we first saw billy in episode 3x2 (the episode is called 'that vision thing') from earlier this season. in the episode, wolfram & hart hijacked cordy's visions (making them manifest into bruises and physical ailments), and we found out they did it as a way to get angel to break one of their clients out of a demon dimension/prison. the prison was engulfed in flames. billy is the guy that angel broke out. that's why angel and cordy repeatedly say they feel "responsible" this episode for billy getting out. because angel is the one who released him in order to save cordy.