2. Background
In September of 2007, the Commission adopted D.07-09-043, establishing the Energy Efficiency Risk/Reward Incentive Mechanism or RRIM. This mechanism was developed with the objective of providing incentives to encourage deployment of energy efficiency measures such that energy efficiency would be viewed by the IOUs as comparable to investments in supply side resources. The mechanism is composed of two primary elements, the minimum performance standard (MPS) and the performance earning basis (PEB). The MPS represents the minimum percent of the energy efficiency goals, as adopted by the Commission, the IOUs must have met through the execution of their programs in order to be eligible for rewards. If a utility is eligible for rewards, the specific amount is determined by applying a "shared savings rate" associated with a given level of goal achievement to the PEB, where the PEB represents an estimate of the costs ratepayers would have otherwise born but for the deployment of energy efficiency. The same basic framework is used to determine penalties if utility program performance falls below a certain threshold.1 D.07-09-043 also established an earnings claim and recovery process that afforded the IOUs the opportunity to file interim claims based on estimated performance achieved in Years One and Two of the three-year program cycle. These interim claim amounts were to be based on verified measure installation and cost reports combined with ex ante performance estimates. Thirty percent of the interim claims were subject to holdback, with this amount being trued-up based on an ex post review of performance after the close of the three-year cycle, using updated performance estimates. Under these rules, the IOUs could be required to return interim payment received if the ex post review indicated the IOUs had received in excess of what was warranted based on those updated planning assumptions. Similarly, if the ex post review indicated that the IOUs should receive more in rewards than was assumed for purposes of the interim claims, the final payment would be adjusted accordingly. The Commission also established a schedule, subject to change as deemed necessary by the assigned Administrative Law Judge (ALJ) in consultation with the assigned office, for the submission, review and payout of incentive claims.
On October 31 and November 7, 2007, Petitioners filed a Petition for Modification and Amended Petition for Modification specifically asking that the interim claim process be modified such that any interim incentives provided to the IOUs would not be subject to potential "claw-back" should the ex post review find that overpayment had occurred. Petitioners argued that the uncertainty created by potential "claw-back" prevents booking of any interim claims and thus undermined the value of any interim incentives, thus compromising the effectiveness of the incentive mechanism. In D.08-01-042, the Commission granted Petitioners' request, modifying the interim claim process to reduce the uncertainty associated with interim payments. Specifically the decision allows the IOUs to retain any interim incentives received except in circumstances where ex post review indicates that the IOUs' performance fell within the penalty band. Under these circumstances any interim incentives received would have to be returned in addition to whatever penalties are owed. Furthermore, the decision established that if the ex post review indicates that utility performance falls within the "deadband," the utility would continue to earn at the 9% shared savings rate, applied to the ex post PEB.2 Because this decision reduced the share of IOU incentive claims that would be subject to ex post review and true-up, all else equal, it necessarily increased the risk of incentive overpayment. To address this concern, the Commission further modified the RRIM in two ways. First, for interim claims, D.08-01-042 increased the holdback amount from 30% to 35%. Second, the decision required that the ex ante assumptions used to calculate interim claims be updated with 2008 and 2009 Database for Energy Efficiency Resources (DEER) measure savings parameters including updated net-to-gross (NTG) ratios and expected useful lives.
In February of 2008 the IOUs filed their interim quarterly savings reports. Since then, Energy Division has encountered delays in the completion of the verification reports and updates to the ex ante assumptions including updates to the DEER. To that end, on October 20, 2008, ALJ Gamson issued a ruling exercising his prerogative to adjust the schedule for the completion of Energy Division's final verification reports.
On August 15, 2008, Petitioners filed the instant petition. Specifically, Petitioners ask that the Commission authorize interim incentive payments to the utilities reflecting their performance in deploying energy efficiency measures in 2006 and 2007 based on the quarterly savings reports submitted by the utilities rather than on Verification Reports Energy Division is in the process of developing. In addition, Petitioners ask the Commission to modify D.08-01-042 to eliminate the requirement that the ex ante savings parameters used to calculate interim claims, specifically the assumptions included in DEER, be updated. Lastly, Petitioners ask that any updates to the assumptions used to evaluate energy efficiency measure and program performance be reviewed by the full Commission rather than left to the discretion of Energy Division as is current policy. The justification offered by Petitioners for each of these changes is provided below.
