9. Earnings Recovery Schedule and Linkage to EM&V Results
Under our adopted EM&V protocols, there is a generic sequence of EM&V events planned that will update and verify the ex ante (pre-installation) estimates of energy efficiency savings as programs are implemented over the three-year program cycle. The first event is the reporting by utilities of the number and type of measures installed and services rendered, along with associated program costs. This occurs during the first quarter of each year (beginning in 2007) for the previous year's accomplishments. Next, Energy Division staff and its contractors verify this information and release Verification Reports of the costs and installations and services completed. Under the EM&V protocols, these reports are scheduled to be released by August following the end of each program year.191
The Verification Reports are used to true-up the ex ante estimates of GWh, MW and MTherm savings and PEB with respect to the number and type of measures installed, and the associated program costs. They do not, however, provide all the updated information on parameters that go into the calculation of GWh, MW and MTherm savings and PEB. Other parameters include: (1) measure or unit energy and peak demand reductions, (2) expected useful lives for installed measures/equipment and (3) "net-to-gross" ratios.192 Energy Division and its consultants will be conducting EM&V studies throughout the program cycle to evaluate these parameters on an ex post (post- installation) basis. The final EM&V event produces a true-up of portfolio savings and PEB over the program cycle based on all the parameters evaluated by Energy Division or its consultants. More specifically, the final true-up will be presented in Energy Division's Final Verification and Performance Basis Report for the 2006-2008 program cycle, which is scheduled to be released in March 2010. Interim results of the EM&V studies completed earlier in the program cycle will also be made available in March 2008.
In their proposals for earnings recovery, parties agree on a sequence of four earnings claims that would be linked to the EM&V events discussed above. In particular, parties propose that the utilities submit an interim claim after each of the three annual Verification Reports, followed by a fourth true-up claim submitted after the Final Verification and Performance Basis Report. This schedule results in an earnings recovery period of approximately five years from the start of the program cycle. Other aspects of the earnings claim and recovery process differ among the parties. The significant areas of differences are discussed below.193
9.1. Timeframe and Treatment of Forecasts for the Interim Claims
Three different approaches to the timeframe and treatment of forecasts for the interim claims have been presented for our consideration: 1) Single-Year Basis, 2) Cumulative-to-Date Basis, and 3) Cumulative-Program-Cycle Basis. For the purpose of describing these approaches, we use the term "verified achievements" to represent the savings and PEB resulting from the Verification Reports discussed above, that is, based on the verified number and type of measures installed and associated program costs. This means that the per-measure savings are still based on expected or estimated (ex ante) savings for each of the interim claims. For the final "true-up" claim, the achievements considered at that time reflect the results of the Final Verification and Performance Basis Report, that is, the ex post results of all performance parameters evaluated by Energy Division and its consultants for the program cycle.
Under the Single-Year Basis approach, verified achievements for a single program year are compared to the savings goal for that year to determine whether performance is within, below or higher than the deadband. The associated earnings or penalties for each interim claim are also calculated based on the results for that single year. Accordingly, once the interim claim has been made, achievements of that particular program year are not considered in the calculation of the remaining interim claims, although they would count in the fourth true-up claim for the entire program cycle.
Unlike the Single-Year Basis approach, a Cumulative-to-Date Basis counts the verified achievements from the previous program year(s) in determining whether the MPS is met in each subsequent interim claim (and in the resulting calculation of earnings or penalties).
The Cumulative-Program-Cycle Basis differs from both the Single-Year and Cumulative-to-Date Basis in that each interim claim requires a calculation of expected achievements over the full 2006-2008 period, with verified information progressively replacing forecast information at each claim. Using a Cumulative-Program-Cycle Basis will level out the interim payouts relative to the two other approaches. We present simple numerical examples of these three alternate approaches in Attachment 5.
The approach we take for the recovery of earnings should send a message to the utility to continue to pursue cost-effective energy savings as quickly and aggressively as possible throughout the program cycle. It should also provide the utility with an opportunity to learn from market and EM&V feedback so that it can "make up" during the program cycle for lower accomplishments in a single program year. The Single-Year approach does not accomplish either of these objectives. In fact, it could actually encourage a utility to slow down or shut down programs because either the annual goals have been met before the end of the calendar or there is no possibility to achieve the annual goals. This result could occur because whatever is accomplished in a previous program year is not counted when evaluating whether the MPS is reached in the next calendar year, except at the very last true-up claim.
