1. Regulatory History of Cost Effectiveness
Jessica Allison,
Energy Analyst, Energy Division
Energy Efficiency Branch
Industrial / Agricultural & Forecasting Section
01/10/2019
Good Morning, my name is Jessica Allison. I’m with the Energy Division of the California Public Utilities Commission. I’m going to talk about the regulatory history of cost effectiveness and how that history informs the current cost effectiveness procedures and guidelines.

2. Presentation Overview
Why Cost-Effectiveness?
The Standard Practice Manual
Procedural History
Evolving Standards
Current Framework
Troubleshooting CET
As an overview of our topics for today, I’m going to address why the commission is focused on cost-effectiveness for energy efficiency programs. Then, I’m going to talk about the standard practice manual and how the manual is used in cost effectiveness evaluations. From there I’ll move on the procedural history of cost effectiveness. In that section I’m going to discuss the Commission decisions and resolutions which shaped cost effectiveness standards overtime. After that I’ll summarize how cost effectiveness standards have changed and close with a brief introduction to the current framework.

3. Why Focus on Cost-Effectiveness?
The California Public Utilities Commission and Investor-Owned Utilities are mandated by legislature to “meet unmet resource needs through all available energy efficiency and demand reduction resources that are cost-effective, reliable, and feasible”. -PUC Code Section (c)
The Commission considers cost-effectiveness to be a crucial metric for judging the success of energy efficiency programs. However, we all know cost-effectiveness isn’t the only measure for judging the value of success of energy efficiency programs. While considerations such as the total energy saved, the money saved by consumers, the number of consumers served, and an equitable distribution of collected funds are important considerations, the programs must also be cost-effective.
This focus on cost effectiveness stems from the Public Utilities Code, Section That section contains numerous references to cost effectiveness, but subsection 9C reads that the Commission and IOU’s must “meet unmet resource needs through all available energy efficiency and demand reduction resources that are cost-effect, reliable, and feasible.” Therefore, based on the PU code, energy efficiency programs must be cost effective, reliable, and feasible in addition to any other desirable criteria.
The PU Code is determined by the legislature, and this portion was influenced by SB 1037 which required the commission to identify all potentially achievable cost‑effective electricity efficiency savings and to establish efficiency targets for the IOU procurement plans. The procurement plans must demonstrate that the IOU will first meet its unmet resource needs through all available energy efficiency and demand reduction resources that are cost effective, reliable, and feasible.

4. The Standard Practice Manual
Guidance document for evaluating energy saving investments.
Describes the Total Resource Cost (TRC) test, the Program Administrator Cost (PAC) test, and the Ratepayer Impact Measure (RIM).
The standard practice manual was developed by the Commission to provide guidance on how energy savings investments, like efficiency programs, are evaluated in terms of cost-effectiveness. In its current form, the document describes the three cost effectiveness tests current used by the Commission. The manual presents the Commission’s underlying theory for calculating cost effectiveness from a number of stakeholder perspectives, but does not provide policy guidance on what standards energy efficiency portfolios must meet. The standard practice manual is in the process of being revised, and future versions may include guidelines on what TRC standards energy efficiency portfolios must meet.
Currently, the three tests are the Total Resource Cost test, the Program Administrator Cost test, and the Ratepayer Impact Measure. The three tests assess costs and benefits for demand-side resource programs from different stakeholder perspectives. Briefly, the Total Resource Cost Test considers costs and benefits from both the program administrator and customer perspective. The Program Administrator Cost test considers costs from just the program administrator perspectives, while the benefits are the same as the total resource cost test. Finally, the RIM test evaluates the potential change in rates resulting from the energy efficiency program.
In this workshop, we primarily focus on the total resource cost test, as it is the primary mechanism by which the CPUC judges cost effectiveness. However, in this portion of the presentation I will mention the RIM and PAC tests, as they are relevant to the regulatory history of cost-effectiveness.

5. Procedural History
1984
Describes and uses five cost effectiveness tests
1992
All efficiency programs evaluated using standard practice manual methodology
TRC to include environmental externalities
TRC primary test, also pass PAC
In addition to the standard practice manual, Commission decisions and resolutions influence cost-effectiveness evaluations. The decisions included in this presentation are a summary of some of the key decisions which impacted cost effectiveness. This is not an exhaustive list. As early as 1984, the Commission adopted official language regarding cost effectiveness tests in evaluating energy efficiency programs. In D the Commission stated that the standard practice manual developed four cost effectiveness tests used in the proceeding. Since this decision, the tests included in the standard practice manual have been renamed or changed.
In 1992, the Commission adopted D which confirmed the requirement that program administrators should analyze the cost effectiveness of demand-side management programs in a manner consistent with the standard practice manual. Additionally, the decision modified the existing TRC test to include environmental externalities which were not originally included in the calculation. Finally, the 1992 decision stated that the Commission would use the TRC test as the primary test for determining cost effectiveness, though the portfolios were also required to meet the PAC test.

