A Working Paper for Discussion and Prepared for the Bay Area Coalition

Funded in part by and under contract to the San Francisco Foundation

Principal Author: Rita Norton & Associates, LLC with direction and input from the Coalition and their advisors. Views expressed are those of the author. Transmittal of the paper is approved with the caveat that all contents and recommendations may not be formally adopted by the Coalition or the San Francisco Foundation but are put forth to encourage timely consideration of these concepts so as to provide input to R.01-08-028.

 

January 12, 2005

rita@ritanortonconsulting.com

408-354-5220
505-982-6654
408-761-3778 (cell)
www.ritanortaconsulting.com

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I.  Introduction

California deserves a strong and unifying Energy Efficiency Administrative structure – one that achieves ambitious goals and has strong support of the diverse and creative energy efficiency community. The Bay Area Coalition, consisting of several northern California local governments, TURN, the San Francisco Foundation and other interested parties, recommends the Commission modify the Energy Efficiency Administrative Structure Draft Decision to include a provision to explore an Administrative Pilot that could overcome the areas in which the Draft Decision falls short.

This Working Paper presents a plan for a Pilot that would complement the proposed administrative structure, address the known limitations of the proposed structure, provide a means to test and adapt innovative approaches to the market, and provide the CPUC with future options should the proposed administrative structure prove unable to meet the State’s aggressive energy savings targets.  The small-scale Pilot can be implemented without delaying the proposed schedule and can be integrated into IOU portfolio planning.  The Pilot envisioned in this Work Paper would be limited to three Counties of the Bay Area Coalition and would direct its attention to customer classes that receive minimal or marginal services from the IOUs:  businesses under 500 kW demand, and municipal, institutional, and residential market sectors.  The Pilot’s ultimate scope and structure would be determined by a working group outlined in this paper. 

Billions of dollars in savings to California’s economy are being staked on how well we deploy energy efficiency services.  It is only prudent to move forward with a small pilot administrative process that can address the known barriers of IOU administration and test innovative approaches to energy efficiency delivery. The Pilot would provide the CPUC with future options and may create a successful dual process where organizations can focus on what they do best. 

The several northern California local governments, TURN, and other interested stakeholders who advance the case for an Administrative Pilot urge the Commission to set in motion the process for examining its merits.  The Decision, with the addition of a few modifying sections, could incorporate a Pilot whose scope adds resources and would build additional capacity for achieving deeper savings.

II. Rationale for Modifying the Decision to Include an Administrative Pilot

Achieving the potential for energy efficiency in California requires a robust and innovative energy efficiency industry.  This can only be achieved under a regulatory climate that fosters a balanced hybrid of certainty and the flexibility to learn and adapt.   The Draft Decision attempts to establish certainty through IOU administration but does not adequately address the recognized problems with IOU administration that seriously limit the ability to achieve the state’s potential.    The proposed Administrative Pilot will allow the CPUC to address these problems, test innovative ideas, and provide the means to improve the statewide administrative structure with little risk. 

The Energy Action Plan sets energy savings targets for all of California.  However, the CPUC only has jurisdiction over IOU service territories. Energy efficiency initiatives sponsored by publicly owned utilities, other state and federal agencies, local governments and special districts are independent of CPUC oversight.  Combined with the constellation of IOU local and statewide initiatives, Flex Your Power, and potential CCA initiatives, the delivery of energy efficiency services is not a seamless process for the consumer.  An Administrative Pilot, independent of IOU Administration, could pursue the development of a more integrated regional approach to the market sectors.  The communities exploring CCA's view the pilot administrative model as a potentially cost-effective means to manage regional initiatives among CCAs as well.   

The State is counting heavily on energy efficiency to meet a large part of our future needs.  The aggressive targets cannot be met by the current mix of established programs but require innovation not just in individual program design but in our total approach to market sectors.   The savings needed will increasingly come from smaller business, institutional, and residential customers who are the hardest to reach.  Under the current system, transaction costs tend to limit program offerings for these sectors, resulting in significant lost opportunities.   The State’s energy saving potential is heavily dependent on how well we approach these markets.  It is critical to have an administrative and regulatory structure that can learn and adapt to these markets quickly. 

The Pilot fulfills the need lacking in the Draft Decision for a means to continue developing and testing a more innovative and market-driven approach to energy efficiency in the smaller business, institutional, municipal, and residential market sectors.   The Pilot would allow us to move beyond the program boxes that inherently lead to diminishing returns, lost opportunities, poor coordination, service gaps and overlaps, and higher cumulative transaction costs.  The Pilot will also provide a comparative means to examine and improve the IOU Administrative process.  

