8. Funding and Budget Issues

8.1. Funding Duration

The staff proposal suggested that funding collections should be continued through 2020 to coincide with the timing of the RPS and AB 32 legislative deadlines. In addition, staff recommended that the budget amounts be allowed to be adjusted for each three-year cycle based on the consumer price index change during the previous three years.

8.1.1. Parties' Comments

In this area, several parties simply repeat their overall objections to funding the EPIC program at all. The utilities all argue that the funding levels should not be set in advance, but rather should be set when each investment plan is adopted, if it is adopted at all.

8.1.2. Discussion

First, we address the issue of the appropriate amount of funding collections annually. Our purpose here is to ensure that EPIC collections continue in a regular manner unless the Commission changes the funding levels or the program. Consistent with earlier discussion, these collection amounts are default amounts that may be amended by the Commission with the adoption of each triennial investment plan. However, for ratemaking and planning purposes, it is useful to have a default expectation for annual funding levels.

Next, we agree with the rationale put forward in the staff proposal that collections of the EPIC funds should continue through 2020, and should be adjusted during each three-year investment plan cycle based on the average change in the consumer price index for the previous three years. In comments on the proposed decision, PG&E suggested using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter specifically;³³ in reply comments, the Black Economic Council, Latino Business Chamber of Greater LA, and National Asian American Coalition concur.³⁴ This recommendation is reasonable and is adopted. Collections through 2020 will ensure that this effort will be coordinated with the deadlines, which are also in 2020, for fulfilling the mandates of the 33% RPS program and AB 32. The Commission can reassess at that time whether the EPIC program and surcharge should be continued, modified, or eliminated. We also note that D.11-12-035 already established the EPIC collection levels for 2012, so the collections authorized in this decision shall begin January 1, 2013 and end on December 31, 2020.

8.2. Administrative Costs

The staff proposal included a recommendation for a cap on administrative costs of no more than 15% of the total EPIC program budget. In addition, a 0.5% oversight budget for Commission staffing and oversight was recommended.

8.2.1. Parties' Comments

The University of California was the only party to support the 15% administrative cost cap recommendation in the staff proposal. They further support excluding administrative costs of grant recipients from the definition of administrative costs that would be capped, though also refer to standard administrative cost terms being developed between the state, the University of California, and the California State University system pursuant to AB 20 (Solorio, Stats. 2009, Ch. 402).

The Joint Environmental Groups believe the Commission should not impose a hard cost cap, but instead should direct the CEC program administrator to minimize and explain administrative expenses to the fullest extent possible. PG&E and CFBF similarly argue that an administrative cost cap is premature until the overall investment plan is actually reviewed and approved under the governance process.

SDG&E does not believe that the Commission should approve administrative costs for EPIC that are higher than for the CSI or energy efficiency programs overseen by the utilities (those limits are currently set at 10%). In addition, SDG&E suggests looking closely at University of California administrative expenses and believes there are "loopholes" that existed under the PIER program that should be restructured under EPIC. In addition, SDG&E argues that the administrative budget for applied research should be kept separate from administrative costs of technology demonstration projects.

SCE agrees with SDG&E that a 15% administrative budget is inconsistent with other policy proceedings at the Commission (including energy efficiency, CSI, and SGIP) where the limits are 10%. In addition, SCE is concerned that "the disproportionate budget for the Commission's and CEC's respective roles suggests that the CEC will likely be engaging in judgment and decision making with respect to customer funds that properly resides with the Commission."³⁵

8.2.2. Discussion

First, the staff proposal was not specific about the definition of administrative costs. We clarify that for EPIC purposes, administrative costs include staffing costs of the administrators, associated general and administrative expenses and overhead, and related contracting costs to: prepare the investment plans, conduct solicitations, select funding recipients, and monitor and oversee the progress of projects and investments. Administrative costs do not include costs for program evaluation, should the administrators wish to conduct their own program evaluations from time to time. Any evaluation costs would come from other program funds and not count towards the administrative cost cap.

Second, as a general matter, it is important to minimize administrative costs for overseeing the EPIC funds to ensure that the greatest possible amount of funding can be used to support the policy purposes identified herein. While several parties raise a valid point that the exact administrative costs will depend on the nature of the particular activities included in each investment plan, we want to send a clear signal about the need to minimize these costs by setting an administrative cost cap.

This cap will be, like the overall program budget, a soft cap. If the administrators, in each triennial investment plan, can justify the need for a larger amount of administrative funding based on the exact nature of the investments proposed, we will consider it at that time. On the other hand, if administrative costs can be less than the cost cap, we expect the administrators to put those extra funds to good use for program purposes.

As to the level of the cost cap, it is difficult to identify a rationale that would justify departing from our general practice and precedent of a 10% administrative cost cap for the energy efficiency, CSI, and SGIP programs. As stated above, the administrators may propose a higher budget in each triennial investment plan if they can show that it is necessary to support the projects proposed. Until then, for the reasons discussed here, the cap will be set at 10% and we find that this cap is just and reasonable.

