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1 ORDER NO IN THE MATTER OF POTOMAC EDISON COMPANY D/B/A ALLEGHENY POWER S ENERGY EFFICIENCY, CONSERVATION AND DEMAND RESPONSE PROGRAMS PURSUANT TO THE EMPOWER MARYLAND ENERGY EFFICIENCY ACT OF 2008 IN THE MATTER OF BALTIMORE GAS AND ELECTRIC COMPANY S ENERGY EFFICIENCY, CONSERVATION AND DEMAND RESPONSE PROGRAMS PURSUANT TO THE EMPOWER MARYLAND ENERGY EFFICIENCY ACT OF 2008 IN THE MATTER OF POTOMAC ELECTRIC POWER COMPANY S ENERGY EFFICIENCY, CONSERVATION AND DEMAND RESPONSE PROGRAMS PURSUANT TO THE EMPOWER MARYLAND ENERGY EFFICIENCY ACT OF 2008 IN THE MATTER OF DELMARVA POWER & LIGHT COMPANY S ENERGY EFFICIENCY, CONSERVATION AND DEMAND RESPONSE PROGRAMS PURSUANT TO THE EMPOWER MARYLAND ENERGY EFFICIENCY ACT OF 2008 IN THE MATTER OF SOUTHERN MARYLAND ELECTRIC COOPERATIVE, INC. S ENERGY EFFICIENCY, CONSERVATION AND DEMAND RESPONSE PROGRAMS PURSUANT TO THE EMPOWER MARYLAND ENERGY EFFICIENCY ACT OF 2008 BEFORE THE PUBLIC SERVICE COMMISSION OF MARYLAND CASE NO CASE NO CASE NO CASE NO CASE NO Issue Date: December 22, 2011 In this Order, the Public Service Commission of Maryland ( the Commission ) authorizes Baltimore Gas and Electric Company ( BGE ), Potomac Edison Company ( Potomac Edison ), Potomac Electric Power Company ( Pepco ), Delmarva Power and 1

2 Light Company ( Delmarva ), and Southern Maryland Electric Cooperative, Inc. ( SMECO ) (collectively the Companies ), to begin transitioning into the next three-year phase of the EmPOWER Maryland Energy Efficiency Act of 2008 ( the EmPOWER Act ). 1 To begin this transition, we order a series of steps now, with additional orders to follow. 2 First, we authorize the Companies to begin implementing new energy efficiency and demand response programs for the period, to the extent and in the manner set forth in this Order. As described in greater detail, we direct the Companies to standardize their programs to a greater extent, and we attach a matrix of uniform incentive amounts for the Companies residential as well as Commercial and Industrial (C&I) programs. Second, in recognition of the fact that the programs the Companies proposed are not projected to meet the EmPOWER Act s 2015 goals, we order the Companies and other parties to form work groups to develop additional programs designed to reach those goals, and to file a report with the group s recommendations by March 1, Third, we direct the Companies to transition their low-income energy efficiency programs to the Maryland Department of Housing and Community Development ( DHCD ). We direct the parties to form a work group for the purpose of addressing the requirements of that transition and to file a transition plan with us by February 15, And fourth, we address some broader questions relating to the EmPOWER Maryland programs, such as the appropriate tests and calculations of cost-effectiveness we will apply going forward. As the EmPOWER Act requires, 3 we approve now the programs that we find of the Public Utilities Article, Annotated Code of Maryland ( PUA ). 2 We recognize that this Order does not address all of the issues raised in the parties filings in these cases or during the hearings. The parties should not read anything into the fact that we have not addressed a particular issue in this Order beyond the fact that they are not authorized at this time to begin implementing any program unless it is expressly approved here. 3 PUA 7-211(d)-(g). 2

3 are likely to be cost-effective. However, more work is needed if we are to achieve our State s ambitious and important goals. We recognize that this next phase of EmPOWER Maryland will require a substantially increased investment in energy efficiency, and the new programs must (and do) reflect this reality. To date, an estimated 235,000 Marylanders and businesses have participated in the first wave of EmPOWER programs, and those programs have saved consumers $91 million annually and 702,000 annual MWh as of September 1, But although these numbers are impressive on some levels, they reflect peak demand reductions and energy savings well below the self-prescribed goals set by the Companies, 5 and starkly below those originally established by the EmPOWER Act. 6 In fact, if consumer participation and program success rates remain at the status quo, only two of the five Companies will meet their own targets for 2015, and none will meet the original targets set by the EmPOWER Act. 7 Furthermore, while installation and participant levels did increase in recent quarters, the programs to date have not met the Commission s expectations, and we are deeply concerned that the Companies will not meet their 2015 statutory goals. Put another way, this Order demonstrates our renewed commitment to EmPOWER Maryland. We take the EmPOWER goals seriously, even if they have been characterized by some as aspirational, and we know that the parties share our sense of urgency to get the next 4 Recommendations for Enhancing Utility Energy Efficiency Program Performance: EmPOWER Maryland Plans for , Maryland Energy Administration, September 1, 2011, Page i. 5 To date, the programs have achieved about MW in reported peak demand reduction and 872,340 MWh in reported annualized energy savings; which is 37 percent and 16 percent, respectively, of the Companies revised 2015 goals. EmPOWER Maryland Plans, General Staff Overview & Comments, October 12, 2011, Page 2. 6 to provide affordable, reliable, and clean energy for consumers of Maryland, it is the goal of the State to achieve the following energy efficiency, conservation, and demand response targets, based on 2007 electricity consumption: (i) a 15% reduction in per capita electricity consumption by the end of 2015; and (ii) a 15% reduction in per capita peak demand by the end of PUA 7-211(b)(2). 7 EmPOWER Maryland Plans, General Staff Overview & Comments, October 12, 2011, Page 2. 3

