ALJ/JMH/sid Mailed 4/8/2005

Decision 05-04-024 April 7, 2005

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Promote Consistency in Methodology and Input Assumptions in Commission Applications of Short-Run and Long-run Avoided Costs, Including Pricing for Qualifying Facilities.

Rulemaking 04-04-025

(Filed April 22, 2004)

INTERIM OPINION ON E3 AVOIDED COST METHODOLOGY

TABLE OF CONTENTS

Title Page

INTERIM OPINION ON E3 AVOIDED COST METHODOLOGY 2 2

1. Summary 2 2

2. Background 4 4

3. The E3 Methodology and Forecast of Avoided Costs 8 8

3.1. Electricity Avoided Cost Formulation 15 15

3.2. Generation Avoided Cost 15 15

3.3. Transmission and Distribution (T&D) Avoided Cost 16 16

3.4. Environmental Externality Avoided Cost 17 17

3.5. Gas Avoided Cost Formulation 18 18

4. Parties' Comments on the Interim Application of the
E3 Avoided Cost Methodology for use in the Energy Efficiency 2006-2008 Program Cycle 19 19

4.1. All-in Hourly vs. Separate Capacity and Energy Costs 21 21

4.2. Environmental Adders 26 26

4.3. Generation Avoided Costs 29 29

4.4. Market Price Referent (MRP) Assumptions 32 32

4.5. Transmission and Distribution Costs 35 35

4.6. Natural Gas Issues 36 36

4.7. Discount Rate 37 37

4.8. Conclusion 38 38

5. Next Steps 41 41

6. Need for Expedited Consideration 42 42

7. Assignment of Proceeding 44 44

Findings of Fact 44 44

Conclusions of Law 46 46

INTERIM ORDER 48 48

ATTACHMENT 1 - List of Acronyms

INTERIM OPINION ON E3 AVOIDED COST METHODOLOGY

1. Summary

This decision adopts a new avoided cost forecast methodology described in a report prepared by the consulting firm E3. This report, Methodology and Forecast of Long-Term Avoided Cost(s) for the Evaluation of California Energy Efficiency Programs, (E3 report)¹ and associated spreadsheet models, describe and generate 20-year forecasts of (1) hourly wholesale electricity costs, and (2) monthly wholesale natural gas costs. These wholesale energy cost forecasts represent the total avoided cost of power that a utility would otherwise have to generate or procure in the absence of other resource options like energy efficiency programs.²

The cost-effectiveness of energy efficiency programs is evaluated on a prospective (budget) and retrospective (actual) basis³ using the cost-effectiveness tests set forth in the Standard Practice Manual (SPM).⁴ The avoided wholesale energy cost forecasts generated by the E3 models are only one of several data inputs to the SPM calculations.

Use of the E3 avoided cost methodology in this manner is recommended by E3, as well as several parties, for energy efficiency investments in the 2006-2008 program cycle, and is unopposed by parties in concept. As discussed in this decision, we intend to consider the permanent adoption of the E3 methodology for generating avoided cost energy forecasts for use in SPM cost-effectiveness tests used to evaluate energy efficiency programs. We will also consider any potential revisions to the E3 methodology in Phase 3 of this rulemaking. At that time, we will also consider the potential application of the E3 methodology to other resource options, such as distributed generation (DG) and demand response (DR) programs.

With this decision, we eliminate a potential gap in the review and approval process for potential energy efficiency programs for program year 2006 and beyond. 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), referred to collectively as "the utilities" are directed to use the adopted E3 methodology to generate avoided cost energy forecasts for use in SPM cost-effectiveness tests to evaluate energy efficiency programs, beginning with program year 2006, until further order by the Commission.

¹ Methodology and Forecast of Long-Term Avoided Cost(s) for the Evaluation of California Energy Efficiency Programs, E3 Research Report Submitted to the CPUC Energy Division, October 25, 2004. ( www.ethree.com/cpuc_avoidedcosts.html) We take official notice of the report, and incorporate it into the record of this proceeding.

² "Total avoided cost" refers to the total cost avoided to society through reduction in energy demand, which can be either electricity or gas.

³ Prospective filings with proposed EE program budgets for the 2006-2008 program cycle are to be filed June 1, 2005. Annual retrospective filings with actual EE program expenditures are to be filed by April 1^st following each year in the program cycle. Of the six SPM cost-effectiveness tests, the utilities are required to present budget and actual results for the Program Administrator test and the Total Resource Cost (TRC) test. In addition to these cost-effectiveness metrics, the utilities are required to estimate and report their energy savings targets on an energy basis in GWh and therms.

⁴ California Standard Practice Manual: Economic Analysis Of Demand-Side Programs And Projects, October 2001, as incorporated by reference in the Energy Efficiency Policy Manual, the latter of which was adopted as Attachment 1 to D.01-11-066. Standard Practice Manual, www.cpuc.ca.gov/static/industry/electric/energy+efficiency/rulemaking/resource5.doc