9. Role of Utility in LIEE Implementation

In D.99-03-056, we stated that the issue of the role of the utility in any program implementation activity would be addressed in the program planning process for each program year:

"In implementing their 1999 program plans and developing plans for 2000 and 2001, utility administrators (including Southern California Gas Company) should transfer implementation activities away from themselves and towards other market participants. In particular, implementation activities for energy efficiency and low-income energy efficiency should be outsourced and competitively bid to the broadest possible 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." (D.99-03-056, Conclusion of Law 4.)

Hence, this is the appropriate forum for considering the utility's role in PY2000 LIEE programs, that is, to consider what activities are appropriate for outsourcing.

While D.99-03-056 does not specifically define the term "implementation activities," the genesis of that term can be found in D.98-04-063, where it was used to delineate the role of a program administrator versus "implementors," i.e., those entities delivering energy efficiency services under the direction of that administrator. In D.98-04-063 we approved CBEE's proposed RFP for Independent Program Administrator (Administrator), before that process was abandoned. In doing so, we stated that responsibilities of the Administrator would include: overseeing program implementation, providing reports on the results of these activities, and providing general program administration and coordination services.

We also defined implementation activities that we expected to be the responsibility of "implementors" in the energy efficiency market, not the Administrator. Those were listed as follows: program implementation, project development, delivery of energy services, agreements with customers, input to program development, customer incentives, standard performance contracting, customer specific information, design assistance, general technical training, commissioning, direct installation, and energy centers. (D.98-04-063, mimeo., pp. 33-36, Attachment 4.)

PG&E contends that "implementation activities" refers only to weatherization services, education services, and appliance and furnace repair work. (PG&E Reply Brief, pp. 6-7.) Based on our review of the genesis of the term, we disagree. Therefore, we believe that the role of utilities in other program functions, such as training and inspections, is a legitimate area of inquiry in this proceeding, and one intended by our direction in D.99-03-056.

9.1 Positions of the Parties

Contractors' Coalition argues that the utility's continued role in any of the LIEE program implementation activities is inappropriate, given the Commission's policy directives. In Contractors' Coalition's view, competitive outsourcing is the only way to determine whether the utility's operations are efficient or not.

In addition to outsourcing in-home education and the installation of weatherization measures and energy efficient appliances, Contractors' Coalition argues that utilities should outsource the prime contractor management function, training activities, furnace repair and inspection services for all of the utility programs, or at least compete against other entities in the market to perform those functions. While Contractors' Coalition argues for a competitive bid for all of this outsourcing, the threshold issue raised by the testimony is whether the utility should outsource these functions to other market participants, rather than perform them in-house.

LIAB, on the other hand, recommends that certain functions be retained by the utilities, namely, training and inspections. In particular, LIAB recommends that the Commission strengthen the use of current utility training facilities by encouraging the use of PG&E's and SoCal's facilities by other utilities. In LIAB's view, since ratepayers and the utilities have made extensive investments in these facilities, they provide a valuable service that would be quite costly to duplicate by other means. In addition, LIAB expresses concern that the pool of potential bidders for the prime contractor function under SDG&E's program will be inappropriately limited to the current contractor if SDG&E does not provide training, or contract out for such training. With regard to pre-and post-installation inspections, LIAB believes that independent contractors may have incentives for incorrectly conducting pre- and post-inspections, resulting in an increase in overall costs. (LIAB Report, pp. 3, 7-8.)

PG&E, SDG&E, SoCal, and SCE argue that outsourcing every aspect of the LIEE programs would compromise their ability to assure program quality and safety. In their view, the utility should have discretion over the outsourcing of program functions that are not directly related to in-home education services and the installation of measures or appliances in the home. ORA also recommends giving utilities this discretion until further studies are conducted.

9.2 Discussion

Before addressing the positions of the parties, it is necessary to clarify our objectives in considering the outsourcing proposals before us in this proceeding. One objective is to reduce the structural conflicts that arise from utility administration in a restructured electric utility industry. As we described in D.99-03-056, electric restructuring increased the utility's motivation to promote energy sales volumes and their own relationships with customers, rather than promote energy efficiency and the provision of those services by others in the market.³³ However, we do not believe that this objective should dictate that any and all implementation functions must be outsourced under the LIEE program, as Contractors' Coalition proposes, for two reasons.