In contrast, by considering the achievements of the previous year as well as the current year, the Cumulative-to-Date approach to evaluating interim earnings claims will encourage continuous effort and improvements in response to feedback throughout the program cycle. Moreover, under this approach only verified installations are considered in each interim earnings claim. This approach greatly reduces the forecasting error that is introduced into calculations of savings achievements and PEB for the earlier claims using a Cumulative-Program-Cycle Basis. The payouts (or penalties) in each earnings claim provide a stronger incentive if they are based on what is known to date about program participation, and not diluted by the forecasts of future program participation that were made at the start of the program cycle.
For the above reasons, we adopt the Cumulative-to-Date Basis for calculating the interim earnings claims under our adopted risk/reward shareholder incentive mechanism. However, as discussed in Section 8.3, we do not pay out 100% of the earnings calculated on this basis in each interim earnings claim. Rather, as some parties propose, we have elected to "hold back" a certain percentage (30%) to reduce the effect of load-impact forecasting errors on the final true-up claim. We also modify the four-claim process and schedule proposed by the parties (and illustrated in our numerical examples) in order to be mindful of resource limitations and competing priorities for staff time. As described below, we adopt an earnings recovery schedule that includes two interim claims (rather than three) and one final true-up claim.
Before discussing these aspects of the earnings recovery process more fully, we turn to the most controversial issue concerning earnings claims, namely, whether there should be any restrictions on the true-up adjustment in the final earnings claim, and if so, the nature of those restrictions.
9.2. True-Up Adjustments in the Final Claim
As discussed above, it is not until the final true-up claim that we will be able to determine the level of net benefits (PEB) and MW, GWh and MTherm savings produced by the energy efficiency portfolio over the three-year period, based on all the EM&V activities undertaken for that program cycle. While we will certainly have progressively better information over time based on Energy Division's verification of program participation and expenditures, there will still be uncertainty over the actual level of portfolio achievements until the final claim. This introduces the risk that portfolio performance will be found to fall within or below the deadband (meaning that the MPS was not actually met) at the final true-up, even though the interim verification results suggested otherwise and earnings were paid out. The numerical examples in Attachment 5 illustrate how this could happen if ex post (post installation) per-unit savings were found to be lower than the ex ante (estimated) per-unit values.
Parties are in general agreement that if net benefits (PEB) at the final true-up are higher than previously calculated, the utility should receive a positive adjustment to earnings at the final claim, assuming that the MPS is met. Otherwise, the utilities would earn less than the shared-savings rate(s) adopted for the incentive mechanism. However, when the savings level or PEB are lower than previously calculated, the parties differ on what should occur at the final true-up claim.
TURN and DRA argue that fairness to ratepayers dictates that the Commission should apply no restrictions to the true-up claim: If the final EM&V results indicate that the MPS was not achieved, the utility should be required to return all earnings previously paid out in the interim claims. If the MPS was reached but the utilities received a higher proportion of net benefits (PEB) than they were entitled to based on the adopted shared-savings rate(s), that difference should be returned to ratepayers. Finally, if the final EM&V results indicate that the utilities are subject to penalties, the utilities should pay these penalties as well as return any interim earnings installments.
In contrast, SDG&E/SoCalGas argue that the utilities should not be required to return previous payouts of earnings, even if the final EM&V results indicate that the MPS was not met by the portfolio. In their view, the final true-up claim should be restricted to non-negative adjustments in order to make the incentive payments meaningful and valuable to the utilities, thereby providing the desired motivation throughout the program cycle.194 SCE concurs with this recommendation, except in the instance when the final true-up indicates that the portfolio is not cost-effective (i.e., the PEB is negative). Under this circumstance, any earnings paid out in the interim claims would be returned to ratepayers. These parties also recommend various ways to minimize the potential risk of overpaying the utilities under their proposals, such as paying less than 100% of the calculated earnings during each interim claim.
