Decision 05-01-055 January 27, 2005

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Examine the Commission’s Future Energy Efficiency Policies, Administration and Programs. Rulemaking 01-08-028(Filed August 23, 2001)

INTERIM OPINION ON THE
ADMINISTRATIVE STRUCTURE FOR
ENERGY EFFICIENCY: THRESHOLD ISSUES

Attachment 1 Administrative Functions and Areas
of Responsibility: Common Terminology
Attachment 2 Overview of Proposals for Energy
Efficiency Administrative Structure
and Advisory Group Recommendations
Attachment 3 List of Acronyms
Figure 1 Administrative Functions
Figure 2 Administrative Functions
Restructuring (“Collaborative”) Era
Figure 3 Administrative Functions
Resturcturing Era-Attempted Independent Administration
Figure 4 Administrative Functions
Current Structure (since Summer 200 Initiatives)
Figure 5 Integrated Portfolio Mgmt (IOUs Coalition)
Figure 6 Reaching New Heights (NRDC/LIF Coalition)
Figure 7 Reaching New Heights (NRDC/LIF Coalition Amended)
Figure 8 Efficiency California (TURN/ORA Coalition)
Figure 9 California Coalition for EE (WEM/SESCO)
Figure 10 Adopted Administrative Structure Energy Efficiency

INTERIM OPINION ON THE
ADMINISTRATIVE STRUCTURE FOR
ENERGY EFFICIENCY: THRESHOLD ISSUES

1. Introduction and Summary
By this decision, we address the threshold issues for designing an administrative structure for energy efficiency programs beyond 2005. The administrative structure we adopt today applies to our electric energy efficiency programs, which are funded through the public goods charge (PGC) and a non bypassable procurement surcharge, and our natural gas energy efficiency programs, which are funded through the natural gas surcharge, but does not apply to low-income energy efficiency programs. As described below, energy efficiency administration encompasses all the functions related to the planning, oversight and management of energy efficiency programs, including decisions on what programs to fund with ratepayer dollars. Attachment 1 lists and describes the various administrative functions, and Figure 1 presents this listing in a flow chart form.

Our use of the term “administration” or “administrative structure” in this decision does not, however, include the various tasks associated with program delivery, e.g., recruiting of customers and installation of measures. We refer to the entities that perform these functions as “program implementers,” who operate under contracts/agreements with the entity or entities managing the entire portfolio of ratepayer-funded programs. Program implementers may deliver programs directly to customers, or hire contractors to perform these services, or a combination of both.
There are many potential program implementers in the energy efficiency market, including investor-owned utilities (IOUs), private energy service companies (ESCOs), local government agencies, nonprofit organizations and other entities that can influence customer decisions over energy services and deliver energy savings measures to them. The proposals presented in this proceeding all recognize that IOUs as well as non-IOUs will continue to play a role in delivering energy efficiency services to customers as program implementers. They differ significantly, however, with respect to the future role of IOUs in performing two key administrative functions: Program Choice and Portfolio Management.

Program Choice involves the selection of activities and implementers for the portfolio of energy efficiency programs, and the allocation of ratepayer dollars to those activities for each funding cycle. Portfolio Management involves the day-to-day tasks associated with general administration and coordination of those ratepayer-funded programs between funding cycles. For example, at the beginning of each funding cycle, the entity responsible for program choice will select among commercial lighting programs, programs to weatherize and upgrade appliances in single- and multi-family residences, programs to educate builders and designers of new construction projects, and many others, and decide how best to allocate authorized funding levels across those activities. Program choice also involves decisions over what combination of IOU and non-IOU implementers will receive program funds to offer and deliver the energy efficiency services to customers.
Once the portfolio of programs is selected, the Portfolio Manager will review and approve program implementation plans, oversee the contracts with implementers and track the costs and performance of the programs (and implementers) selected. As the programs “roll out” during the funding cycle, the Portfolio Manager is also responsible for identifying areas where program design and implementation can be improved, and for making (or recommending) changes to improve portfolio performance, including funding allocation changes. In addition, the Portfolio Manager is responsible for reviewing and approving invoices from implementers, generating required reports to regulators on portfolio performance, and for other general administrative and coordination tasks.
As part of its policy oversight responsibility, the Commission may establish parameters for program choice and portfolio management that limit the discretion of the entity or entities responsible for those functions. For example, the Commission may establish a policy that allocates a minimum percentage of total program funding to the residential sector, or limits the degree of fund shifting that the Portfolio Manager can initiate across the major market sectors (residential/non-residential) without prior Commission approval. The Commission may also establish a policy that a certain percentage of program funding must be allocated based on competitive responses to a Request For Proposal (RFP), or that a certain amount of funding must be set aside for statewide initiatives. Nonetheless, within Commission-established parameters, the entity or entities responsible for the Program Choice and Portfolio Management functions will be responsible for making numerous decisions that affect the way in which energy efficiency choices are presented to customers, and how energy efficiency technologies are made available to them.
It is therefore not surprising that the most controversial issue related to administrative structure is what entity or entities should be responsible for these two key functions. Some parties to this proceeding propose that the Commission delegate these responsibilities to an independent administrator (or administrators), selected based on a competitive solicitation. Others argue that the IOUs should perform these functions, as they did prior to electric industry restructuring, with input from advisory groups and other safeguards to ensure that the IOUs will not favor their own programs over those of non-IOU implementers, or favor supply-side investments over cost-effective energy efficiency. Based on the proposals and comments in this proceeding, we believe that this major “fork in the road” must be addressed before we can proceed further to design an administrative structure for energy efficiency programs.
As discussed in today’s decision, we choose the fork in the road that returns the IOUs to the lead role in Program Choice and Portfolio Management. In considering our options, we recognize that the energy crisis of 2000 and 2001 has changed the regulatory landscape in a profound way for California. As a result of California’s painful experience with electric industry restructuring, the Legislature and this Commission have directed the IOUs to resume responsibility for procuring resources to meet customer demand. The energy crisis has also brought about a renewed and expanded appreciation for energy efficiency as a cost-effective resource to meet that demand. Accordingly, the Energy Action Plan has placed energy efficiency at the forefront of energy policy and resource procurement in California.
Decisions in California concerning the optimal levels of energy efficiency and supply-side resources will now be made in the resource planning process undertaken by the IOUs, subject to our oversight and approval. In this context, making another entity (or entities) responsible for Program Choice and Portfolio Management of energy efficiency means that all of the program selection and day-to-day management decisions would be “handed down” to the IOUs to incorporate into their resource plans and resource adequacy projections. As we stated in Decision (D.) 04-01-050, California IOUs should not be required to adopt the forecasts and resource plans of others because “[w]e strongly believe that the utilities themselves must be responsible and accountable for providing their customers reliable service and just and reasonable rates; this is the utilities’ statutory obligation to serve.”
We have also been presented with a proposal for energy efficiency administration structure that would leave Program Choice and Portfolio Management to the private competitive market, through a program of standard offer contracts administered by multiple non-IOU entities. As we discuss in this decision, our experiences in California have left us unwilling to rely solely on competitive market solutions to meet customers’ energy needs. Moreover, we conclude that under this approach statewide programs could cease to exist entirely, customers would be faced with multiple and sometimes overlapping programs, and overall, the program synergies and leveraging necessary to optimize savings from energy efficiency would not be achieved.
We also discuss in today’s decision how returning the IOUs to the Program Choice and Portfolio Management roles for energy efficiency is the logical corollary for the market structure we have recently adopted for supply-side resource procurement. In D.04-01-050, we established a market structure that placed the California IOUs in the role of program selection and portfolio manager of supply-side resources (including dispatch decisions for IOU-owned generation plant), but also allowed them to directly participate as supply-side implementers by owning and/or building new generation facilities. We did so after hearing arguments similar to the ones raised in this proceeding concerning the pros and cons of allowing IOUs to both serve as administrators and potential implementers. In response to those arguments, we adopted certain safeguards to protect against bias in the selection process, including the use of procurement advisory groups, Commission review of procurement plans with notice and opportunity for comment, and a ban on affiliate transactions.
Even if the IOUs were not once again responsible for resource procurement, we would have significant concerns about placing responsibility for Program Choice and Portfolio Management responsibilities with third-party administrators. One of those concerns relates to the degree of control we could exert over third parties under the contractual arrangements relied on under those proposals. In order to meet our goals for energy efficiency, we must have the authority to hold program administrators fully accountable for delivering energy savings. As discussed in this decision, we believe that this authority is clearly established with our regulatory oversight of the IOUs, but considerably less certain under the proposals for independent administration.
In addition, our unsuccessful attempts to shift to independent administration for energy efficiency during electric restructuring persuades us that pursuing this approach again would require new statutory authority. The Attorney General and the Department of Finance have clearly articulated the position of these agencies: Ratepayer money such as the PGC is public money that can be held by the IOUs and spent under Commission direction, but in the absence of specific legislation, cannot be moved to an outside trust account or bank account. Therefore, even if we desired to pursue a model that transfers funds from the IOUs to an outside entity, we would first need to seek legislation similar to the provisions that authorize the transfer of telecommunication public purpose funds to treasury accounts, or PGC funds to the CEC treasury accounts. This would delay our ability to move forward with a permanent administrative structure for energy efficiency, create uncertainty with respect to the outcome of that legislative process, and render program funding vulnerable to borrowing by the Legislature.
In addition to the uncertainty and implementation delays associated with seeking new legislation, the independent administrative structures proposed in this proceeding create other substantial implementation challenges. These include significant start-up costs and transition time, as well as the challenge of finding third-party administrator(s) capable of assuming the huge fiduciary responsibilities associated with over $400 million in annual program funding. While a “single purpose” independent entity sounds simple and appealing in theory, it is also far from certain that that a single organization or partnership of firms capable of administering energy efficiency in California will emerge as truly single purpose, i.e., free from conflicting financial interest with respect to energy efficiency.
In contrast, returning the IOUs to a lead role in program choice and portfolio management will not create the legal obstacles described above or require statutory changes. Transitioning responsibilities from Commission staff to IOU staff could be accomplished by the beginning of the 2006 program cycle in a manner that would not disrupt program delivery. Based on our experience with utility administration during the pre-restructuring/collaborative era, we are also confident that the IOUs have the requisite expertise and capability to administer energy efficiency consistent with the Energy Action Plan and the savings goals we establish in this proceeding. That experience has demonstrated to us that IOUs can meet aggressive savings goals under an administrative structure that holds them directly accountable for program results. As we reported in D.03 10 057, we estimate that IOU administrators during the restructuring/collaborative era produced $1.4 billion in net benefits to ratepayers (savings minus costs, including shareholder incentives) for programs implemented or initiated over the 1994-1997 period.
For the above reasons, we return the IOUs to the lead role in Program Choice and Portfolio Management for energy efficiency program administration beginning with program year 2006. At the same time, we realize that returning IOUs to these roles will also require us to institute appropriate safeguards, as part of our overall approach to quality control for both supply-side and demand-side resource procurement. To this end, we adopt an advisory group structure and competitive bidding minimum requirement, as described in this decision. To further safeguard against bias in program selection, we adopt a ban on affiliate transactions between IOU administrators and program implementers. We also clarify the functions for which the Commission and our staff will retain responsibility.
In today’s decision, we also provide direction on how evaluation, measurement and verification (EM&V) should be structured in the future. As described in Attachment 1, the tasks under EM&V include: (1) establishing the EM&V plan for the portfolio of programs; (2) selecting evaluation firms and managing the evaluation of individual programs within the portfolio and for the portfolio as a whole; (3) overseeing the verification of program milestones, load impacts, completion of cost-effectiveness studies and other appropriate measurements of program performance; and (4) making recommendations for improvements based on EM&V program results. Based on the comments, we are persuaded that we must improve upon our current and past approaches to EM&V by requiring a clearer separation between “those who do” (the program administrators and implementers) and “those who evaluate” the program performance.

