders called the "California Collaborative" (Collaborative).16 The Collaborative recommendations led to the issuance of a DSM Rulemaking to further define policies and oversight responsibilities for energy efficiency programs.17
As indicated in Figure 2, the administrative structure that resulted from this process placed lead responsibility for Program Choice and Portfolio Management with the IOUs. In addition, the Commission put in place a system of financial rewards and penalties (shareholder incentive mechanisms) for energy efficiency programs to address the financial conflicts facing IOUs under cost-of-service regulation. In particular, IOUs earn a financial return for their shareholders when they invest in generation, distribution or transmission plant ("steel in the ground"). They did not at that time earn any return on energy efficiency programs. To address this financial conflict, the Commission provided the IOUs with an opportunity to earn on cost-effective energy efficiency. Experimental incentive mechanisms were adopted in 1990, and then subsequently refined into a "shared savings" mechanism for the 1995-1997 program years.18
Under the shared-savings mechanism, IOUs earned a fixed percentage of the net savings to ratepayers (energy savings minus costs) after a threshold level
of savings was achieved.19 These savings levels were based predominantly on post-installation (ex post) measurements and the IOUs were at risk for ratepayer expenditures if the program portfolio was not cost-effective on an ex post basis. The Commission established a California DSM Measurement Advisory Council (CADMAC) to provide a forum for presentations, discussions, and review of DSM program measurement studies. These studies were filed in each Annual Earnings Assessment Proceeding (AEAP), which was the forum for the Commission's review of the IOUs'earnings claims under the shareholder incentive mechanism. CADMAC also presented recommendations to the Commission on changes to adopted measurement protocols for consideration in each AEAP. Regular membership consisted of the IOUs, ORA, Energy Division and CEC staff, and supplemental members were added via advice letter filings. They included: NRDC, TURN, Sacramento Municipal Utility District, Los Angeles Department of Water and Power, NAESCO, Lawrence Berkeley Lab, among others. The CADMAC structure included voting rules and guidelines for participation and attendance.
Independent reviewers were also part of the CADMAC structure. They were selected and managed by Energy Division and paid for out of program funds. Their primary task was to provide input to Energy Division and the Commission on the savings estimates presented by the IOUs in each AEAP. In addition, program funds were allocated to ORA to conduct its own independent verification of the IOUs' savings studies.
Other administrative features were put in place to address the Collaborative stakeholders' concerns with placing IOUs in the lead role for program choice and portfolio management. During the Collaborative process (and subsequent settlement agreements), the stakeholders recommended that the IOUs establish informal advisory committees as an outgrowth of the Collaborative working groups to review the utility programs. The Commission directed the IOUs to continue the use of these advisory committees in the DSM Rulemaking as a method of obtaining input on program choice and implementation issues, and they became an integral component of the administrative structure during the pre-restructuring era.20
The IOUs selected initial members from a broad range of interested stakeholders (e.g. regulatory staff, customer groups, environmental groups, among others) and participation evolved over time between 1990 and 1997 based on the interests of specific stakeholders and emerging program design issues.21 The advisory committees met approximately once each quarter (or more frequently as needed) to discuss the composition of the IOUs portfolio and consider modifications to program design or funding levels for individual programs as their performance was observed during the course of each program year. Participation was voluntary and there were no voting rules. In those instances where Commission approval was required (based on policy rules regarding fund shifting, and other guidelines for portfolio management), the IOUs filed their requests with the Commission indicating whether the advisory committee supported the proposed modifications. Individual advisory committee members could protest the filings if they did not concur with the proposed program selection or changes to those selections.
The advisory committees described above addressed some of the concerns expressed by the Collaborative over the IOUs' lead role in program choice and portfolio management by making the process more receptive to stakeholder input on an ongoing basis. However, they did not address competitive issues that were emerging in both supply-side and demand-side resource acquisition. In particular, the experience of the mid-to late 1980s with independent power producers and supply-side bidding in California led to analogues that appeared transferable to the demand-side. Both the Legislature and the Commission viewed the introduction of competitive bidding in demand-side resource acquisition as a vehicle to use competitive forces to reduce the cost (or increase the value) of ratepayer-funded programs.22
Consistent with that vision, the Commission directed the IOUs to develop proposals for DSM bidding pilots and to form a DSM bidding advisory committee to assist the IOUs and the Commission in this task, with the Division of Strategic Planning (DSP) acting as facilitator.23 The group included representatives from IOUs, consumer and environmental groups, ESCOs and other interested parties. During the next two years, a series of pilots were implemented to test the potential of DSM bidding to provide least-cost energy efficiency services and to assess the capabilities of third party providers to complement or replace existing or planned IOU programs. However, before the results of these pilots could be fully evaluated in the context of the industry structure in which they were conceived, electric industry restructuring fundamentally changed the IOUs'role in both supply-side and demand-side resource procurement.
