III. Preliminary Scoping Memo: Scope of the Proceeding

This new Rulemaking divides the present task into five issue areas:

Cost-Benefit-Analyses for Customer and IOU Installations: As we discussed in R.04-03-017, the Commission must establish a way of measuring costs and benefits of DG projects to meet our legislative obligations and to measure the success of various program elements and tailor incentives accordingly.¹

In R.04-03-017, we began the process of investigating a cost-benefit methodology for DG projects. The Commission solicited testimony and held hearings on this matter in May 2005 following the issuance of a report sponsored by the Self-Generation Working Group and drafted by Itron, Inc. in March 2005.² The proceeding was also guided by the energy efficiency standard practice manual, which has been in use for evaluating utility energy efficiency programs for several years.

In September 2005, the assigned ALJ issued a proposed decision on this topic and later withdrew it in order to coordinate its findings with the work in other related proceedings, including our rulemaking developing consistent avoided costs (R.04-04-025), and the work undertaken in energy efficiency proceedings (R.01-08-028 and related).

We expect to renew our inquiry into this topic over the next year. Parties should expect to hear from the assigned ALJ about how the Commission will proceed on this topic in the near future.

SGIP Rules and Management. The Commission's SGIP program has so far encumbered more than $421 million in incentives and motivated more than 113 MW of DG capacity since 2001. In R.04-03-017, we refined our interconnection rules, revised incentive payments, and approved a method to recognize DG air quality standards set forth by AB 1685. We also addressed funding issues when utility budgets became exhausted before the end of the funding cycle. These types of issues will continue to require our oversight.

The SGIP is currently set to sunset at the end of 2007. We are strongly inclined to continue the program past that date, but will need to determine, in this proceeding, the exact nature of that program continuation, including funding levels, timeframe, incentive amounts, as well as other ongoing policy and program modifications. At this point, we are also concerned with the prospects for performance-based incentives (PBI). Currently, incentives are paid for installed capacity based on a flat "dollar per watt." We have also stated our intent to reduce these incentive payments in the years ahead in order to motivate market transformation. We expect to consider whether performance-based measures would motivate better and more efficient projects and project management.

We will also consider changes to incentive levels and technologies as market conditions change. As we stated in R.04-03-017, our ongoing collaboration with the CEC will help us to understand and incorporate these technologies when and if they become viable, and we encourage other parties to propose ways to motivate sound technological development as well.

CSI Program Rules and Policies. D.06-01-024 adopted a number of policies for the implementation of the CSI, which we created in D.05-12-044 and funded at a level of $343 million for 2006. The CSI commits $2.5 billion for solar incentives over the next ten years. D.06-01-024 sets the stage for this expanded commitment to solar development and leaves many program details to further investigation. Specifically, we stated our intent to develop a more detailed record on the following unresolved program issues:

· Performance-based incentives - how to create incentive schedules to promote better project development and project management;

· Federal tax incentives - the impact of new federal tax breaks on total project costs and how to recognize these tax credits in the calculation of appropriate CSI incentives;

· Solar technologies other than photovoltaics - how to determine which new and developing technologies are promising enough to qualify for incentives and what those incentives should be;

· Energy efficiency standards -- Requirements for project developers to implement energy efficiency improvements or standards in order to qualify for incentives;

· Financing assistance for low income projects - whether and how to promote solar projects in low income or other communities by providing access to low-cost or no-cost financing;

· Administration by third parties -- how to implement third party administration for the residential retrofit component of CSI ;

· Marketing and outreach - the development of protocols for CSI that make good use of funds in efforts to inform potential solar customers and developers of program opportunities;³

· Advanced metering - the types of metering necessary and for what purposes, and their relationship to advanced metering infrastructure proposals pending before the Commission from two utilities;

· Research, development and demonstration (RD&D) - how to fund solar related RD&D that will promote the most effective use of CSI funds and promote market development of the best technologies;

· Program evaluation - Assess program effectiveness through review of evaluations filed by program administrators.

We hope to resolve these issues expeditiously - and to modify the SGIP implementation handbook accordingly -- in order to assure a comprehensive, efficient, and effective CSI program fully developed and operational by 2007.

Participation by small multi-jurisdictional utilities. As expressed in Senate Bill 1 and D.06-01-024, we support a statewide program, and encourage municipal electric utilities and utility districts to participate in the CSI or develop similar programs within their service territories. Thus far, we have not addressed participation by California's small multi-jurisdictional utilities (SMJUs). In this proceeding, we intend to consider whether and to what extent these utilities could participate in the CSI. The SMJUs are added as respondents to this proceeding to facilitate our consideration of these issues. (Appendix C)

Treatment of DG Output for Purposes of RPS. The Commission is currently developing protocols for each utility's efforts to deliver renewable energy to their customers, as required by the RPS. As part of that effort, we are exploring the use of renewable energy credits (RECs) that, if owned or bought by the utilities, would quantify utility investments in renewable energy toward the utility's overall portfolio requirements. In D.05-05-011, we addressed a controversy regarding whether and how DG should be counted as part of utility renewable energy portfolios. That order explains the related controversies well, and finds that we should, in R.04-03-017 or successor docket, consider (1) a way to calculate the benefits ratepayers have received from the SGIP subsidies they have paid to DG projects, for purposes of fairly allocating RPS credit and RECs between the utilities and the DG project owners and, 2) how to measure a DG project's output with sufficient accuracy to support the use of the output for RPS purposes. Other issues related to attributes and uses of RECs would continue to be decided in R.04-04-026 or its successor and R.06-02-012 (in which we intend to address a number of questions related to the use of RECs in the RPS program).

We will proceed to consider this matter expeditiously and direct the ALJ to coordinate this inquiry with work in R.06-02-012 and R.04-04-026 or its successor.

¹ Public Utilities Code Section 353.9, enacted in SB 28x of 2001, as follows:

"The commission shall create a firewall that segregates distribution cost recovery so that any net costs, taking into account the actual costs and benefits of distributed energy resources, proportional to each customer class, as determined by the commission, resulting from the tariff modifications granted to members of each customer class may be recovered only from that class."

Similarly, Public Utilities Code Section 2827(n) directs the Commission to

"assess the environmental costs and benefits of net metering to customer-generators, ratepayers, and utilities, including any beneficial and adverse effects on public benefit programs and special purpose surcharges."

² The March 2005 report is titled "Framework for Assessing the Cost-Effectiveness of the Self-Generation Incentive Program."

³ D.06-01-024 required that the current SGIP program administrators file marketing and outreach proposals by June 1, 2006. We hereby suspend that deadline, and instead will delegate to the assigned ALJ, in consultation with the Assigned Commissioner, the ability to set the schedule for this rulemaking in general, and marketing and outreach proposals in particular.