6. Procedural History
2005
Primary test weighted average of TRC & PAC
Established ex ante & ex post evaluations
2007
Clarified application of Net-to-Gross in TRC
In 2005 the Commission changed the standard by which cost-effectiveness was evaluated again. D decided that portfolios must achieve a cost effectiveness of 1.0 using a weighted average of the TRC and PAC. The TRC was weighted 2/3rds and the PAC weighted 1/3. Importantly, the Commission also added the requirement that energy efficiency programs were to be evaluated both ex-ante and ex-post. This requirement is still in effect, and means that programs are evaluated before implementation using forecasting based on program assumptions. After implementation, the program is reevaluated using actual expenditure levels.
In 2007, D clarified how issues regarding free-ridership were to be included in the cost-effectiveness equations. Free riders are customers who received incentives for implementing energy efficiency measures but would have implemented the measures even without incentives. These individuals are accounted for using a net-to-gross ratio, and D stated that the ratio should be applied to incentive costs paid to customers.

7. Procedural History
2017
Updated “Baseline” guidance for EE programs
2018
Adopted greenhouse gas adder
Defined net-to-gross values for “hard-to-reach” customers
Portfolios must have TRC of 1.25 by 2023
I’m going to skip forward in the interest of time. In 2017, the Commission issued Resolution E-4818 in response to AB 802. AB 802 directed the Commission to include all energy reductions when determining the energy savings resulting from energy efficiency programs. Therefore, the Commission included behavioral, retro-commissioning, and operational programs in addition to energy efficiency resulting directly from measures and installations. In order to count the savings resulting from retro-commissioning programs, the Commission outlined protocol for determining “baseline” energy efficiency ratings of equipment being replaced by energy efficiency programs. For example, Resolution E-818 stated that installed equipment must exceed the energy efficiency standards of equipment being replaced, unless the equipment is offered through a behavioral, retrocommissioning, or operational program.
In 2018, the Commission adopted a permanent greenhouse gas adder to the avoided cost calculator. The avoided cost calculator is used to calculate the “benefits” portion of the cost-effectiveness calculations. This will be explained in further detail later in the presentation. The greenhouse gas adder was added to the avoided cost calculator to measure the marginal greenhouse gas abatement costs associated with the energy avoided through efficiency programs. The GHG adder essentially ensured the benefits associated with avoided greenhouse gas emissions were included in cost effectiveness calculations.
Also in 2018, the Commission provided a clear definition for “hard-to-reach” customers. The Commission sought to encourage program offers to customers who historically benefited less from energy efficiency programs, such as low-income customers with a primary language other than English. Finally, the Commission adopted D which stated that that energy efficiency portfolios must have a TRC of 1.25 by The years 2020 through 2022 are considered “ramp years” where portfolios must meet a TRC of 1.0 and business plans include information on how the program administrator intends to eventually achieve a portfolio of 1.25.

8. Evolving Standards 1992: TRC of 1.0 & PAC of 1.0
2005: Weighted TRC & PAC of 1.0
2018: TRC of 1.0 until 2022, 1.25 by 2023
D stated that the Commission would rely on the total resource cost test as the primary indicator for program cost effectiveness. The Commission stated that the TRC encouraged the development of programs which served as alternatives to supply-side resource options. In order to prevent excessive customer rebates and the impact of energy efficiency programs on program administrator revenue requirements, the Commission also required energy efficiency programs to pass the Utility Costs test, which would later be renamed the Program Administrator Cost Test.
In D , the Commission reiterated that it favored the TRC as a primary test for judging cost effectiveness. However, the Commission also acknowledged the importance of encouraging program administrators to minimize program costs as they strive to maximize resource benefits. Therefore, the Commission confirmed that the PAC test was to be included with a 1/3rd weight.
In D , the Commission returned to requiring a TRC standard of 1.25 which was originally implemented in D but later removed. According to the decision, the Commission implemented the higher 1.25 standard as a hedge against the risk that program administrators would not achieve the forecasted TRC estimates of 1.0.

9. Current Framework https://cedars.sound-data.com/
Currently, the cost effectiveness tool is SQL based and available online though the California Energy Data and Reporting System (CEDARS). On the website, unregistered users can view program level cost effectiveness data, utility monthly reports, budget filings, and quarterly claims. If users register for an account, they can access the cost effectiveness tool and evaluate the cost effectiveness of their own programs.

10. Troubleshooting CET
The CET User Guide answers many basic questions related to using CET
During the 3rd party solicitations, questions must be answered publicly
Later in the presentation we will discuss how to use the cost effectiveness tool and address common questions associated with using the tool. However, if you have additional questions after this training, note that the CET user guide, available on the CEDARS website, addresses the mechanics of using CET. If after completing this training and reviewing the CET guide online, issues still arise in successfully running a cost effectiveness calculation, questions can be directed through Power Advocate. Please note that during the 3rd party solicitation process, questions must be answered publicly so all participants can benefit from the information.

11. Questions?

12. Appendix: Decision Numbers
Resolution E-4818 D