Phase 4: Avoided Costs

As discussed at the PHC, a report on avoided cost updating, entitled "A Forecast of Cost Effectiveness Avoided Costs and Externality Adders" prepared by Energy and Environmental Economics, Inc., has been posted on the Commission's Website.⁷

This report was developed at the Commission's direction in D.03-04-055 in order to: (1) update the current cost-effectiveness inputs used in evaluating energy efficiency programs to more accurately reflect current conditions, and (2) provide the Commission with a method and model for updating cost-effectiveness inputs on an ongoing basis. Among other things, this report develops a forecast for the years 2004-2005 of avoided energy costs for use in quantifying the benefits of demand-reduction programs. It also establishes a forecast for those years of externality adders for use in quantifying program benefits, namely, an environmental externality adder, a transmission and distribution adder, a system reliability adder, and a price elasticity of demand adder.

As noted in my December 22, 2003 ruling and by several parties in their PHC statements, avoided costs appear in contexts other than energy efficiency and demand-reduction. For example, avoided costs are used to determine contract rates for Qualifying Facilities (QFs). Avoided costs influence the evaluation and ranking of bids under the Renewables Portfolio Standard (RPS) from various resources, and for energy bids other than the RPS for energy procurement. Avoided costs have also been used to establish the value of achieved savings in incentive mechanisms. In addition, the "marginal cost" aspect of avoided cost is used for revenue allocation and rate design purposes in Commission proceedings.

In D.03-12-062, the Commission indicated its intent to issue an Order Instituting Rulemaking (OIR) to update the short-run avoided costs used to determine contract rates for QFs. At the PHC, we discussed ways to coordinate our efforts to update avoided costs in this proceeding with that OIR and other Commission proceedings where updated avoided costs will be needed. I suggested that the Commission might consider issuing a generic OIR on avoided cost methodology, inputs and updating that would apply to the various applications for avoided costs at the Commission, including short-run avoided cost pricing for QFs. Regardless of the particular application of an avoided cost calculation, the Commission should ensure that the data inputs used in calculating avoided costs are consistent. In my view, issuing a generic OIR on avoided cost updating is a reasonable approach for ensuring this consistency. I will be pursuing this idea with my colleagues and Commission staff in the coming weeks. However, even if a generic OIR is not created for this purpose, we can still work to ensure consistency in avoided cost forecasting through broadly noticed workshops and careful coordination across proceedings. Moreover, a workshop process can help to frame the issues for a more generic approach to calculating and updating avoided costs in the future.

Accordingly, I envision for this phase of the proceeding a broadly noticed Energy Division workshop and request for comments on the avoided cost report referenced above.⁸ At that workshop, representatives from Energy and Environmental Economics, Inc. should present an overview of their proposed approach to forecasting avoided costs and externality adders, and be available to answer questions concerning their approach and respond to concerns raised in pre-workshop comments. The workshop will serve as a forum for parties to discuss their views on the proposed methodology and resulting forecasts with respect to energy efficiency applications, such as cost-effectiveness evaluations for program selection and the valuation of resource benefits after program implementation. This will be the first task of the Workshop. As a second task, the workshop will serve as a forum for discussing the extent to which the proposed avoided cost methodology and resulting forecasts could be applicable to other avoided cost applications.

The schedule for this phase is as follows:

Energy Division Workshop Notice: May 21, 2004

Pre-Workshop Opening Comments: June 4, 2004

Pre-Workshop Reply Comments: June 18, 2004

Energy Division Workshop: June 23, 24, and 25, 2004

Post-Workshop Comments: July 16, 2004

Post-Workshop Reply Comments: July 30, 2004

The workshop discussion, and subsequent post-workshop comments, should focus on the following issues:

1. Should the Commission adopt the methodology for updating avoided costs presented in the consultant's report for the purpose of evaluating the resource value of energy efficiency programs, both before and after program implementation? If not, what aspects of that methodology should be refined or modified?

2. Which components of the proposed methodology could be applicable to other avoided cost applications, such as short-run avoided costs for QF pricing, cost-effectiveness evaluation of demand-response programs, distributed generation, renewables and other supply-side resources? Which components do not appear to be applicable, and why not?

3. How should the development of avoided costs be further coordinated to ensure consistency of common inputs and avoided cost components across the various avoided cost applications at the Commission?

At the July PHC, I will discuss the next procedural steps for addressing avoided cost issues in this proceeding.

⁷ http://www.cpuc.ca.gov/static/industry/electric/energy+efficiency/rulemaking/index.htm.

⁸ If a generic OIR is not created for this purpose, then Energy Division should notice the Workshop in this docket, with service to parties in all other proceedings where avoided costs are being considered or applied, including the procurement rulemaking, distributed generation proceedings, demand-response rulemaking, and QF proceedings.