2. Background

Utilities currently implement two types of assistance to low-income residents: rate assistance and energy efficiency services. Rate assistance is provided consistent with Pub. Util. Code §§ 739.1 and 739.2 under the California Alternate Rates for Energy (CARE) program. Under this program, eligible low-income households and group living facilities receive up to a 15% rate discount for their electric and gas consumption.

Direct assistance to low-income customers in the form of energy efficiency education and measures became a statutory requirement in 1990 with the passage of Senate Bill (SB) 845.⁴ SB 845 added § 2790 to the Pub. Util. Code. This statute directed the Commission to require gas and electric corporations to perform home weatherization services for low-income households "if the commission determines that a significant need for those services exists in the corporation's service territory, taking both the cost effectiveness of the services and the policy of reducing low-income hardships into consideration." The legislation defined weatherization to include the following, which are known as the "Big Six" measures: (1) attic insulation; (2) caulking; (3) weatherstripping; (4) low flow showerheads; (5) water heater blankets; and (6) door and building envelope repairs which reduce infiltration.

The legislation also determined that weatherization services might include other building conservation measures such as energy efficiency appliances and energy education programs. For example, relamping (i.e., replacing incandescent bulbs with compact fluorescent bulbs) has become a standard service beyond the "Big Six" measures for SCE and PG&E. In addition, all of the utilities provide in-home energy education as part of their direct assistance programs.

More recently, the Commission directed the utilities to include measures in their standard weatherization services that they may not have included in the past, at least on a trial basis.⁵ These include energy efficiency refrigerators, gas furnace repair and replacement, water heater pipe wrap, faucet aerators, evaporative coolers, evaporative cooler covers, outlet gaskets, porch light fixtures, and attic ventilation as a stand-alone measure.

Traditionally, the costs associated with CARE rate discounts have been collected as a cents-per-kWh component of electric rates and collected as part of traditional rates on the gas side. Funding for energy efficiency education and weatherization services under the LIEE program, also referred to as "direct assistance program" or "DAP," has historically been part of utility demand-side management (DSM) program funding.⁶ DSM focuses on the customer side of the utility meter and has included programs for load management, energy efficiency, fuel substitution, among others, for both low-income and non-low-income utility customers.

The issue of competitive bidding for the provision of energy efficiency services to both low-income and non-low-income utility customers has an extensive history in Commission proceedings. We summarize this history in the following sections.

2.1 DSM Rules and Competitive Bid Pilots

In the early and mid-1990s, the Commission considered DSM to be an increasingly viable resource alternative to utility generation. In Rulemaking (R.) 91-08-003/Investigation (I.) 91-08-002, the Commission adopted rules governing the evaluation, funding, and implementation of DSM programs and associated shareholder incentives. The rules established cost-effectiveness tests for DSM programs, which were considered an important factor in determining future funding levels. The rules also described competitive bidding as offering "great potential for achieving our goal of reliable, least cost, environmentally sensitive energy service," and directed the utilities to conduct pilot tests of competitive bidding for DSM programs, consistent with the requirements of Pub. Util. Code § 747.⁷

DSM competitive bidding pilots were approved by the Commission for all four utilities, and they were implemented over the 1992-1996 time period.⁸ PG&E's pilot was a partnership bid in which PG&E sought to obtain up to 20 megawatts (MW) of energy efficiency resources either from its customers or third party non-utility providers to enhance PG&E's existing DSM efforts. Under SCE's bid pilot, two market sectors (small office buildings and large commercial/industrial sectors) in two designated districts were replaced by the programs developed by winning bidders. SDG&E's pilot allowed bidders to replace SDG&E's appliance efficiency program in both single and multi-family sectors.

SoCal conducted two pilots. One pilot covered residential, single and multi-family weatherization retrofits and appliance efficiency, in a manner that primarily augmented SoCal's existing efforts. SCE and SoCal were directed to coordinate their pilots so that winning bidders would be compensated for both gas and electric savings.

