7. Savings Associated with Pre-2006 Codes
and Standards Advocacy

In D.05-04-051, the Commission updated the policy rules for energy efficiency and addressed threshold EM&V issues. This included the establishment of the "performance basis" for resource programs, that is, the metric for evaluating energy efficiency programs designed to displace or defer more costly supply-side resources. The Commission adopted a metric that calculates portfolio-level net resource benefits (resource benefits minus costs), subject to a threshold level of performance based on the Commission-adopted energy efficiency savings goals. One of the issues raised with respect to calculating the performance basis for a particular program year was how to consider installations that result from prior-year commitments.

In the decision establishing energy efficiency savings goals (D.04-09-060), the Commission had directed that only savings from "actual" installations from program activities would count towards those goals, beginning in program year 2006 and beyond. This represented a departure from accounting practices in recent years, where savings from both actual installations and program commitments were counted towards program achievements for a particular program year, even if the savings from those commitments would not actually occur until a later program year when the measures were installed. However, the Commission recognized that it would be necessary to return to earlier practices of counting only "actuals" towards performance goals in order to avoid the need for an additional true-up process (between commitments and actual installations) when evaluating program achievements, thereby allowing for a more timely calculation of the portfolio performance basis for a given program cycle.

The Commission further clarified in D.05-04-051 how to transition from the "actual and commitments" to the "actuals only" accounting approach, and included various findings of facts, conclusions of law and ordering paragraphs that directly relate to this issue.⁹⁵ In particular, the Commission found that allowing the utilities to include savings realized in 2006 and beyond from standard performance contracting or new construction programs from commitments made before 2006 would "double count" the savings accomplishments from those goals. Therefore, the utilities were directed to exclude savings from pre-2006 commitments that resulted in actual installations in 2006 and beyond from their projections of portfolio accomplishments.

NRDC raised a corollary transition issue in its comments on the draft decision leading to D.05-04-051, namely, whether savings attributed to the codes and standards advocacy program implemented prior to 2006 should be reported by the utilities and counted towards the 2006-2008 savings goals. As discussed above, this is a statewide program that promotes enhancements to, and enforcement of, energy efficiency standards and codes. Among other things, this program funds studies that are key input to the CEC's public rulemaking process to adopt new energy efficiency standards, which occurs every three or more years. Energy savings targets or accomplishments have not been tied to this program in the past.

In the final decision (D.05-04-051), the Commission directed Joint Staff, with input from technical experts and the public, to develop protocols for attributing electricity and natural gas savings from these programs for future program years 2006 and beyond. However, the Commission declined to authorize utilities to include in their 2006-2008 program plans their estimates of savings associated with the 2002-2004 ("pre-2006") codes and advocacy work that contributed to the adoption of the new building and appliance standards effective in 2005 and 2006, respectively.⁹⁶

By ruling dated May 11, 2005 in R.01-08-028, the Assigned Commissioner provided further clarification on energy efficiency savings issues associated with the 2006-2008 program cycle. Among other things, she directed Joint Staff to quantify savings from pre-2006 codes and standards work for resource planning purposes based on existing historical studies as part of the EM&V phase of this proceeding. In addition, she requested that Joint Staff develop recommendations on whether the Commission should reconsider its determination in D.05-04-051 and count some portion of these savings estimates toward meeting the 2006-2008 program goals.

In response to this direction and the schedule established at the PHC, Joint Staff presented the results of its review and recommendations (Joint Staff Report) to CMS participants during the development of the CMS document.⁹⁷ However, the CMS states that parties required additional time to fully review and develop a response to the Joint Staff Report. Therefore, the utilities and interested parties presented their positions on codes and standards savings issues in written comments.

In the sections below, we briefly describe the savings estimates for pre-2006 codes and standards advocacy work presented in this proceeding, the recommendations presented in the Joint Staff Report, and the positions of the parties.

7.1. Estimates of Savings

On July 1, 2005, the utilities filed a joint supplement to their respective applications submitting energy savings estimates for codes and standards advocacy work (Joint Supplement), after holding a public workshop on the proposed methodology. The Joint Supplement presents a report prepared by Herchong Mahone Group, Inc. (HMG) for the utilities entitled Codes and Standards Program Savings Estimate For 2005 Building Standards and 2006/2007 Appliance Standards, dated June 30, 2005 (HMG Report). This report supplements and expands upon a white paper on methods for estimating savings from codes and standards programs that was prepared by a team of consultants, including principals of HMG in April, 2005.

The report starts with "gross" statewide first-year savings estimates associated with the adopted codes and standards. For the most part, the savings are based on engineering estimates of per household or per square footage energy savings associated with each standard multiplied by the expected number of new homes or buildings in 2006. The methodology does not include expected growth in new building starts, population or appliance purchases over time. Instead, it conservatively assumes that 2003 levels will remain constant over the next decade. The savings calculations do include estimates of the additional savings expected due to new requirements that apply to retrofits of new windows and central air conditioning units.