PG&E recommends somewhat of a hybrid approach to the final true-up adjustment. PG&E concurs with SCE's recommendation if the MPS is ultimately not met at the final true-up, that is, to not require the payback of earnings already received except if the PEB is negative. However, like DRA and TURN, PG&E would return earnings to ratepayers if the interim pay outs represent a higher share of PEB than provided for under the adopted shared-savings rate(s). PG&E further proposes that any negative or positive adjustments in the final claim be booked against earnings calculated for the next program cycle.
More than any other time in California history, we are counting on investments in energy efficiency to reduce California's reliance on nonrenewable supply-side resources and become "first in the loading order", consistent with the Energy Action Plan. To this end we established savings goals for the portfolio of programs funded by ratepayers, and incorporated those savings projections into the utility's supply-side procurement plans. In today's procurement context, energy efficiency needs to produce more than positive returns (net benefits) to ratepayers on their investment to be considered "successful." Most importantly, it needs to produce sizable GWh, MW and MTherm savings that resource planners can depend upon now and in the future.
Throughout this decision, we have designed the shareholder risk/reward incentive mechanism with this primary purpose in mind. Our adopted MPS reflects our assessment of how sizable these savings must be before any earnings should be awarded. Our adopted deadband range establishes the level of portfolio energy savings we find to be unacceptably low, thereby triggering the start of penalties. However, these design parameters lose meaning if the true-up adjustment does not fully reflect the final EM&V results. Essentially, under the approach proposed by the utilities, the MPS or deadband range could end up being anywhere, since the utilities could keep the earnings they received in the interim claims even if they actually achieved energy savings within the deadband or in the penalty range. In our opinion, this approach is not compatible with an incentive design that establishes the MPS and deadband range based on GWh, MW and MTherm savings achievements.
In response to the utilities' observation that our pre-1998 shared-savings mechanism did not require a full true-up of earnings at the end of the program cycle, we observe that the earlier incentive mechanism also did not tie the MPS and deadband range to a percentage of savings goal achievement. Instead, these parameters were tied to net benefits, the same as the PEB. In that context, the Commission's decision not to true-up the MPS with the final earnings claim was predicated on a different policy perspective. That perspective focused on creating positive net benefits to ratepayers on their investment, and did not consider the achievement of specific levels of GWh, MW or MTherm savings as a paramount objective for utility management of the portfolio.
We also observe that the true-up approach proposed by SCE and SDG&E/SoCalGas would result in a skewed treatment of load impact forecasting errors: If they work to the benefit of shareholders, the earnings are adjusted so that the actual earnings rate is never lower than the adopted rate. However, if forecasting errors work to the detriment of shareholders, those errors would be ignored, and shareholders would actually earn at a shared-savings rate that is higher than the one adopted. This is because these parties recommend that the Commission not make any negative adjustments to PEB in the final claim that result from lower-than-expected load impacts. At the same time, these parties would permit positive adjustments to PEB based on the final claim. PG&E's proposal eliminates this one-sided adjustment to PEB, but as discussed above, would still insulate earnings from the final true-up with respect to achievement of the MPS. In any event, we see no reason to pay out either a higher or lower percentage of actual net benefits under the mechanism, once the MPS is reached. Ratepayers should "share" the net benefits from their investment with shareholders at precisely the adopted shared-savings rates-no more, no less.
Finally, as DRA points out, an approach that fails to true-up savings and net benefits (PEB) accomplishments based on the results of final load impact studies creates a perverse incentive for utility managers to promote exaggerated savings assumptions during the planning process. This is because the utility knows that it can get progress payments based on these inflated estimates that are not returnable when the final true-up reveals lower load impacts. Since our EM&V protocols solicit input from the utilities throughout the process of developing ex ante savings estimates, finalizing study evaluation plans and EM&V study results, we need to make sure that our earnings recovery process does not work at cross purposes with the intent of that process, namely, to obtain unbiased, technical input from program administrators. Requiring a true-up that fully impacts total utility earnings provides the proper incentive for utility managers and staff to support the most accurate ex ante estimation process as possible. In contrast, for the reasons pointed out by DRA, the approach proposed by the utilities would work at cross purposes with this intent.