3.2. Restructuring Era ("Attempted Independent Administration"): 1997-2000
In D.95-12-063, as modified by D.96-01-009 ("restructuring decision"), the Commission described its vision of a competitive framework for the electric services industry. Briefly, the decision describes a future in which customers would have choice among competing generation providers, and where traditional cost-of-service regulation would be replaced by performance-based regulation. In terms of market structure, the restructuring decision placed control over all transmission assets in the hands of an independent system operator (ISO) and required the IOUs to bid all their generating assets (with the exception of must-take power) into a spot market pool over a five-year transition period, beginning January 1, 1998. During this transition period, some utility generating assets would undergo a market valuation process and possibly a transfer of ownership, while others would remain under the ownership of the utility and Commission regulation. The Commission would continue to have oversight over utility generation during the transition. The utilities would be given the opportunity to recover generation "transition costs" (i.e., the net above-market costs for each utility) over the five-year period, but the price for electricity, on a kWh basis, could not rise above the rate levels in effect as of January 1, 1996.
In its restructuring decision, the Commission acknowledged the continued need for energy efficiency programs, but signaled a major shift in emphasis away from financial incentives to individual customers towards energy efficiency programs with broader market transformation effects, such as educational programs and incentives targeted to equipment and appliance manufacturers. The Commission anticipated that public funding for energy efficiency would be needed "only for specified and limited periods of time, to cause the market to be transformed."24 The Commission also articulated its expectation that the administration of energy efficiency programs would transition from the utilities to an independent, nonprofit organization:
"After a short transition period, we believe that the funds collected through a surcharge for energy efficiency should be competitively allocated by an independent, nonprofit organization, but we would like to capture the expertise and knowledge that the utilities have gained in administering DSM programs as we begin the transition. We expect to reach closure on this issue through the implementation activities we will undertake in the next few months and through ongoing coordination with the Legislature."25
On September 23, 1996, Assembly Bill (AB) 1890 was signed into law. (Stats 1996, Chapter 854.) Overall, AB 1890 endorsed the Commission's vision for a restructured electric industry. With respect to energy efficiency, the statute authorized the continuation of public purpose programs through the imposition of a nonbypassable charge on local distribution service (i.e., the PGC). However, in terms of funding levels for energy efficiency, AB 1890 mandated only a limited time period, commencing January 1, 1998 through December 31, 2001, during which ratepayer funds were earmarked for those activities. The statute's language did not articulate any specific expectations regarding program design or administration. Those details were left to the Commission.26
At the Commission's direction, working groups met during 1996 to discuss public purpose programs, including energy efficiency, and to present recommendations responding to the issues identified in the restructuring decision. On August 16, 1996, the Energy Services Working Group presented a report entitled "Funding and Administering Public Interest Energy Efficiency Programs."27 The report presented consensus and non-consensus views on market transformation goals, the types of energy efficiency activities to be funded by utilities in the future and program funding levels. It presented administrative options for setting policies, administering the public goods charge and delivering energy efficiency activities and programs.
In D.97-02-014, issued on February 14, 1997, the Commission reiterated its intent to establish an administrative structure that would "facilitate the privatization" of energy efficiency services in the marketplace.28 For this purpose, the Commission established an independent board (California Board For Energy Efficiency or "CBEE") consisting of regulatory representatives and members of the public to oversee limited term contracts for the administration of market transformation programs.29 Among other things, CBEE was directed to develop and issue a RFP articulating policy and programmatic guidelines for one or more administrators, subject to Commission approval. The Commission stated its goal of having the new administrative structure for energy efficiency programs in place by January 1, 1998. Figure 3 illustrates the administrative structure for energy efficiency that the Commission envisioned for a restructured electric industry.
To create this administrative structure, the Commission first addressed several issues related to CBEE start-up, including board appointments, legal structure, authorization to contract and hire staff, conflict of interest, per diem and expense reimbursements, Bagley-Keene Open Meeting Act, among others.