4 wave of programs going without delay. Accordingly, we order the Companies and DHCD to begin executing the approved EmPOWER plans, and we direct the Companies to make compliance filings to implement their EmPOWER Plans, including tariff pages and surcharge provisions, consistent with this Order. I. Background The EmPOWER Act requires each electric company to file an electricity savings and demand reduction plan, as well as a cost recovery proposal ( the Plan ) with the Commission every three years after September 1, The Companies filed their Plans for the period with the Commission on or about September 1, Written comments on the Plans were filed by numerous parties on or about October 3, Furthermore, as initiated by the Commission Staff ( Staff ), the Commission obtained an independent evaluation and cost-effectiveness analysis of the Companies programs which was prepared by Itron, Inc. and filed with the Commission on August 26, Written comments were also obtained from the parties on the Itron Report. The Commission conducted legislative-style hearings in the above-captioned matters on October 11-14, and October 17-20, 2011 ( the Hearings ) for the purpose of analyzing the 8 PUA 7-211(h)(2). 9 The Alliance to Save Energy filed comments on October 5, 2011; the Alliance to Save Energy, Institute for Market Transformation, and Northeast Energy Efficiency Partnerships collectively filed comments on October 3, 2011; Northeast Energy Efficiency Partnerships filed comments on September 29, 2011; Sierra Club, Chesapeake Climate Action Network, Environment Maryland Research & Policy Center, Maryland League of Conservation Voters, Maryland PIRG, and Sierra Club Maryland Members collectively filed comments on October 5, 2011; U.S. Department of Energy filed comments on October 4, 2011; Efficiency First filed comments on September 30, 2011; Maryland Department of the Environment filed comments on October 3, 2011; the Office of People s Counsel filed comments on October 5, 2011; Staff filed comments on October 5, 2011; the Department of Housing and Community Development filed comments on October 5, 2011; Efficient Home, LLC filed comments on October 5, 2011; Maryland Energy Administration filed comments on October 5, 2011; Montgomery County Maryland Office of Consumer Protection and Department of Environmental Protection collectively filed comments on October 5, 2011; the Energy Future Coalition filed comments on October 5, 2011; and the Maryland Alliance for Fair Competition and the Air Conditioning Contractors of America, Central Maryland Chapter, collectively filed comments on October 5,

5 impact and results of Potomac Edison s, BGE s, Pepco s, Delmarva s, and SMECO s EmPOWER programs and also to review and, as appropriate, approve the Companies proposed programs and services planned for We reviewed the Companies proposed plans for adequacy and cost-effectiveness, and for whether they will achieve the EmPOWER Act s underlying goals of achieving energy savings and demand reduction. During the Hearings, the Commission heard testimony from Itron, the Companies, Office of People s Council ( OPC ), Staff, Maryland Energy Administration ( MEA ) on behalf of the State, and several of the Parties that filed comments. In making its findings in this Order, the Commission has carefully considered the written comments and oral presentations. II. The Programs Subject to the terms of this Order, we approve the Companies proposals to continue the core EmPOWER programs they have implemented over the past three years. We agree that in the program period the Companies should expand dramatically their appliance rebate programs, lighting programs, HVAC rebate programs, Quick Home Energy Checkup programs, Home Performance with Energy Star incentive programs, and C&I programs. All core energy efficiency programs will additionally benefit from standardization, as discussed below. We also approve the continuation of the Companies demand response programs. None of the Companies proposed any significant change to their existing demand management programs, which generally have been successful. To the extent they have fallen short, those programs have suffered from execution rather than design errors, and we expect those issues will be overcome during the next programmatic phase. 5

6 We do not, however, approve the consumer electronics incentives proposed by all the Companies for the purchase of high definition televisions, computer monitors, laptops and other electronic devices. We conclude that incentives in the range of $5 to $30 are far too low to influence consumer behavior in the purchase of high-priced electronic equipment. 10 A. Standardization of Core Programs Throughout the Hearings, witnesses consistently expressed the need for greater statewide consistency and uniformity among performance, programs, and rebates, albeit with some flexibility for each utility to optimize their specific plans. Although we do not believe in standardizing these programs merely for the sake of consistency, 11 we are persuaded that standardization of EmPOWER elements across the Companies will reduce confusion for consumers, retailers and contractors, and thereby increase awareness and participation. Retailers located in more than one utility service territory will more likely be knowledgeable and familiar with eligible products, rebates and incentives, and so will educate consumers more effectively. Contractors will more conversantly discuss terms and incentives associated with EmPOWER programs across the State, regardless of the utility service territory. We see three opportunities to standardize the next wave of EmPOWER programs immediately. First, we find that the EmPOWER incentives given to consumers and businesses for actions taken or purchases made under the EmPOWER Act should be uniform. To that end, we have compiled a list of standard incentives for approved products and 10 The Commission will review in 2012 efforts and incentives to increase the energy efficiency of cable and satellite TV boxes, which contribute substantially to the total energy use from electronic equipment in residential homes. 11 A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. R. W. Emerson, Essays. First Series. Self-Reliance (1841). 6