In particular, for program year 2006 and beyond, Energy Division will assume the management and contracting responsibilities for all EM&V studies that will be used to (1) measure and verify energy and peak load savings for individual programs, groups of programs and at the portfolio level, (2) generate the data for savings estimates and cost-effectiveness inputs, (3) measure and evaluate the achievements of energy efficiency programs, groups of programs and/or the portfolio in terms of the “performance basis” established under Commission-adopted EM&V protocols and (4) evaluate whether programs or portfolio goals are met. As a further safeguard to ensure against conflict-of-interest in EM&V, we prohibit entities from performing these types of EM&V studies at the same time they are under contract for program delivery work—either as a non-IOU program implementer or subcontractor to an IOU implementer.
Energy Division will also take the lead in performing research and developing recommendations to assist in developing energy efficiency policy goals and priorities, in evaluating the remaining potential to achieve additional energy or peak savings, and other research activities needed to support our policy oversight. In recognition that IOU portfolio managers and program implementers need access to market information to perform their responsibilities, we adopt a process that allows them to manage a limited subset of evaluation studies as long as there is no potential for conflict due to the nature of the study, and as long as Energy Division makes the final selection of contractors.
As described in this decision, our adopted administrative structure provides significant opportunities for public input during the planning and design of the energy efficiency portfolio, the competitive bid solicitation process and selection of program implementers, as well as the during development and review of EM&V plans and funding levels. Finally, we reiterate our commitment to continued collaboration with the CEC at both the staff and Commissioner level on a broad range of energy efficiency issues, as exemplified during this proceeding under the leadership of Commissioner Kennedy and CEC Commissioner Art Rosenfeld. We will also explore creating a more formal arrangement with the CEC for collaboration in the administrative areas of EM&V and Research and Analysis in support of energy efficiency policy development, as described in this decision. A summary of our adopted administrative structure for energy efficiency is presented in Figure 10, attached to this decision.
By addressing these threshold issues today, we resolve a major area of uncertainty regarding post-2005 energy efficiency program implementation. We can now turn to issues that have been put on hold pending their resolution, and proceed on several fronts to prepare for the 2006 funding cycle. Between now and the end of 2005 we will need to complete a variety of tasks, some of which are currently underway. These include: (1) updating avoided costs for the evaluation of program savings; (2) developing the performance basis for energy efficiency programs that defer or avoid more costly supply-side resources; (3) updating EM&V protocols and procedures for measuring program performance; and (4) updating our Energy Efficiency Policy Rules. In addition, the portfolio design and program selection process described in this decision must be completed before the end of 2005. We also intend to address the issue of risk/reward mechanisms for energy efficiency, as well as for the overall procurement framework, before the end of 2005.
By D.04-09-060, we adopted electric and natural gas savings goals by IOU service territory through the year 2013, subject to updates for 2009 and beyond. Completing all the remaining tasks in time for the 2006 funding cycle will require an ambitious schedule during 2005. We call on all the stakeholders to put past differences aside and work collaboratively in the months ahead. Working together, all stakeholders will benefit from the result of these efforts: The full recognition of energy efficiency as a viable resource that can be relied upon to reduce the demand for energy in California.
2. Procedural History
By rulings dated July 3 and September 24, 2003, the Assigned Commissioner (Commissioner Kennedy) articulated several priorities for the coming months, including: (1) selecting 2004-2005 energy efficiency programs; (2) adopting specific savings goals based on the overall potential for cost-effective energy efficiency; (3) updating measurement and evaluation protocols; and (4) addressing the issue of long-term program administration. To provide a foundation upon which the Commission could decide these issues, Commissioner Kennedy initiated a series of informal workshops during late 2003 and early 2004 on related topics. All workshops were co-chaired by Commissioner Kennedy and Commissioner Rosenfeld from the CEC, attended by a California Power Authority (CPA) representative and facilitated by both Commission and CEC staff.
Consistent with the inter-agency collaborative model this Commission has utilized in other resource-related proceedings, Commissioner Kennedy and the assigned Administrative Law Judge (ALJ) have worked closely with the CEC and CPA in developing the policy direction for this proceeding, including the development of this draft decision on threshold administrative structure issues for the Commission’s consideration.
In December 2003, in its Procurement Rulemaking (R.01-10-024), the Commission increased funding for 2004-2005 energy efficiency programs by $245 million “due to the integration of energy efficiency and procurement programs.” This represented an increase of 43% above levels authorized by statute via the PGC, bringing total authorized funding for energy efficiency to over $800 million for the two-year 2004-2005 funding cycle. Parties to that rulemaking urged the Commission to resolve the issue of energy efficiency administration as a high priority during 2004. The Commission responded in D.04-01-050 as follows:
“Many parties comment on the issue of administration of energy efficiency programs. In its testimony, TURN took no explicit position on whether utilities should or should not administer energy efficiency programs but strongly urged the Commission to address this issue in the energy efficiency proceeding. ORA concurs with TURN, urging the Commission to ‘promptly’ address this issue. NRDC urges the Commission as well to resolve the ‘unsettled issues’ regarding the administration of energy efficiency programs. Utility long-term plans also support prompt resolution of this issue in R.01 08 028.
“Both the initial Order Instituting Rulemaking and the July 3 [Assigned Commissioner’s Ruling] for R.01-08-028 identify administration of energy efficiency programs as one of the key issues to be addressed in that Rulemaking, with a goal of resolving this issue in 2004. As the Commission will authorize a uniform portfolio of energy efficiency, we believe it is necessary that the Commission have in place a unified administrative structure to oversee all energy efficiency programs, regardless of the source of funding in the years ahead. For this reason, we are referring the issue of administration of energy efficiency programs authorized in this proceeding to R.01-08-028.”
By D.03-12-060 and D.04-02-059, the Commission completed the program selection for the 2004-2005 energy efficiency funding cycle, after reviewing over 400 proposals exceeding $1.2 billion in requested funding. Concurrently, Commissioner Kennedy held workshops on the following topics: (1) The Potential For Energy Efficiency; (2) Customer Needs; and (3) Collaboration and Partnership among Program Implementers. A further prehearing conference (PHC) in this proceeding was held on January 23, 2004. Per the direction articulated in D.04-01-050, a schedule for addressing the issue of administrative structure by the end of 2004 was established at the PHC and subsequent scoping ruling.
Workshops on administrative structure were held on March 17 and 18, 2004 in San Francisco. Over 100 individuals and organizations were in attendance. The workshop included presentations by the Commission’s Strategic Planning Division and the Regulatory Assistance Project on administrative structures for energy efficiency in other states. CEC and Commission staff also facilitated discussions to develop a common terminology, format and list of policy and implementation considerations for parties to address in their administrative structure proposals. Stakeholders were encouraged to work together to find common ground on the issues and develop joint proposals where possible. To address competitive concerns and encourage the broadest possible participation, the ALJ also developed procedures for participants who would prefer to file proposals or comments with their identities under seal.
On April 8, 2004, four coalitions and Cal-Ucons, Inc. (Cal-Ucons) filed proposals for the post-2005 administrative structure. Cal-Ucons is a private ESCO that contracts with California IOUs and utilities (both public and private) in other states to implement energy efficiency programs, including programs tailored to reach hard-to-reach market sectors such as mobile homes. The four coalitions are comprised of the organizations listed below. For ease of reference, we have given each coalition a shortened title that indicates some, but certainly not all, of the coalition members.
· IOUs Coalition (also referred to as the Integrated Portfolio Management Coalition): Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), Southern California Edison Company (SCE), Southern California Gas Company (SoCalGas), Building Owners and Managers Association, Coalition of California Utility Employers, Efficiency Partnership, Northern California Power Agency, Richard Heath and Associates, Inc., Sacramento Municipal Utility District and The Energy Coalition.
· NRDC/LIF Coalition (also referred to as the Reaching New Heights Coalition): Natural Resources Defense Council (NRDC), Latino Issues Forum (LIF) American Council For An Energy-Efficient Economy, CHEERS, Electric Gas Industries Association, Equipoise Consulting, Heschong Mahone Group, Inc., ICF Consulting, KEMA-Xenergy, Nexant, Inc. and Silicon Valley Manufacturing Group.
· TURN/ORA Coalition (also referred to as the Efficiency California Coalition): The Utility Reform Network (TURN), Office of Ratepayer Advocates (ORA), San Diego Regional Energy Office (SDREO), City and County of San Francisco (CCSF) and K. J. Kammerer & Associates.