A second pilot was initiated as part of SoCal's Test Year 1994 General Rate Case, where the Commission also directed SoCal to competitively bid 25% of its weatherization services under its low-income assistance program. Prior to this time, SoCal was relying entirely on the use of CBOs to administer this program.⁹ SoCal conducted this pilot during 1995 and 1996, and submitted its evaluation in April, 1997. (See Exhibit (Exh.) 28, Attachment.)

2.2 Independent Administration of Energy Efficiency and Low-Income Assistance Programs

While the DSM bidding pilots and other forms of competitive procurement for DSM services were being developed and implemented, the Commission articulated its overall vision of a competitive framework for generation services in the electric industry.¹⁰ This vision acknowledged the continued need for activities performed in the public interest, such as energy efficiency and low-income assistance programs. However, the Commission viewed the role of utilities as the providers of these services as less clear. The Commission found it appropriate to continue ratepayer funding for these programs as the industry moved towards a competitive framework, and called for a non-bypassable surcharge (public goods charge) to recover the associated costs. AB 1890, signed into law on September 23, 1996, similarly directed that the costs of energy efficiency and low-income assistance programs be collected via a non-bypassable charge on local electricity distribution.

On February 5, 1997, the Commission further articulated its policies regarding the administration of energy efficiency and low-income assistance programs. In D.97-02-014, the Commission clarified that its goal for the provision of energy efficiency services "is to establish an administrative structure that will facilitate the privatization of those services in the marketplace."¹¹ To this end, the Commission established the California Board For Energy Efficiency (CBEE) and the Low-Income Governing Board (recently renamed the Low-Income Advisory Board, or "LIAB"), to make recommendations about energy efficiency and low-income assistance programs in the restructured electric industry.

Among other things, CBEE and LIAB were assigned the task of developing requests for proposals (RFPs) articulating policy and programmatic guidelines for new independent administrators of these programs, subject to Commission approval. The new administrators would be selected on a competitive basis. Until this selection occurred and new administrators were fully operational, the utilities would serve as interim administrators of energy efficiency and low-income programs. Utilities were allowed to bid in response to the RFP to serve as the new independent administrators, however, D.97-02-014 clarified that there would be no DSM shareholder incentives for utilities in that role. In D.97-09-117, the Commission set deadlines of October 1, 1998, and January 1, 1999, for completion of the transition to the new energy efficiency and low-income independent program administrators, respectively.

2.3 Competitive Bidding for Low-Income Assistance Programs

At the inception of SDG&E's direct assistance program, SDG&E competitively bid out the contract for management of the program. The contract was initially awarded to two companies, and each was assigned a specific geographic area of SDG&E's service territory. Both management consultants had identical contractual requirements. At the end of the first year, SDG&E evaluated each of the contractor's performance and determined that one contractor excelled in meeting the program's requirements. That contractor was Richard Heath and Associates (RHA). SDG&E has retained RHA as the management consultant for direct assistance services throughout SDG&E's service territory since 1991. In 1996, SDG&E was prepared to conduct a competitive RFP selection process, but deferred this action "in the face of uncertainties regarding utility management of low-income energy efficiency programs...." (Exh. 44, pp. 8-9.)

SCE bid out its weatherization program in 1991. SCE continues to use the private contractor selected by that competitive bid to complete weatherization work in areas not covered by SoCal. Subsequent to the 1991 bid, SoCal entered into an inter-utility agreement with SCE to deliver weatherization services for SCE in the SCE areas served by SoCal. In addition to providing weatherization services, SCE purchases evaporative coolers from a manufacturer and ships them to licensed contractors for installation in low-income homes in areas where coolers are the most effective. Contractors were selected through a competitive bid process conducted in 1993. SCE's relamping program has never been put out to bid. (RT at 471-475; Exh. 11, p. 11; Exh. 43, Attachment B, pp. 3-4.)

PG&E has been bidding out weatherization services periodically since 1987, starting with a model where weatherization subcontractors reported directly to PG&E and switching to a model where the primary management (or "prime contractor") function was also bid out. RHA acquired this role via competitive bid in 1992 and 1993, and the contract was rolled over for the next few years. However, RHA's weatherization subcontractors were selected via competitive bid process that RHA conducted with PG&E's participation in 1994 and 1995. (Exh. 15, 16; RT at 132-138.)

