COM/SKI/MEG/jva DRAFT Agenda ID #4107

Quasi-Legislative

1/27/05 Item 30

Decision DRAFT DECISION OF COMMISSIONER KENNEDY
AND ALJ GOTTSTEIN (Mailed 11/29/2004)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

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

Rulemaking 01-08-028 (Filed August 23, 2001)

INTERIM OPINION ON THE

ADMINISTRATIVE STRUCTURE FOR

ENERGY EFFICIENCY: THRESHOLD ISSUES

Table of Contents

Title Pages

INTERIM OPINION ON THE ADMINISTRATIVE STRUCTURE FOR ENERGY EFFICIENCY: THRESHOLD ISSUES 2

1. Introduction and Summary 2

2. Procedural History 14

3. Past Experience and Current Administrative Structure 23

3.1. Pre-Restructuring ("Collaborative") Era: 1990-1997 23

3.2. Restructuring Era ("Attempted Independent Administration"): 1997-2000 29

3.3. Current Structure (Summer 2000 Initiative to Present) 37

4. Administrative Structure Proposals and Positions of the Parties 40

4.1. IOUs in the Role of Program Choice and Portfolio Management 42

4.1.1. IOUs Coalition Proposal: "Integrated Portfolio Management" 42

4.1.2. NRDC/LIF Coalition Proposal: "Reaching New Heights" 43

4.1.3. Proponents' Arguments 44

4.2. Independent Administrator(s) For Program Choice
and Portfolio Management 45

4.2.1. TURN/ORA Coalition Proposal: "Efficiency California" 46

4.2.2. WEM/SESCO Coalition Proposal: "The California Standard Offer

Program For Energy Efficiency" 47

4.2.3. Proponents' Arguments 49

4.3. Cal-Ucons' "Discrete Market Segment Focus Plan" 51

4.4. Collaborating Parties' Proposal for Advisory Board and EM&V
Administrative Structure 52

5. Discussion 56

5.1. Threshold Issue: Who Should Perform the Program Choice
and Portfolio Management Functions? 59

5.2. Quality Control Measures For Program Choice
and Portfolio Management 89

5.2.1. Competitive Solicitations. 91

5.2.2. Advisory Group Structure 96

5.2.3. Affiliate Transactions 105

5.2.4. The Post-2005 Portfolio Design and Program Selection Process 108

5.3. EM&V and Other Administrative Structure Issues 110

5.3.1. EM&V Administrative Structure 110

5.3.2. Research and Analysis in Support of Policy Oversight 127

5.3.3. Quality Assurance and Policy Oversight 129

Table of Contents

Title Pages

6. Next Steps in Preparation for the 2006-2008 Program Implementation

and Funding Cycle 132

7. Comments on Draft Decision 135

8. Assignment of Proceeding 138

Findings of Fact 138

Conclusions of Law 151

INTERIM ORDER 153

Attachment 1 Administrative Functions and Areas
of Responsibility: Common Terminology

Attachment 2 Overview of Proposals for Energy
Efficiency Administrative Structure
and Advisory Group Recommendations

Attachment 3 List of Acronyms

Figure 1 Administrative Functions

Figure 2 Administrative Functions
Restructuring ("Collaborative") Era

Figure 3 Administrative Functions
Resturcturing Era-Attempted Independent Administration

Figure 4 Administrative Functions
Current Structure (since Summer 200 Initiatives)

Figure 5 Integrated Portfolio Mgmt (IOUs Coalition)

Figure 6 Reaching New Heights (NRDC/LIF Coalition)

Figure 7 Reaching New Heights (NRDC/LIF Coalition Amended)

Figure 8 Efficiency California (TURN/ORA Coalition)

Figure 9 California Coalition for EE (WEM/SESCO)

Figure 10 Adopted Administrative Structure Energy Efficiency

INTERIM OPINION ON THE
ADMINISTRATIVE STRUCTURE FOR
ENERGY EFFICIENCY: THRESHOLD ISSUES

1. Introduction and Summary¹

By this decision, we address the threshold issues for designing an administrative structure for energy efficiency programs beyond 2005. The administrative structure we adopt today applies to our electric energy efficiency programs, which are funded through the public goods charge (PGC) and a non-bypassable procurement surcharge, and our natural gas energy efficiency programs, which are funded through the natural gas surcharge, but does not apply to low-income energy efficiency programs.² As described below, energy efficiency administration encompasses all the functions related to the planning, oversight and management of energy efficiency programs, including decisions on what programs to fund with ratepayer dollars. Attachment 1 lists and describes the various administrative functions, and Figure 1 presents this listing in a flow chart form.