7 services, (see Appendix A for residential and Appendix B for C&I 12 ) and direct the Companies to conform their incentives to these levels. We recognize that not all Companies will offer all products and services listed, and we are not ordering all Companies to offer identical products. To the extent a Company may wish to modify an incentive as stated to optimize the cost-effectiveness and program attractiveness specific to its own region, we authorize Staff to approve requests by Companies to adjust incentives for products and services listed in Appendices A and B up to a maximum of plus or minus 10%, to the extent the adjustments are consistent with these objectives. A Company wishing to deviate by more than 10% must receive advance approval from the Commission. 13 Second, there should be greater uniformity across the Companies home audit and Home Performance programs. At the Hearings we heard that, while Companies Quick Home Energy Checkups ( QHEC ) generally had a satisfactory consumer participation rate, 14 the conversion rate of the QHEC to actual work performed was quite low. 15 Potomac Edison, BGE, and SMECO proposed the creation of a premium home audit designed to provide consumers with direct and immediate installation measures and a more thorough evaluation of their home s energy efficiency potential. The premium program would be performed at a 12 In some instances, the rebates for C&I measures were expressed in ranges that we have not attempted to reconcile. We approve the inclusion of all of the measures listed in Appendix B, and direct Commission Staff, in consultation with the other parties, to propose uniform incentive levels for each of the measures tagged with asterisks in that Appendix. We direct Staff to file a completed Appendix B by February 1, 2012 for approval at a subsequent Administrative Meeting. 13 These requests will be heard and resolved at an Administrative meeting. We acknowledge that the Companies have made commitments to fund certain projects at the incentive levels currently in effect and on the current terms, and hereby allow the Companies to award prior incentives for jobs approved in 2011, provided that the work begins in 2012 and concludes by the end of The Commission reiterates that customers of all Companies should have a quick home energy checkup performed on their residences and businesses whenever practicable. 15 Presentation distributed by OPC at the October 11, 2011 hearing, Tr., pp

8 nominal charge to engender the consumer s investment in the process and encourage them to follow through on recommended measures under a home performance program. We acknowledge that successful Home Performance programs and achievement of the EmPOWER Act s savings goals will require a higher percentage of home checkup or audit jobs to convert into actual Home Performance jobs. Accordingly, we support the Companies proposals to offer both a Quick Home Energy Checkup and a premium home energy audit. Based in large part on testimony from MEA, 16 we are persuaded that a consumer who invests $100 for the premium audit is more inclined to have recommended work performed under a utility s home performance program. The Commission therefore directs all Companies to establish both a no-charge quick home energy checkup and a $100 premium home energy audit and, in the interest of furthering the goal of standardization, to convene a work group for the purpose of synchronizing the audit and home performance programs across the Companies, both in terms of terminologies and features, including but not limited to titles, incentives, contractor payments, and audit structure. The Commission further directs the work group to establish appropriate marketing templates and sales support for the Companies contractors in order to best assist them in turning audits into retrofits Chairman Nazarian: Why are free audits bad, other than that they re just more expensive? Ms. Urbanek (MEA): They re more expensive. There s not really a value to the consumer. You get something for free, you don t really feel as invested in it which is why the $100 model is almost a sweet spot. It s not a barrier. A $100 to a lot of homeowners, they re willing to put that out of pocket and not think about it a whole lot. But they re still invested enough in it that they re not just going to put it on the shelf and forget about it. It s still in their mind that this was expended. October 13, 2011 hearing, Transcript ( Tr. ), p As was stated by Mr. David Hill of Vermont Energy Investment Corporation ( VEIC ) on behalf of OPC, Providing marketing and sales support for the contractor network I think is a step that s proven to be useful in other markets. In some of our written comments, we noted that things such as Dale Carnegie sales training has been done in Maine to help improve the amount of closing from audits to actual retrofits that are done. This needs to be done thoughtfully, and you don t want to be selling people a bill of goods which can t be delivered upon. So quality assurance and quality control are very important. But at the same time, if you have folks not geared toward making the sale, you re leaving stuff on the table. You re there and it s the time to help the consumer understand the costs and benefits and take that forward. October 19, 2011, Tr., pp and