First, as we recognized in D.99-03-056, the conflict between our energy efficiency policies and continued utility administration is not very pronounced for low-income assistance programs:

"...our concerns over the continuation of utility administration of these programs do not appear as evident, nor as pronounced. The CARE program is designed to provide financial relief to low-income ratepayers, in the form of discounts to the energy bills. Energy efficiency programs implemented within the low-income assistance program are generally designed for equity purposes. Because utility involvement in these programs does not represent an apparent conflict with their role in the restructured energy market, we do not reject the possibility of continued utility administration beyond 2001." (Id., mimeo., p. 15.)

Second, there are other factors to consider when determining the appropriate degree of outsourcing that is the "broadest possible extent and appropriate for maximizing the Commission's objectives." Outsourcing must not compromise the utility's ability, as program administrator, to assure that ratepayers are funding a quality, safe program, that is as cost-efficient as possible. Therefore, we will examine the outsourcing proposals with these factors in mind.

Moreover, to put this issue in perspective, we note that all of the utilities continue or propose to outsource in-home energy education and the installation of all weatherization measures and energy efficient appliances, as well as their furnace repair and replacement work.³⁴ Therefore, the vast majority of LIEE program implementation activities in PY2000 will be outsourced to other market entities, consistent with the policy direction D.99-03-056. Our discussion of each of the remaining functions, namely, the prime contractor role, inspections and training, is presented below.

9.2.1 Prime Contractor Role

The prime contractor role involves both administrative and implementation tasks related to the program, as we have defined them in D.98-04-063. In an administrative role, the prime contractor secures the necessary contracts for program operations and delivery of services, and oversees the implementation of these services. In PG&E's case, the prime contractor also maintains a telephone center to answer customer questions, takes service requests and responds to complaints, tracks performance by service delivery implementers and overall program results, monitors customer satisfaction as well as maintains regional offices. (RT at 720-723, 778-779.) In addition, the prime contractor may train contractors, as in the case of SDG&E, or perform installations itself, as in the case of SESCO under PG&E's program.

PG&E and SDG&E currently outsource the prime contractor function for in-house energy education, the installation of weatherization measures, efficient appliances and furnace work. For PY2000, SoCal proposes to perform this function for the joint service territory, in cooperation with SCE. SoCal would retain this function for its separate furnace repair/replacement outsourcing and energy education workshops. SCE retains the prime contractor function for the area served exclusively by SCE.

PG&E believes that outsourcing this function has produced efficiencies in its program, although the PG&E witnesses could not identify the specific efficiencies obtained or quantify them. (RT at 143-144, 222.) SCE argues that outsourcing the prime contractor function creates duplication of administrative costs and functions that the utility should, as administrator, handle alone. (SCE Opening Brief, pp. 11-12.) However, as LIAB points out, the lack of standardization of administrative cost accounting and reporting makes it difficult to draw conclusions about the efficiency of alternative outsourcing approaches. (LIAB report, p. 8.) In R.98-07-037, we are considering proposals to standardize administrative cost reporting for the low-income assistance programs and to standardize program reporting.

Without any evidence that outsourcing the prime contractor function increases program efficiencies, we believe that it is imprudent to impose the PG&E/SDG&E model on the other utilities. Instead, we will continue our practice of affording utility administrators the flexibility to decide whether to perform the prime contractor function in-house, outsource it in a bundled fashion, as PG&E and SDG&E currently do, or outsource that function separately. (See RT at 737-738.) However, as discussed in Section 19 below, we will continue efforts to standardize utility administrative costs and other program performance indicators so that we may examine this issue in the future with better information.

9.2.2 Inspections

The utilities take different approaches to inspections, based on the degree to which they plan to outsource the prime contractor function. SDG&E and PG&E keep inspections in-house, rather than contracting out with an independent vendor to perform those services for the program.³⁵ As discussed above, these utilities outsource the prime contractor function. SoCal and SCE have done the inverse: keeping prime contractor management for themselves while agreeing to outsource inspections.³⁶

Both models attempt to strike an appropriate balance between outsourcing and maintaining effective supervisory control. We note that PG&E tried an alternative outsourcing combination, one that outsourced both the prime contractor function and inspections, and experienced significant difficulties with maintaining quality control:

"In 1996, PG&E did contract with an independent vendor to conduct inspections for the program. However, there were numerous communications and coordination problems between the inspection contractor, the program administrator and the administrator's subcontractors. Software incompatibility problems between the independent vendors complicated the communication problems and made it difficult to get meaningful data results in a timely fashion. As a result, the 1996 LIEE program was plagued by inspections that weren't being completed and results communicated in the time frame envisioned in the weatherization contracts." (Exh. 4, pp. 3-4.)