For the reasons stated above, we do not restrict the true-up adjustment in the final claim. We recognize that the possibility of refunding earnings already claimed presents certain problems for the utilities with respect to their financial reporting. However, these problems can be readily addressed by 1) limiting payout of initial claim(s) as NRDC and others have suggested and 2) deducting any over-collections from future earnings claims, as recommended by PG&E. Accordingly, we incorporate both of these design features into today's adopted earnings recovery schedule, as discussed further below.
9.3. Schedule for Claims, Percentage of Payout and Related Issues
We have carefully considered parties' proposals and consulted with Energy Division management and staff in developing a schedule for earnings claims. Our objective is to establish a schedule that will link claims and payments to EM&V results, produce a stream of earnings during and at the end of the program to provide ongoing incentives to the utilities, and at the same time be mindful of resource limitations and competing priorities for staff time.
In our judgment, we have achieved a reasonable balancing of these considerations with the schedule illustrated in Attachment 6. As indicated in that Attachment, there will be two interim claims and a final true-up claim, resulting in one claim per calendar year for the 2006-2008 and each subsequent program cycle, beginning in 2008. The interim claims will be tied to the second and third annual Verification Reports, and the final claim will be tied to the Final Verification and Performance Basis Report. We do not tie any claim to the Interim Performance Basis Reports, since these were originally intended by staff to provide feedback for program improvements and not be a basis for incentive payments.
As discussed further below, we adopt an Advice Letter process for the submittal of claims, and indicate the approximate dates of those submittals in Attachment 6. However, the actual due dates for those claims are tied to the issuance date of Energy Division's reports, as discussed in Section 8.4 below. Our staff is fully committed to meeting the deadlines established by our EM&V protocols for their reports. Nonetheless, no one can guarantee that unforeseen circumstances will never require some delay to that schedule.
Therefore, should circumstances warrant, we permit the assigned ALJ to modify the schedule set forth in Attachment 6, in consultation with Energy Division and the assigned Commissioner
Some parties to this proceeding suggest that we authorize the utilities to submit earnings claims and pay out some portion of the estimated savings if those Energy Division reports are delayed in any way. We do not adopt this suggestion. Ratepayers' interests are best served when the payout of earnings (or imposition of penalties) occurs only after the installations, program costs and (for the final claim) load impacts have been verified by our staff and its contractors.
In its pre-workshop comments, PG&E recommended that shareholder earnings claimed but not yet collected should accrue interest from the end of the program year in which the claim is submitted until earnings recovery. 195 Although we permitted interest accrual on uncollected earnings for the pre-1998 shared-savings incentive mechanism, we do not adopt this treatment today. Under the pre-1998 shared-savings mechanism, earnings recovery extended to up to 10 years after program implementation pending the completion of persistence and retention studies. The EM&V reports managed by the utilities at that time, and resulting earnings claims, were subject to litigation that could result in substantial delays to the earnings recovery schedule. In that context, we allowed for the calculation of interest using the 90-day commercial paper rate. 196 However, EM&V responsibilities for post-2005 programs and the claim review and approval process adopted today for energy efficiency do not share these characteristics. Therefore, we are not persuaded that interest should accrue on delayed payments of either earnings or penalties under today's adopted incentive mechanism.
With respect to the percentage of payout, we agree with NRDC and others that some percentage of the interim payouts should be "held back" until the final true-up claim. Doing so reduces the possibility that the utility may have to return earnings already paid out (or reduce the amount considerably) upon the final true-up claim.197 In the context of the overall incentive design we adopt today, a 30% hold-back is a reasonable way to mitigate this risk. Accordingly, we will hold back 30% of the authorized earnings or penalties for each of the interim claims. For example, if the MPS is met and shared savings would be $30 million (based on verified costs and installations) for the interim claim, the payout in that claim would actually be $20 million (2/3 x $30). As discussed in this decision, any pay-back obligations that might still arise in the final true-up claim will be booked against positive earnings in the next program cycle.