9 Third, as standardization of programs and incentives across the Companies increases, the need for an individual Company s General Awareness campaigns should decrease, and the Companies should be able to focus more on messaging and marketing related to specific Company programs. In the consumer s path from awareness to consideration to choice, tightening the connection between messages about saving electricity with specific program measures and opportunities will, we expect, increase participation in specific programs in response to marketing. It also raises for us real questions about the proper role, if any, for General Awareness messaging at this time in the life of EmPOWER Maryland. Although General Awareness was (properly) intended to create a foundation of awareness of energy efficiency and conservation on which program-specific marketing could build, the reality is that the General Awareness messages should tend more and more to point customers to particular measures. Because General Awareness spending is not allocated to individual programs (and program-specific marketing is), the Companies tend to characterize a disproportionate share of their marketing activity as General Awareness. This leaves proper marketing expenditures which drives consumers towards consideration and choice out of the programs cost-effectiveness calculations. Accordingly, we direct the Companies to suspend their General Awareness spending at this point, pending further proceedings about the proper role of General Awareness expenditures during this next phase of EmPOWER Maryland. This does not mean that the Companies should reduce their marketing activity to the contrary, the Companies should undertake the full extent of marketing necessary to drive participation in their programs. Rather than straddling the blurry line between General Awareness and individual programs, 9

10 though, the Companies should allocate their marketing expenditures proportionately to the programs that the messages support. B. Low-Income Programs The Companies, as well as DHCD, testified about their implementation plans and progress on low-income programs. 18 The Companies programs spanned a wide range in coverage and success rates. Some Companies have reached a modest number of households, while others seem, frankly, to have devoted little attention to this area of great importance to the Commission and to the State of Maryland. 19 DHCD s programs, on the other hand, greatly surpassed even the best performing utility, 20 all while creating jobs, ensuring that all contractors are properly and consistently trained, implementing and maintaining rigid quality control measures, and keeping marketing costs extremely low. The Commission is tasked with deciding whether the Companies or the State, through DHCD, should manage the weatherization and retrofitting programs intended for low-income households. We are convinced that having DHCD administer the programs would further the previously mentioned goal of maximizing statewide consistency. In addition, DHCD is bestsuited to direct the low-income programs, given its proven track record of creating and operating four programs that have successfully and efficiently assisted low-income 18 While DHCD is primarily known as a housing finance agency, it does have four programs that contribute directly to the EmPOWER energy reduction goals: (1) a weatherization systems program; (2) a multifamily energy and efficiency and housing affordability program ( MEEHA ) which, through a combined effort of DHCD and MEA, is a comprehensive low and moderate subsidized rental program reaching working families, senior housing, and other specialized buildings such as for the disabled; (3) the statewide building codes; and (4) a better buildings program ( Be Smart ) that provides loans for retrofits to single family and multifamily homes and commercial buildings without regards to income, with the weatherization and MEEHA programs being for low income households. DHCD, October 12, 2011 Tr., pp. 86 and Presentation distributed by OPC at the October 11, 2011 hearing, Tr., pp. 5 and DHCD s weatherization program has weatherized nearly 8,000 low income houses between July 2009 and October 2011, taking a program that did less than 80 units per month and growing it into a program now doing more than 400 units per month. DHCD s MEEHA program provided $8.8 million to 46 different multi-family projects across the state and has proven to be extremely cost effective as an average investment of $1,750 per unit returns a savings of more than $10,000. DHCD, October 12, 2011 Tr., pp. 88, 90, and

11 households in decreasing their electric bills and consumption. This transition comes at a time when DHCD will wind down its three-year, $64 million American Recovery and Reinvestment Act ( ARRA ) weatherization program in the spring of Furthermore, this shift will allow the Companies to focus more directly on their other programs and will ensure the continuation of one of the most successful statewide energy efficiency programs in the country. 21 The Commission hereby designates DHCD as the single provider of low-income energy efficiency programs for the EmPOWER Act throughout the State, and directs that all low-income programs initiated by the Companies under the EmPOWER Act shall be transitioned to DHCD upon implementation of the Plans. Furthermore, the Commission approves DHCD s requested budget of $70.6 million over three years, to be distributed as follows: $15 million per year for the single-family weatherization program; $12.6 million for administrative and overhead costs over three years for the single-family program (which, per DHCD, will result in 9,800 fully and completely weatherized units); $12.5 million over three years to continue the MEEHA program; and $0.5 million over three years for the MEEHA overhead expenses. Each Company shall contribute to the funding of the DHCD annual budget an amount equal to the percentage of its customers who are eligible to qualify for benefits under the Electric Universal Service Program ( EUSP ), compared to the total number of EUSP-eligible customers across all five Companies. Although this transition and the subsequent administration of the programs will be monitored by Staff, the Commission recognizes that this transition will raise a number of logistical and organizational issues that go beyond the record we have developed so far. Accordingly, we need to deal with issues surrounding the restructuring and therefore direct 21 DHCD, October 12, 2011 Tr., p