Our use of the term "administration" or "administrative structure" in this decision does not, however, include the various tasks associated with program delivery, e.g., recruiting of customers and installation of measures. We refer to the entities that perform these functions as "program implementers," who operate under contracts/agreements with the entity or entities managing the entire portfolio of ratepayer-funded programs. Program implementers may deliver programs directly to customers, or hire contractors to perform these services, or a combination of both.³

There are many potential program implementers in the energy efficiency market, including investor-owned utilities (IOUs), private energy service companies (ESCOs), local government agencies, nonprofit organizations and other entities that can influence customer decisions over energy services and deliver energy savings measures to them. The proposals presented in this proceeding all recognize that IOUs as well as non-IOUs will continue to play a role in delivering energy efficiency services to customers as program implementers. They differ significantly, however, with respect to the future role of IOUs in performing two key administrative functions: Program Choice and Portfolio Management.

Program Choice involves the selection of activities and implementers for the portfolio of energy efficiency programs, and the allocation of ratepayer dollars to those activities for each funding cycle. Portfolio Management involves the day-to-day tasks associated with general administration and coordination of those ratepayer-funded programs between funding cycles. For example, at the beginning of each funding cycle, the entity responsible for program choice will select among commercial lighting programs, programs to weatherize and upgrade appliances in single- and multi-family residences, programs to educate builders and designers of new construction projects, and many others, and decide how best to allocate authorized funding levels across those activities. Program choice also involves decisions over what combination of IOU and non-IOU implementers will receive program funds to offer and deliver the energy efficiency services to customers.

Once the portfolio of programs is selected, the Portfolio Manager will review and approve program implementation plans, oversee the contracts with implementers and track the costs and performance of the programs (and implementers) selected. As the programs "roll out" during the funding cycle, the Portfolio Manager is also responsible for identifying areas where program design and implementation can be improved, and for making (or recommending) changes to improve portfolio performance, including funding allocation changes. In addition, the Portfolio Manager is responsible for reviewing and approving invoices from implementers, generating required reports to regulators on portfolio performance, and for other general administrative and coordination tasks.

As part of its policy oversight responsibility, the Commission may establish parameters for program choice and portfolio management that limit the discretion of the entity or entities responsible for those functions. For example, the Commission may establish a policy that allocates a minimum percentage of total program funding to the residential sector, or limits the degree of fund shifting that the Portfolio Manager can initiate across the major market sectors (residential/non-residential) without prior Commission approval. The Commission may also establish a policy that a certain percentage of program funding must be allocated based on competitive responses to a Request For Proposal (RFP), or that a certain amount of funding must be set aside for statewide initiatives. Nonetheless, within Commission-established parameters, the entity or entities responsible for the Program Choice and Portfolio Management functions will be responsible for making numerous decisions that affect the way in which energy efficiency choices are presented to customers, and how energy efficiency technologies are made available to them.

It is therefore not surprising that the most controversial issue related to administrative structure is what entity or entities should be responsible for these two key functions. Some parties to this proceeding propose that the Commission delegate these responsibilities to an independent administrator (or administrators), selected based on a competitive solicitation. Others argue that the IOUs should perform these functions, as they did prior to electric industry restructuring, with input from advisory groups and other safeguards to ensure that the IOUs will not favor their own programs over those of non-IOU implementers, or favor supply-side investments over cost-effective energy efficiency. ⁴ Based on the proposals and comments in this proceeding, we believe that this major "fork in the road" must be addressed before we can proceed further to design an administrative structure for energy efficiency programs.

As discussed in today's decision, we choose the fork in the road that returns the IOUs to the lead role in Program Choice and Portfolio Management. In considering our options, we recognize that the energy crisis of 2000 and 2001 has changed the regulatory landscape in a profound way for California. As a result of California's painful experience with electric industry restructuring, the Legislature and this Commission have directed the IOUs to resume responsibility for procuring resources to meet customer demand. The energy crisis has also brought about a renewed and expanded appreciation for energy efficiency as a cost-effective resource to meet that demand. Accordingly, the Energy Action Plan has placed energy efficiency at the forefront of energy policy and resource procurement in California.