By limiting the scope of market sectors and location, the pilot can be adequately coordinated with the IOU administrator to minimize the overlap and leverage each other’s services as appropriate. 

Current System is Unlikely to Meet Established Goals

While there is agreement on the necessity to move ahead quickly and that IOU initiatives can capture significant energy savings, there is widespread concern even within the IOU ranks that the magnitude of savings expected under the Energy Action Plan[1] cannot be achieved.  Further, the Governor’s recent Green Buildings Executive Order  (S-70-04) calls for some new aggressive targets beyond those called for in the Energy Action Plan.  

Establishing a risk/reward system for the IOU’s does not guarantee that the targets will be met, only that the IOUs will not be rewarded if they are not met.  This system will not protect California consumers from the future cost of massive lost opportunities.  Without a tested alternative, the CPUC will have lost valuable time to change course should the proposed administrative model prove unable to achieve the State’s aggressive goals.   What was learned over ten years ago during the Collaborative Era does not provide an adequate framework to address today’s market climate and the necessity to dig deeper for savings than was required during that time. Other Administrative models for securing energy savings must be explored as a practical matter in the event these expected shortfalls occur, and as a stimulus for more robust savings opportunities in the years ahead.

Pilot Concept is Consistent with the Decision’s Call for Innovation

The Draft Decision states the following:

The CPUC recognizes the importance of innovation.  However, innovation occurs not just at a program level, but at the administrative level as well, where important program choices are made.  The most important innovation achieved by Efficiency Vermont was a fundamental shift from a program-driven to a market-driven model for EE.  Faced with diminishing returns and lost opportunities endemic to the program-based model we use in California, Efficiency Vermont completely restructured the manner in which EE is delivered.   Such attention to the market and quick ability to innovate on an organizational level is not possible under the IOU administration model.  A Pilot Administrator can implement the successful Efficiency Vermont model and provide invaluable guidance to the CPUC on effective EE administration without losing current momentum.

Leaving innovation to IOUs as the only administrator for Third Party Programs is likely to revert to pre-2002 practices such as risk averse selections with a bias for programs that have had proven successes but may create substantial lost opportunities.

The Pilot as presented for discussion in this Working Paper is consistent with the Draft Decision's recognition that more and varied effort is needed to reach goals.  The Pilot will provide invaluable information to this end. The Pilot would test alternative approaches to portfolio design in targeted geographical and market sectors. 

Pilot Would Address Existing Constraints on Third Parties

The Draft Decision cites innovation as justification for Third Party Program solicitations emphasizing that the 20% set aside is to "solicit innovative ideas and proposals for improved portfolio performance." (Pp. 95, 110)

Yet, under the proposed IOU Administration, Third Parties will be hampered by IOU organizational requirements that cause unnecessary and costly delays to achieving program success and even add requirements that eliminate opportunities outright, such as risk management limits that do not allow for hiring students.  These problems exist not simply in the initial contractual relationships, of which the Commission is well aware, but in the ongoing implementation of programs as well.   Such problems are greater for smaller and innovative programs, thus creating a bias toward larger established programs.   For example, in one current partnership, the implementer is required to vet all marketing materials through the IOU’s attorneys, materials that the implementer has used successfully and without incident for years as an independent Third Party implementer.  Other partnerships have been forced to review simple matters with IOU corporate attorneys that otherwise could have been handled with a phone call between parties.   While standard contracts are a good start, these other organizational barriers cannot be overcome by CPUC oversight and intervention.   They become especially prohibitive to innovative initiatives that require organizational flexibility to succeed.   

The Pilot would not be subject to these administrative barriers, thus allowing for much greater flexibility and adaptation to innovative approaches to energy efficiency.   The Pilot Administrator, working in cooperation with the IOU Administrator, will also be able to more efficiently coordinate programs and resolve such barriers that can prove insurmountable to smaller implementers.   Programs administered by the Pilot can also serve to insulate the IOU administrator from risks that are unique to the IOU. 

The Pilot Can Effectively Focus on Capturing Lost Opportunities Inherent to the Program-Driven Delivery Model. 

For reasons inherent to the IOU energy efficiency program-driven model, Third Party programs often experience mixed success in capturing energy efficiency investments and influencing changes[2]. While services are often well received by participants, in some well-documented cases, they have led to only a limited amount of energy efficiency investments and changes. Many programs are dependent on referring participants to statewide rebate programs not designed to address the customers' specific needs, target only a few measures at a time, or lack a financing element.

