2. Background and Procedural History

We initiated this proceeding in our energy efficiency rulemaking⁷ with the issuance of D.04-09-060. By that decision, we established the Commission's energy efficiency savings goals for 2006 and beyond to reflect the critical importance of reducing energy use per capita in California. For the three electric utilities, these goals reflect our expectation that energy efficiency efforts in their combined service territories should capture on the order of 70% of the economic potential and 90% of the maximum achievable potential for electric energy savings, based on the most recent studies of that potential. These efforts are projected to meet 55% to 59% of the utilities' incremental electric energy needs between 2004 and 2013. On the natural gas side, our adopted savings goals represent a 116% increase in expected savings over the next decade, relative to the status quo.⁸

In D.04-09-060 we also authorized a three-year program implementation and funding cycle for electric and natural gas energy efficiency (program cycle). We directed that the proposed energy efficiency plans and funding levels for the 2006-2008 program cycle be developed to meet the adopted savings goals for those years.

By D.05-01-055 and D.05-04-051, we further clarified our expectations regarding the development of the 2006-2008 energy efficiency plans. In D.05-01-055, we returned the utilities to the lead administrative role in energy efficiency program selection and portfolio management-a role that they fulfilled in California prior to electric restructuring. We also clarified our expectations that the focus for spending ratepayer dollars in the future would be to meet or exceed our savings goals by capturing the most cost-effective energy efficiency resources as possible over both the short- and long-term.

As part of our overall approach to quality control, we established an advisory group structure, competitive bidding minimum requirements and a ban on affiliate transactions. These safeguards were designed to ensure that the program selection process would not favor programs designed and implemented by the utilities over those designed and implemented by third parties. In particular, we required that the utilities put out a minimum of 20% of their portfolio plans to competitive bid by third parties for the purpose of soliciting innovative ideas and proposals for improved portfolio performance.

We also directed the utilities to form program advisory groups (PAGs) representing local customer interests as well as national experts in the field of energy efficiency in order to: (1) promote transparency in portfolio development and design, (2) provide a forum for obtaining valuable technical expertise, (3) encourage collaboration among stakeholders and (4) create an open exchange of information in the development of the energy efficiency portfolios. A description of the advisory group process and list of PAG members is presented in Attachment 2.

In addition, we directed that a subgroup of non-financially interested members of each PAG, referred to as Peer Review Groups or "PRGs," be formed to review the utilities' submittals to the Commission. PRG membership includes Energy Division and Office of Ratepayer Advocates (ORA) staff, CEC staff and representatives from organizations without any financial interest in the program plans or competitive solicitations, such as the Natural Resources Defense Council (NRDC) and The Utility Reform Network (TURN).

The PRGs are required to provide written assessments of the utilities' overall portfolio plans, their plans for bidding out components of the portfolios per the minimum bidding requirements, the bid evaluation criteria utilized by the utilities and their application of that criteria in selecting third-party programs. We authorized Energy Division to hire a consultant to assist in its PRG responsibilities, including the review of the utilities' cost-effectiveness calculations for the proposed portfolio plans.

In D.05-04-051, we addressed threshold issues related to EM&V and directed the utilities to include in their applications a placeholder funding level for EM&V equal to 8% of program funding. We discussed the need to develop specific EM&V plans and funding levels on a separate track, so that the process could be informed by the protocol development activities coordinated by the Joint Staff. Finally, we directed the utilities to submit their proposed 2006-2008 energy efficiency plans and funding levels, together with the PRG written assessments, by separate application no later than June 1, 2005.

In addition, we updated the existing Energy Efficiency Policy Manual to reflect policy rules that articulate the Commission's objectives for energy efficiency, and provide guidance to the utility program administrators, program implementers and interested parties for the development of program portfolios for 2006 and beyond. Among other things, these rules describe threshold requirements for cost-effectiveness, and discuss how to calculate and present cost-effectiveness results for our consideration. They also summarize our determinations in D.05-01-055 regarding competitive bidding, advisory groups, affiliate rules and other administrative structure issues. In addition, the policy rules describe our expectations regarding the information that utility program administrators would file with their June 1 applications and during program implementation.

