2. Procedural Background

In Phase 1 of this rulemaking, the Commission adopted an avoided cost methodology on an interim basis for the evaluation of energy efficiency programs during the 2006-2008 program cycle. In doing so, the Commission stated its intent to consider potential revisions to this methodology in Phase 3 of this rulemaking. Phase 3 was also designated as the forum for considering the potential application of the interim avoided cost methodology to other resource options, such as distributed generation and demand response programs.⁹

On September 22, 2005, the Commission issued D.05-09-043 in the energy efficiency rulemaking, R.01-08-028. In that decision, the Commission determined that specific improvements to the interim avoided cost methodology with respect to the valuation of peak/critical peak demand reductions should be considered during 2006, prior to the initiation of Phase 3. As part of this "2006 Update," the Commission directed that staff and interested parties work to develop a common definition of peak/critical peak demand reductions for energy efficiency planning and evaluation purposes.

In addition, the Commission identified the need to refine/make consistent across the utilities certain aspects of the calculator model used to map the Commission-adopted avoided costs to energy efficiency programs for cost-effectiveness calculations. This model is referred to as the "E3 calculator," named after the consultants (Energy and Environmental Economics, or E3) that developed the interim avoided methodology adopted by the Commission and the calculator model for use by the utilities.

Finally, D.05-09-043 identified the need to improve the consistency in underlying load shape data and the methods by which energy savings from energy efficiency measures are translated into peak savings estimates.

Consistent with the approach taken in Phase 1 of this proceeding, the Commission directed the utilities to contract with the appropriate expertise to develop recommendations on these avoided cost updating issues, after obtaining public input. The Commission also articulated its goal to "issue a decision on these issues during the first half of 2006, or as soon thereafter as practicable."¹⁰

The utilities contracted with E3 for this work. The utilities and E3 held informational workshops in October 2005, consistent with D.05-09-043, to explain how the calculator produces peak savings estimates for the portfolio as a whole and for specific types of measures, and to provide information on the underlying load shape data. As discussed in that decision, the primary purpose of the workshops was informational-they were not intended to be the forum for debating or resolving disagreements about the E3 calculator or inputs at this juncture. However, the Commission asked workshop participants to assist in identifying what E3 calculator (model or input) "quick fixes" would be relatively easy to implement and where consensus could be reached, and areas where longer term refinements/improvements should be considered with respect to the valuation of peak load reductions and related issues. The utilities submitted this information in a joint November 1, 2005 workshop report (Joint Report).¹¹

By ruling dated December 7, 2005, the Assigned Commissioner solicited written comments on that report "to assist in scoping the issues for the 2006 updating process," as directed by the Commission.¹² The Assigned Commissioner also presented a list of issues and proposed schedule for the 2006 Update, based on the discussion in D.05-09-043 and the workshop report, and invited the utilities and interested parties to comment on that proposal. In addition, parties were asked to comment on how the avoided cost/E3 calculator updating issues discussed in D.05-09-043 relate to Phase 3 of this proceeding, and whether they should be addressed through the 2006 Update process or in a later Phase 3.

After considering the Joint Report and subsequent comments, on December 27, 2005, the assigned ALJ issued a ruling setting forth the scope for the 2006 Update and established the due date for E3's report and recommendations.

On January 24, 2006, E3 held a public workshop to discuss each of the issue areas identified in the December 27, 2005 Assigned Commissioner's ruling. Pre-workshop written comments were also submitted to E3. Taking into consideration the written comments and workshop feedback, on February 20, 2006, E3 issued a draft report summarizing the positions of the parties and presenting preliminary recommendations for each issue area.¹³

Pre-workshop comments were filed on March 9, 2006 by the Division of Ratepayer Advocates (DRA), PG&E, SCE, The Utility Reform Network (TURN) and jointly by SDG&E and SoCalGas. A two-day workshop was held on March 14 and 15, 2006 in San Francisco. It was led by E3 with assistance from James J. Hirsch and Associates (collectively referred to as "2006 Update consultants") and also attended by the assigned ALJ. In addition to the utilities and Joint Staff, representatives from the following organizations participated in person or via conference call access: DRA, Freeman Sullivan, JBS Energy, TURN, Coast Economic Consulting, Van Horn Consulting and Quantum Consulting. We refer to those participating at the workshop collectively as "workshop participants" or "participants" throughout this decision.

Based on the comments and workshop discussion, on March 21, 2006, the 2006 Update consultants submitted a final report summarizing consensus and non-consensus positions on the 2006 Update issues, and presented final recommendations for Commission consideration (Final Report).¹⁴

At the direction of the ALJ, parties were given a further opportunity to comment on the 2006 Update issues and Final Report. Opening comments were filed on March 27, 2006 by DRA, TURN, PG&E, SCE and jointly by SDG&E and SoCalGas. Reply comments were filed by DRA, TURN, PG&E, SCE and SDG&E.

Based on the input from parties, the ALJ directed the 2006 Update consultants to supplement the report with an alternative set of weighting factors for the tables in Attachment 2 (Supplement).¹⁵ The Supplement was submitted on April 10, 2006. TURN and DRA jointly filed comments on the recalculated weighting factors on April 14, 2006.

⁹ D.05-04-024, p. 1. Phase 2 of this rulemaking is addressing QF pricing issues, to be addressed in a separate decision.

¹⁰ D.05-09-043, mimeo., p. 141.

¹¹ See Joint Utility Report Summarizing Workshops on Avoided Costs Inputs and The E3 Calculator, November 1, 2005 (A.05-06-004 et al.). The report includes a description of the "quick fixes" to the E3 calculator made based on the consensus that emerged during the workshop process. See pp. 9-11.

¹² D.05-09-043, mimeo., p. 113.

¹³ Draft Report on 2006 Update to Avoided Costs and E3 Calculator, Prepared for the California Public Utilities Commission by Energy and Environmental Economics, Inc., February 20, 2006.

¹⁴ Report on 2006 Update to Avoided Costs and E3 Calculator, prepared for the California Public Utilities Commission by Energy and Environmental Economics, Inc. with assistance from James J. Hirsch and Associates, March 21, 2006. This report can be viewed on the Commission's website at http://www.cpuc.ca.gov/static/energy/electric/energy+efficiency/rulemaking/eeevaluation.htm.

¹⁵ Administrative Law Judge's Ruling Requesting Additional Information for 2006 Update, April 3, 2006. The Supplement is also posted at http://www.cpuc.ca.gov/static/energy/electric/energy+efficiency/rulemaking/eeevaluation.htm.