The scope of most Third Party and Local Partnership programs has been far too limited to demonstrate the feasibility of innovative approaches to program design, delivery and coordination. On one hand, the Third Parties, often left with only the margins of housing types, customer sectors, and energy saving measures[3], have been ineligible for demonstration of large- scale alternatives to utility programs.   Even when doing so creates an obvious barrier to the customer, many programs must refer the customer to another program for services.  Multiple transaction costs for customers result in lower participation and follow-through, and wasted program funds.  On the other hand, the IOUs are bound by the dictates of the statewide programs, where consistency and statewide coordination are important elements of program success.  

IOUs and Third Parties continue to attempt coordination but not integration and have faced repeated difficulties and limited success.  IOU Administration alone will reduce California’s ability to resolve these problems and will continue to accrue lost opportunities.  The State will be nearly doubling the money pumped into energy efficiency without addressing these systemic problems.

The Administrative Pilot will permit an additional approach to that prescribed by the Draft Decision.  The CPUC under this order has the opportunity for not just a variety of new hard-to- reach outreach and referral services, but significantly different approaches for customer service. To undertake meaningful innovation, Third Party proposers should be freed up to design services that substantially leapfrog current methods. Next generation methods offered by Third Parties under a Pilot would serve customers who have not been reached by IOU offerings and would improve program interaction and the potential for savings.  This next era of tapping additional savings justifies the development of an administrative process that serves as a laboratory for innovative administrative design and management.

The Pilot Would Focus Exclusively on the Market Sectors that Have Been the Most Difficult for the IOU’s to Reach – Businesses Under 500kW, and the Institutional, Municipal, and Residential Sectors 

The IOU’s have and will continue to have the greatest success with large customers, those with 500kW and larger service.   The IOU’s maintain account representatives who are assigned to most of these customers to assess and serve their needs.   The under 500kW customers are “unassigned” and thus have no ongoing relationship with the IOU.  As the customer size goes down, it becomes proportionately costly to provide comprehensive attention to the customer and consequently the potential savings per customer goes down as well.  For this reason, IOU programs have focused on information and rebates, and have avoided direct install because of the risk to the IOU of lawsuits.  Some third-party programs do direct install but focus on only the most cost-effective measures for smaller customers.  These cream-skimming practices, driven to unreasonably exploit the current program model for energy efficiency delivery, continue to create significant lost opportunities[4] among the smaller business, institutional, and residential sectors. These untapped and largely ignored energy efficiency savings are critical to achieving California’s aggressive targets.  The Pilot will provide an opportunity to develop and test an integrated approach to energy efficiency delivery that captures these lost opportunities.

The Pilot Would Test a New Approach to Energy Savings not Possible under IOU Administration

The most significant and successful innovation for the procurement of energy efficiency in recent years is not in program design but a fundamentally new approach to working with market sectors.   This approach has been pioneered by Efficiency Vermont[5] and is being investigated and adopted by other states.  Efficiency Vermont began in 2000 with the same program-driven approach we use in California but quickly noticed diminishing returns and lost opportunities.  In a few short years, Efficiency Vermont went through a radical reorganization from a program-driven to a market-driven approach that has succeeded in increasing cost-effectiveness, penetrating the hard-to-reach smaller business and residential sectors, and capturing savings opportunities that would have otherwise been lost. [6]

Under Efficiency Vermont’s new business structure, Market Strategy Teams take ownership for the sector, looking across all boundaries to understand the players and interactions involved in decisions affecting energy use, employing integrated strategies to cost effectively impact those decisions, and reducing energy use. The Market Strategy Teams include business development, marketing, planning and implementation staff and have access to information technology (IT), and technology and analysis resources to support their work. Their work lays out the transition from a set of core programs to markets, documenting a new operational paradigm for energy efficiency.

Efficiency Vermont’s well-documented success provides an excellent example of what a Pilot could achieve that would be impossible under IOU administration.   The Pilot, somewhat comparable to the scale of Efficiency Vermont, can test this innovative approach and other ideas drawn from the energy efficiency community without requiring any disruptive change to the current EE administrative momentum.   It was in part Efficiency Vermont’s small scale and focused purpose that allowed them to recognize the inherent limitations of the program approach and reinvent themselves within a few short years. 

The same problems exist in California but have been harder to recognize due to the sheer size of our market sectors.  Limited-measure programs with high payback can go a long time before they run up against diminishing returns.   What we don’t measure effectively is the cost to California of lost opportunities these programs are creating. 

The Pilot Administrator can test the Efficiency Vermont approach on a manageable scale (large enough to be worthwhile but small enough to be a “laboratory”) to learn from and adapt this approach to our market sectors.   The Pilot can target overlapping sectors that are not well-served such as small business existing buildings, institutional and multi-family residential.   Lessons from the pilot will help inform and allow the statewide administrative structure to transform with less risk.