In recognition that the transfer of functions, funding, assets and program commitments from utilities to the new administrator would take longer than expected, in D.97-09-117, the Commission extended interim utility administration until October 1, 1998. During the remainder of 1998, the Commission considered CBEE recommendations for directing utility energy efficiency activities during the transition, and proceeded to adopt a 1998 operating budget for CBEE, establish policy rules for independent administration and approve an RFP for that administration.30 However, beginning in early 1998, the transition to independent administration for energy efficiency programs encountered several obstacles-and was ultimately put on hold indefinitely by the Commission.
In August 1997 the California State Employees Association (CSEA) challenged two agreements between CBEE and private contractors, and requested that the State Personnel Board (SPB) find that the agreements violated the requirement that state agencies use civil servants for completing tasks traditionally performed by the state.31 The contractors provided administrative and technical assistance to CBEE. In response to CSEA's challenge, the Commission pointed out that the agreements32 were between CBEE and the contractors, but PG&E paid the contractors from PGC funds. The Commission argued that since the agreements were between CBEE and the consultants, and the money was not part of the Commission's budget, SPB did not have jurisdiction over the agreements. Moreover, the Commission argued even if SPB had jurisdiction, the services were exempt from the requirement that state agencies must use civil servants to perform the work.
Not persuaded by these arguments, SPB ruled in February 1998 that the CBEE was "created by the [Commission] to advise and assist it in developing and administering energy efficiency ...programs and [is] performing functions which have been imposed by statute upon the [Commission] " and was therefore subject to the requirement its work must be performed by civil servants.33 SPB rejected the Commission's contention that the work done by contractors for CBEE was exempt under any of the exceptions in Section 19130(b) of the Government Code.
While the CSEA challenge was pending, Commission staff met with the California Attorney General's office and representatives from the Department of Finance, who raised additional issues with the Commission's use of CBEE and other advisory boards. The representatives opined that absent explicit statutory authorization, the Commission could not create additional entities to perform tasks under the oversight of the Commission. In their view, Sections 381 (c)(1) and 701 of the Public Utilities Code were not sufficient to allow the Commission to create CBEE.
Both the Attorney General's and the Department of Finance's representatives stated that the ratepayer money such as the PGC were public funds that could be held by the IOUs and spent under Commission direction, but in the absence of specific legislation, they could not be moved to an outside trust account or bank account. Thus, if funds were not held by the IOUs, then they needed to be held in a treasury account,34 or other account authorized by the legislature.
To resolve these issues, the Commission proposed legislation, AB 2461, which would have authorized creation of CBEE and seven other advisory boards. The bill would also have created a "California Board for Energy Efficiency Fund" to receive money collected by the IOUs, which would be remitted to the Commission, and then forwarded to the Controller's for deposit in the "CBEE Fund." In addition, AB 2461 would have authorized the Commission to contract for the services of one or more "independent administrators" to implement "programs to accomplish the research and environmental objectives" as provided in Section 381 of the Public Utilities Code. AB 2461 would have authorized the Commission to make advance payments to such an administrator,35 and provided that the contracts of that administrator would not be subject to the requirements of the Public Contracts Code. Governor Wilson vetoed AB 2461 in September 1998.
Recognizing that these actions created insurmountable obstacles to handing off energy efficiency programs to new administrators as planned, the Commission extended interim utility administration through December 31, 2001, and cancelled the RFP authorized by D.98-07-036.36 On June 10, 1999, the Assigned Commissioner suspended further exploration of administrative options until further notice.37 On October 6, 1999, the Governor signed AB 1393 into law. Among other things, that law required that low-income assistance programs, including energy efficiency services to eligible low-income customers, continue to be administered by the IOUs.
In 2001, Governor Davis signed legislation that allowed the creation of six telecommunications advisory committees and created six Treasury Funds for the ratepayer money associated with the functions on which the boards provide advice. These boards now function in a purely advisory capacity, with no authority to enter contracts or spend money.
3.3. Current Structure (Summer 2000 Initiative to Present)
Huge price spikes and supply shortages that were the beginning of California's energy crisis marked the summer of 2000. The ISO was forced to call for curtailments of customers on interruptible tariffs throughout its control area (PG&E, SCE and SDG&E service territories) and in June 2000, the Bay Area experienced several days of rolling blackouts. These events prompted the Commission to adopt a "rapid response procedure" to provide "maximum impact of demand and energy usage reductions" during the Summer 2000 energy capacity shortage and for the potential energy shortage projected over the next few years.38
To implement this rapid response procedure, referred to as the Summer 2000 Energy Efficiency Initiative (Summer Initiative), the Commission solicited program proposals from the IOUs and other interested parties that would "bring about the largest reductions in electric demand and/or electric usage reductions in the shortest period of time.39 The Commission directed that proposals for funding under the Summer Initiative be filed and served by July 21, 2000, that comments on the proposals be filed and served by July 31, 2000 and that the programs be approved and implemented by September 1, 2000. The Commission authorized the Assigned Commissioners and ALJ to approve the Summer Initiative programs by ruling, which was accomplished on August 21, 2000. The ruling authorized a total of $72 million in unspent PGC program funds for the initiative, and selected implementers were directed to spend these funds by December 31, 2001.