12 that a work group be convened prior to full implementation to submit a transition plan by February 15, 2012 that resolves matters such as reporting methods, interim milestones, software compatibility, accountability, contractual arrangements, possible budget amendment issues, and quality control procedures. C. Conservation Voltage Reduction Another topic discussed at length at the Hearings, though proposed as a program by only Potomac Edison, was that of conservation voltage reduction ( CVR ). CVR is a practice that has been exercised by Companies across the country for decades, in which the utility puts a device on its distribution system to help better regulate the output voltage range. 22 It is installed by the Companies, requires no consumer participation, does not involve direct costs to consumers, 23 and has a very high cost-effectiveness rating. We are intrigued by the opportunities for highly cost-effective savings that CVR programs could create. Accordingly, we approve Potomac Edison s proposed program, with one modification discussed below, and we direct all of the other Companies to develop a CVR program (or, in BGE s case, to accelerate the CVR program it is currently developing). Although these programs have arisen in the context of the EmPOWER Maryland cases, we view the installation of CVR equipment as the installation of infrastructure that, unlike the expenditures from other EmPOWER programs, builds the Companies rate base. Accordingly, the costs of CVR installations should not be paid by the EmPOWER surcharges, but should seek recovery through rates. Potomac Edison s specific request to recover the costs of its CVR program through the EmPOWER Maryland surcharge is, therefore, denied, 22 Rather than putting up much higher voltage to get into the acceptable range for consumers, you start off with much lower and you have line voltage regulators in the distribution array so you don t have to waste that much energy to keep it in the technical bounds. MEA, October 12, 2011 Tr., pp. 45 and There is no direct cost to the customer for CVR, if there are distribution improvements, they will obviously be impacted by those minor increases in distribution. MEA, October 13, 2011 Tr., pp. 503 and

13 and the other Companies should expect to recover the costs of their programs through future rate-base proceedings as well. The Companies may count the projected energy savings generated by their respective CVR programs toward their EmPOWER goals. To determine cost-effectiveness, we direct the Companies to track and report separately the costs associated with their CVR programs. D. New Program Development Work Groups Although we are optimistic that the programs we have approved above will drive significant new participation and move us closer to meeting the EmPOWER goals, only two of the Companies proposed program suites would, if fully implemented and subscribed, satisfy their own 2015 EmPOWER goals, and none would meet the statutory goal. As such, and while the Companies execute the programs we have approved, we order the parties to convene work groups as discussed below. 1. Financing Programs As we have learned during the last three years, the availability of financing has been a daunting barrier to participation in many of the Companies EmPOWER programs. There is no doubt that the up-front costs associated with making energy efficient improvements have prevented both residential and C&I consumers in Maryland from taking advantage of the incentives available under the EmPOWER Act. We agree that participation in the EmPOWER programs would increase if consumers had financial assistance options. The lack of convenient, accessible financing at favorable rates is a missing link in all of the Companies EmPOWER programs. Access to financing is critical for many consumers who must invest thousands of dollars to achieve significant energy savings in their homes and 13

14 businesses. These investments can often pay for themselves in a matter of years if financing rates are affordable. At the EmPOWER hearings, witnesses and testimony presented the pros and cons of various options for financing and the roles that Companies can and should play in supporting financing programs, from coordinated loan funds to interest rate buy-down programs and onbill financing. We appreciate, and have considered, the PHI Companies proposal to support the existing Maryland Clean Energy Center financing program, but we are not prepared at this point to commit to that specific model. Instead, we direct the parties to convene a work group for the purpose of analyzing financing opportunities in greater detail, as well as legislative or regulatory solutions that might overcome barriers to financing programs. The work group should consider, among other things, whether changes to the banking or debt collection laws might allow on-bill financing or utility collection of loan payments without turning the Companies into banks, 24 and other ways the significant revenue streams from the EmPOWER surcharges could be used to facilitate financing for customer participation in EmPOWER programs. 2. Additional Programs Finally, we direct the Companies and all of the parties to continue the work group process that began over a year ago and, in that setting, to develop the additional programs or program enhancements that would be necessary to meet the full EmPOWER Maryland goals by The work group shall file a progress report by March 1, 2012, and we will determine at that time what further proceedings are appropriate. We recognize that this next increment of programs could well fail the current cost-effectiveness tests (we will have more to say about that below), but we will never know what it would take to reach the EmPOWER 24 EmPOWER Maryland Plans, General Staff Overview & Comments, October 12, 2011, Page

15 goals without this information and analysis, and we will need a better understanding of the universe of further options as we continue to refine these programs going forward. This process will also help to inform the post-2014 future of EmPOWER Maryland, an act and policy direction that will not magically disappear in 2015 when the goals are or are not met. We encourage the Companies to include in proposals programs targeting the numerous untapped markets discussed at the Hearings and in written testimony, including non-profits such as the American Red Cross, the Maryland Food Bank, and the Maryland School for the Blind, students and schools in general, master-metered communities, and street lighting. III. Broader EmPOWER Issues In addition to providing the approvals the Companies need to get going, we also offer some guidance on cost-effectiveness, as well as certain mechanical and housekeeping matters. A. Cost-Effectiveness Some parties expressed concern during the Hearings that the cost-effectiveness standard we have utilized since has created uncertainty for the Companies and inhibited creative or innovative program design. We are urged, primarily by MEA, to define 25 The EmPower Maryland Act leaves [the term cost-effective ] undefined, and the Commission finds this omission relevant. As discussed below, there are well-known industry notions of cost-effectiveness that the General Assembly could have imported or referenced, but did not. As such, the Commission reads the EmPower legislation as directing it to use its best judgment, to be good stewards of ratepayer funds, and to ensure that any programs it approves achieve a direct and appropriate return for the ratepayers investment. The Commission is aware that its counterparts in other states, particularly in California, have utilized a series of cost-effectiveness tests that seek to quantify the costs and benefits of energy efficiency programs from different perspectives. At the risk of seeming cynical, our analysis of the California tests leads the Commission to conclude that the selection of the appropriate test tends to determine whether programs are cost-effective more than the terms of the programs themselves. The tests vary considerably in how narrowly or broadly they define costs and benefits, and the calculations required to determine the results under each of the tests are both complicated and acutely sensitive to assumptions. For this reason, the same program can yield highly divergent measures of cost effectiveness depending on which test is applied As a legal matter, the Commission does not consider itself bound to follow or accept any particular calculation of cost-effectiveness the EmPower Maryland Act does not incorporate or refer to any definition, from California or elsewhere. But when the Commission analyzes the cost-effectiveness of these and any other utility programs before it starts from the premise that each has only one certain feature: all ratepayers will fund these programs through a surcharge on their bills, whether they participate or not. Commission Letter Order to BGE, August 18, 2008, Maillog # , pp