· WEM/SESCO Coalition (also referred to as the California Coalition for Energy Efficiency): Women Energy Matters (WEM), SESCO, Inc. (SESCO), RESCUE, Community First Coalition and Local Power and Public Citizen.
Opening comments were submitted by the following parties:
· American Lighting
· Association of Bay Area Governments
· Cal-Ucons
· City of Berkeley
· CCSF
· City of Santa Monica
· Ecology Action
· ICF Associates, Inc.
· Latino Issues Forum
· National Association of Energy Service Companies (NAESCO)
· NRDC

· Jointly by members of the IOUs Coalition and NRDC/LIF Coalition (see above), California Retailers Association, California State Chamber of Commerce, City of Bakersfield, City of Fresno, City of Stockton, County of Kern, Energy solutions and Quantum Consulting, Inc.
· Jointly by PG&E, SDG&E, SCE and SoCalGas
· Quality Conservation Services, Inc.
· Redwood Coast Energy Authority
· Rita Norton and Associates LLC
· SDREO
· SESCO
· South Bay Cities Council of Governments
· TEDCO Energy Services, Inc.
· TURN
· Utility Consumers’ Action Network (UCAN)
· WEM
· “John Doe” representing a firm that provides consulting services to IOUs and other parties in energy efficiency programs, filing its identity under seal per the procedures established by the ALJ.
Reply comments were filed by American Lighting, CCSF, Insulation Contractors Association, the IOUs (jointly), LIF, NRDC, SESCO, the TURN/ORA Coalition members (jointly), Cal-Ucons and WEM.
In its reply comments, SESCO submitted cost-effectiveness data regarding 2003 programs implemented by the IOUs to support its position that the IOUs should not perform program administration functions. The IOUs requested an opportunity to respond and, with approval from the assigned ALJ, filed supplemental reply comments on May 18, 2004. In their responses, the IOUs refuted the accuracy of SESCO’s evaluation of their 2003 program performance.
We note that this is not the forum for evaluating the performance of either IOU or non-IOU implemented programs during 2003. Such an evaluation should comprehensively consider all of the performance attributes we established for that program year, in contrast to SESCO’s selective review. Accordingly, we do not consider SESCO’s reply comments with respect to the issues being addressed in this phase of the proceeding. However, as discussed below, the EM&V administrative structure we adopt today is designed to produce objective evaluations of the program performance for all implementers, irrespective of what entity or entities are responsible for the Program Choice and Portfolio Management functions.
Subsequent to the filing of reply comments, Steve Schiller on behalf of a group of parties (referring to themselves as “Collaborating Parties”) contacted the assigned ALJ to report that meetings had been held among various coalition members to seek a common ground with respect to the future EM&V administrative structure. The Collaborating Parties are: NRDC, TURN, ORA, SDREO, the IOUs, Nexant Inc., Heschong Mahone Group, Inc., Bevilacqua-Knight, Inc., California Building Performance Contractors Association, Ridge & Associates, UCONS, LLC, and Quantum Consulting, Inc.
Although they did not agree on the threshold issues regarding who should perform the Program Choice and Portfolio Management roles, Mr. Schiller informed the ALJ that the Collaborating Parties were close to consensus on advisory group structure with particular focus on EM&V administration that could be adopted by the Commission irrespective of its final determination on the threshold issues. The assigned ALJ authorized the Collaborating Parties to file their proposal, and provided interested parties an opportunity for comment.
Comments on the Collaborating Parties’ proposal were filed on June 4, 2004 by CCSF, NAESCO, Residential Energy Service Companies’ United Effort (RESCUE) and WEM. In addition, ORA, TURN, NRDC and the IOUs (filing jointly) submitted comments addressing the remaining non-consensus issue.
On September 30, 2004, Commissioner Susan Kennedy and CEC Commissioner Art Rosenfeld held an oral argument on an initial version of their proposal for energy efficiency administrative structure, which was posted on the Commission website for discussion purposes only. Following the oral argument, Commissioner Kennedy solicited legal briefs and written comments on policy issues related to affiliate transactions and EM&V structure. Opening comments and legal briefs were filed on October 18, 2004 by the IOUs (jointly), NRDC and other members of the Reaching New Heights Coalition, TURN, CCSF and ORA (jointly), and WEM on behalf of the California Coalition for Energy Efficiency. Reply comments and briefs were filed on October 25, 2004, by these parties/coalitions, as well as by SESCO, NAESCO and Cal-Ucons.
3. Past Experience and Current Administrative Structure
The proposals submitted by the four separate Coalitions are in large part reminiscent of the administrative structures (or components thereof) that we have either implemented or attempted to implement in the past for ratepayer-funded energy efficiency since the early 1990s. It is therefore instructive to review our past experience with the issues related to administrative structure for energy efficiency and examine how we arrived at the current structure. We divide this discussion into three distinct “eras” of program administration. The discussion that follows is not intended to provide a detailed description of how each administrative function was carried out during these three eras, but rather to highlight the key features with respect to Program Choice and Portfolio Management and the context in which these functions were (and are now) performed. We also describe the use of various advisory groups during these eras, since all of the proposals recommend that one or more variation of these advisory groups be incorporated into the future administrative structure. Throughout the discussion, we use the terms and definitions presented in Attachment 1.
3.1. Pre-Restructuring (“Collaborative”)
Era: 1990-1997
Prior to electric industry restructuring, the IOUs were responsible for resource procurement on behalf of their customers, subject to Commission oversight. That is, the IOUs were responsible for investing in and building new generation plants, dispatching their existing generating plants, purchasing power from other utilities or third-party generators (referred to as “qualifying facilities” or “QFs”), and purchasing natural gas supplies to meet customer demands for energy. During the aftermath of the 1970s energy crisis, California was viewed as a leader in the nation in requiring IOUs to investigate and implement demand-side management (DSM). However, by the mid-1980s, efforts to develop demand-side alternatives languished significantly in California, in large part because of excess generating capacity in the State. In July 1989, the Commission and CEC convened a joint en banc hearing to consider ways to revitalize energy efficiency in California.
In the notice announcing the hearing, the Commission cited the shrinking of the capacity surplus, the air quality consequences of inefficient energy use, and recent dramatic improvements in energy-efficient technologies as grounds for reinvigorating DSM activities. The purpose of the en banc was to address the central questions of how energy efficiency and other DSM programs should fit into utility resource procurement, and how regulation could encourage desirable investments in demand-side resources. The administrative structure in place from 1990 through 1997 grew out of recommendations offered in response to the en banc by a group of interested stakeholders called the “California Collaborative” (Collaborative). The Collaborative recommendations led to the issuance of a DSM Rulemaking to further define policies and oversight responsibilities for energy efficiency programs.
As indicated in Figure 2, the administrative structure that resulted from this process placed lead responsibility for Program Choice and Portfolio Management with the IOUs. In addition, the Commission put in place a system of financial rewards and penalties (shareholder incentive mechanisms) for energy efficiency programs to address the financial conflicts facing IOUs under cost-of-service regulation. In particular, IOUs earn a financial return for their shareholders when they invest in generation, distribution or transmission plant (“steel in the ground”). They did not at that time earn any return on energy efficiency programs. To address this financial conflict, the Commission provided the IOUs with an opportunity to earn on cost-effective energy efficiency. Experimental incentive mechanisms were adopted in 1990, and then subsequently refined into a “shared savings” mechanism for the 1995-1997 program years.
Under the shared-savings mechanism, IOUs earned a fixed percentage of the net savings to ratepayers (energy savings minus costs) after a threshold level
of savings was achieved. These savings levels were based predominantly on post-installation (ex post) measurements and the IOUs were at risk for ratepayer expenditures if the program portfolio was not cost-effective on an ex post basis. The Commission established a California DSM Measurement Advisory Council (CADMAC) to provide a forum for presentations, discussions, and review of DSM program measurement studies. These studies were filed in each Annual Earnings Assessment Proceeding (AEAP), which was the forum for the Commission’s review of the IOUs’earnings claims under the shareholder incentive mechanism. CADMAC also presented recommendations to the Commission on changes to adopted measurement protocols for consideration in each AEAP. Regular membership consisted of the IOUs, ORA, Energy Division and CEC staff, and supplemental members were added via advice letter filings. They included: NRDC, TURN, Sacramento Municipal Utility District, Los Angeles Department of Water and Power, NAESCO, Lawrence Berkeley Lab, among others. The CADMAC structure included voting rules and guidelines for participation and attendance.
Independent reviewers were also part of the CADMAC structure. They were selected and managed by Energy Division and paid for out of program funds. Their primary task was to provide input to Energy Division and the Commission on the savings estimates presented by the IOUs in each AEAP. In addition, program funds were allocated to ORA to conduct its own independent verification of the IOUs’ savings studies.
Other administrative features were put in place to address the Collaborative stakeholders’ concerns with placing IOUs in the lead role for program choice and portfolio management. During the Collaborative process (and subsequent settlement agreements), the stakeholders recommended that the IOUs establish informal advisory committees as an outgrowth of the Collaborative working groups to review the utility programs. The Commission directed the IOUs to continue the use of these advisory committees in the DSM Rulemaking as a method of obtaining input on program choice and implementation issues, and they became an integral component of the administrative structure during the pre-restructuring era.
The IOUs selected initial members from a broad range of interested stakeholders (e.g., regulatory staff, customer groups, environmental groups, among others) and participation evolved over time between 1990 and 1997 based on the interests of specific stakeholders and emerging program design issues. The advisory committees met approximately once each quarter (or more frequently as needed) to discuss the composition of the IOUs portfolio and consider modifications to program design or funding levels for individual programs as their performance was observed during the course of each program year. Participation was voluntary and there were no voting rules. In those instances where Commission approval was required (based on policy rules regarding fund shifting, and other guidelines for portfolio management), the IOUs filed their requests with the Commission indicating whether the advisory committee supported the proposed modifications. Individual advisory committee members could protest the filings if they did not concur with the proposed program selection or changes to those selections.
The advisory committees described above addressed some of the concerns expressed by the Collaborative over the IOUs’ lead role in program choice and portfolio management by making the process more receptive to stakeholder input on an ongoing basis. However, they did not address competitive issues that were emerging in both supply-side and demand-side resource acquisition. In particular, the experience of the mid-to late 1980s with independent power producers and supply-side bidding in California led to analogues that appeared transferable to the demand-side. Both the Legislature and the Commission viewed the introduction of competitive bidding in demand-side resource acquisition as a vehicle to use competitive forces to reduce the cost (or increase the value) of ratepayer-funded programs.
Consistent with that vision, the Commission directed the IOUs to develop proposals for DSM bidding pilots and to form a DSM bidding advisory committee to assist the IOUs and the Commission in this task, with the Division of Strategic Planning (DSP) acting as facilitator. The group included representatives from IOUs, consumer and environmental groups, ESCOs and other interested parties. During the next two years, a series of pilots were implemented to test the potential of DSM bidding to provide least-cost energy efficiency services and to assess the capabilities of third party providers to complement or replace existing or planned IOU programs. However, before the results of these pilots could be fully evaluated in the context of the industry structure in which they were conceived, electric industry restructuring fundamentally changed the IOUs’role in both supply-side and demand-side resource procurement.
3.2. Restructuring Era (“Attempted Independent Administration”): 1997-2000
In D.95-12-063, as modified by D.96-01-009 (“restructuring decision”), the Commission described its vision of a competitive framework for the electric services industry. Briefly, the decision describes a future in which customers would have choice among competing generation providers, and where traditional cost-of-service regulation would be replaced by performance-based regulation. In terms of market structure, the restructuring decision placed control over all transmission assets in the hands of an independent system operator (ISO) and required the IOUs to bid all their generating assets (with the exception of must-take power) into a spot market pool over a five-year transition period, beginning January 1, 1998. During this transition period, some utility generating assets would undergo a market valuation process and possibly a transfer of ownership, while others would remain under the ownership of the utility and Commission regulation. The Commission would continue to have oversight over utility generation during the transition. The utilities would be given the opportunity to recover generation “transition costs” (i.e., the net above-market costs for each utility) over the five-year period, but the price for electricity, on a kWh basis, could not rise above the rate levels in effect as of January 1, 1996.
In its restructuring decision, the Commission acknowledged the continued need for energy efficiency programs, but signaled a major shift in emphasis away from financial incentives to individual customers towards energy efficiency programs with broader market transformation effects, such as educational programs and incentives targeted to equipment and appliance manufacturers. The Commission anticipated that public funding for energy efficiency would be needed “only for specified and limited periods of time, to cause the market to be transformed.” The Commission also articulated its expectation that the administration of energy efficiency programs would transition from the utilities to an independent, nonprofit organization:
“After a short transition period, we believe that the funds collected through a surcharge for energy efficiency should be competitively allocated by an independent, nonprofit organization, but we would like to capture the expertise and knowledge that the utilities have gained in administering DSM programs as we begin the transition. We expect to reach closure on this issue through the implementation activities we will undertake in the next few months and through ongoing coordination with the Legislature.”
On September 23, 1996, Assembly Bill (AB) 1890 was signed into law. (Stats 1996, Chapter 854.) Overall, AB 1890 endorsed the Commission’s vision for a restructured electric industry. With respect to energy efficiency, the statute authorized the continuation of public purpose programs through the imposition of a nonbypassable charge on local distribution service (i.e., the PGC). However, in terms of funding levels for energy efficiency, AB 1890 mandated only a limited time period, commencing January 1, 1998 through December 31, 2001, during which ratepayer funds were earmarked for those activities. The statute’s language did not articulate any specific expectations regarding program design or administration. Those details were left to the Commission.
