It is important to note that Category 2) NPRs are created when you enter a system for the first time, depending if there are any habitable planets and the percentile chance you defined at game start.
Category 3) NPR(s) are created immediately at game start and they actively develop and scout around, ie behave exactly like the player. It is entirely possible for them to active Category 2) NPRs when they are expanding.
The tech-level for the former can vary wildly, whereas the tech-level for the latter is generally somewhat similar to you because the starting point for both was the same. Exception is if you do a conventional start, as the AI NPR will still have a TN-start and thus a significant head start over you. Still, the AI ain't too smart in the long-run, so that's not a bad thing, really.
That's not quite the way it works. If "computer-controlled is on", then all NPR that are activated are computer-controlled (category 3) NOT category 2. In addition, the tech algorithm is straightforward: the populations get bigger and the tech goes up for newly activated NPR as time passes. This makes conventional starts a bit challenging
More details below:
Both Category 2 and 3 NPRs are created in the same way - the algorithm is A) "Has an NPR been created?" then B) "Is it human or computer controlled". If it's computer controlled, then it's category 3 and Aurora handles all the setup for you and controls the race after setup. If it's category 2, then it's a much bigger pain - you have to generate the NPR by hand (there's a wizard to do this). Note that this happens in SM mode - this is one of the primary uses of SM.
There are three general situations for when an NPR is created:
A1) As part of Aurora's auto-setup, by specifying the number of NPR. Caveat: I don't remember what happens if you choose a non-zero number of NPR in the setup screen by have computer-controlled NPRs "off"; the NPRs generated in auto-setup might only be computer controlled.
A2) By hand. At any time (usually during setup, after Aurora's auto-setup) you're free to generate a new race, whether it's player or NPR. Typically this is used to generate a new human-controlled NPR with the wizard (category 2), but I think there's a way to generate a computer-controlled one (category 3) as well.
A3) During exploration. Whenever a new system is generated with potentially habitable planets, a check is made for populations. If there's a population, then depending on the "computer-controlled NPR" flag it will either be category 2 or 3. If it's category 2 you'll need to use the wizard.
Note that there's no difference between human and (computer-controlled) NPR empires in terms of probability of NPR generation during exploration - the probabilities are the same. In principle, if you switch the flag from "Generate computer-controlled NPR" to "Generate human-controlled NPR" half way through a game (where there are already computer-controlled NPR) then the populations that a computer-controlled NPR discovers should require you to set up their empires and control them. I'm not sure what is actually the case here though - it may be that Aurora is set up so that any NPR activated (discovered) by a computer-controlled NPR (category 3) is itself computer-controlled.
John