PG&E decided to put the prime contractor function out to competitive bid again for PY1998. SESCO won that bid and is PG&E's current contractor.¹² In order to avoid any break in program services, SESCO did not go out for competitive bid to procure subcontractors, but rather solicited continuation of work by PG&E's current weatherization contractors and those working under the program under previous contracts. When SESCO assumed the prime contractor role in 1998, all of the subcontractors that SESCO hired were the same subcontractors that participated in the 1997 PG&E program under RHA. (RT at 726-727, 735-736, 977-979, 1008.)

As discussed in Section 2.1 above, SoCal conducted a competitive bid pilot for 25% of its LIEE program in 1995 and 1996. To further utilize the process it implemented under the pilot, SoCal originally planned to bid out its entire 1998 low-income energy efficiency program. However, SoCal delayed that proposal in light of the Commission's stated intent to move these programs to a statewide independent administrator before the end of 1998.¹³ With the delay in implementation of independent administration, SoCal submitted Advice Letter 2731 describing its intent to competitively bid the weatherization services portion of its 1999 low-income energy efficiency program. This included separate RFPs for outreach and home assessment services, measure installation and energy conservation education workshops.

SoCal's proposal was protested by several parties, including CBOs in Southern California and private contractors operating in both Southern and Northern California. Some supported the concept of a competitive bid, based on the results of the pilot, but objected to some of SoCal's proposed bidder qualifications or the separation of outreach and installation RFPs. Others objected strongly to having a bid at all, arguing that the pilot did not demonstrate significant cost savings and that putting the program out to bid would lead to customer confusion and program disruptions. The Office of Ratepayer Advocates (ORA) filed comments in support of the SoCal advice letter, urging the Commission to approve it with an additional suggested requirement to increase the competitiveness of the outreach portion.

On December 3, 1998, the Commission issued Res. G-3245 denying SoCal's request, without prejudice. The Commission stated that it would defer a decision at this time "due to the many questions raised by Protestants regarding the administration of the competitive bid process." As discussed below, the future of how energy efficiency and low-income assistance programs were going to be administered, including any competitive bidding proposals, remained very uncertain.

2.4 Obstacles to Independent Administration and Commission's Stated Policies Regarding Competitive Bidding

As described in prior Commission decisions and Assigned Commissioner's rulings, major obstacles to implementing the transition to independent program administration began to surface in early 1998.¹⁴ These included the State Personal Board's disapproval of agreements between the Boards and their administrative and technical consultants and the Governor's veto of legislation necessary to address resource and budget uncertainties regarding independent administration.

In D.98-05-018 and D.99-03-056, the Commission addressed the issue of how energy efficiency programs and low-income assistance programs should be administered in light of these uncertainties. In D.98-05-018, the Commission extended utility administration through 1999 for low-income assistance programs and directed the utilities to work closely with the Boards in their development of PY1999 program plans and budgets. The utility proposals for PY1999 CARE and low-income energy efficiency programs were filed on October 1, 1998, as advice letters, pursuant to the Commission's directives. The Commission conditionally approved the advice letters by Res. E-3586. With regard to competitive bidding, the Commission stated its position as follows:

"...the Commission has not changed its goal of moving towards competitive-bid programs and is interested in ensuring that per unit costs of individual measures are reasonable. The Commission understands that there is a trade-off in putting programs out for competitive-bid-while unit costs may go down, an additional one-time administrative cost is incurred by each bidding process. Among other things, these administrative costs must be weighed against the potential reduction in unit costs. PG&E's competitive bid programs for 1997, 1998 and 1999 should provide us with useful information for evaluating competitive-bid programs for the other utilities. If utilities continue as administrators beyond 1999, they should include in their PY2000 proposals plans to provide competitive-bid programs. (Res. E-3586, p. 31.)

"Putting LIEE programs out for competitive bid every one to three years appears to have positive benefits in lowering unit costs. (Finding 25.)