At the Commission’s direction, working groups met during 1996 to discuss public purpose programs, including energy efficiency, and to present recommendations responding to the issues identified in the restructuring decision. On August 16, 1996, the Energy Services Working Group presented a report entitled “Funding and Administering Public Interest Energy Efficiency Programs.” The report presented consensus and non-consensus views on market transformation goals, the types of energy efficiency activities to be funded by utilities in the future and program funding levels. It presented administrative options for setting policies, administering the public goods charge and delivering energy efficiency activities and programs.
In D.97-02-014, issued on February 14, 1997, the Commission reiterated its intent to establish an administrative structure that would “facilitate the privatization” of energy efficiency services in the marketplace. For this purpose, the Commission established an independent board (California Board For Energy Efficiency or “CBEE”) consisting of regulatory representatives and members of the public to oversee limited term contracts for the administration of market transformation programs. Among other things, CBEE was directed to develop and issue a RFP articulating policy and programmatic guidelines for one or more administrators, subject to Commission approval. The Commission stated its goal of having the new administrative structure for energy efficiency programs in place by January 1, 1998. Figure 3 illustrates the administrative structure for energy efficiency that the Commission envisioned for a restructured electric industry.
To create this administrative structure, the Commission first addressed several issues related to CBEE start-up, including board appointments, legal structure, authorization to contract and hire staff, conflict of interest, per diem and expense reimbursements, Bagley-Keene Open Meeting Act, among others.
In recognition that the transfer of functions, funding, assets and program commitments from utilities to the new administrator would take longer than expected, in D.97-09-117, the Commission extended interim utility administration until October 1, 1998. During the remainder of 1998, the Commission considered CBEE recommendations for directing utility energy efficiency activities during the transition, and proceeded to adopt a 1998 operating budget for CBEE, establish policy rules for independent administration and approve an RFP for that administration. However, beginning in early 1998, the transition to independent administration for energy efficiency programs encountered several obstacles—and was ultimately put on hold indefinitely by the Commission.
In August 1997 the California State Employees Association (CSEA) challenged two agreements between CBEE and private contractors, and requested that the State Personnel Board (SPB) find that the agreements violated the requirement that state agencies use civil servants for completing tasks traditionally performed by the state. The contractors provided administrative and technical assistance to CBEE. In response to CSEA’s challenge, the Commission pointed out that the agreements were between CBEE and the contractors, but PG&E paid the contractors from PGC funds. The Commission argued that since the agreements were between CBEE and the consultants, and the money was not part of the Commission’s budget, SPB did not have jurisdiction over the agreements. Moreover, the Commission argued even if SPB had jurisdiction, the services were exempt from the requirement that state agencies must use civil servants to perform the work.
Not persuaded by these arguments, SPB ruled in February 1998 that the CBEE was “created by the [Commission] to advise and assist it in developing and administering energy efficiency …programs and [is] performing functions which have been imposed by statute upon the [Commission] ” and was therefore subject to the requirement its work must be performed by civil servants. SPB rejected the Commission’s contention that the work done by contractors for CBEE was exempt under any of the exceptions in Section 19130(b) of the Government Code.
While the CSEA challenge was pending, Commission staff met with the California Attorney General’s office and representatives from the Department of Finance, who raised additional issues with the Commission’s use of CBEE and other advisory boards. The representatives opined that absent explicit statutory authorization, the Commission could not create additional entities to perform tasks under the oversight of the Commission. In their view, Sections 381 (c)(1) and 701 of the Public Utilities Code were not sufficient to allow the Commission to create CBEE.
Both the Attorney General’s and the Department of Finance’s representatives stated that the ratepayer money such as the PGC were public funds that could be held by the IOUs and spent under Commission direction, but in the absence of specific legislation, they could not be moved to an outside trust account or bank account. Thus, if funds were not held by the IOUs, then they needed to be held in a treasury account, or other account authorized by the legislature.
To resolve these issues, the Commission proposed legislation, AB 2461, which would have authorized creation of CBEE and seven other advisory boards. The bill would also have created a “California Board for Energy Efficiency Fund” to receive money collected by the IOUs, which would be remitted to the Commission, and then forwarded to the Controller’s for deposit in the “CBEE Fund.” In addition, AB 2461 would have authorized the Commission to contract for the services of one or more “independent administrators” to implement “programs to accomplish the research and environmental objectives” as provided in Section 381 of the Public Utilities Code. AB 2461 would have authorized the Commission to make advance payments to such an administrator, and provided that the contracts of that administrator would not be subject to the requirements of the Public Contracts Code. Governor Wilson vetoed AB 2461 in September 1998.
Recognizing that these actions created insurmountable obstacles to handing off energy efficiency programs to new administrators as planned, the Commission extended interim utility administration through December 31, 2001, and cancelled the RFP authorized by D.98-07-036. On June 10, 1999, the Assigned Commissioner suspended further exploration of administrative options until further notice. On October 6, 1999, the Governor signed AB 1393 into law. Among other things, that law required that low-income assistance programs, including energy efficiency services to eligible low-income customers, continue to be administered by the IOUs.
In 2001, Governor Davis signed legislation that allowed the creation of six telecommunications advisory committees and created six Treasury Funds for the ratepayer money associated with the functions on which the boards provide advice. These boards now function in a purely advisory capacity, with no authority to enter contracts or spend money.
3.3. Current Structure (Summer 2000 Initiative to Present)
Huge price spikes and supply shortages that were the beginning of California’s energy crisis marked the summer of 2000. The ISO was forced to call for curtailments of customers on interruptible tariffs throughout its control area (PG&E, SCE and SDG&E service territories) and in June 2000, the Bay Area experienced several days of rolling blackouts. These events prompted the Commission to adopt a “rapid response procedure” to provide “maximum impact of demand and energy usage reductions” during the Summer 2000 energy capacity shortage and for the potential energy shortage projected over the next few years.
To implement this rapid response procedure, referred to as the Summer 2000 Energy Efficiency Initiative (Summer Initiative), the Commission solicited program proposals from the IOUs and other interested parties that would “bring about the largest reductions in electric demand and/or electric usage reductions in the shortest period of time. The Commission directed that proposals for funding under the Summer Initiative be filed and served by July 21, 2000, that comments on the proposals be filed and served by July 31, 2000 and that the programs be approved and implemented by September 1, 2000. The Commission authorized the Assigned Commissioners and ALJ to approve the Summer Initiative programs by ruling, which was accomplished on August 21, 2000. The ruling authorized a total of $72 million in unspent PGC program funds for the initiative, and selected implementers were directed to spend these funds by December 31, 2001.
The Summer Initiative marked the beginning of a new administrative structure for energy efficiency programs, which is still in place today. (See Figure 4) Under this structure, the Commission establishes evaluation criteria for reviewing program proposals, solicits proposals for program funding from IOUs and non-IOU implementers, and makes final program selections for each funding cycle. Commission staff oversees the implementation of multiple statewide and local energy efficiency programs. This oversight involves “review of proposals, program plans, budgets, expenditures and program activity reports, as well as program monitoring, program plan modifications, and other day-to-day management assignments.”
More specifically, Energy Division staff reviews program applications and makes selection recommendations to the Commission for each funding cycle. Energy Division staff also oversees portfolio management with respect to the development and review of program implementation plans, for both IOU and non-IOU programs. Energy Division reviews non-IOU program implementation plans and contracts (and any changes) which are subject to either Energy Division or ALJ approval. Energy Division also reviews and approves any IOU proposed changes to the program implementation plans that involve: (1) significant fund shifting across budget categories; (2) changes to incentive amounts offered to program participants and (3) changes in program design or program offerings. ALJ approval is also needed for time extensions to non-IOU programs.
With respect to EM&V, Commission staff responsibilities include: (1) Energy Division review and ALJ approval of the IOUs’ EM&V plans for statewide programs; (2) ALJ approval of a list of qualified EM&V contractors for implementers; and (3) Energy Division review (assisted by an independent contractor) and approval of non-IOUs’ EM&V plans. In addition, the IOUs are required to submit their proposed contractors for EM&V studies to the Energy Division and ALJ for approval. Energy Division also contracts with independent consultants to evaluate program performance, including the methods and inputs used by EM&V contractors to evaluate program savings.
The Commission has not formally created any advisory groups under the current administrative structure. However, in 1999, the IOUs, ORA and CEC jointly recommended that a California Measurement Advisory Council (CALMAC) be established to provide a forum for discussing and reviewing post-1998 market assessment and evaluation studies, and for coordinating the development of statewide measurement studies. The Commission did not object to the concept of using CALMAC to assist the IOUs, ORA and others for this purpose, but specifically did not recognize it as an official Commission-sponsored advisory body. CALMAC’s organizational membership, voting rules and funding arrangements are similar to CADMAC, but no independent reviewers are part of the structure. CADMAC still exists for the limited purpose of providing input during the Commission’s review of the remaining AEAP earnings claims associated with pre-1998 programs.
4. Administrative Structure Proposals and Positions of the Parties
Attachment 2 describes and compares the proposals for administrative structure presented in this proceeding, including the various advisory groups recommended for our consideration. In this section and the discussion that follows, we highlight the major characteristics of each proposal and concentrate on the chief points of contention. Members of each coalition are listed in Section 2 above.
4.1. IOUs in the Role of Program Choice and Portfolio Management
The IOUs’ Coalition and the NRDC/LIF Coalition propose an administrative structure that places the IOUs in the role of Program Choice and Portfolio Management. In addition to coalition members, American Lighting, American Synergy Corporation, Cal-Ucons, ICF Associates, Inc. and the National Association of Energy Service Companies filed comments in support of this approach.
4.1.1. IOUs Coalition Proposal: “Integrated Portfolio Management”
Figure 5 presents an overview of the “Integrated Portfolio Management” structure recommended by members of the IOUs’ Coalition. This structure is almost identical to the administrative structure in place during the pre-restructuring/collaborative era. It places the IOUs in the role of Program Choice (subject to Commission approval) and ongoing Portfolio Management, with input from advisory groups. The differences relate to the advisory group structure. In addition to an advisory group for each IOU service territory, the proposal creates a statewide policy advisory committee to provide the IOUs with advice regarding program selection criteria and portfolio composition. Overall, the advisory groups are more formally structured than during the pre-restructuring/collaborative era, with membership appointed by the Commission. Parties seeking energy efficiency funds are excluded from membership on the advisory groups. Broader input from parties without a direct financial interest is solicited through public workshops held during the program selection and portfolio management process.
The EM&V framework presented under this proposal is also very similar to the pre-restructuring/collaborative era, including the use of a measurement advisory group. Under the proposed approach, the IOU administrators and implementers contract with EM&V consultants to perform measurement studies, which are required to follow Commission-approved measurement protocols. The study results are subject to independent verification. Similar to the pre-restructuring EM&V framework, ORA is allocated program funds to perform an independent evaluation of program accomplishments. However the structure does not include independent reviewers as part of the measurement advisory structure, as it did under CADMAC.
4.1.2. NRDC/LIF Coalition Proposal: “Reaching New Heights”
Under the “Reaching New Heights” proposal submitted by the NRDC/LIF Coalition, IOUs would also return to the Program Choice and Portfolio Management roles. Figure 6 presents an overview of this proposal. In addition to an EM&V and policy and Program Advisory Group (PAG) structure similar (but not identical) to the “Integrated Portfolio Management” proposal, this proposal includes 1) an Independent Observer and 2) a minimum set-aside for non-IOU implementers.
The Independent Observer is under contract to Energy Division to ensure that the IOUs portfolios are designed, and implementers are chosen, in a fair and transparent process. In particular, the Independent Observer provides feedback to the IOUs on portfolio plans, program selection criteria and final program selections, prior to the submittal of filings at the Commission. In addition, the Independent Observer serves as a conduit of information from market participants to Energy Division and the Commission. The NRDC/LIF Coalition also sets aside a minimum of 20% of the total portfolio funds to be competitively bid out for design and/or delivery by non-IOU implementers.
Subsequent to the filing of proposals, the IOUs Coalition and NRDC/LIF Coalition agreed on an amended version of the “Reaching New Heights” proposal, with the addition of several new supporters, including the City of Bakersfield, City of Stockton, City of Kern and California Retailers Association.
The amended “Reaching New Heights” structure is illustrated in Figure 7. It retains the 20% set-aside for non-IOU implementers, but puts Energy Division in the role of Independent Observer, rather than a third-party contractor. It also blends certain characteristics of the advisory group structures proposed under the “Integrated Portfolio Management” and initial “Reaching New Heights” proposals. Further description of the amended proposal is presented in Attachment 2.
4.1.3. Proponents’ Arguments
Proponents of returning the IOUs to the Portfolio Choice and Portfolio Management roles argue that this is the best approach for capturing all cost-effective energy efficiency resources, given the structure of California’s energy industry and the state’s political climate. In their view, having the IOUs manage energy efficiency as an integral component of their energy procurement responsibilities will “treat energy efficiency as the valuable resource for meeting customers’ needs that it is, and…stop treating it as a limited social program operating on the sidelines of the energy industry.” They contend that the IOUs have the staffing and contracting capability to administer a portfolio of programs of the magnitude necessary to meet the state’s goals. In addition, they argue that this approach allows the Commission to retain clear and effective oversight over the entire energy efficiency administrative structure, as well as the combined portfolio of PGC and procurement-funded energy efficiency programs. In their view, the proposed structure can be implemented more easily and without the major start-up costs, uncertainty or potential delays associated with other options.
