5. Minimum Performance Standard (MPS)
The MPS is the minimum level of savings that utilities must achieve relative to their savings goal before accruing any earnings, and is expressed as a percentage of that savings goal. Graphically, the MPS is illustrated in the figures presented in Attachment 4 as the point along the "x" axis where the earnings/penalty curve becomes positive. For example, in Figure 2 of that attachment under PG&E's proposal, earnings would not begin to accrue until the portfolio achieves 80% of the savings goal.
Since the Commission establishes individual goals for MW, GWh and MTherm savings, there is more than one option for determining when the MPS is reached. Parties propose for our consideration three different approaches to establishing the MPS, and present recommendations for the MPS level that range from 70% to 100% of the savings goal(s). These differences are described below.
5.1. Proposals for Establishing the MPS
SCE recommends that the MPS be established by averaging the achievements (relative to goals) across the savings goals metrics that are applicable to each utility. For example, if the MTherm savings achieved by the portfolio represent 75% of the MTherm goal, the GWh savings represent 85% of the GWh goal and the MW savings represent 80% of the MW goal, then the simple average of these percentages (75 + 85 + 80 divided by 3 = 80) would meet the 80% MPS proposed by SCE.
DRA, TURN and NRDC propose that the MPS threshold apply to each GWh, MW and MTherm savings metric individually. This means, if the portfolio fails to achieve the MPS level (e.g., 85% of the goal) for any one of these savings metrics, then the utility is not eligible for any earnings on the portfolio achievements. NRDC recommends an MPS of 85%, DRA recommends an MPS of 90% and TURN recommends an MPS of 100% for each savings metric.
PG&E, SDG&E/SoCalGas and CE Council propose a hybrid approach, whereby the MPS would be met by averaging the GWh, MTherm and MW achievements, but each individual savings metric would be subject to a minimum floor. More specifically, PG&E and SDG&E/SoCalGas recommend that the MPS be set at 80% based on an average of the percentage of goal achieved by each savings metric, as long as no single metric falls below 70% of its goal. Under the numerical example presented above, this MPS would be met because each individual savings metric meets the minimum floor of 70% of its goal and the simple average of the percent-of-goal achieved by each metric equals 80%. In addition, SDG&E/SoCalGas recommend a variation for SoCalGas since, by definition, as a gas-only utility it cannot average across two or more savings metric to meet the MPS. Under this variation, the MPS for SoCalGas alone would be set at the 70% floor established above for each individual savings metric.
CE Council supports the hybrid approach, but recommends that the MPS be set at 100% for the average minimum threshold, with the individual floors set at 90% for each savings metric.
5.2. Discussion
In our view, the MPS approach proposed by DRA, NRDC and TURN sets up an "all-or-nothing" trigger for allowing any earnings that relies too heavily on specific numerical values. Under this approach, just missing one of these values by a small amount could mean that the utilities forfeit the potential for any earnings on the portfolio, even if that portfolio produces sizable net benefits to ratepayers and achieves or surpasses the savings goals for one or more of the other metrics. Consider a situation where the utility achieves 110% of both the MW and GWh goals and 84.5% of the MTherm goal. Under NRDC's proposed MPS of 85%, these results would receive no incentives at all, despite the substantial net dollar benefits to ratepayers, the achievement of electric savings that exceed the portfolio forecast, and therm savings that "just miss" the MPS threshold. This is not a reasonable outcome, in our view.
Moreover, the possibility of missing the MPS by falling short on one metric by a small margin is also likely to motivate utility administrators in ways that do not make sense from the standpoint of optimizing portfolio performance. PG&E points out that the actions of the marketplace may be difficult to predict, especially several years in advance. Under the approach proposed by DRA, TURN and NRDC, if the utility were behind on one savings goal, but well over for the other goal(s) due to unanticipated market interest, the utility would have to focus extensive, and potentially expensive attention on one component while reducing attention (and probably funding) for the highly successful and probably more cost-effective components that the market desires.26
Incentive design should try to avoid creating such "pressure points" for determining whether the utilities are eligible for any earnings at all. At the same time, we agree with NRDC and others that the simple average approach proposed by SCE would allow a utility to earn rewards even if it is doing a poor job in achieving one or more of the individual savings goals. DRA points out in a numerical example how there are tradeoffs between maximizing the net benefits of the portfolio and achieving each one of the individual savings goals.27 As a result, an MPS based on simple averaging could result in the utility becoming eligible for earnings, even if it has unacceptably under-performed in one or more areas.
The hybrid approach recommended by PG&E, SDG&E/SoCalGas and CE Council presents us with an option that both provides the utility with some flexibility in achieving the MPS (through averaging) and yet ensures that poor performance is not rewarded by establishing individual floors for each savings metric. The result is a framework that motivates superior performance while reducing unnecessary pressure points. Therefore, we will adopt this approach in establishing the MPS for the risk/reward incentive mechanism.