"Lowering unit costs should allow additional homes to be weatherized and/or allow additional measures to be installed in each home, assuming increased administrative costs are not greater than the benefits. (Finding 26.)

"Due to current uncertainties regarding independent administration, initiating competitive bidding for SDG&E, SCE and SoCal Gas is not reasonable at this time, without further analysis. (Finding 27.)

"PG&E's competitive-bid 1997, 1998 and 1999 programs should provide the Commission with valuable information for evaluating competitive bidding for the future." (Finding 28.)

In D.99-03-056, the Commission acknowledged that significant obstacles to proceeding with independent administration of energy efficiency and low-income assistance programs still remained, and determined that these programs should continue to be administered by the utilities, subject to Commission oversight, through 2001. For the administration of low-income assistance programs after 2001, the Commission stated that it would explore a variety of organizational options. The Commission also reiterated its ongoing concerns over "the potential conflicts between the utilities' role in the newly competitive energy services industry and their continued role as interim program administrators."¹⁵ In order to reduce those potential conflicts, the Commission directed the utilities to "transfer program implementation activities away from themselves and towards other market participants":¹⁶

"In particular, implementation activities for energy efficiency and low-income energy efficiency should be outsourced and competitively bid to the broadest extent and appropriate for maximizing the achievement of the Commission's objectives. The specific role of utilities in any implementation activity should be addressed in the program planning process for each program year and approved by the Commission in its review of the proposed program and budgets. For those activities where outsourcing is appropriate, there should be an orderly, yet rapid transition from utility implementation to implementation by other market participants between now and the end of 2001."¹⁷

The Commission authorized the continuation of programs and funding adopted for 1999 energy efficiency and low-income assistance activities through December 31, 2001, unless subsequent program and budget changes were adopted by the Commission.

The Assigned Commissioner was delegated the task of considering options for future budget and program change proposals.¹⁸

For this purpose, a workshop was held on March 10, 1999, to develop options for proceeding with PY2000 and PY2001energy efficiency and low-income assistance activities. Following the workshop, on March 26, 1999, the Assigned Commissioner directed the utilities to file their PY2000 applications for low-income energy efficiency programs "with proposals to competitively bid out their programs, as directed in Resolution E-3586."¹⁹ With respect to further modifications to low-income assistance programs, the Assigned Commissioner stated:

"With the ambitious schedule already ahead of us because of issues remaining from the PY1999 planning process, coupled with our desire to evaluate the recently adopted changes due to begin June 1, 1999 and results from any needs assessment/outreach pilot, I believe that further modifications to low-income programs would not be in the public interest at this time. However, I do not preclude [Low-Income Governing Board] the utilities and interested parties from developing proposals that they believe address high priority modifications or augmentations after sufficient public input has been obtained. I will not establish a schedule for this effort, because I do not believe that this can be effectively accomplished within the next few months, for the reasons stated above. Moreover, I caution all participants that the filings required by this ruling should take highest priority."²⁰

2.5 AB 1393

Also relevant to this proceeding and its issues is the enactment of AB 1393, which was approved by the Governor on October 6, 1999, and became effective January 1, 2000. AB 1393 adds § 327 and § 381.5 to the Public Utilities Code and amends § 2790. The legislative action came after the prehearing conference in this proceeding (August 23, 1999) and before the Assigned Commissioner's revised scoping memo (September 17, 1999). The provisions of this statute are addressed in LIAB's October 15, 1999, report, parties' testimony, and the briefs in this proceeding.

Among other things, AB 1393 directs that the utilities (rather than any independent administrator envisioned by D.97-02-014) shall continue to administer low-income energy efficiency programs, subject to Commission oversight. AB 1393 also describes factors that bidding criteria should recognize, should the Commission require competitive bidding for low-income energy efficiency program implementation. Attachment 3 presents AB 1393 in its entirety.

It is against this background that we consider the utility applications requesting authority to continue low-income assistance programs and funding for PY2000 and requesting approval of their proposals for competitive bidding.