16 cost-effectiveness in a more formulaic manner and to expand our notion of cost-effectiveness to allow a broader range of programs to pass. Specifically, MEA asks us to adopt a twopronged approach that utilizes the California Manual s Total Resource Cost ( TRC ) test and a test MEA calls colloquially the Mrs. Jones test, which compares the cost of each kilowatthour saved to the cost of a kilowatt-hour of generation. 26 Other parties asked us to clarify the standard to include factors such as natural gas savings, carbon emission and other environmental impacts, job creation, and program maturity. 27 In general, then, there appears to be a need for further guidance from us on both broader and narrower questions relating to cost-effectiveness. Although we cannot solve all of these questions on the record that has been developed this fall, we can clarify three matters now. First, cost-effectiveness shall be examined on a sub-portfolio level, i.e., collectively for residential programs and collectively for C&I programs. We acknowledge that further incremental energy savings will require greater innovation in the Companies program designs, and that such innovation may not always satisfy cost-effectiveness standards on a program-by-program basis. This is not to say that we endorse innovation at any cost, but we recognize that an innovative proposed program may not meet the immediate first-year cost-effectiveness threshold, even if it may still, over time, bring significant overall energy savings or demand response participation. Second, we find that the Companies should use gross savings figures when reporting their projected energy savings, and net savings figures for the purpose of considering costeffectiveness and program design. We had not previously considered this distinction, but we 26 MEA, October 12, 2011 Tr., pp. 36 and EmPOWER Maryland Evaluation and Cost Effectiveness Analysis: Key Findings and Recommendations, Itron, October 12, 2011, pp. 8 and 9; BGE, October 14, 2011 Tr, pp. 658 and 659; MEA, October 13, 2011 Tr., pp. 474 and 475; Itron, October 11, 2011 Tr., p

17 are persuaded that factors such as free ridership and spillovers 28 should be considered when assessing the savings attributable to a specific program. A gross estimate of potential savings would not accurately reflect free ridership or spillovers during the design phase and when determining the cost-effectiveness of a specific program, which could skew future decisions about whether to continue or expand a particular program. On the other hand, when calculating the overall impact of EmPOWER Maryland, a net account of savings would not accurately reflect the actual energy or dollars saved by consumers the consumers realized the savings, however they came into being, and the fact of the savings should not be ignored in that context. We are comfortable using different methodologies for different purposes, and we direct the parties to proceed accordingly. Third, recognizing that third-party Evaluation, Measurement & Verification ( EM&V ) of actual performance is critical to the design and delivery of cost-effective programs, 29 we direct the Companies to have a budget of 4% for EM&V programs. We are not prepared, at this point, to modify the cost-effectiveness standard itself. Our standard to date has focused on ensuring a real return on the ratepayers investment, and we continue to believe that that remains a critical central principle. Within that principle, however, there are subsidiary issues that will require further analysis, including whether and to what extent to attempt to include the value of externalities within the benefits portion of the calculation. We have previously rejected the Mrs. Jones standard, and we remain concerned that an overly inclusive or imprecise set of assumptions could render the calculation meaningless. We are willing, however, to re-evaluate the scope and balance of the 28 Free ridership is the concept of a consumer purchasing a product or service that they would have purchased regardless of EmPOWER or the incentives available, and spillover is the concept of a consumer purchasing a product or service due to the review or recommendation received from another consumer on the product or service. 29 VEIC, October 12, 2011 Tr., p