The gross statewide annual savings are then adjusted by several factors. The first is an "Attribution Weighted Score" that reduces the statewide savings amounts by a factor to leave only that portion of the savings that is attributable to the efforts of the codes and standards program. This score was developed through the consideration and relative weighting of five key criteria evaluated through a joint committee interview process with core CEC and utility staff that participated in the standards development process.⁹⁸

A second adjustment is made to annual savings based on a "Normally Occurring Standards Adoption factor." This adjustment reflects the fact that the standards adopted in 2005 by the CEC would have been adopted in the normal course of time. In other words, a primary effect of the codes and standards advocacy work is to accelerate the time it takes for the CEC to adopt or update standards. HMG assigned values for when the standards would have normally been adopted by the CEC without the program based on several considerations, including whether the particular standard was already under consideration by the CEC staff. Savings for each standard are adjusted down to zero when the year of "normally-occurring" adoption is reached.

The third adjustment results from the application of a "Naturally-Occurring Market Adoption factor" to each of the annual savings numbers. This factor is intended to capture the phenomenon that better, more energy efficient products are likely to be adopted by the market even without the codes and standards program activities or standards being adopted. To establish these factors, HMS developed a set of market adoption curves that grow in a linear fashion up to an ultimate adoption rate of 100% over a selected time period between the range of 3 to 24 years. Shorter time periods were assigned to those measures that were close to full market adoption, and longer time period to those that are less close. The annual savings are adjusted downward by the factor for each year, and become zero in the year of full market adoption.

The fourth adjustment factor is made by a "Non-Compliance Adjustment" factor to reflect the fact that not all buildings or appliances comply fully with the standards. HMG selected a 30% non-compliance rate for all of the standards and measure, lacking sufficient data with which to assign individual compliance rates to each.

Finally, the savings estimates are adjusted for the life of individual measures. The measure life is used to limit the time period for counting savings. After the first measure life has expired, re-installations are only credited at the rate of naturally-occurring measure installations, rather than counted indefinitely as new installations. This has the effect of bringing the program net savings estimates back down to zero after a number of years have passed.

The table below summarizes the overall results of the calculations and adjustments described above. As can be seen, the Commission's savings goals are set to increase from year to year, but the savings attributed to the codes and standards program (as a function of the savings attributed to the standards themselves) increase at an even greater rate. The HMG Report estimates that by 2008, savings from codes and standards work that led up to the new standards adopted in 2005/2006 would be responsible for meeting approximately 22% of the GWh/yr electricity savings goals, 30% of the (MW/yr) demand reduction goals, and 30% of the natural gas (Mtherm/yr) savings goals.⁹⁹

	Total Net Savings Attributable to Codes and Standards(C&S) Programs
	(Within PG&E, SCE, SDG&E and SoCalGas Service Territories)
		2006			2007			2008
	Goal	C&S	C&S%	Goal	C&S	C&S%	Goal	C&S	C&S%
Energy (GWh/yr)	2032	172	8%	2275	349	15%	2504	545	22%
Demand (MW/yr)	442	50	11%	478	104	22%	528	159	30%
Gas (Mtherm/yr)	30	5.1	17%	37.3	9.6	26%	44.4	13.5	30%

7.2. Joint Staff Recommendations

Joint Staff recommends that the utilities be allowed to credit 50% of the savings actually verified from the pre-2006 codes and standards advocacy work towards the 2006, 2007 and 2008 goals. Using the estimate of savings from the HMG Report, this would give utilities credit for GWh savings equivalent to 4% (50% of 8%) of the 2006 savings goal, 7.5% of the 2007 goals and 11% of the 2008 goals. Credit for demand reductions and natural gas savings would be somewhat higher, corresponding to 50% of the percentage contributions presented in the table above. Joint Staff notes that this contribution assumes that most or all of the ex ante savings are verified in 2006 and beyond. Joint Staff also notes that the contribution of codes and standards work to the goals could be up to 50% higher if the number of housing starts continues to grow over the next three years as it had in the previous three years. Overall, Joint Staff believes that counting 50% of the verified savings represents an appropriate balance between too much and too little acknowledgment for these past program efforts.

Joint Staff presents this recommendation with the following conditions:

· The utilities agree to complete a market survey to estimate actual level of code compliance from an energy savings perspective for those portions of 2005 building and appliance standards that will take effect by June 1, 2006. This study will be completed by March 1, 2007.

· The utilities agree not to heavily rely on these ex-ante savings estimates to meet their portfolio savings goals for 2006-2008. Instead these estimates should be treated as basically "bonus" savings, more like a hedge against inherent risks that other programs may not meet their performance goals.