This brings us to the issue of the level of the overall MPS, that is, the percentage of the goals (on average) that must be achieved before earnings begin to accrue to shareholders. In addressing the level of the MPS, some parties argue that the utilities will have little difficulty in achieving the Commission-adopted savings goals, and therefore the MPS should be set at 100% of the goals (TURN, CE Council) or relatively close to them, e.g., within 10% (DRA). The utilities, on the other hand, argue there is considerable uncertainty associated with forecasting program participation and associated load impacts, and therefore the MPS should reflect this uncertainty by being set no less than 20% below the savings goals.
The savings goals established by D.04-09-060 are aggressive, yet achievable. As we noted in that decision, the goals reflect the expectation that 55% to 59% of the utilities' incremental electric energy needs between 2004 and 2013 will be met through energy efficiency. Our adopted goals for natural gas energy efficiency represent a 116% increase in expected savings over the next decade, relative to the status quo.
While we concluded in D.04-09-060 that these goals are achievable, we do not agree with CE Council that they "shouldn't be particularly difficult to meet."28 Moreover, we do not agree with the conclusion reached by TURN that because the utility portfolio plans are designed to meet the Commission's cumulative goals, the utilities should not be eligible for financial incentives until they exceed those goals.29 There are significant unknowns at the time of portfolio and program planning with respect to how the market will respond and the level of load impacts that will be achieved on an ex post (post-installation) basis even under this "expected case" of portfolio performance. As a result, as the utilities work with their expanded number of energy efficiency partners and receive market feedback and EM&V evaluation results, they must quickly and efficiently incorporate new information into their program designs and aggressively pursue all potential avenues for cost-effective energy efficiency throughout the program cycle. The challenges that utilities face in achieving the savings goals should be recognized in the adopted MPS threshold.
Therefore, in establishing the MPS, we recognize that the Commission's aggressive goals for energy efficiency will require utility program managers to be proactive and innovative to meet them, especially in face of the inherent uncertainties discussed above. At the same time, we want to give appropriate weight to the individual goals themselves in establishing a minimum level of performance before any earnings will accrue.
In our judgment, a MPS of 85% coupled with individual floors of 80% for each savings metric will accomplish our objectives. This provides a buffer for uncertainty around the individual goals of 20% and a buffer of 15% around the average of the GWh, MW and MTherm goals. While utilities argue for a wider buffer and some parties argue for less of one, today's adopted MPS represents a reasonable compromise among the competing positions and meets our objectives. Moreover, it recognizes that the utilities' success in achieving 85% to 100% of the savings goals creates a substantial return on ratepayers' investment, even after shareholder earnings are paid. As discussed in Section 6.3.4, ratepayers will earn an estimated $1.775 billion over and above their 2006-2008 energy efficiency investment if the utilities achieve 85% of the savings goals under today's adopted incentive mechanism. That return will continue to increase if the utilities reach beyond the MPS to meet and surpass the 2006-2008 savings goals. (See Attachment 8.)
As a gas-only utility, SoCalGas is subject to a single goal (for MTherm savings), and therefore will not be able to average across two or more individual savings goals to demonstrate achievement of the MPS. Therefore, SoCalGas will have less flexibility than the other utilities in meeting an average MPS of 85%. In order to treat all utilities consistently with respect to a minimum threshold of performance, we agree with SDG&E/SoCalGas that the MPS for SoCalGas should be established at the level of the individual floors we have adopted for the other three utilities.
In sum, to be eligible for earnings, PG&E, SDG&E and SCE must (1) achieve a minimum of 85% of the savings goals, based on a simple average of the percentage of each individual GWh, MW and (as applicable) MTherm goal they achieve, and also (2) meet a minimum of 80% of the goal for each individual savings metric. SoCalGas will be eligible for earnings if it achieves a minimum of 80% of the savings goal that applies to a gas-only utility, namely the MTherm goal.
PG&E raises the issue of what "numbers" should be used to establish the MPS level, that is, the Commission-adopted savings goals or the compliance filing targets submitted by the utilities at the start of the program cycle. As discussed in Section 8.3 below, we will use the Commission-adopted goals to evaluate utility performance in our adopted risk/reward incentive mechanism.
26 PG&E Reply Comments on Energy Efficiency Shareholder Risk/Reward Incentive Mechanism, September 29, 2006, p. 12.
27 DRA Proposed Risk/Return Shareholder Incentive Mechanism for Energy Efficiency Portfolios, September 8, 2006, pp. 16-17. However, we do not concur with DRA's conclusion that any averaging of goals in establishing the MPS is undesirable because it will encourage the utilities to not meet 100% of each goal. DRA reaches this conclusion without considering other aspects of the incentive mechanism, in particular, the tiered earnings rates that would increase potential shareholder earnings as the utility achieves savings at and beyond the goals.
28 Revised Post-Workshop Comments on a Proposed Risk/Reward Incentive Mechanism by the CE Council, September 14, 2006, p. 10.
29 TURN's Post-Workshop Comments on the Design of an Energy Efficiency Shareholder Incentive Mechanism , September 8, 2006, p. 15. See also DRA Proposed Risk/Return Shareholder Incentive Mechanism for Energy Efficiency, September 8, 2006, p. 6.