Proponents argue that these advantages overshadow the potential competitive or financial conflicts associated with putting IOUs in the lead role for program choice and portfolio management. Moreover, they contend that potential conflicts are effectively addressed by the checks and balances incorporated into the proposal, coupled with the overall procurement structure that holds the IOUs accountable for their resource selections.
4.2. Independent Administrator(s) For Program Choice and Portfolio Management
Both the TURN/ORA Coalition and the WEM/SESCO Coalition propose an administrative structure in which the IOUs do not select energy efficiency programs or manage the program portfolio. They recommend that the Commission oversee a competitive RFP to select a single independent administrator (TURN/ORA Coalition) or multiple administrators (WEM/SESCO Coalition) to perform these responsibilities. In almost all other respects, however, the proposals are different from one another, as described below. Figures 8 and 9 present overviews of these two approaches to independent administration.
4.2.1. TURN/ORA Coalition Proposal: “Efficiency California”
The TURN/ORA Coalition proposes an “Efficiency California” administrative structure that is reminiscent of the administrative structure the Commission attempted to put in place during restructuring. The major difference is the absence of a separate CBEE-type advisory board overseeing the RFP and contracting process. Under “ Efficiency California,” the Commission (rather than CBEE) contracts with a single administrator to perform the Program Choice and Portfolio Management functions. In addition to coalition members, the Association of Bay Area Governments and UCAN support this proposal.
Under “Efficiency California,“ the program administrator could consist of a single organization or a partnership of firms, but could not be an IOU or any other program implementer. The program administrator selects all implementers through a competitive bidding process, and contracts directly with the winning bidders. A program advisory committee provides input to the program administrator on program design and mid-cycle program changes. (See Figure 8.)
An expanded CALMAC structure is responsible for managing and contracting for all portfolio-level and program-level EM&V studies, subject to Commission approval. Independent contractors conduct all EM&V studies, with input from Energy Division and other Commission-appointed CALMAC members. The program administrator and implementers do not oversee or contract for EM&V studies under this administrative structure.
4.2.2. WEM/SESCO Coalition Proposal: “The California Standard Offer Program For Energy Efficiency”
The WEM/SESCO Coalition proposes a “California Standard Offer Program For Energy Efficiency,” whereby multiple non-IOU entities would administer energy efficiency programs by overseeing a continuous standard offer program. The proposal is presented as a system modeled after the structure currently operating in Texas. In addition to coalition members, two third-party implementers in Texas (Quality Conservation Services, Inc. and TEDCO Energy Services) filed comments in support of the WEM/SESCO Coalition proposal.
This approach envisions that program administrators would be comprised of CCAs, local governments, non-profit and/or for profit entities, and they would be permitted to overlap with respect to geographic regions and climate zones. The Commission (or a System Director selected by the Commission) would accept applications from any parties who wish to serve as program administrators and evaluate those applications under the criteria set forth in AB 117 (Pub. Util. Code § 381.1).
Each program administrator is responsible for administering contracts with implementers using standard offers developed by the Commission (or System Director, subject to Commission approval), and for assisting customers to participate in the program. These standard offers set forth a standard incentive amount based on a percentage of avoided costs (less than 100%) for installed measures. The payment terms and other conditions are fully spelled out in a standard contract that the implementer can sign without any further negotiations with the program administrator. Under the WEM/SESCO Coalition proposal, program implementers would only get paid after the measures are installed and verified through field inspections conducted by EM&V contractors. Savings per measure are based on “deemed” (ex ante) estimates, i.e., on engineering data or load impact studies, without on-site testing or metering.
Here’s how the standard offer program would work: The program implementer approaches residential customers in a specific geographic area to install measures. The type of measures to be installed is the decision between the energy service provider and the customer. The incentive typically does not cover the full cost of the measures that are installed, and the customer usually must make a contribution. The level of the contribution is also between the customer and the program implementer. Typically, projects for residential customers involve insulating homes or upgrading heating or cooling systems. The standard offer program includes a list of these measures with associated “deemed” savings, and the program implementer is credited those savings once that particular installation (or a sample of the installations of that implementer) has been inspected. After that occurs, assuming that the inspector finds the measures to be installed properly, the program implementer receives a payment for the credited savings based on a percentage of avoided costs.
Under the WEM/SESCO Coalition proposal, no entity would be allowed to serve at the same time as program administrator, implementer or EM&V contractor. The Commission (and System Director) and CEC would convene an EM&V committee to oversee periodic updates of the measure savings database, initiate studies to research information in the database, and generally serve as the interface between energy efficiency and supply-side resource planning. This committee would replace the existing CALMAC.
The WEM/SESCO Coalition proposal also provides for a “Special Administrator” to manage program funds for statewide information and education programs, such as Flex-Your-Power, codes and standards advocacy and training programs. In the alternative, the Commission or the System Director (if different) could also administer these programs. Under the proposal, 5% of program funds would be set aside for this purpose. The rest would be administered under the standard offer program described above.
4.2.3. Proponents’ Arguments
In general, proponents for independent administration argue that the conflicts-of-interest inherent in an administrative structure where IOUs serve as both program administrators and implementers severely undermine the Commission’s resource procurement goals for energy efficiency. Moreover, they contend that regulatory efforts to resolve or mitigate these conflicts will “at best result in dueling incentives that will in the long-run be more expensive for ratepayers than simply changing administrators.” At worst, they argue that these efforts simply will not be effective. In addition, they contend that IOU program administration would not produce highly cost-effective results.
Supporters of “Efficiency California” argue that this approach is particularly well suited to meeting the energy savings goals of the Energy Action Plan and the Commission because it creates a single-purpose administrative entity with sufficient staff and resources to undertake the requisite tasks. In their view, a further advantage of this structure is that it could easily evolve into a statewide administrator for self-generation and demand response programs, thereby fostering more innovative and integrated approaches to serving customers’ multiple energy needs. They also argue that this approach will reduce conflict and increase collaboration in the apportioning of the monies. In their view, this approach will build improved centralized information systems for managing the funds and portfolio of programs, as well as for tracking performance and long-term results. They also contend that the single-purpose administrator can be established quickly under existing statutory authority. Finally, proponents of “Efficiency California” argue that strengthening and consolidating CALMAC’s role will clarify responsibilities for EM&V and ensure that all assessments of program and portfolio performance are conducted by independent, non-biased entities.
Supporters of the “California Standard Offer Program For Energy Efficiency” argue that this approach has the advantage of eliminating conflicts-of-interest by establishing a clear separation of roles between program administrators, implementers and EM&V contractors. They also argue that standard offers provide the added advantage of creating a “bottoms up” portfolio development process, whereby the choice of what measures to install (and where) is left to the competitive market based on the implementers’ assessment of costs and risks, and competition among them. Another key benefit they point to is the shift of performance risk from ratepayers to implementers, since the latter are paid only when measures are installed and inspected. Since payments to implementers are based on a percentage of avoided costs (less than 100%) they also argue that this approach will ensure that ratepayers pay no more than the costs of more expensive supply-side resources for the programs. Proponents of this approach also contend that the Texas standard offer-based administrative structure has demonstrated the ability to deliver large amounts of very cost-effective energy savings at relatively low administrative costs.
4.3. Cal-Ucons’ “Discrete Market Segment Focus Plan”
Cal-Ucons proposes a “Discrete Market Segment Focus Plan” that is designed to be complementary to whatever administrative structure is chosen. Under this plan, the Commission would assemble an advisory group whenever necessary to provide input on how to improve success in an energy efficiency market segment, i.e., one that is under-producing in terms of energy savings. Focus advisory group members would serve by Commission-appointment and be comprised of stakeholders in the market segment. At any given time, there could be any number of Focus advisory groups in place to work on a variety of market segments statewide or in specified regions, such as an IOUs service territory. Any interested person may petition the Commission to create a Focus advisory group.
Cal-Ucons argues that this approach would provide the Commission with a powerful tool “to locate rich pockets of untapped [energy efficiency] savings on which to focus institutional attention,” such as the hard-to-reach landlord-tenant market. American Synergy Corp and Insulation Contractors Association supports the Focus Plan specifically in their comments. LIF expresses general support for the concept of focusing program efforts on hard-to-reach constituencies, such as the Latino and Asian communities, based on equity concerns.
4.4. Collaborating Parties’ Proposal for Advisory Board and EM&V Administrative Structure
The Collaborating Parties have submitted a joint proposal for a statewide advisory group, called the “California Efficiency Advisory Council” (CEAC), to assist the Commission, program administrator(s) and a separate EM&V advisory group described further below. The purpose of CEAC would be to “provide pro-active input on (a) overall procurement and PGC energy efficiency portfolio designs and implementation, as well as (b) feedback on administrator and portfolio performance in the context of meeting statewide energy efficiency goals, efficiency of administration/implementation, compliance with Commission policies, etc.” The CEAC would not have decision-making or contracting authority, but would be a formally constituted advisory group, complying with the Bagley-Keene Act. CEAC would submit an annual report on its findings and recommendations with respect to ratepayer funded and statewide energy efficiency programs. The CEAC would replace the statewide advisory groups proposed in the original filings by the IOUs Coalition, NRDC/LIF Coalition and TURN/ORA Coalition, but would not preclude adoption of regional advisory groups as well. Additional detail on CEAC is provided in Attachment 2.
With respect to EM&V administrative structure, the Collaborating Parties have developed a joint proposal that is independent of their separate recommendations for Program Choice and Portfolio Management. They all agree that a Measurement and Evaluation Council (MEC) should be established to advise the Commission on technical issues related to EM&V. The purpose of this group would be threefold. First, MEC would be the primary entity responsible for portfolio-level EM&V. Second, MEC would advise the Commission on setting protocols for EM&V of individual programs. Third, MEC would coordinate the program-level EM&V studies. In addition, MEC would make recommendations to the Commission on the level of EM&V funding during each program planning cycle, and on future updates to EM&V protocols.
MEC would consist of technical experts appointed by the Commission, as described further in Attachment 2. Under the proposed structure, MEC would operate by consensus and, if consensus cannot be reached, the assigned ALJ would make the final decision on any unresolved issues.
MEC would not have contracting authority. The Collaborating Parties propose that the IOUs administer and contract for the portfolio-level EM&V studies. These types of studies would include evaluations of energy savings potential, saturation studies, summary studies of statewide programs and achievements, market share tracking studies, updates to energy efficiency savings data, best practices studies, among others. The portfolio of studies would be developed though a public process and in close coordination with CEC and Commission staff through their participation on MEC. A Study Advisory Committee comprised of the IOU project manager and interested MEC members would select the EM&V consultant from among the bidders. The IOU project manager would contract with the EM&V consultant, review the consultant’s invoices and approve the disbursement of EM&V funds accordingly.
As each portfolio-level study is underway, the Study Advisory Committee would meet on a regular basis to assess status and report findings and recommendations to the MEC. MEC, in turn, would provide opportunities for public input on the studies. Once finalized, MEC would report findings to the program administrator(s) and the Commission.
For program-level EM&V, the Collaborating Parties could not reach consensus on which organization should be the contracting entity for program-level EM&V. Some collaborating party members support Energy Division for this role (ORA and TURN) to avoid conflict-of-interest issues and others (IOUs and NRDC) support utility contracting for these EM&V studies due to utility expertise and potential limitations of state contracting rules and staff resources. The Collaborating Parties also put forth a third option; that MEC decides who should hold the contracts on a case-by-case basis, with the ALJ making the final decision if MEC cannot agree.
Irrespective of who contracts with the evaluators, the Collaborating Parties agree that MEC should create Project Advisory Committees (PACs) to oversee the efforts of each program-level evaluation study. MEC would appoint an IOU project manager to each PAC, and other PAC participants would include a representative from each program implementer being evaluated, an Energy Division staff person, and additional interested independent participants.
In accordance with the EM&V protocols established by the Commission, the PACs would develop measurement and evaluation plans for each program or group of programs. These plans would be reviewed by Energy Division and other MEC members and approved at a regularly notices MEC meeting. Each PAC would also develop the scope of work to be included in the evaluation consultant RFP, and recommend the selection of the independent evaluation consultant. Each PAC would meet on a regular basis, providing input while the evaluation is being conducted, and report findings and recommendations to MEC and the program administrators. Energy Division would also oversee a Summary Study that includes the issuance of Study Review Memos to verify the compliance of each evaluation study with the adopted protocols and summarize the total energy savings attributed to energy efficiency programs during the funding cycle. At its discretion, ORA may also verify any element of a program evaluation report as a further check on the evaluator’s performance and the validity of savings. The Commission would review program performance annually based on study reports and would hold hearings to resolve any disputed results.