Several parties brought up the 0.5% budget reserved for Commission oversight. This amount is necessary due to the ongoing oversight that will now regularly reside with the Commission and its staff, which is a new activity. We anticipate several ongoing proceedings to oversee the EPIC investments, analogous to Commission oversight of energy efficiency portfolios, the CSI, or the SGIP programs. This modest 0.5% budget amount should fund dedicated staff time to devote to EPIC oversight as well as the cost of the independent evaluator which will be hired in 2016. The 10% administrative cap for the EPIC administration should be compared to the 10% administrative costs that go to utilities for administering the energy efficiency, CSI, and SGIP programs.

8.3. Fund Shifting

The staff proposal recommended that the EPIC administrator(s) be given discretion to shift up to 10% of program funds from one category to another category during each three-year investment plan cycle, after the initial investment plan is approved.

8.3.1. Parties' Comments

The Efficiency Council supports the basic notion of flexibility and giving the administrator some discretion in case unexpected opportunities arise. SDG&E also supports some flexibility, but suggests that a 10% limit is too high. PG&E likewise believes some flexibility is warranted, but suggests that the fund shifting flexibility be reviewed as part of each investment plan approval process and determined at that time. CFC believes similarly, that there should be a formal review process of the program areas to be funded. SCE's view is the most restrictive, arguing that any flexibility for the CEC to shift funds constitutes unlawful delegation of judgment, discretion, and decision-making from the Commission to another governmental entity.

8.3.2. Discussion

With the potential size of each three-year investment plan portfolio budget under the EPIC program, we believe it is necessary to allow the administrators some flexibility in the event that events during the three-year period do not exactly match the plans adopted in the investment plans. This is not a delegation of the Commission's discretionary authority; it is purely for administrative practicality. This type of fund-shifting flexibility is given to utilities routinely within their energy efficiency portfolios, for example. The consequence of not allowing any flexibility in fund shifting will be either unspent/idle funding or regulatory delay while a Commission proceeding is completed, even for relatively small changes.

SDG&E's suggested limit of 5% strikes a reasonable balance and we will adopt it. For the sake of clarity, this limit is for 5% of the adopted budget for each category of expenditures approved in each investment plan. If the administrator wishes to propose an entirely new category of expenditures between adopted investment plans, that would constitute a material change to the plan and would require further Commission review and consideration.

8.4. Funding Flow

The staff proposal offered two options for flow of funding from the utilities to the CEC, with the objective of protecting the funds, as much as possible, from potential diversion to other purposes unrelated to EPIC by the state budget process. The first option was to transfer funds periodically, either monthly or quarterly, to minimize buildup of funds in state accounts. The second option was to transfer funds only when funds are encumbered through executed contracts or grants. Staff also noted that these two options are not mutually exclusive. For example, option 1 could be used for administrative costs with option 2 for grants or contract expenditures.

8.4.1. Parties' Comments

All parties who commented on this issue (Efficiency Council, all utilities, TURN, and the University of California) supported the goal of protecting the funds, as much as possible, from the potential for diversion to other purposes. PG&E suggests that neither option offered by staff completely protects the funds, and argues that the only way to protect the funds fully is to have the utilities administer all of the EPIC funds. SCE believes the second option put forward by staff provides the best available option for protecting the funds.

SDG&E states that they disagree with both funding flow options, but goes on constructively to describe an approach used between SDG&E and the California Center for Sustainable Energy for managing the CSI program, which sounds very similar to the combination of both approaches offered by staff here. Similarly, TURN supports funding transfer to the CEC on a quarterly basis to cover administrative and staffing costs, with transfer of funding for awards to third parties only once the funding has been encumbered by the CEC. Finally, SDG&E points out that the CEC should not be able to use the EPIC funds for purposes other than overseeing the EPIC program, such as publicly-owned utility (POU) RPS compliance determination.

8.4.2. Discussion

Utilizing IOU ratepayer funds from EPIC only for the purposes described herein is an important consideration. The best way to accomplish this protection is a hybrid of the two options presented by staff. That is, funds devoted to administration and staffing costs should be transferred by the IOUs to the CEC on a quarterly basis. So that the CEC may begin administrative activities in 2012 in advance of the submission of their first investment plan, the IOUs shall begin forwarding administrative funding from their EPIC balancing accounts on July 1, 2012, and shall continue those payments quarterly thereafter until October 1, 2020. The payment amounts for the administrative budget shall be calculated as one-quarter of the total administrative budget for each year in which the Commission has established a total EPIC budget.

Program funds to be used for grants or contracts with third parties should be transferred from the IOU EPIC balancing accounts to the CEC only after contract or grant execution. We encourage the utilities and CEC to collaborate as soon as possible to work out specific logistical agreements that they can mutually agree upon for transfer of funding.

