In javascript this inside a function represents the context in which the function invoked on, if a method is invoked without a context it will be the window object(or undefined in strict mode).
In jQuery event handlers this represents the dom element reference on which the handler is registered on so in your case this refers to the li element. in case of event delegation this will refer to the actual target of the handler like if an li was targeted by the handler($(document).on('click', 'li', function(){...})) then this will be the li element
Another option instead of using this will be the currentTarget property of the event object
$(".controls li").click(function (e) {
// or $(e.currentTarget)
$(this).siblings().removeClass("selected");
$(this).addClass("selected");
color = $(this).css("background-color");
});
Demo: Fiddle