18 factors bearing on cost-effectiveness, and we will address this in further proceedings we will order in the coming weeks. B. Work Plans In order to ensure that the new programs are implemented promptly and fully, we direct the Companies to submit detailed work plans with milestones and associated timelines to us by March 1, The purpose of these work plans is to establish concrete implementation milestones which will allow greater and more precise accountability at the periodic review hearings (discussed further below). Although we do not intend to micromanage the Companies efforts, these plans will allow our Staff to monitor the Companies performance and to identify areas of concern earlier than would otherwise be possible with a more general plan. C. Reporting Staff requested the Commission modify the reporting requirements from quarterly to semi-annually. 30 We recognize and appreciate the immense amount of time spent by all parties on compiling the reports, as well as the time spent reviewing the reports once they are filed, and as such we will grant the request and direct that all reports be filed semiannually rather than quarterly, subject to the following conditions: Companies must continue to report data and metrics to Staff on a quarterly basis so that Staff may present any concerns to the Commission immediately. Companies are required to use standard templates for their reports but are also encouraged to utilize data tables and graphics more frequently. 30 Staff, October 12, 2011, Tr., p. 187; EmPOWER Maryland Plans, General Staff Overview & Comments, October 12, 2011, p. 16; Utility Specific Comments on the EmPOWER Maryland Program Plans, On Behalf of State of Maryland Office of People s Counsel, October 19, 2011, p

19 Stakeholder meetings will also be reduced from quarterly to semiannually, with the upcoming schedule set as follows: Semiannual Reports for the July 1 through December 31, 2011 performance period due January 31, 2012; Stakeholder meeting held by March 2012; Staff Comments due by March 31, 2012; Legislative-style Commission hearings held in April 2012; Semiannual Reports for the January 1 through June 30, 2012 performance period due July 31, 2012; Stakeholder meeting held by September 2012; Staff Comments due by September 30, 2012; and Legislative-style Commission hearings held in October IT IS THEREFORE, this 22 nd day of December, in the year Two Thousand Eleven, by the Public Service Commission of Maryland, ORDERED: (1) That Potomac Edison, BGE, Pepco, Delmarva, and SMECO shall make compliance filings to implement their EmPOWER Plans, including tariffs surcharge provisions, consistent with this Order; (2) That the following Potomac Edison EmPOWER programs are approved and shall be implemented with the applicable incentives set forth in the Appendices: (a) Residential Energy Efficiency programs: (i) (ii) (iii) (iv) (v) Lighting; Appliance Rebate; Appliance Recycling; Plug Load Controls and Smart Strips; Energy Efficiency Kits (for 2012 only); 19

20 (vi) Home Performance programs: 1. Online Audit; 2. Quick Home Energy Check-up; 3. Comprehensive Home Audit; (vii) New Construction; (viii) HVAC and Domestic Hot Water Equipment; (b) C&I Energy Efficiency programs: (i) (ii) (iii) (iv) (v) Prescriptive Equipment programs; Custom Equipment programs; Retro-commissioning; New Construction; Small Business and Multi-family programs: 1. Audits and Direct Installations; 2. Energy Efficiency Kits; (3) That the following BGE EmPOWER programs are approved and shall be implemented with the applicable incentives set forth in the Appendices: (a) Residential Energy Efficiency Programs: (i) (ii) (iii) (iv) (v) (vi) Lighting; Appliance Rebate; Appliance Recycling; Home Performance programs; 1. Quick Home Energy Check-up; 2. Home Performance with Energy Star; Energy Star New Homes; HVAC Rebates; (b) C&I Energy Efficiency programs: (i) (ii) (iii) Small Business Solutions Direct Installations; Energy Solutions for Business: 1. Prescriptive program; 2. Custom program; 3. New Construction program; Retro-commissioning program; (c) Demand Response programs for Residential and C&I; (4) That the following Pepco EmPOWER programs are approved and shall be implemented with the applicable incentives set forth in the Appendices: 20

21 (a) Residential Energy Efficiency programs: (i) (ii) (iii) (iv) (v) (vi) (vii) Lighting; Appliance Rebate; Appliance Recycling; Plug Load Controls and Smart Strips; Home Performance programs; 1. Quick Home Energy Check-up; 2. Home Performance with Energy Star (excluding the Home Performance with Energy Star financing buy-down program); New Construction; HVAC and Water Heating Efficiency Rebates; (b) C&I Energy Efficiency Programs: (i) (ii) (iii) (iv) (v) (vi) Non-Residential Existing Buildings; Non-Residential Custom; Retro-Commissioning and Operations and Maintenance Program; New Construction; Small Business; Master-Metered Multifamily Buildings program; (c) Demand Response Programs: (i) (ii) Residential and Master-Metered Demand Response programs; Small Commercial Energy Wise Rewards program; (5) That the following Delmarva EmPOWER programs are approved and shall be implemented with the applicable incentives set forth in the Appendices: (a) Residential Energy Efficiency programs: (i) (ii) (iii) (iv) (v) Lighting; Appliance Rebate; Appliance Recycling; Plug Load Controls and Smart Strips; Home Performance programs: A. Quick Home Energy Check-up; 21

22 (vi) (vii) B. Home Performance with Energy Star (excluding the Home Performance with Energy Star financing buy-down program); New Construction; HVAC and Water Heating Efficiency Rebates; (b) C&I Energy Efficiency programs: (i) (ii) (iii) (iv) (v) Existing Buildings; Custom Incentive; Retro-commissioning and Operations and Maintenance program; New Construction; Small Business Customer; (c) Demand Response programs for Direct Load Control Air Conditioning Demand Response (Residential and C&I); (6) That the following SMECO EmPOWER programs are approved and shall be implemented with the applicable incentives set forth in the Appendices: (a) Residential Energy Efficiency programs: (i) (ii) (iii) (iv) (v) (vi) Lighting; Appliance Rebate; Appliance Recycling; Home Performance programs: A. Quick Home Energy Check-up; B. Home Performance with Energy Star; Energy Star New Homes; HVAC Rebates; (b) C&I Energy Efficiency programs: (i) (ii) Small Business Direct Installations; Business Solutions; (c) Demand Response Programs for Residential and C&I; (7) That Commission Staff, in consultation with the parties, shall propose uniform incentive levels for each of the measures tagged with asterisks in Appendix 22