The Collaborating Parties believe that this proposal represents a reasonable common ground among competing approaches to advisory group structure and EM&V administrative structure. In addition, they note that the process of developing this proposal has served to build trust and collaboration among parties with widely divergent views on other issues related to administrative structure.
5. Discussion
We are pleased to see the broad range of active participants in this phase of the proceeding, as evidenced by workshop participation, the diverse composition of the Coalitions and Collaborating Parties, and the large number of opening and reply comments. Although these participants clearly do not agree on how to structure the specific Program Choice and Portfolio Management functions, we note that the administrative proposals are more similar than different.
In particular, all of the proposals recognize that the Commission is responsible for the policy oversight and quality assurance functions, and provide thoughtful recommendations on how the Commission might best obtain the policy and technical expertise to assist it in carrying out those responsibilities. All of the proposals recommend approaches to EM&V designed to mitigate potential conflicts between the overall administrator, program implementers, and EM&V contractors. They all propose the use of an EM&V technical advisory group to assist the Commission in this effort. And all of the proposals envision an energy efficiency delivery system in California that continues to include a role for both IOU and non-IOU program implementers, although they differ with respect to how those IOU and non-IOU implementers should be selected. Finally, with the exception of the WEM/SESCO Coalition proposal, all proposals establish one or more advisory groups to provide guidance in program selection and portfolio management, irrespective of what entity or entities perform those functions.
While there are significant areas of agreement, there are also key differences among the parties with respect to the threshold issue of what entity (or entities) should be responsible for Program Choice and Portfolio Management in the future. Based on the proposals and comments in this proceeding, we believe that this major “fork in the road” must be addressed before we can proceed further to design an administrative structure for energy efficiency programs.
Before turning to this issue, we wish to comment on a proposal that was not put forth in the April 8 filings, namely, to continue with an administrative structure that places Commission staff in the role of Program Choice and Portfolio Management. As described above, this structure was put in place as a rapid response approach during the energy crisis, when the Commission perceived a need to play a more significant role in the Program Choice and Portfolio Management functions. We commend staff for performing an admirable job under very difficult circumstances and constraints over the past few years. However, we believe that this current structure should not be continued beyond 2005 for several reasons.
First and foremost, placing our staff in the role of Program Choice and Portfolio Management stretches limited staff resources between those functions and the quality assurance and EM&V responsibilities that we believe should be the primary focus of our staff efforts. While requesting increases in staff resources is always an option, the outcome of those efforts is highly uncertain, particularly given the budget realities in California today. Moreover, even if staff resources were not limited, we are concerned that many innovative programs may not be discovered through an application and review process at a regulatory agency. Past experience indicates that program administrators and program implementers, working together with public input, are well suited to the task of developing innovative and cost-effective energy efficiency programs from concept to full program design for our consideration--examples of which include Flex Your Power, Standard Performance Contracting and Energy by Design.
The City of Oakland and others note that placing the responsibility on this Commission to make the initial selections of energy efficiency programs and then to oversee the portfolio management of those selections puts us in the position of both “judge and jury.” We believe that the Commission could fairly perform the program selection function, while at the same time overseeing quality assurance and an EM&V process that provides us with an independent assessment of program performance, but on balance we agree that separating these two functions promotes more confidence in the process and is a better use of staff expertise.
Finally, we concur with Commissioner Kennedy’s observations that:
“The Public Utilities Commission is a regulatory agency, not an administrative agency. As such, the Commission’s regulatory functions, and the Commission’s responsibility for providing independent oversight of all ratepayer-funded programs, are incompatible with administration of any of those programs or contracts on a long-term basis.”
We now turn to the threshold issue on administrative structure in this proceeding.
5.1. Threshold Issue: Who Should Perform the Program Choice and Portfolio Management Functions?
We concur with the observations of our Strategic Planning Division and the Regulatory Assistance Project that there is no single best model for how energy efficiency programs should be administered, particularly with respect to the Program Choice and Portfolio Management functions. One size does not “fit al”: The best administrative structure depends on each state’s particular context. We believe that these questions should be carefully considered within the specific context of California, beginning with the goals for energy efficiency that we have established in the Energy Action Plan.
As discussed in Section 3, energy efficiency has been a component of energy planning in California since the mid-1970s, but the focus and goals have shifted over time. Prior to the Collaborative era, energy efficiency programs were developed outside the IOUs’ resource planning process. As a result of the Collaborative and subsequent DSM rulemaking, energy efficiency was recognized as an integral component of utility resource procurement and an important means of achieving the Commission’s goal of “reliable, least-cost, environmentally sensitive electricity service.”