Decisions in California concerning the optimal levels of energy efficiency and supply-side resources will now be made in the resource planning process undertaken by the IOUs, subject to our oversight and approval. In this context, making another entity (or entities) responsible for Program Choice and Portfolio Management of energy efficiency means that all of the program selection and day-to-day management decisions would be "handed down" to the IOUs to incorporate into their resource plans and resource adequacy projections. As we stated in Decision (D.) 04-01-050, California IOUs should not be required to adopt the forecasts and resource plans of others because "[w]e strongly believe that the utilities themselves must be responsible and accountable for providing their customers reliable service and just and reasonable rates; this is the utilities' statutory obligation to serve."⁵

We have also been presented with a proposal for energy efficiency administration structure that would leave Program Choice and Portfolio Management to the private competitive market, through a program of standard offer contracts administered by multiple non-IOU entities. As we discuss in this decision, our experiences in California have left us unwilling to rely solely on competitive market solutions to meet customers' energy needs. Moreover, we conclude that under this approach statewide programs could cease to exist entirely, customers would be faced with multiple and sometimes overlapping programs, and overall, the program synergies and leveraging necessary to optimize savings from energy efficiency would not be achieved.

We also discuss in today's decision how returning the IOUs to the Program Choice and Portfolio Management roles for energy efficiency is the logical corollary for the market structure we have recently adopted for supply-side resource procurement. In D.04-01-050, we established a market structure that placed the California IOUs in the role of program selection and portfolio manager of supply-side resources (including dispatch decisions for IOU-owned generation plant), but also allowed them to directly participate as supply-side implementers by owning and/or building new generation facilities. We did so after hearing arguments similar to the ones raised in this proceeding concerning the pros and cons of allowing IOUs to both serve as administrators and potential implementers. In response to those arguments, we adopted certain safeguards to protect against bias in the selection process, including the use of procurement advisory groups, Commission review of procurement plans with notice and opportunity for comment, and a ban on affiliate transactions.

Even if the IOUs were not once again responsible for resource procurement, we would have significant concerns about placing responsibility for Program Choice and Portfolio Management responsibilities with third-party administrators. One of those concerns relates to the degree of control we could exert over third parties under the contractual arrangements relied on under those proposals. In order to meet our goals for energy efficiency, we must have the authority to hold program administrators fully accountable for delivering energy savings. As discussed in this decision, we believe that this authority is clearly established with our regulatory oversight of the IOUs, but considerably less certain under the proposals for independent administration.

In addition, our unsuccessful attempts to shift to independent administration for energy efficiency during electric restructuring persuades us that pursuing this approach again would require new statutory authority. The Attorney General and the Department of Finance have clearly articulated the position of these agencies: Ratepayer money such as the PGC is public money that can be held by the IOUs and spent under Commission direction, but in the absence of specific legislation, cannot be moved to an outside trust account or bank account. Therefore, even if we desired to pursue a model that transfers funds from the IOUs to an outside entity, we would first need to seek legislation similar to the provisions that authorize the transfer of telecommunication public purpose funds to treasury accounts, or PGC funds to the CEC treasury accounts. This would delay our ability to move forward with a permanent administrative structure for energy efficiency, create uncertainty with respect to the outcome of that legislative process, and render program funding vulnerable to borrowing by the Legislature.

In addition to the uncertainty and implementation delays associated with seeking new legislation, the independent administrative structures proposed in this proceeding create other substantial implementation challenges. These include significant start-up costs and transition time, as well as the challenge of finding third-party administrator(s) capable of assuming the huge fiduciary responsibilities associated with over $400 million in annual program funding. While a "single purpose" independent entity sounds simple and appealing in theory, it is also far from certain that that a single organization or partnership of firms capable of administering energy efficiency in California will emerge as truly single purpose, i.e., free from conflicting financial interest with respect to energy efficiency.