The Summer Initiative marked the beginning of a new administrative structure for energy efficiency programs, which is still in place today. (See Figure 4) Under this structure, the Commission establishes evaluation criteria for reviewing program proposals, solicits proposals for program funding from IOUs and non-IOU implementers, and makes final program selections for each funding cycle.40 Commission staff oversees the implementation of multiple statewide and local energy efficiency programs. This oversight involves "review of proposals, program plans, budgets, expenditures and program activity reports, as well as program monitoring, program plan modifications, and other day-to-day management assignments."41
More specifically, Energy Division staff reviews program applications and makes selection recommendations to the Commission for each funding cycle. Energy Division staff also oversees portfolio management with respect to the development and review of program implementation plans, for both IOU and non-IOU programs. Energy Division reviews non-IOU program implementation plans and contracts (and any changes) which are subject to either Energy Division or ALJ approval. Energy Division also reviews and approves any IOU proposed changes to the program implementation plans that involve: (1) significant fund shifting across budget categories; (2) changes to incentive amounts offered to program participants and (3) changes in program design or program offerings. ALJ approval is also needed for time extensions to non-IOU programs.
With respect to EM&V, Commission staff responsibilities include: (1) Energy Division review and ALJ approval of the IOUs' EM&V plans for statewide programs; (2) ALJ approval of a list of qualified EM&V contractors for implementers; and (3) Energy Division review (assisted by an independent contractor) and approval of non-IOUs' EM&V plans. In addition, the IOUs are required to submit their proposed contractors for EM&V studies to the Energy Division and ALJ for approval. Energy Division also contracts with independent consultants to evaluate program performance, including the methods and inputs used by EM&V contractors to evaluate program savings.
The Commission has not formally created any advisory groups under the current administrative structure. However, in 1999, the IOUs, ORA and CEC jointly recommended that a California Measurement Advisory Council (CALMAC) be established to provide a forum for discussing and reviewing post-1998 market assessment and evaluation studies, and for coordinating the development of statewide measurement studies. The Commission did not object to the concept of using CALMAC to assist the IOUs, ORA and others for this purpose, but specifically did not recognize it as an official Commission-sponsored advisory body.42 CALMAC's organizational membership, voting rules and funding arrangements are similar to CADMAC, but no independent reviewers are part of the structure. CADMAC still exists for the limited purpose of providing input during the Commission's review of the remaining AEAP earnings claims associated with pre-1998 programs.
15 "Demand-side management" or "DSM" refers to programs that focus on the customer side of the utility meter, which include programs for load management and energy efficiency, among others. 16 Members of the Collaborative included the four energy IOUs, representatives of various California state agencies, environmentalists, residential, commercial, industrial and low-income ratepayers, agriculture, energy service companies and independent energy producers. The Collaborative observers included legislative representatives, the South Coast Air Quality Management District and several energy consulting firms. The Commission's Strategic Planning Division also assisted the Collaborative. Their recommendations were submitted in An Energy Efficiency Blueprint For California: Report of the Statewide Collaborative Process, January 1990. 17 R.91-08-003 and Companion Investigation (I.) 91-08-002. 18 For a detailed history of shared-savings incentive mechanisms for energy efficiency programs, see Attachment 2 of D.03-10-057. 19 Ibid. The shared savings mechanism applied to "resource programs", that is, programs that could displace or defer more costly supply-side resources, such as the direct installation of energy efficiency measures. Other incentive mechanisms (e.g., in the form of fixed management fees) applied to programs that either produced savings that were hard to measure (e.g., information programs or energy management audits), or were implemented primarily for equity reasons and not expected to be cost-effective. The latter encompassed what we now refer to as low-income energy efficiency programs or "LIEE". Prior to restructuring, we referred to LIEE as "direct assistance" programs, and these programs were funded out of the energy efficiency budgets. Today, LIEE is funded separately from all other energy efficiency activities. 