This focus shifted dramatically in 1996 to reflect the competitive framework that this Commission and Legislature envisioned for the electric
services industry at that time. Ratepayer investments in energy efficiency were undertaken to develop a fully competitive market in energy efficiency services so that customers could seek and obtain these services in the private sector. The goal was to provide ratepayer funding for this purpose for a transitional period only (through December 2001), at which time all ratepayer funding of non low-income energy efficiency programs would cease.
Today, the Energy Action Plan has placed energy efficiency back at the forefront of resource procurement activities in California. In particular, the plan establishes a loading order of energy resources that requires California to first optimize “all strategies for increasing conservation and energy efficiency to minimize increases in electricity and natural gas demand” before turning to supply-side resources. With the return of the IOUs to resource procurement and the policies articulated in the Energy Action Plan, the focus of energy efficiency in California has returned to resource acquisition. Consistent with that shift in focus, in D.02-10-062 we directed the IOUs to optimize electric energy efficiency investments in their resource plan portfolios for our consideration, regardless of the limitations of funding through the PGC mechanism. Based on our consideration of those projections, we increased energy efficiency funding to

over $800 million for the 2004-2005 funding cycle, or an average of approximately $400 million per year. In addition, we recently augmented natural gas energy efficiency funding for PG&E, SDG&E and SoCalGas on an
expedited basis, in order to expand current program offerings for the 2004/2005
winter season. By D.04-09-060, we established aggressive natural gas and electric savings goals by IOU service territory through the year 2013, subject to updates for 2009 and beyond. As described in that order:
“For the three electric IOUs, today’s adopted savings goals reflect the expectation that energy efficiency efforts in their combined service territories should be able to capture on the order of 70% of the economic potential and 90% of the maximum achievable potential for electric energy savings over the 10-year period, based on the most up to date study of that potential. These efforts are projected to meet 55% to 59% of the IOUs’ incremental electric energy needs between 2004 and 2013.
For natural gas, our adopted savings goals are designed at this time to capture approximately 40% of the maximum achievable potential identified in the most recent studies of that potential. This level of expectation recognizes the fact that natural gas program funding levels have dropped substantially over the last five years, and that ramping up those efforts to meet the full savings potential may take more time than on the electric side. It also recognizes some uncertainty over the level of achievable savings in the non-core sector. Nonetheless, today’s adopted natural gas savings goals represent substantial “stretch goals” by anyone’s standards: They reflect an increase in savings by 244 Mth over the 210 Mth in savings that would be achieved if current funding levels and program effectiveness (therms per dollar) remained constant. In other words, today’s adopted goals for natural gas energy efficiency represent a 116% increase in expected savings over the next decade, relative to the status quo.“
No state has ever placed energy efficiency at the forefront of energy policy in this manner, or has committed the level of resources that California has to meet the goal of optimizing energy efficiency investments. It is therefore imperative that we adopt an administrative structure that is capable of mobilizing the resources and efforts needed to meet the goals of the Energy Action Plan, without uncertainty or delays that could undermine California’s ability to recover from energy crisis and move its economy ahead with “reasonably priced and environmentally sensitive energy resources.”
To this end, our options for energy efficiency administration should be considered in the context of California’s regulatory framework for resource procurement as it exists today and for the foreseeable future. As described in previous Commission decisions, the energy crisis of 2000 and 2001 changed the regulatory landscape in a profound way for California. The Commission and the Legislature responded to the crisis in 2002 with direction to the IOUs that they were to resume responsibility for procuring resources to meet customer demands, subject to Commission oversight and approval. In contrast to Texas and other states that have implemented full retail competition, California IOUs are required once again to plan for and acquire both supply-side and demand-side resources for a large portion of their natural gas customers and all of their electric customers. Even under the core/non-core structure for electric customers currently under consideration, the IOUs would remain responsible for resource procurement for a sizeable level of electric load.
This is very different from the approach taken in Texas, for instance, where the IOUs are not allowed to participate in planning or delivering energy services (supply- or demand-side) within their service territories, except to oversee standard contracts with third-party providers. In Texas and other states that have implemented full retail competition, decisions concerning the optimal levels of energy efficiency and supply-side resources are determined entirely by the private market.
In California, these decisions will now be made in the resource planning process undertaken by the IOUs, subject to our oversight and approval. In this context, establishing an independent administrator (or administrators) for program choice and portfolio management means that all of the program selection and day-to-day management decisions are “handed down” to the IOUs to incorporate into their resource plans and resource adequacy projections (TURN/ORA Coalition), or left to the private market to determine (WEM/SESCO Coalition). While this may not be an issue in other states where the IOUs are not as involved--or not involved at all--in resource procurement, we believe it is an unworkable approach to integrated resource planning in California. In particular, as we stated in D.04-01-050, California IOUs should not be required to adopt the forecasts and resource plans of others -because “[w]e strongly believe that the utilities themselves must be responsible and accountable for providing their customers reliable service and just and reasonable rates; this is the utilities’ statutory obligation to serve.” And, as discussed below, our experiences in California have left us unwilling to rely solely on competitive market solutions to meet customers’ energy needs.
Even if the IOUs were not responsible for resource procurement, we would have significant concerns about the degree of control we could exert over third parties under an independent administrative structure. The Commission has broad regulatory authority to ensure and enforce the IOUs’ compliance with our policy rules and requirements based on current statute and Constitutional authority. In contrast, the proposals for independent administrators in this proceeding rely on contractual authority. This form of authority is potentially weaker, more complex, and less flexible than relying on our regulatory powers. In particular, we would have limited recourse in the event that the programs do not deliver the requisite energy savings or the program administrator fails to perform in other ways. As NRDC points out, the remedies for breach of contract are much more limited than our regulatory authority under current law:
“If a contracting party fails or refuses to discharge his/her contractual obligation, a ‘breach’ of contract occurs. However, the standard as to whether there was in fact a breach in contractual performance is much higher than a CPUC regulatory determination. In order to recover for damages for a breach of contract, a breach has to be ‘material.’ Material breach occurs if the defect in the promisor’s performance seriously disappoints the reasonable expectation of the aggrieved promisee. The burden of proving that this ‘impact is serious’ is on the promisee who claims the privileges accorded to the victim of material breach. And when it is found that a party breached a contract, the Government agency is limited to usual remedies for breach. [Footnote omitted.] These remedies include restitution and monetary damages. Remedies for a breach of contract do not include punitive or exemplary damages. In addition, in most instances, specific performances are not available. On the other hand, the CPUC’s regulatory authority allows it to order specific performance, and/or impose fines and penalties if the utilities do not perform.”
TURN and CCSF argue that “there is ample opportunity and authority for the Commission to exercise any degree of control it desires over a non-utility administrator through a contract. While the Commission can and does exercise control of contractors by defining the terms and scope of work, entities that sign contracts with the Commission do not by that fact alone become subject to the Commission’s regulatory jurisdiction. In fact, according to the presumed contract terms under the TURN/ORA Coalition proposal, the only expedient remedy for unsatisfactory performance is the termination of the program administrator’s contract. Any other remedy could require us to litigate the matter in Superior Court, which is time consuming, expensive and uncertain, and less satisfactory than direct regulation. In either case, we would be forced to assign an interim administrator, a scenario that could be highly disruptive and costly. In order to meet our goals for energy efficiency, we must have the authority to hold the administrator(s) fully accountable for delivering energy savings without recourse to litigation. We believe that this authority is clearly established with our regulatory oversight of the IOUs, but considerably less certain under the proposals for independent administration in this proceeding.
Returning the IOUs to the program choice and portfolio management roles for energy efficiency is also a logical corollary to the market structure we have recently adopted for supply-side resource procurement. It is instructive that the debate over this issue in our Procurement Rulemaking focused in large part on the same threshold issue in this proceeding: The role of IOUs as both the “program choice/portfolio manager” and a potential “implementer” of supply-side resources, e.g., through dispatch of existing IOU resources or IOU construction of new power plants. Parties to our Procurement Rulemaking lined up on different sides of this issue, as they have in this proceeding.
For example, TURN, the Independent Energy Producers Association (IEP) and the Western Power Trading Forum (WPTF) expressed many of the same concerns about the potential for conflicts of interest discussed by TURN, ORA, WEM, SESCO and others in this proceeding if the IOU selects and manages the portfolio of supply-side resources and also “contracts with itself” for power production from existing or new generation. To address this issue, TURN, IEP, WPTF recommended two alternatives. First, that there be “independent administration” of the bid preparation and selection process if IOUs are allowed to participate in the solicitation with IOU-owned and/or IOU-constructed new plant. In the alternative, these parties recommend that the IOUs be required to administer an open competitive solicitation with third-party market generators but not be allowed to compete in the solicitation with IOU proposed new plant. Third-party developers supported this position by arguing (as proponents for independent administration do in this proceeding) that separating IOUs from resource selection process coupled with the discipline of an open competitive solicitation is the best way to ensure lower costs and risks to ratepayers.
In contrast, SDG&E and the IOUs recommended a supply-side market structure that would allow the IOUs to directly participate in resource selection as well as in the ownership of new generation facilities. In doing so, they presented many of the same arguments that the IOUs, NRDC, LIF and others present in support of their preferred energy efficiency administrative structure in this proceeding. These include: (1) the stability and permanence of a regulated utility; (2) the ability of the Commission to directly regulate the price, terms and quality of the generation service provided by the utility; and (3) the availability of a proven high-quality workforce (both management and labor).
In weighing the arguments on market structure for long-term supply side procurement, the Commission concluded that California “should not rely solely on competitive market theory and the behavior of market generators”, noting that our State has “a long history of reliable service being provided by utility-owned and operated generation plant and a recent painful history of rolling blackouts and high price spikes from reliance on third-party generators in a