· The Commission makes it clear now that it will not entertain portfolio administrator requests to dramatically reduce overall funding levels for 2007 or 2008 based on the savings booked from the codes and standards program in 2006 or beyond.

In terms of developing savings estimates on a going forward basis, Joint Staff recommends the Commission allow utilities to count 100% of the savings from 2006, 2007 and 2008 codes and standards advocacy work using the methodology proposed in the HMG Report. This recommendation is subject to the following condition:

· Utilities and CEC staff agree to turn over relevant data on the standards development process to an independent evaluator. This independent evaluator will be responsible for conducting the attribution/ interview sessions with a wide variety of participants in the process, obtaining public input, documenting the baseline assumptions used to estimate savings from the standards and then using this information to verify total savings from future revisions to Title 24 or Title 20. The independent observer and the evaluation he or she conducts, should be managed by the Energy Division.

In addition, Joint staff recommends that the Commission formally direct Joint Staff to set up an evaluation contract for 2006 that will verify parameters listed in the HMG Report and used to develop ex ante savings estimates for the codes and standards program, which include the following:

a. Engineering estimates of baseline operating conditions, per dwelling unit or per appliance;

b. Engineering estimate of the annual savings and load shape impacts predicted to occur after the standard took effect;

c. The actual number of housing starts and appliance sales in 2006 for relevant products;

d. Natural rate of market progress assumptions contained in the HMG Report;

e. Assumed level of compliance with key code provisions.

Finally, Joint Staff recommends that the utilities be directed to prepare ex-ante estimates of the likely savings from the 2006-2007 Codes and Standards Advocacy Programs for use in prioritizing or rebalancing program funds at the end of calendar year 2006.

With respect to specific savings estimates for codes and standards programs that should be used by resource planners, Joint Staff plans to develop recommendations during 2006, as part of its ongoing EM&V activities.

7.3. Positions of the Parties

The utilities jointly prepared a response to Joint Staff's recommendations. They find Joint Staff's recommendations to be reasonable, though for some different reasons than Joint Staff provides. In particular, they emphasize the reasons why the estimates of achievable energy efficiency program savings underlying the Commission's adopted savings goals were on the high side, making these goals very challenging to achieve without crediting savings from the pre-2006 Codes and Standards Advocacy Program towards them.

In sum, the utilities accept that given the uncertainty involved in measuring the realized savings associated with this program, Joint Staff's recommendations provide a rationale bound for attribution at this time. They also agree with Joint Staff that crediting these savings towards the goals, rather than adjusting the goals themselves is the preferred approach.

ORA recommends that the Commission not allow the utilities to count codes and standards savings attributable to pre-2006 program activities towards the savings goals because doing so could potentially lead to two undesirable outcomes. First, ORA is concerned that the utilities may decide to cut back on the overall energy efficiency budget if they no longer perceive a need to fund the full $2.1 billion worth of energy efficiency programs to meet the savings goals. In ORA's view, such an outcome would conflict with the "loading order priority" given to energy efficiency that requires the utilities to aggressively pursue cost-effective energy efficiency savings.

Second, ORA is concerned that the utilities may not be as motivated to optimize their program design (including customer incentives) if they already have a comfortable safety margin to meet the goals. As long as the portfolio stays ahead of the assigned goals, in ORA's view the utility would remain indifferent to program changes that lower the projected savings. ORA also questions how savings from these pre-2006 activities would be treated in the calculation of performance basis, if they were indeed considered as "bonus savings" with respect to the 2006-2008 savings goals as Joint Staff recommends. TURN joins in ORA's comments on this issue.¹⁰⁰

While noting the importance of the pre-2006 Codes and Standards Advocacy Program, NRDC recommends that the Commission defer resolution of this issue because of conflicting concerns and unresolved issues related to the design of a risk/reward incentive mechanism for resource programs. On the one hand, NRDC is concerned that not counting the savings associated with pre-2006 codes and standards advocacy towards the 2006-2008 goals would create a disincentive for codes and standards work during the upcoming program cycle. On the other hand, NRDC is concerned that crediting these savings towards the 2006-2008 goals could reduce utility motivation to pursue all cost-effective savings during that funding period. Moreover, NRDC argues that the Commission should first resolve issues related to how utility earnings and penalties will be specifically linked to their achievements of the savings goals, before finalizing a decision on whether to count these savings.

CCSF supports in principle the concept of attributing savings to codes and standards advocacy work because it constitutes an effective, low-cost method of reducing overall energy use and peak demand. Unless these savings are recognized, CCSF is concerned that the utilities will have a disincentive to aggressively pursue further development, strengthening and compliance support of codes and standards. CCSF urges the Commission to put into place a rigorous methodology to quantify the savings impacts from these activities, without delay. In CCSF's view, the scope of the methodology should be expanded to estimate savings for the development and implementation of local codes and standards, as well as the savings from local enforcement efforts to improve state code compliance rates.¹⁰¹