ALJ/MEG/tcg Date of Issuance 1/11/2008

Decision 08-01-006 January 10, 2008

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 DENYING JOINT PETITION
FOR MODIFICATION OF DECISION 06-06-063

TABLE OF CONTENTS

Title Page

INTERIM OPINION DENYING JOINT PETITION
FOR MODIFICATION OF DECISION 06-06-063 11

1. Introduction and Summary 22

2. Procedural Background 33

3. The TRC Definitions that are the Basis of the Joint Petition 66

4. Program Administrator Costs + Participant Costs 77

4.1. TRC Benefits 99

4.2. Incentives Paid to a Participant 1010

4.3. TRC Participant Cost and Program Administrator
Cost 1111

5. Joint Petition and Comments 1414

6. Discussion 1616

7. Assignment of Proceeding 3030

8. Comments on Proposed Decision 3030

Findings of Fact 3131

Conclusions of Law 3434

INTERIM ORDER 3535

LIST OF ATTACHMENTS

Attachment 1 - List of Acronyms and Abbreviations

Attachment 2 - Excerpts from D.06-06-063 in R.04-04-025 and December 21,
2006 Compliance Ruling

Attachment 3 - Excerpts from D.07-09-043 on Treatment of Free Riders on
Cost Side of TRC Test

INTERIM OPINION DENYING JOINT PETITION
FOR MODIFICATION OF DECISION 06-06-063

1. Introduction and Summary¹

By Decision (D.) 05-04-024 in Rulemaking (R.) 04-04-025, the Commission adopted an avoided cost methodology for the purpose of evaluating the 2006-2008 energy efficiency portfolio plans of Pacific Gas and Electric Company (PG&E), Southern California Edison Company (SCE), San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas), collectively referred to as "the utilities."² In D.06-06-063, the Commission refined those avoided costs and addressed other issues related to the calculation of energy efficiency cost-effectiveness.

In particular, the Commission addressed certain anomalies in the "E3 calculators" used by the utilities to calculate program and portfolio cost-effectiveness for their energy efficiency activities.³ One of those anomalies related to the manner in which the E3 calculators treated costs in the calculation of the Standard Practice Manual (SPM) tests of cost-effectiveness. The SPM contains the Commission's methodology for evaluating energy efficiency investments. Under the policy rules for energy efficiency adopted by D.05-04-051, the utility program administrators and all program implementers are required to perform cost-effectiveness analysis with the indicators and methodologies included in the SPM, unless we direct otherwise.

In D.06-06-063, the Commission recognized that proper inputting of costs and benefits in the SPM tests of cost-effectiveness is critical to program planning and evaluation. In addition, the Commission noted that the SPM tests of cost-effectiveness would form the basis for calculating earnings under the risk/reward shareholder incentive mechanism developed in R.06-04-010. Therefore, the Commission explored the SPM test anomalies observed in the E3 calculator in some detail in D.06-06-063, and provided direction on how to correct them.

The utilities jointly filed a Petition for Modification of D.06-06-063 on May 31, 2007 (Joint Petition) requesting substantive modifications to the treatment of energy efficiency costs addressed in that decision. As we explain in today's decision, adopting the modifications requested by the utilities would effectively hide real program costs from the calculation of portfolio net benefits, thereby overstating those benefits for particular program strategies. Instead, we affirm the direction we have provided in previous decisions to ensure that all the costs (both to the utility and to the participating customers) are properly reflected when we evaluate the total resource costs and benefits associated with energy efficiency programs.

¹ Attachment 1 describes the abbreviations and acronyms used in this decision.

² Avoided costs refers to the incremental costs avoided by the investor-owned utility when it purchases power from qualifying facilities, implements demand-side management, such as energy efficiency or demand-response programs, or otherwise defers or avoids generation from existing/new utility supply-side investments or energy purchases in the market. Avoided costs also encompass the deferral or avoidance of transmission and distribution-related costs.

³ The E3 calculator is a model developed by Energy and Environmental Economics (or "E3") for use by the utilities to map Commission-adopted avoided costs to energy efficiency programs for cost-effectiveness calculations.