This brings us to the recommendation of PG&E and SCE to either adjust the MPS or the goals (equal to compliance targets) for the interim claims. In particular, these utilities note that the Commission has established both three-year cumulative and annual goals for the 2006-2008 period, but pursuant to D.04-09-060 has also allowed utilities to "ramp up" to the three-year cumulative goals with program efforts over time. They also observe that their compliance filings for the 2006-2008 portfolio plans include savings targets that reflect a ramping up to the cumulative goals that are generally lower than the annual goals established in D.04-09-060. Therefore, SCE and PG&E argue that the benchmark for the interim claims should comport with this ramp up, by either (1) adopting lower MPS levels for 2006/2007 period (SCE) or (2) keeping the MPS the same in each year but basing the progress payments on achievement of the compliance targets (PG&E).
We decline to adopt either of these approaches. In particular, PG&E's recommendation could introduce significant gaming of ramp-up targets in future compliance filings. More importantly, PG&E's concerns that it will forego earnings associated with 2006 activities because of a "slower start" at the beginning of a program cycle only occurs under the "Single-Year Basis" approach that PG&E has proposed in this proceeding. Under the Cumulative-To-Date Approach we adopt today, those efforts will be fully reflected over the program cycle in subsequent claims. In addition, our decision to move the first progress payment to the second year of the program cycle makes moot any need for a lower first-year MPS or threshold savings requirement. Therefore, the MPS will not change from one interim claim to the next, and the MPS threshold for performance will be based on the Commission-adopted annual and cumulative goals.
9.4. Procedures for Reviewing and Approving Claims
To further develop the record on implementation issues, the Assigned Commissioner issued a ruling (ACR) soliciting comment on Energy Division's proposed procedures for reviewing and approving earnings claims, once the incentive mechanism is in place.198 Comments were filed by NRDC, DRA, SCE, PG&E, TURN and jointly by SDG&E and SoCalGas.
SDG&E, SoCalGas and PG&E recommend reinstating the Annual Earnings Assessment Proceedings (AEAPs) with formal procedures for review and approval of interim and final earnings claims. In particular, SDG&E and SoCalGas jointly argue that the AEAP process provides "all parties an opportunity to participate both substantively and procedurally in the application review process."199 In addition, they argue that the procedure set forth in the ACR may compromise "data accuracy"200 and "fails to provide the same level of critical review to inform the Commission decision-making on whether the utilities have supported their claims for incentive payments."201
PG&E argues that occasionally disputes require "an unbiased and experienced person to oversee a formal process to ensure that all parties have the opportunities to question the positions of others."202 PG&E contends that in the past disputes have "dealt with tune-ups to the measurement protocols themselves"203 and that "[n]either a workshop that included interested stakeholders nor written comments as a result of those workshops provides sufficient opportunity or rigor to thoroughly examine the range of issues that could reasonably be in dispute."204 SCE argues for allowing utilities to request an AEAP with its formal proceedings in the event of a dispute.
NRDC similarly argues for a more formal process along the lines of the AEAP for earnings claims made pursuant to the Final Performance Basis Report, asserting that "the proposal has Energy Division staff making all final decisions about the reports and studies without a specific process for addressing concerns raised by parties. Some amount of Commission oversight seems appropriate..."205
With regard to the method for being paid pursuant to the Final Performance Basis Report, DRA argues in favor of requiring the utilities to file either an application or an Advice Letter subject to General Order 96-B, Section 7.6.2 (which requires resolutions to be approved by the Commission). According to DRA, an application or Advice Letter requiring a resolution would "promote transparency and public participation in the process."206 TURN supported this approach in its Reply Comments. DRA was also concerned with scheduling a specific timeline in order to have program results to inform program planning, using the same procedures it suggested for assessing penalties, and establishing a process evaluation mechanism.
NRDC and PG&E support DRA's suggestion for a timeline in their Reply Comments. NRDC and TURN also support a formal process for assessing penalties. In addition, SCE argues in favor of adding a step to allow the program implementers and administrators to review preliminary drafts in order to identify factual errors before drafts are issued publicly. PG&E agrees with this suggestion in its Reply Comments. PG&E also contends that there was a lack of stakeholder input in the proposed procedures for review and approval of interim and final earnings claims.
NRDC points out that the Attachment 1 proposal of the ACR is intended to replace steps 4 through 9 of Attachment 4 to the January 11, 2006 ALJ Ruling. However, Attachment 4 of that ALJ Ruling addresses Impact and Market Effects Studies, whereas the Attachment 1 proposal addresses only Verification and Performance Basis Reports. NRDC requests clarification that the Attachment 1 proposal of the ACR is intended as a review and approval process for impact evaluation studies as well as Verification and Performance Basis Reports. NRDC also notes that the procedures refer only to earnings claims, and do not reflect the fact that penalties may be assessed in interim or final claims.