23 B and file a completed Appendix B by February 1, 2012 for approval at an Administrative Meeting. (8) That the consumer electronics incentives proposed by the Companies are hereby denied, with the exception of the incentives for plug load controls and smart strips which, as stated above, are approved; (9) That at the request of a Company, Staff is authorized to approve requests to adjust the incentives in the Appendices up to a maximum of plus or minus 10%, provided the adjustments are consistent with optimizing cost-effectiveness and program attractiveness; (10) That any Company wishing to deviate beyond plus or minus 10% from the incentives in the Appendices must receive advance approval from the Commission; (11) That incentives in effect prior to the issuance of this Order may be awarded for jobs that were approved in 2011, provided that the work begins in 2012 and concludes by the end of 2013; (12) That all Companies establish both a no-charge quick home energy checkup program and a $100 premium home energy audit; (13) That all Companies suspend their General Awareness expenditures pending further proceedings about General Awareness spending, and may instead use those resources for more direct EmPOWER program marketing with the Commission s approval; (14) That DHCD shall hereby be the single provider of low-income energy efficiency programs for the EmPOWER Act throughout the State, and therefore all 23

24 low-income programs initiated by the Companies under the EmPOWER Act shall be transitioned to DHCD by the Companies upon implementation of their Plans; (15) That DHCD s requested budget of $70.6 million over three years ($15 million per year for the single-family weatherization program, $12.6 million for administrative and overhead expenses for the single-family weatherization program, $12.5 million to continue the MEEHA program, and $0.5 million for MEEHA overhead expenses) is approved; (16) That each Company shall contribute to the funding of the DHCD annual budget an amount equal to the percentage of its customers who are eligible to qualify for benefits under the Electric Universal Service Program ( EUSP ), compared to the total number of EUSP-eligible customers across all five Companies; (17) That Staff shall monitor the transition to and subsequent administration by DHCD of the low-income programs; (18) That all Companies shall develop and implement a CVR program; specifically, Potomac Edison s proposed CVR program is hereby approved, subject to the term stated below; BGE is directed to accelerate its CVR program development and implementation; and Pepco, Delmarva, and SMECO are directed to establish and implement a CVR program; (19) That the Companies may not add costs associated with their CVR programs to their EmPOWER surcharges, and that Potomac Edison s specific request to do so is denied; (20) That the Companies shall track and report separately the costs associated with their CVR programs for the purpose of determining cost-effectiveness; 24

25 (21) That the cost-effectiveness of Company programs shall be examined collectively for residential programs and collectively for C&I programs; (22) That the Companies shall use gross energy savings figures for the purpose of determining their projected energy savings, and net energy savings figures for the purpose of considering cost-effectiveness and program design; (23) That each Company shall have a budget of 4% for EM&V programs; (24) That further proceedings be held for the purpose of establishing the appropriate standard to be used for determining cost-effectiveness of programs; (25) That the Companies shall submit detailed work plans with milestones and associated timelines to the Commission by March 1, 2012, subject to the conditions specified elsewhere in this Order; (26) That the Companies shall file their performance reports semiannually, subject to the conditions and schedule specified elsewhere in this Order; (27) That work groups shall be convened or continued for the following purposes: (a) With regard to the Companies home performance programs, to synchronize the audits, check-ups and other home performance programs across the Companies, both in terms of terminologies and features, including but not limited to titles, incentives, contractor payments, and audit structure, as well as to put in place appropriate marketing and sales support for the Companies contractors so as to best assist them in turning audits into retrofits; 25

26 (b) With regard to DHCD directing the low-income programs, to address and resolve matters such as reporting methods, interim milestones, software compatibility, accountability, contractual arrangements, possible budget amendment issues, and quality control procedures, and to file a transition plan with us by February 15, 2012; (c) With regard to establishing financing programs by the Companies, to analyze financial opportunities in greater detail, as well as legislative or regulatory solutions that might overcome barriers to financing programs, while considering, among other things, whether changes to the banking or debt collection laws might allow onbill financing or utility collection of loan payments without turning Companies into banks, and any other ways the significant revenue streams from the EmPOWER surcharges could be used to facilitate financing for customer participation in EmPOWER programs; and (d) With regard to meeting the EmPOWER Act s 2015 statutory goals, to develop the additional programs or program enhancements that would be necessary to meet the goals, and to file a progress report containing the group s recommendations by March 1, 2012; and (28) That all motions not specifically granted or denied herein are held pending further Order of the Commission. /s/ Douglas R. M. Nazarian /s/ Harold D. Williams /s/ Lawrence Brenner /s/ Kelly Speakes-Backman /s/ W. Kevin Hughes Commissioners 26