2. Background
Under the risk/reward incentive mechanism adopted in D.07-09-043, the Commission established a minimum performance standard (MPS) for the utility portfolio of energy efficiency activities. For San Diego Gas & Electric Company (SDG&E), Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (SCE), earnings begin to accrue if the utility portfolio achieves no less than an 85% average of the Commission's kilowatt-hour (kWh), kilowatt (kW) and therm goals, and no individual savings metric can fall below 80% of those goals. Since Southern California Gas Company (SoCalGas) cannot average across savings metrics (because its energy efficiency portfolio saves only therms, and not any kWhs or kWs), SoCalGas is required to meet a minimum of 80% of the therm savings goal to be eligible for earnings.
If the portfolio meets the MPS, the utility shares a percentage of the net benefits produced by the portfolio, where "net benefits"represents the dollar value of the portfolio resource savings minus costs. The dollar value of these net benefits is referred to as the performance earnings basis (PEB). More specifically, if the MPS is achieved, the utilities share 9% of the portfolio PEB. If portfolio performance achieves 100% of the Commission's savings goal(s) or higher, the shared-savings rate increases from 9% to 12%. If performance falls to 65% or below of the savings goals for any individual metric (kWh, kW or therms), financial penalties are imposed. No earnings or penalties accrue in the "deadband range," i.e., above 65% and below 85% of the Commission's savings goals. Total earnings and penalties are capped at $450 million over each three-year program cycle, for the four utilities combined.
During the three-year program cycle, the utilities file two interim incentive claims (1st and 2nd Claims) based on the Energy Division's verification of measure installations and program costs, which can result in either earnings or penalties. The interim incentive calculations are based on cumulative savings and net benefits that reflect the actual measures installed and actual program expenditures (as verified by Energy Division), but using planning ex ante estimates for per measure savings (also referred to as "load impacts"). There is a 30% "hold-back" for any interim payout of earnings, that is, if the calculations indicate that the payout should be $100 million, only $70 million (70% of $100 million) would be authorized for rate recovery at that claim.
The utilities submit the 3rd Claim after the program cycle has been completed. For this final claim, the planning estimates of load impacts (including net-to-gross ratios to remove free riders)2 are also trued-up based on Energy Division's ex post measurement results. Because all earnings payouts are based on cumulative savings and net benefits, the 1st Claim payout is subtracted from the 2nd Claim earnings calculations, and both the 1st and 2nd Claim payouts are subtracted from the final claim calculations to establish the final payout amount (positive or negative).
Under D.07-09-043, both attainment of the MPS and the calculation of PEB net benefits are trued-up at the third (and final) earnings claim based on the results of ex post measurement of load impacts, including net-to-gross adjustments to remove free riders. That is, the savings and net benefit calculations for the 3rd Claim incorporate the Energy Division's verification of measure installations, verification of program expenditures and ex post measurement of load impacts for the full three-year program cycle. This true-up introduces the possibility that the utility may have been found to meet the MPS during the two interim earnings payouts, but at the final true-up payment they are found to have fallen short of the 85% threshold (80% for SoCalGas). Under these circumstances, the utility would be required to return the previously distributed interim payments by booking those (negative) amounts against positive energy efficiency earnings in a subsequent program cycle.
2 In the context of energy efficiency, free riders are those program participants who would have undertaken the energy efficiency activity in the absence of the program. The "net-to-gross" ratio is the total number of participants who are not free riders, e.g., a ratio of 0.80 indicates that 20% of the participants are free riders. This ratio is evaluated on an ex post basis for many programs/measures as part of Energy Division's evaluation, measurement and verification activities, and the results are included in the studies used to true-up the 3rd Claim.