In contrast, returning the IOUs to a lead role in program choice and portfolio management will not create the legal obstacles described above or require statutory changes. Transitioning responsibilities from Commission staff to IOU staff could be accomplished by the beginning of the 2006 program cycle in a manner that would not disrupt program delivery. Based on our experience with utility administration during the pre-restructuring/collaborative era, we are also confident that the IOUs have the requisite expertise and capability to administer energy efficiency consistent with the Energy Action Plan and the savings goals we establish in this proceeding. That experience has demonstrated to us that IOUs can meet aggressive savings goals under an administrative structure that holds them directly accountable for program results. As we reported in D.03-10-057, we estimate that IOU administrators during the restructuring/collaborative era produced $1.4 billion in net benefits to ratepayers (savings minus costs, including shareholder incentives) for programs implemented or initiated over the 1994-1997 period.

For the above reasons, we return the IOUs to the lead role in Program Choice and Portfolio Management for energy efficiency program administration beginning with program year 2006. At the same time, we realize that returning IOUs to these roles will also require us to institute appropriate safeguards, as part of our overall approach to quality control for both supply-side and demand-side resource procurement. To this end, we adopt an advisory group structure and competitive bidding minimum requirement, as described in this decision. To further safeguard against bias in program selection, we adopt a ban on affiliate transactions between IOU administrators and program implementers. We also clarify the functions for which the Commission and our staff will retain responsibility.

In today's decision, we also provide direction on how evaluation, measurement and verification (EM&V) should be structured in the future. As described in Attachment 1, the tasks under EM&V include: (1) establishing the EM&V plan for the portfolio of programs; (2) selecting evaluation firms and managing the evaluation of individual programs within the portfolio and for the portfolio as a whole; (3) overseeing the verification of program milestones, load impacts, completion of cost-effectiveness studies and other appropriate measurements of program performance; and (4) making recommendations for improvements based on EM&V program results. Based on the comments, we are persuaded that we must improve upon our current and past approaches to EM&V by requiring a clearer separation between "those who do" (the program administrators and implementers) and "those who evaluate" the program performance.

In particular, for program year 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. As a further safeguard to ensure against conflict-of-interest in EM&V, we prohibit entities from performing these types of EM&V studies at the same time they are under contract for program delivery work-either as a non-IOU program implementer or subcontractor to an IOU implementer.

Energy Division will also take the lead in performing research and developing recommendations to assist in developing energy efficiency policy goals and priorities, in evaluating the remaining potential to achieve additional energy or peak savings, and other research activities needed to support our policy oversight. In recognition that IOU portfolio managers and program implementers need access to market information to perform their responsibilities, we adopt 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.

As described in this decision, our adopted administrative structure provides significant opportunities for public input during the planning and design of the energy efficiency portfolio, the competitive bid solicitation process and selection of program implementers, as well as the during development and review of EM&V plans and funding levels. Finally, we reiterate our commitment to continued collaboration with the CEC at both the staff and Commissioner level on a broad range of energy efficiency issues, as exemplified during this proceeding under the leadership of Commissioner Kennedy and CEC Commissioner Art Rosenfeld. We will also explore creating a more formal arrangement with the CEC for collaboration in the administrative areas of EM&V and Research and Analysis in support of energy efficiency policy development, as described in this decision. A summary of our adopted administrative structure for energy efficiency is presented in Figure 10, attached to this decision.

By addressing these threshold issues today, we resolve a major area of uncertainty regarding post-2005 energy efficiency program implementation. We can now turn to issues that have been put on hold pending their resolution, and proceed on several fronts to prepare for the 2006 funding cycle. Between now and the end of 2005 we will need to complete a variety of tasks, some of which are currently underway. These include: (1) updating avoided costs for the evaluation of program savings; (2) developing the performance basis for energy efficiency programs that defer or avoid more costly supply-side resources; (3) updating EM&V protocols and procedures for measuring program performance; and (4) updating our Energy Efficiency Policy Rules. In addition, the portfolio design and program selection process described in this decision must be completed before the end of 2005. We also intend to address the issue of risk/reward mechanisms for energy efficiency, as well as for the overall procurement framework, before the end of 2005.

By D.04-09-060, we adopted electric and natural gas savings goals by IOU service territory through the year 2013, subject to updates for 2009 and beyond. Completing all the remaining tasks in time for the 2006 funding cycle will require an ambitious schedule during 2005. We call on all the stakeholders to put past differences aside and work collaboratively in the months ahead. 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.