As described in Attachment 2, the utilities closely collaborated with their advisory groups and held public workshops as they developed their portfolio plans for our consideration. Their applications present a detailed listing of the comments and recommendations received during the PAG/PRG meetings and public workshops, and present the utilities' responses. As indicated by those responses, many of the specific recommendations were directly incorporated into the utilities' proposed portfolio plans.⁹

On June 1, 2005, the utilities filed their 2006-2008 portfolio plans and funding levels in this application docket. SDG&E, SoCalGas and SCE filed the PRG assessments with those applications. PG&E's PRG was granted a one-week extension in submitting their assessment. On July 8, 2005, PG&E filed the PRG assessment as a supplement to its June 1 application. The July 1 and July 8 PRG assessments included a draft report by TecMarket Works, Energy Division's consultant. That report reviewed the utilities' proposed plans with regard to cost-effectiveness and related issues based on information available as of mid-May.

On July 20, in response to PRG recommendations, PG&E filed an additional supplement to its application providing additional program detail and modifying the scope of portfolio areas that would be open to third-party bidding. On July 21, PG&E filed an errata to its June 1 submittals.

A prehearing conference (PHC) was held on June 22 in San Francisco. As discussed at the PHC and in the Assigned Commissioner's subsequent scoping memo,¹⁰ the proceeding is bifurcated into separate phases. Today's decision will address the portfolio plans and funding levels for non-EM&V related activities (Phase 1). As anticipated by the Commission in D.05-01-055, we will need to address specific EM&V plans for 2006-2008 energy efficiency activities and associated funding levels in a separate, subsequent Commission decision (Phase 2).

Once the Phase 1 issues are addressed by today's decision, the "compliance phase" begins as the utilities (with input from the PRGs) issue requests for proposals for competitive bids, review those bids, select winning bidders and finalize their program plans based on the responses. Per D.05-01-055, the Commission will allow the compliance filing to be submitted as an advice letter if the utility and its PRG are in full agreement on the final program plans and bid selections. If not, the utility will submit a compliance filing in this consolidated application docket requesting Commission approval of the final programs.¹¹

Comments on Phase 1 issues were filed on June 30, 2005 by the following parties: Center for Small Business and the Environment, San Francisco Small Business Network and Small Business California (collectively referred to as CSBE in this decision), City and County of San Francisco (CCSF), ConSol, County of Los Angeles, NRDC, National Association of Energy Service Companies (NAESCO), ORA, Proctor Engineering Group (Proctor), TURN, Utility Consumers Action Network (UCAN) and Women's Energy Matters (WEM).

On July 1, the utilities jointly filed a supplement on estimated savings from codes and standards advocacy programs, after holding a public workshop on the proposed methodology. On that same day, TecMarket Works' final report on cost-effectiveness was also issued for comment by Administrative Law Judge (ALJ) ruling.¹² On July 8, 2005, opening comments on the issue of codes and standards savings were filed by CCSF, ORA and NRDC. PG&E also submitted additional program detail to the PRGs on July 8, 2005.

On July 15, the utilities filed requests for interim authorizations, pending Commission action on the compliance filings. Per the direction of the ALJ and Assigned Commissioner, the utilities jointly filed a Case Management Statement (also referred to as CMS) on July 18, 2005.¹³ This filing articulates the current status of the undisputed and disputed issues in this proceeding among the utilities, PRG members and all parties filing opening comments in this proceeding.

On July 21, 2005, reply comments were filed by CSBE, Cal-UCONs, Inc. (Cal-UCONS), CCSF, ConSol, jointly by Efficiency Partnership, Runyon Saltzman & Einhorn and Staples Marketing Communications, Inc., NRDC, NAESCO, PG&E, TURN, SDG&E/SoCalGas, and WEM. These comments respond to (1) positions of the parties as reflected in the June 30 opening comments and subsequent CMS, (2) updates to TecMarket Works draft report as reflected in the July 1 final report, (3) July 8 opening comments on codes and standards savings, and (4) the utilities' July 15 requests for interim authorization. The utilities submitted joint reply comments on codes and standards savings.

On June 30, 2005, the Assigned Commissioner issued a scoping memo confirming the preliminary categorization of the proceeding as ratesetting. The record of the proceeding provides sufficient information for us to evaluate the issues. No hearing is necessary.¹⁴