The Pilot Would Provide New Data for Understanding and Analyzing Costs

IOU Administrative costs have been a subject of much discussion and scrutiny in this Proceeding. While the Pilot may pioneer a new approach such as the market-driven model that would make a side-by-side comparison difficult, there will still be valuable comparative data from the pilot for the Commission to analyze administrative and other overall system costs.   A more integrated market-driven approach and other innovations in energy efficiency delivery may also require a different approach to EM&V, such as one that accounts for lost opportunities.  

III.  How an Administrative Pilot Would Work:  A Bay Area Model

Below we outline a possible scenario for the establishment of an Administrative Pilot in the Bay Area.  It is hoped this example will begin a discussion for an actual Pilot design, sanctioned by the Commission in a Modified Decision

The Pilot as presented in this Working Paper assumes that IOUs will continue to develop integrated resource plans with Commission oversight and input from the CEC. These “top-down” directions will identify the portions of the total resource portfolio to be met through energy efficiency with detail regarding any regional load impacts. Based on this assessment, the Pilot would develop a portfolio with energy savings goals that complement the IOU portfolio through a “bottoms up “ approach, which comes from Pilot parties' greater knowledge of local populations and agencies.

The 2005 planning timeline for the 2006-08 program cycle would incorporate the Pilot and schedule a Workshop for its design. From this Workshop a report would identify the customer segments and saving opportunities that have not been satisfactorily addressed by the IOUs.  It would assign these segments of customers and targeted savings in the Bay Area to a Pilot Administrator, and would outline the qualifications that define roles and responsibilities of such an Administrator. The region of San Francisco, Marin and Alameda County would be the identified target area for service to a narrowly defined set of customers. These communities lend themselves to this examination given the high level of organized efforts made to date by local agencies to create new approaches.  The Pilot Administrator’s energy-efficiency portfolio would focus on this well-defined set of customers to explore new concepts, but would be consistent with the State’s long-term plan. This structure provides for both portfolio management by the IOU and capacity building outside the regulated monopoly model.

Following the Workshop, the CPUC would release a Request for Qualifications (RFQ), followed by a Request for Proposals (RFP) for a Pilot Administrator.  The preparation and review of the RFQ/RFP would involve the Energy Division, the Bay Area Coalition, the ORA, and the IOU serving customers in the Pilot service area--in this case, PG&E.  The CEC and LBNL should also be invited to advise on the RFP. The selected Pilot Administrator would then enter into a contract with the CPUC.

This process would commence immediately following approval of the Modified Decision. The Administrator should be chosen on or about the time the IOU's Program Implementation Plans (PIPs) are submitted for the 2006-2008 program cycle (currently scheduled for June, 2005).  The findings of the workshop will be taken into consideration as the IOU in the Pilot region prepares its PIP. As the Pilot Administrator will be tasked with capturing savings in ways the IOUs traditionally fall short, the utility’s PIP, together with its integrated resource plan and the long term EAP goals, will enable the Pilot Administrator to frame a customized RFP for implementation.

The review panel for the RFP for Third Party Implementation would be convened by the Energy Division and composed of a representative from the CEC, LBNL, ORA, PG&E and TURN.  Members of the Bay Area Coalition who wish to respond to the RFP for implementation would not be permitted to serve on the selection committee nor actively participate in its development.

 Summary of Steps in the Pilot RFP Process under a Modified Decision, with Suggested Timeline

Þ     CPUC Holds Pilot Administrator Workshop  (February)

Þ     CPUC/Panel Define Roles and Responsibility of Pilot Administrator/ Release an RFQ (March)

Þ     CPUC releases an RFP to selected qualified parties (April)

Þ     CPUC/Panel select Pilot Administrator (June)

Þ     CPUC enters contract with selected Pilot Administrator (July)

Þ     Pilot Administrator develops portfolio design to capture savings targets absent in IOU's PIP (August)

Þ     Pilot Administrator releases a clearly defined RFP encouraging community partnerships (September)

Þ     Pilot Administrator selects contractors to deliver energy-saving services within the Pilot region. (November)

Þ     Parties enter into contract with Pilot Administrator and commence work, coordinating with IOU often and as needed. (January, 2006)

The CPUC and the review panel will guide the Pilot Administrator on implementer qualifications.  At a minimum, implementation parties will have to demonstrate documented experience in successfully executing innovative, comprehensive services, with emphasis on experience with governmental agencies and use of public funds.  The qualifications would include experience fostering aggressive and sustained energy savings in sectors identified.