poorly designed competitive market.” In view of these overriding concerns, and in recognition of certain benefits of allowing IOUs to participate in owning new generation facilities, the Commission rejected proposals to either (1) remove IOUs from the role of resource selection or (2) allow the IOUs to select supply-side resources but not to participate as implementers. Instead, the Commission determined that IOUs should participate in both functions “in order to have the assurance of more state control over resources and an effective check against competitive market manipulations and abuses.”
Accordingly, in D.04-01-050, the Commission established a market structure that placed the California IOUs in the role of program choice and portfolio manager of supply-side resources (including dispatch decisions for IOU-owned generation plant), but also allowed them to directly participate as supply-side implementers by owning and/or building new generation facilities. In setting the market structure and rules for long-term procurement, the Commission recognized that it would need to be vigilant in overseeing “that no perceived bias occurs in selecting, or dispatching the resources, especially when the current cost recovery mechanisms favor the rate-based power plants.” To this end, the Commission put in place important safeguards to “provide assurance to the third-party generators that we see a meaningful role for them in California’s energy future.” The Commission found that third-party generating capacity, “if contracted properly,…holds a number of advantages for California ratepayers.”
More specifically, to address concerns that IOUs would rather rely on their own existing resources than on those that come from the market, the utilities are monitored for their patterns of dispatch to assure that the operations are undertaken in a least-cost manner.
In addition, the Commission directed the IOUs to solicit future long-term generating capacity resources from non-IOU suppliers through a formal RFP process as a “standard procedure.” The Commission established Procurement Review Groups (PRGs) comprised of eligible non-market participants to consult with the IOUs in the design of the RFP and the evaluation of bids on a quarterly basis. At the same time, however, the Commission recognized that IOU-owned and/or built projects should not be discouraged “where they are cost-effective and appropriate.” Accordingly, IOUs were permitted to present such projects for the Commission’s consideration outside of the RFP process with evidence and justification for why IOU ownership structure is preferable, and how cost containment would be addressed.
The language of D.04-01-050 is instructive on how the Commission viewed the need for safeguards in the IOUs relationship with third-party implementers on the supply-side, and the best way to put such safeguards in place:
“WPTF argues for a specific structure for capacity procurement that puts procurement via contract on an equal footing with utility-built options. WPTF’s proposal is that prior to its issuance, an RFP must be approved by the Commission or an independent third party to verify that it is not tilted in favor of the utility or its affiliate’s bid. Second, bids should be evaluated by an independent third party, such as an accounting firm, consultant, or specially convened review panel. Finally, the third party will select a winning bid which, if it meets the criteria presented in the RFP, the utility must accept.
“WPTF’s proposal would result in a cumbersome process, and one that would be difficult for any utility to endorse, especially as it reserves final choice of contracting partner to a party other than the utility itself. But its need derives from the perception that without the involvement of independent parties in the development of the RFP, the evaluation of the bids, and the ultimate selection of the winning bidder, the utility would have an incentive to act in ways that would bias the process in favor of itself.
“The Commission currently has in place safeguards to address WPTF’s concerns. First, each utility has a Procurement Review Group (PRG) that consults with the utility in the design of the RFP and the evaluation of bids. Next, the Commission will review all long-term commitments that result from an RFP through its formal process which allows notice to all parties and an opportunity for public review and comment. Based on our continuing review of the RFP process, we will adopt additional safeguards if we find it is necessary.”
As an additional means of addressing potential bias in this structure, the Commission endorsed the concept of creating a procurement incentive mechanism:
“The utilities have an opportunity to invest and earn a return from generation assets; a similar opportunity for profit should be provided for selecting and managing well all other procurement products.”
“The goal of this effort is to motivate the IOUs to procure least-cost supply-side resources and make cost-effective demand-side investments, taking into account the environmental costs (or benefits) of various resource options. Our challenge will be to create an overall procurement incentive framework that aligns the interests of utility investors, management and ratepayers such that the proper balancing of these preferred resources occurs in the procurement of power from existing and new resources.”
In sum, placing IOUs in the role of program choice and portfolio management, as proposed by the IOUs’ Coalition and the NRDC/LIF Coalition, is consistent with the “hybrid” market structure we established in the Procurement Rulemaking for supply-side resource acquisition. This structure consists of both IOU and non-IOU market participants in the ownership and construction of supply-side resources. Project selection is the responsibility of the IOUs as part of their overall resource procurement obligations. The process is subject to Commission oversight and the safeguards described above to ensure against IOU bias in the selection process.

In contrast, the independent administrative structure proposed by TURN/ORA Coalition would create a new organization (and in the case of WEM/SESCO, several competing organizations) to perform the corollary functions of program choice and management for energy efficiency, while leaving the IOUs responsible for those same functions for all supply-side resources. We do not see any clear advantage to creating this dichotomy in the context of California’s current resource procurement structure. As discussed above, we rejected the principle that no entity should be allowed to assume both the program choice/portfolio management function and implementation function in our Procurement Rulemaking for supply-side resources. While TURN, ORA, SESCO, Ecology Action, WEM and other proponents of independent administration clearly consider this principle to be paramount, we do not view it to be an end unto itself. Returning the IOUs to these administrative functions has other advantages, as discussed above. Moreover, we believe there are significant impediments to putting independent administration in place that will introduce considerable delay and uncertainty into the process, thereby undermining California’s ability to achieve the Energy Action Plan goals.
Our unsuccessful attempts to shift to independent administration during electric industry restructuring created over two years of uncertainty in the administration of energy efficiency programs, an experience that we cannot afford to repeat at this critical juncture for energy procurement in California. That experience persuades us that we should carefully consider the potential legal and implementation challenges inherent in moving to the independent administrative structure proposed by the TURN/ORA Coalition or the WEM/SESCO Coalition, even without a “CBEE” type board overseeing the RFP solicitations. In their April 8, 2004 filings, both the TURN/ORA Coalition and the WEM/SESCO Coalition appear to contemplate the transfer of ratepayer funds from the IOU to the independent administrator(s). For example, the TURN/ORA Coalition states that since the Legislature directed the Commission to oversee the expenditure of PGC funds collected for energy efficiency purposes, the Commission may “order the utilities to collect the PGC energy efficiency funds and to transfer them to an independent entity.” The WEM/SESCO Coalition echoes this argument and concludes that no legislation would be needed to implement their proposed administrative structure.
This was also our position in 1998 regarding our authority to oversee PGC funds collected pursuant to Section 381, as well as the telecommunication public purpose funds, which were collected from the IOUs, kept in trust accounts and spent under the Commission’s ultimate authority. As described in Section 3.2, the Department of Finance and the Attorney General rejected this position. Both the Attorney General