DRA recommends that Energy Division's proposed process for a 60-day turnaround time for program administrators' written responses to staff final evaluation reports be shortened to 30 days given that administrators will have outlined their issues both in oral workshop and written comments. DRA expresses concerns about Energy Division granting approval to extend this deadline even further, as noted under this same step.
The ACR recognized that "adoption of these procedures may result in some change to D.05-01-055 . . ., and to Attachment 4 to Administrative Law Judge's Ruling Adopting Protocols For Process and Review of Post-2005 Evaluation, Measurement and Verification (EM&V) Activities, dated January 11, 2006."207 The ACR was sent to the energy efficiency service list in this rulemaking. Those on that service list thereby had notice of any potential changes to prior Commission actions and an opportunity to comment on any possible changes. This notice and opportunity to comment addresses PG&E's concern regarding lack of stakeholder input. The ACR was put out for comment precisely for the purpose of garnering stakeholder input. Parties provided useful and detailed input on the process set forth in the ACR. Therefore, we find that the procedures set forth in the ACR have had the benefit of stakeholder input.
In our view, the parties have failed to show why the procedures set forth in the ACR do not address parties' concerns while achieving both efficiency and accuracy. The steps outlined in the ACR provide parties the ability to participate, both procedurally and substantively. Contrary to NRDC's position, the ACR sets forth a specific and adequate process by which parties can submit questions, concerns and comments to both Energy Division and evaluation contractors. Conferences and the submission of written comments based on conferences, allow parties to participate in the process by raising and discussing issues. This takes place in formulating the several reports before they are finalized: the draft Verification Report, the draft final evaluation reports, and the draft Final Performance Basis Report. Our belief is that any concerns the parties may have can be resolved through such a process. Regarding substantive concerns, the scope of comments is not limited in any respect by the Ruling. Parties are free to raise any and all substantive concerns they may have with the reports to both Energy Division and the evaluation contractors. Thus, the steps outlined in the ACR allow for both procedural and substantive involvement of the parties in the review and approval of interim and final earnings claims.
It is precisely the nature of, and the numerous opportunities for, the procedural and substantive participation of the parties that will help ensure the accuracy of report results. As discussed in the ACR, the procedures allow for a free exchange between all of the stakeholders and technical experts. In so doing, the procedures allow the opportunity to explore and resolve areas of potential disagreement amongst the stakeholders and technical experts. PG&E seems to argue that nothing short of cross-examination provides sufficient opportunity or rigor to address potential disputes. We disagree with the proposition that only cross-examination allows thorough analysis of these kinds of issues. Cross-examination does not provide for the multi-party give and take available in a conference, which we think is better suited for the kinds of disputes likely to arise here. Furthermore, the procedures require response to all written comments, ensuring, as noted in the Ruling, that all comments will be considered and dealt with in a reasonable manner. The mechanism allowing for parties to interact with evaluation contractors, through conferences and written comments, helps to ensure the accuracy of the results.
Overall, we think the procedures set forth in the ACR to be equally accurate and more efficient than any of the more formal processes suggested by the parties. Parties who have requested more formal procedures have not shown why the procedures set forth in the ACR would not be equally accurate while being more efficient. Because the issues are of a technical nature, no party has shown why such issues are not just as well, if not better, suited to resolution by Energy Division with the assistance of outside consultants rather than an ALJ and the five Commissioners.
As noted in the ACR, "The goal of these proposed procedures is to determine the level of incentive payments by a process that is both efficient and accurate."208 The idea behind the procedures is to create a mechanism in advance to determine the level of incentive payments. Having created such a mechanism there is no need for full Commission involvement to resolve issues, except to the extent required under General Order 96-B, 7.6.1, discussed below. Once Energy Division has issued a Final Verification Report or the Final Performance Basis Report, determining the level of earnings or penalties is strictly a matter of applying the formulas in this decision to the results outlined in those final reports. Accordingly, it will be a ministerial task for Energy Division to determine whether the utilities' advice letters filed in response to these reports contain the correct calculation of earnings or penalties.