Finally, considering the source of EPIC funds and consistent with the key guiding principle of producing IOU electricity ratepayer benefits, funds administered by the CEC may not be used for any purposes associated with POU activities, including POU RPS compliance determinations.

8.5. Allocation of Costs by Utility

The staff proposal included the following percentage allocation among the utilities for funding the EPIC program.

· PG&E: 50.1%

· SDG&E: 8.8%

· SCE: 41.1%.

8.5.1. Parties' Comments

Very few parties commented specifically on the question of allocation of EPIC costs among the IOUs. However, several parties commented on related issues of cost allocation and eligibility for receipt of funding.

PG&E and the Efficiency Council generally agreed that the cost responsibility for EPIC should be allocated in the same manner as the PGC in the past. PG&E suggests that the exact funding amounts by utility need not be determined until such time as each investment plan is approved.

CLECA, as in Phase 1, seeks clarification that the Commission is not contemplating changing the cost allocation for EPIC funds between or among customer classes.

With respect to eligibility in use of the funding, several parties raise issues about participation of POUs. TURN supports the staff proposal that EPIC funds should not be used by CEC staff for POU RPS compliance activities. TURN also proposes that EPIC funds should be prohibited from funding projects located in the service territory of POUs, reasoning that "there is no justification for allowing POUs to refrain from collecting R&D funds while POU customers are able to seek awards from IOU ratepayers."³⁶

PG&E seems to agree, commenting that "POUs that wish to participate in a legislated statewide RD&D program should fund their participation in the program equitably."³⁷

In reply comments, the Joint Environmental Groups agree that "ensuring that EPIC funds are not awarded to generation projects that plan to sign a power purchase agreement with a POU and serve POU electricity customers is appropriate and easy to implement. But categorically excluding major research institutions in POU service territories, including Stanford University and the University of California at Los Angeles, does not serve the public interest or IOU customers."³⁸

8.5.2. Discussion

No party disputed the reasonableness of the cost allocation among utilities suggested by the staff proposal. Thus, we adopt the cost allocation of 50.1% to PG&E, 8.8% to SDG&E, and 41.1% to SCE ratepayers.

To reassure and clarify for CLECA, nothing in the staff proposal was intended to modify the cost allocation among different classes of customers. D.11-12-035 already concluded that "this surcharge [EPIC] shall reflect the same allocation among classes as the rates for the system benefits charge..."³⁹ This decision does not change that determination in any way.

Turning to the question of eligibility to receive funding, TURN and PG&E raise the question of whether entities within POU territories should be able to receive funding from EPIC that was paid for by IOU ratepayers. We generally agree that it would be ideal if the POUs voluntarily, or by requirement of the Legislature, co-funded the portion of the EPIC activities that will be overseen by the CEC. However, we have no authority to require this.

Contrary to the arguments of TURN and consistent with those of the Joint Environmental Groups, there is no evidence that a research or demonstration project undertaken by an entity that happens to be located within the service territory of a POU would necessarily produce fewer ratepayer benefits than the same activity by an entity located anywhere else. Technology breakthroughs and policy innovation that may benefit IOU ratepayers can occur anywhere, and funding should be awarded on a merit basis, not on the basis of geographic restrictions. For example, there are a number of world-class academic institutions in California that happen to be located within POU territories, and it seems potentially self-defeating to exclude them from the ability to compete for relevant research funds. Therefore, we decline to set any explicit limits on the geographic eligibility for funding, though still maintain delivering IOU electricity ratepayer benefits as the most important guiding principle. This should be taken into consideration by the administrators when awarding funding to individual projects proposed.

8.6. Summary of Budget and Collections Beginning in 2013

The purpose of this section is simply to summarize the funding decisions discussed above into an overall budget for the EPIC program. Table 2 below summarizes the collections we order starting January 1, 2013, the relevant entity, and the purpose to which the funds will be allocated, as ordered in this decision.

Table 2.

Annual EPIC Funding Collections and Allocation

Beginning January 1, 2013 (in $ Millions)

We also clarify that the funding authorized already in D.11-12-035 for collection in 2012 should be included in the budget for the 2012-2014 investment plans and should be allocated in the same proportions as the amounts in Table 2 above.

³³ PG&E opening comments on proposed decision, May 14, 2012, at 11.

³⁴ Joint reply comments of the Black Economic Council, Latino Business Chamber of Greater LA, and National Asian American Coalition, May 21, 2012, at 2.

³⁵ SCE comments, March 7, 2012, at 13-14.

³⁶ TURN comments, March 7, 2012, at 5.

³⁷ PG&E comments, March 7, 2012, at 6.

³⁸ Joint Environmental Groups reply comments, March 16, 2012, at 11.

³⁹ D.11-12-035, Ordering Paragraph 3 at 40.