Contract Administration

For the Pilot to function effectively, the Pilot Administrator should enter a contract directly with the CPUC. As argued in other sections of this paper, IOU contracts are impediments to high performance and are the reason so many Third Party and partnerships encountered costly delays that resulted in lost opportunities. The Commission should review the status, differences, and issues affecting the performance of these programs as a result of these contractual roadblocks.  This status report should be background information for the 2005 Pilot Administrative Workshop called for under a Modified Decision.

A model the Pilot might follow is the agreement between the CPUC and the San Diego Regional Energy Office.  Contract administration for the implementation of the Pilot Administrator, however, would differ to the extent that services to be rendered under a new structure are market focused, rather than program focused.  The contract would likely entail—

While it has been argued that managing a contract for a Pilot would present undo burden on the Energy Division, it should be noted that the administration of current Third Party contracts is about to cease, as that role will be totally assumed by the IOUs   Therefore, oversight of the Pilot would actually represent a reduction in contract management workload for the Energy Division, relative to the present scale of demands. In fact, overseeing the IOU portfolios alongside the Pilot portfolio would present the perfect opportunity for staff to contrast and compare regulated to contractual performance of administrators.

  Funding the Pilot

The Pilot must be of a size that can be evaluated for success at administrating multiple projects at higher effectiveness and lower cost than has been the norm.  This requires the Pilot to be large enough to achieve some economies of scale in staffing and other components so that it can be evaluated against IOU administrative costs.  Additionally, the Pilot must have enough customer service activity at a level complex enough to discover most of the potential opportunities and issues.  This proposal assumes that a level of customer service activity equivalent to ten projects would create the requisite level of complexity.  It is also assumes that the average third party program equivalent has an annual budget of approximately $1.5 million to have a significant impact in the limited geographic area. Therefore, programs administered under the Pilot need approximately $15 million annually.  Below is a high-level budget estimate showing a total annual budget of $20 million, less than 5% of the annual energy efficiency commitment statewide.

Budget for Year 1 ($millions)     Pilot Services through Third Parties 77.5% $15.5 Pilot Administrator 16.0% $3.2 Energy Division Oversight   1.5% $0.3 EM&V   5.0% $1.0         Total   100.0% $20.00

One of the principal claims in favor of independent administration is that it will have lower administrative costs.  The CPUC has viewed 20% as a maximum level for administration costs at the portfolio level.  This Working Paper is proposing that for the first year the Pilot will use no more than 16% for start-up and operations; however, this percentage will decrease to no more than 14% in the second and third years.  All savings below these caps can be used to expand outstanding Third Party programs in the second and third years.  If the Commission should decide to fund the Pilot at a lower overall cost, then administrative percentages will have to be raised to approximately 19% the first year and 15% in the second and third years. 

Evaluation, measurement, and verification (EM&V) of the Pilot program and portfolio may need to be slightly higher than the average set-aside to ensure that new aspects of delivery services can be properly assessed.

The source of funds for the Pilot can come entirely from the IOU that serves the Pilot territory. Alternatively, it could be argued that the entire state will ultimately benefit from a successful Pilot and should share some of the burden. In this event, each IOU would need a commensurate adjustment of their energy efficiency goals.  This question could be answered in the workshop and proposed for later approval.  Another question to be answered in the workshop is the extent to which funds should come from the 80% designated for IOU programs and partnerships or the 20% designated for Third Party programs.  Because the $15 million in programmatic activity will be bid out to third parties, it will be argued that most of the funds should come from the 20% Third Party funds.

  Evaluation of the Pilot

The EM&V of the Administration Pilot will require the development of criteria above and beyond the standard now used for program and portfolio evaluations, as structure and integrated process must also be considered. In addition, a set of metrics that could demonstrate a comparative examination of aspects of the Administrative Pilot with the IOU model would be necessary to ascertain what structural changes could be incorporated into the system to attain deeper, long-term savings. With a Modified Decision and the inclusion of the Pilot, evaluation criteria needs to better address how well systems and programs integrate from the perspective of the customer.

The evaluations of Third Party programs to date have not adequately engaged the sponsors and implementation teams in the evaluation process nor has it created a culture where evaluation findings can be integrated into dramatically new and innovative solutions. Evaluations narrowly focus on program elements rather than customer strategies and miss the point for departures from standard offerings.

A Pilot test case would provide a basis for identification of improved processes; new mechanisms for the selection, administration, and delivery of energy efficiency; and evaluation of impacts by leveraging the strengths of both local or Third Party programs and IOU portfolios.