SCE argues for allowing utilities to request an AEAP with its formal procedures in the event of a dispute. As already discussed above, an AEAP is not necessary in light of the procedures outlined in the ACR.
PG&E raises the issue of an "unbiased and experienced" party to facilitate parties' participation. As discussed in the ACR, D.05-01-055 marked a shift in the responsibility for overseeing EM&V studies, from the utilities to Commission staff. The purpose of the shift was to help ensure unbiased results by having a neutral party overseeing the EM&V process. Commission staff provides a neutral, unbiased party to facilitate parties' participation. In addition, Commission staff, specifically Energy Division, will have access to the experience and expertise of evaluation contractors throughout the processes for review and approval of both interim and final earnings claims. The procedures set forth in the ACR address PG&E's concerns regarding having an unbiased and experienced party oversee the process.
With regard to the method for being paid pursuant to the Final Performance Basis Report, DRA suggests an application process or an advice letter requiring resolution in order to promote transparency and public participation. As discussed above, the steps outlined in the Ruling provide ample opportunity for public participation. Stakeholders in this process include, not only those on one of the Commission's energy efficiency service lists, but also any individual or organization who has "notified Energy Division of their interest [in] being informed of these meetings."209 Therefore, the procedures in the ACR allow for broad public participation. The procedures also allow for transparency through the various conferences and the requirement that all written comments to the various reports be addressed in the final versions of each report.
DRA argues for at least an Advice Letter process subject to General Order 96-B, Section 7.6.2, which requires resolutions to be approved by the Commission. The current process allows for Energy Division disposition pursuant to General Order 96-B, 7.6.1 which states that:
An advice letter will be subject to Industry Division disposition even though its subject matter is technically complex, so long as a technically qualified person could determine objectively whether the proposed action has been authorized by the statutes or Commission orders cited in the advice letter. Whenever such determination requires more than ministerial action, the disposition of the advice letter on the merits will be by Commission resolution, as provided in General Rule 7.6.2. (Emphasis added.)
Where Energy Division disposition of utility earnings claims would be ministerial, a Commission resolution should not be required. As explained above, approval of claims should be ministerial because any substantive issues will already have been resolved through the procedures set forth. However, the current process still allows for Commission resolution under appropriate circumstances where Energy Division disposition would require "more than ministerial action." If more than ministerial action is required than under General Order 96-B, 7.6.1, Energy Division will, of course, prepare a resolution for Commission approval.
SCE argues in favor of adding a step to allow the program implementers and administrators to review preliminary drafts in order to identify factual errors before drafts are issued publicly. As set forth in the ACR and discussed above, SCE, as well as the other utilities and stakeholders, will have various opportunities to address errors in the studies and reports. Therefore, extra steps allowing for program implementers and administrators to review preliminary drafts to identify errors prior to public release of the drafts is unnecessary.
In sum, we find the procedures outlined in the ACR to be reasonable and will adopt them, subject to certain clarifications. First, in response to NRDC's comments, we clarify that the procedures adopted in Attachment 7 are intended to establish a public and stakeholder review and input process for Energy Division consultants' evaluation reports (e.g., impact evaluation studies) as well as Energy Division's Verification and Performance Basis reports. Steps 1-4 under "Final Claim" in that attachment describes the process for reviewing and providing input on the consultants' evaluation reports.
In addition, we clarify that the 60-day turnaround time for program administrators' written responses to final evaluation reports is not pertinent to any earnings claims disputes but rather relevant to implementing the findings of evaluation reports. The procedures are now modified to make this clear. The 60-day period described in Step 5 under "Final Claims" of the ACR is not excessive and may be a practical timeframe for the program administrators to develop an action plan based on the evaluation results. We do, however, agree with DRA's concerns regarding delays getting EM&V on-track and in synch with the programs. We therefore grant Energy Division the authority to shorten the response timeframe on a case by case basis as needed. Step 5 under "Final Claims" of the ACR contained erroneous language in light of the process adopted in this decision.210 Today's adopted procedure removes that language.
We also clarify in Attachment 7 that the adopted procedures apply to claims that involve either penalties or earnings, and establish the due dates for utility advice letters.
