8. Caps on Penalties and Earnings

There is general consensus among the parties that penalties and earnings be capped in some way, in order to provide upper limits to both ratepayers' and shareholders' risks under the incentive mechanism.¹⁸⁸ As described in the attachments to this decision, the proposals vary in terms of the trigger for the cap (e.g., a specific dollar level, percentage of program costs or percentage of goal achievement), as well as the resulting dollar levels.

For the reasons discussed in Section 6.3.4, we limit the earnings potential under today's incentive mechanism to $450 million for all utilities combined, over the three-year program cycle. This level is high enough to encourage superior performance in terms of goal achievement and create a corresponding level of superior net benefits to ratepayers. At the same time it provides a limit to the maximum level of earnings that ratepayers will share, thereby limiting ratepayers' exposure to forecasting uncertainty or unanticipated results associated with the mechanism.¹⁸⁹ Limiting penalties to $450 million provides a symmetrical boundary to the utilities' risk exposure, but still provides ratepayers with substantial protection in the event of poor portfolio performance.

We will allocate the $450 million limit on penalties and earnings for each program cycle to individual utilities based on the percentage of net benefits expected by their efforts at 100% of goal achievement, as projected in this proceeding. This allocation results in the following utility-specific caps: PG&E--$180 million (40%), SCE--$200 million (44%), SDG&E--$50 million (11%) and SoCalGas--$20 million (5%). ¹⁹⁰ These caps on earnings and penalties apply to each three-year program cycle (beginning with the 2006-2008 program cycle), unless and until modified by the Commission.

¹⁸⁸ PG&E is the only party that would not cap penalties but would cap earnings under its proposed incentive mechanism. See Attachment 2.

¹⁸⁹ Even though savings are verified through Energy Division's EM&V activities, not all parameters used to calculate the PEB are subject to ex post verification for all programs, which can introduce some forecasting uncertainty in both directions (to the benefit of ratepayers or to the benefit of shareholders).

¹⁹⁰ Numbers have been rounded to the closest "even" dollar value.