As administrators of the program, the utilities are still fully accountable for program performance. Inspections, along with the prime contractor function discussed above, are an integral part of the utility's ability to assure itself and the Commission that its contractors are delivering a safe, quality program. The Contractor Coalition's recommendations would, in effect, require the utility to delegate all of these functions to third parties, under contractual arrangements. We are persuaded by PG&E's experience and the observations made by LIAB and others that such a requirement could severely undermine the utility's ability to maintain quality control over the program.

We appreciate LIAB's concerns about outsourcing inspections in general, but do not believe that a one-size-fits-all model for outsourcing the inspection function should be imposed at this time. We are persuaded by SoCal's testimony that quality control can be maintained through outsourcing the inspection function, if the prime contractor function is retained in-house as discussed above.

In particular, SoCal explains that, by providing both the inspectors and installers with the same training and applying the same standards to inspections and installations, SoCal has established a consistent quality inspection process with its inspection contractors. SoCal believes it would be costly to now bring that function in-house. (Exh. 48, pp.7-8; Exh. 50, pp. 8-9.) Similarly, SCE has determined that maintaining an internal inspection function is not critical if SCE retains its current administrative role. (SCE Opening Brief, pp. 11-12.)

In sum, we believe it is reasonable for the utility to perform inspection functions for the LIEE program if it is outsourcing the prime contractor function, as in the case of PG&E and SDG&E. If the utility does not outsource the prime contractor function, the utility should outsource inspections.³⁷ As SoCal explains, it currently uses certified employees who have been trained in the safety and operation of gas appliances and have completed field service training to perform inspections of furnace repairs and replacements. (Exh. 48, p. 5.) We will permit SoCal to continue this practice, but will revisit this issue during the PY2002 program planning cycle. In the meantime, SoCal should explore with interested parties the feasibility of providing specialized training and outsourcing with third parties to provide these inspection services, as long as SoCal continues to retain the prime contractor function in-house.

9.2.3 Training

The utilities take different approaches to training for LIEE contractors, with differing degrees of outsourcing. PG&E requires that all contractors undergo training and certification at PG&E facilities (Stockton Training Center), and uses in-house staff for over half of the LIEE training courses provided at that facility. PG&E hires an independent vendor via competitive bid to provide the additional LIEE training courses at the Stockton Training Center, as needed. SDG&E outsources all of the LIEE training to its prime contractor for the program, and does not require training or certification at any particular facility. For SoCal and SCE, on the other hand, training is exclusively a utility role, with no outsourcing. SoCal conducts LIEE training in-house for both its weatherization contractors and SCE's contractors at SoCal's DAP Training Center.

Unlike inspections, the issue of the utility role in training does not seem to be related to the utility's decision to outsource the prime contractor function. If anything, the relationship is an inverse one. For both PG&E and SDG&E, which outsource the prime contractor function to a private market entity, there is substantial outsourcing of training (50% for PG&E and 100% in SDG&E's case). In contrast, for SCE and SoCal, SoCal retains the training role while SoCal (in cooperation with SCE) retains the prime contractor role for the LIEE weatherization program.

Nor is there a clear pattern among the prime contractor, inspection, and training functions that would indicate any particular "model" for utility oversight. SCE and SoCal retain two of these functions (prime contractor and training) for themselves, SDG&E retains only one function in-house (inspections) and PG&E retains one function in-house fully (inspections) and one partially (training).

Instead, it appears that each utility's preferred role with respect to LIEE training is directly related to whether or not the utility has a history of providing energy efficiency training at facilities owned by that utility over the years. SDG&E is without such facilities, and argues that it would be more costly to require all contractors to go to SoCal's facilities, as LIAB recommends, or to provide training and facilities itself. (Exh. 44, p. 17.) Contractors' Coalition supports SDG&E's approach to training (but would outsource both the prime contractor function and training via a competitive bid), arguing that the other utilities' approach to training increases administrative costs by redundant training, and only serves to subsidize the utility's training facilities. (Exh. 14, pp. 7-8.)