20 In its DSM Rules, the Commission required that the IOUs establish a single clearinghouse for all advisory committee noticing and scheduling, provide appropriate notice of all meetings with advance agendas, provide the Committees with comprehensive information on program implementation activities and proposed program changes, and take other steps to ensure that parties had an opportunity to review the programs and work with them to improve program implementation. Order Instituting Rulemaking and Order Instituting Investigation (R.91-08-003/I.91-08-002), mimeo., p. 37; D.92-02-075, pp. 62-63, Attachment 3, Rule 24. 21 The advisory committees differed with respect to representatives from customer groups. SDG&E's general practice at that time was to get input from customers via focus groups, including public meetings in some instances, and bring that information to the Advisory Committee comprised of stakeholders that represented broader interests, such as ORA, CEC, UCAN, Sierra Club and NRDC. SCE and PG&E, on the other hand, included customer representatives on their Advisory Committees, along with broader interest groups. 22 See Order Instituting Rulemaking/Investigation (R.91-08-003/I.91-08-002), dated August 7, 1991, and Stats. 1990. Ch. 1369, Sec. 3, which added Section 747 to the Public Utilities Code. 23 See R.91-08-003/I.91-08-002, mimeo. p. 44 and ALJ Ruling and Notice of First Meeting of the Statewide Advisory Group on DSM Bidding Pilots, October 1, 1991 in that proceeding. See also: D.92-02-075, pp. 12-13; Attachment 1, Rules 26-29. Subsequent decisions provided specific direction on the design and implementation of bidding pilots: D. 92-09-080, D.92-09-080 and D.93-06-040. 24 The Commission's vision for the privatization of energy efficiency services did not extend to LIEE programs. In fact, continued funding for these low-income assistance programs was authorized under the electric restructuring statute (AB 1890) without dollar limits or sunset provisions. We continue to address all issues related to LIEE (e.g., annual budgets, program priorities, program design) in our separate rulemaking on low-income energy assistance, R.04-01-006. 25 Id. 26 In passing AB 995 (Stats 2000, ch. 1051), the Legislature subsequently extended energy efficiency funding for the electric utilities until January 1, 2011, and at the same time established an annual funding limit of $228 million for PG&E, SCE and SDG&E, combined. See Pub. Util. Code § 399.8 (d)(1) and § 381(c)(1). 27 Over 30 organizations were represented in the Working Group, including the utilities, energy service providers, State agencies (e.g., CEC and Department of General Services), ratepayer advocates (e.g., DRA and TURN), and environmental organizations. 28 D.97-02-014 in R.94-04-031/I.94-04-032 (Electric Restructuring Proceeding), 70 CPUC 2d, 774 at 784. 29 The Commission also established a Low-Income Governing Board at that time to make recommendations about low-income assistance programs in the restructured electric industry. Since we are focusing on non low-income energy efficiency in this decision, we do not describe developments related to the low-income board any further. However, similar legal obstacles did arise with respect to this board. 30 See D.98-02-040 (78 CPUC 2d, 439) and D.98-04-063 (79 CPUC 2d, 704). 31 Article VII Section 1 of the California Constitution is construed as an implied mandate limiting the state's authority to contract with private entities to perform services the state has historically performed. Professional Engineers in California Government v. Department of Transportation, 15 Cal. 4th 543, 547 (1997). Section 19130 of the Government Code contains exceptions to the general requirement that civil servants perform state work. 32 Contracts between CBEE and the consultants were not executed. Letters of understanding were used because CBEE's legal status was uncertain. It was anticipated that PG&E and the contractors would ultimately sign contracts. 33 February 4, 1998 letter from SPB Acting Executive Director Walter Vaughn to CPUC Executive Director Wes Franklin. 34 The Department of Finance rejected the Commission's position that former Section 2881(d) of the Public Utilities Code, which stated that the "commission shall establish a fund and require a separate accounting for each of the programs [for deaf and disabled telephone subscribers] implemented in this section" authorized establishment of a trust fund outside the state treasury. (Emphasis added.) 35 With limited exceptions, state agencies are prohibited from making advance payments under contracts. Public Contracts Code Section 10312. 36 D.99-03-056. 37 Assigned Commissioner's Ruling Regarding Administration of Energy Efficiency and Low-Income Assistance Programs in R.98-07-037, June 10, 1999. 38 D.00-07-017, mimeo., p. 199. 39 Ibid,, p. 203. 40 See, for example, D.02-03-056 (Selection of 2002 Programs), D.03-04-055 (Selection of 2003 Programs), D.03-12-060 and D.04-02-059 (Selection of 2004-2005 Programs). 41 D.03-04-055, p. 23. 42 See D.00-05-019, pp. 19-21; Finding of Fact 14; Attachment B.