Finally, establishing where performance falls along the adopted penalty/earnings curve involves estimating load impacts, load shapes and (for calculating PEB) measure and program costs for an extensive number of programs and measures. In recognition that we may not have the resources to verify each parameter on an ex post basis for every program, our adopted EM&V protocols provide staff the flexibility to establish priorities for the EM&V efforts throughout the program cycle. In performing its EM&V duties, we clarify that staff or its evaluation contractors may utilize any or all of the following approaches in order to report an estimated PEB for those programs that do not receive an impact evaluation, as staff deems appropriate:
· Extrapolate findings from comparable programs to determine net resource benefits for programs that do not receive full impact evaluation; or
· Accept reported savings values for programs that do not receive impact evaluation; or
· Extrapolate savings findings from impact evaluations for comparable programs for some net resource benefit parameters and accept reported values for others; or
· Apply a discount factor to savings or costs from programs that do not receive impact evaluation based upon historic impact evaluation results for comparable programs.
Staff should describe the method(s) it uses to estimate PEB for those programs that do not receive an impact evaluation in the Final Performance Basis Report, which will be issued to obtain stakeholder input pursuant to the Attachment 7 procedures. In addition, Energy Division may need to prioritize resources for verifying measure installations and program costs over the program cycle, and may, as circumstances warrant, report the results of completed verification tasks in the Final Verification and Performance Basis Report. If such circumstances arise, Energy Division should describe in each Verification Report the additional verification activities that will be performed and reported later in the program cycle.
191 See ALJ Ruling Adopting Protocols for Process and Review of Post-2005 EM&V activities, January 11, 2006. As discussed further below, the annual schedule for Energy Division's Verification Report was modified by ALJ ruling on January 2, 2007. For the 2006-2008 program cycle, the verification of 2006 installations and program costs will be combined with the report on 2007 accomplishments, so that both are now scheduled to be released in August of 2008.
192 Net-to-gross ratios are used to discount savings associated with program to reflect the existence of "free riders," that is, customers who would have installed the energy efficiency measure or equipment without the utility's financial incentive (e.g., rebate). Net-to-gross ratios are estimated at the start of program implementation, and EM&V studies are designed to evaluate those ratios on an ex post (post-installation) basis, using control groups and statistical regression analyses, among other approaches.
193 TURN's post-workshop comments are silent on many of the earnings claim and recovery issues discussed below and CE Council's comments provide only a one-sentence general blanket endorsement of DRA's position on these issues. In the discussion that follows, we attribute a particular position to a party only if the party explicitly presents a position on that issue, including supporting arguments, in its post-workshop comments.
194 NRDC's post-workshop comments suggested that the claim schedule should not include paybacks to customers, but only in conjunction with the claims process being modified to significantly reduce the chance that a payback would ever be needed. (See NRDC's September 8, 2006 Comments, pp. 19-23 and Opening Comments on Proposed Decision, August 29, 2007, p. 9.)
195 PG&E Pre-Workshop Comments, June 16, 2006, pp. 16-17.
196 See D.94-10-059; 57 CPUC 2d, pp. 62-63.
197 This is illustrated numerically in Example 3 of Attachment 5, using very simplified assumptions.
198 Assigned Commissioner's Ruling Soliciting Further Comment on Procedures for Review and Approval of Interim and Final Earnings Claims, April 4, 2007.
199 Opening Comments of SDG&E and SoCalGas, April 23, 2007, p. 3.
200 Ibid.
201 Ibid., p. 4.
202 Comments of PG&E, April 23, 2007, p. 2.
203 Ibid.
204 Ibid., pp. 2-3.
205 Opening Comments of NRDC, April 23, 2007, p. 3.
206 Comments of DRA, April 23, 2007, p. 5.
207 Assigned Commissioner's Ruling Soliciting Further Comment on Procedures for Review and Approval of Interim and Final Earnings Claims, April 4, 2007, p. 4.
208 Ibid., p. 2.
209 Ibid., Attachment 1, fn. 5.
210 Specifically, we delete the following sentence: "In this follow-up response to each report, administrators should note any concerns they have over specific report finding and indicate whether they agree with the final load impact estimates for the programs in question."