Conversely, SoCal and PG&E argue that using their centralized training facilities and trained in-house staff is more cost-effective than outsourcing to the prime contractor (in the case of PG&E) or to any third party (in the case of SoCal). Again, since we do not have comparative costs for LIEE training costs on the record, we cannot verify the relative cost-efficiency of outsourcing training versus keeping it in-house at utility training centers.

However, there is no dispute that either approach can be effective in terms of performance. No parties have alleged that outsourcing training, either through competitive bid for a prime contractor (SDG&E) or by using independent vendors (PG&E), has had a detrimental effect on the overall quality of training. Clearly, SDG&E believes that outsourcing this function entirely to its prime contractor is effective in ensuring that installers are familiar with varying code requirements, the utilities' individual programs, and the utilities' installation expectations and standards. In fact, the Department of Community Services and Development in 1998 outsourced the responsibility for training for its new LIEE programs, which would support observations that third parties in the market can provide effective LIEE training.³⁸

At the same time, none of the parties have alleged that requiring utility training at utility facilities compromises the quality of training, even though the issue of redundancy and cost-efficiency is raised by Contractor's Coalition. In fact, in considering this issue for PY1999, we found merit to SoCal's and PG&E's proposals to use their training centers, over the objections of the Residential Service Companies' United Effort:

"The utilities' proposed requirements for contractor training at their facilities should help ensure that installers are familiar with varying code requirements, the utilities' individual programs, and the utilities' installation expectations and standards. Training of the contractors at utility facilities, as proposed by the utilities, should be adopted." (Res. E-3586, pp. 30-31.)

Since both approaches can provide effective, quality training, we believe that the issue of whether the utilities should continue to train LIEE contractors at utility facilities, by utility personnel, needs to be further examined from a cost-efficiency standpoint in time for PY2002 implementation. The most straightforward way to make this cost comparison is to direct the utilities to seek training proposals from third parties that could meet PY2002 training requirements at the same or lower cost than if the utility continued to do it in-house, at utility training centers.³⁹ This does not necessarily require a formal competitive bid, with an RFP; rather, the utility could pursue informal discussions with independent vendors, or utilize other means to see what the market has to offer. We will leave it up to the utility to determine how best to obtain broad feedback from private entities that can provide LIEE training in the market, and we expect a successful effort in obtaining that feedback.

Therefore, in preparation for their PY2002 LIEE applications, PG&E and SoCal (on behalf of SoCal's and SCE's programs) are directed to document their in-house costs and training requirements for the LIEE program. This information should be used as a benchmark for the utility's presentation and review of proposals from other market entities that can also provide training to LIEE installation contractors, either at the utilities' training facilities (i.e., renting them as needed) or in other locations.

For PY2000 and PY2001, we will not require changes to the utilities' approach to providing training, and SDG&E may continue to outsource the training function, as it has in the past.⁴⁰ However, we will revisit the utility's role in training during the PY2002 planning process, based on the comparative cost information discussed above. We also need to examine SDG&E's training costs, as we consider this role and continue to examine the issue of competitive bidding. (See Section 7.3 below.) Although SDG&E does not have an in-house benchmark, like PG&E and SoCal, it should submit to the Commission a breakdown of its current outsourced training costs for the LIEE program, and projected costs for PY2002, as part of the PY2002 program planning process.

In developing the training information described above, the utilities should jointly conduct public workshops to develop, explain, and obtain feedback on their calculations of current training costs (whether in-house or outsourced), and on how best to obtain comparison cost information from other market entities. LIAB and a broad range of market participants should be invited to participate in these workshops. We are looking for standardization in methodology and reporting, so that these costs are presented during the PY2002 program review on a consistent basis.

After receiving public input and standardizing the methodology and reporting of training costs, the utilities should submit these costs as part of their applications for approval of their PY2002 program plans. In addition, as discussed above, PG&E and SoCal should include information that would allow us to compare their in-house costs of training with outsourcing that function.