With respect to authorizing interim payments based on utility submitted performance reports rather than Energy Division verification reports, Petitioners argue that the effectiveness of the mechanism is dependent on timely receipt of any interim incentives that might be owed. Thus, the delays experienced in completing the verification reports and the ex ante updates, as described above, and the associated delay in the ability of the IOUs to book interim incentive payments, undermines the ability of the mechanism to provide meaningful incentives for the deployment of energy efficiency measures.
Regarding the requested elimination of the requirement to update the ex ante DEER values used in calculating interim claims Petitioners allege that the studies underlying these updates are limited and outdated. This concern dovetails with their third request, namely that the Commission retain the ability to review "earnings related issues raised in evaluation measurement and verification reports."
On August 22, 2008, the assigned Commissioner issued a ruling imposing an ex parte ban through September 15, 2008, the deadline for submitting responses to the Petition to Modify (PTM). This ban was imposed to give parties the opportunity to pursue alternative dispute resolution (ADR). ADR was specifically supported by the assigned Commissioner and ALJ. To that end the Commission offered ADR resources to facilitate a mediated solution. No settlement or mediated outcome was reached.
Responses to the petition were filed by the Natural Resources Defense Council (NRDC), as well as the Division of Ratepayer Advocates (DRA), The Utility Reform Network (TURN), and the California Environmental Council (CEC) (Joint Respondents), who filed jointly on September 15, 2008.
In its response, NRDC articulates general support for Petitioners' request to authorize interim claims such that the IOUs can receive interim incentive payments consistent with the schedule established in D.08-01-042. In NRDC's view, allowing the delays in Energy Division's verification reports and updates to the DEER database to prevent issuance of interim incentive payments will compromise the effectiveness of the incentive mechanism in "[making] the incentive mechanism credible to both company managements and a financial community that are unused to any material relationship between the utilities' earnings and their energy efficiency achievements." NRDC goes on to acknowledge concerns regarding potential overpayment reliance on utility submitted performance reports invites and provides its assessment of the likelihood such overpayment would occur. NRDC finds that the results reported by PG&E, SCE, and SoCalGas that serve as the basis for the requested interim claim amounts, "represent robust lower bounds for the final total incentive payment entitlement," if those results are not updated to reflect adjustment to the NTG ratios. For SDG&E, NRDC cannot, on the basis of its analysis, assert that SDG&E's results are sufficiently conservative to support interim incentive payments. NRDC also suggests that for purposes of implementing the incentive mechanism for the 2006-2008 program cycle, the Commission should retain the ex post true-up provisions, but exclude updates to the NTG ratios from that assessment.
Joint Respondents oppose the PTM and recommend that the Commission reject it in its entirety. Joint Respondents argue that granting the PTM would alter the careful balance embodied by the incentive mechanism between ratepayer and utility interests, dramatically shifting that balance in favor of the utilities. By basing interim claims on unsubstantiated reports submitted by the utilities themselves as well as removing updates to the ex ante DEER estimates on a going-forward basis, Joint Respondents argue that the petition seeks to remove key elements that play a crucial role in limiting the extent to which ratepayers provide incentives under the incentive framework where such incentives cannot be credibly attributed to the utility programs. With respect to the specific amounts requested by Petitioners for 2006 and 2007, Joint Respondents assert that were the mechanism applied as currently designed, the utilities would earn far less than the $152 million and could conceivably earn nothing. Joint Respondents also argue that the Commission already considered and rejected a proposal by the IOUs to allow interim claims to be awarded on the basis of the IOU performance reports in the event the schedule established in D.07-09-043 encountered delays.
Petitioners filed a Reply to the Responses to the Petition for Modification September 25, 2008.
On October 3, 2008, the assigned ALJ convened a prehearing conference to discuss the PTM and any updates to parties' respective positions on the issues raised therein.
On October 28, 2008, the assigned Commissioner issued a ruling taking Judicial Notice of the Final DEER 2006-2007 Measure Updates, as well as all comments and Energy Division responses developed in the process leading up to final adoption of the updates, thereby incorporating this information into the record of this proceeding.
1 For a more detailed description of the incentive mechanism, refer to D.07-09-043 in its entirety.
2 D.08-01-042, Ordering Paragraph 2.
