10. Defining "What Counts" in Calculating Achieved Savings and Net Benefits

As we directed in D.05-04-051, the risk/reward shareholder incentive mechanism we adopt today will be applied to portfolio performance, rather than to the performance of each individual program. We determined that this portfolio-level approach was necessary "to encourage innovation and allow for some risk taking on pilot programs and/or measures in the portfolio."211 All parties to this phase of the proceeding propose that the incentive mechanism be applied to a portfolio of programs; however, they differ with respect to what program costs and EM&V expenditures should be included in that portfolio. In other areas related to "what counts" there is agreement among the parties, such as the treatment of savings from low-income energy efficiency (LIEE) programs and Codes and Standards Advocacy programs. We discuss these and other related issues in the following sections.

10.1. Non-Resource Programs

Non-resource programs represent energy efficiency activities that do not focus on the displacement of supply-side resources at the time they are implemented (but may lead to that displacement over the longer-term, or enhance program participation overall). Therefore it is very difficult, and in some instances impossible, to reasonably estimate and verify the resource savings attributable to those programs. Non-Resource programs include Emerging Technologies Programs, Flex Your Power and other statewide marketing activities, general education, training and outreach programs and demonstration programs, such as Advanced Home Design.

The adopted EM&V protocols describe the difficulties in independently estimating the savings attributable to non-resource programs.212 For this reason, in almost all instances, EM&V efforts for these programs will focus on evaluating performance parameters other than resource benefits, at least until the first evaluations of their primary impacts can be completed. Because resource benefits will not be directly attributed to these programs over the 2006-2008 program cycle, SCE and SDG&E/SoCalGas recommend that the incentive mechanism apply only to the portfolio of resource programs. They propose that all costs associated with non-resource programs (including associated EM&V) be excluded from the calculation of PEB.213 CE Council supports this approach.

TURN and DRA, on the other hand, recommend that all costs of the non-resource programs be included in the calculation of PEB, even though they do not directly contribute to the calculation of resource benefits. In DRA's view, these programs are an essential part of the portfolio to promote the achievement of program savings, and since their impacts will be reflected in the success of the resource programs, their costs should be included as well. NRDC and PG&E support this approach in conjunction with providing the utility an opportunity to earn under PG&E's proposed performance-adder treatment. (See Section 11 below).

The treatment of non-resource programs under today's adopted incentive mechanism should be consistent with their treatment at the start of the program cycle, when we assess whether or not the portfolio of proposed programs should be funded by ratepayers. Our policy rules for energy efficiency require that all portfolio costs, including those associated with non-resource programs, be included in our evaluation of whether the portfolio is cost-effectiveness from a net benefits perspective over the 3-year program cycle, with only one exception. We permit the exclusion of Emerging Technologies Program in recognition that the development and commercialization of new energy efficiency technologies may not contribute directly or indirectly to resource savings for several program cycles.214

Excluding all non-resource program costs from the PEB, as SCE and SDG&E/SoCalGas recommend, would be inconsistent with the manner in which we evaluate portfolio performance for the purpose of committing ratepayer dollars. As our policy rules recognize, statewide marketing and outreach programs, upstream market transformation programs, information and education programs and other non-resource program activities will promote the achievement of program savings over the near- and long-term. Since their impacts will be reflected in the success of the resource programs, their costs should be included as well.215

Moreover, the approach suggested by SCE and SDG&E/SoCalGas would create a perverse incentive for the utility to "game" the classification of programs or the allocation of costs across programs in order to maximize the net benefits of those programs subject to the incentive mechanism (resource programs) relative to those that are not (non-resource programs). In addition, under this approach utility program administrators would be less motivated to make the non-resource programs as cost-efficient as possible, since those improvements would not impact the calculation of PEB and associated shareholder earnings.

For the above reasons, we will include both resource and non-resource program costs in the calculation of PEB, with the exception the Emerging Technologies Program. Those program costs, and related EM&V costs, will be excluded in the calculation of the PEB. We discuss in greater detail the treatment of the costs and benefits of one particular resource program, Codes and Standards Advocacy, in Section 9.3 below.

Finally, because energy efficiency funding is now authorized over 3-year program cycles and subject to a 10-year trajectory of increasingly aggressive savings goals, it is not in the interest of the utility to shortchange non-resource programs that can enhance portfolio savings performance over both the short-and long-term. In any event, the ability of utility program administrators to unilaterally implement shifts in portfolio funding away from non-resource programs is restricted by our adopted fund-shifting rules.216

10.2. EM&V

NRDC and the utilities propose to exclude from the calculation of PEB the vast majority of EM&V expenditures managed by Energy Division, arguing that the utilities do not have control over those efforts and therefore their earnings should not be contingent upon such dollar expenditures. We find no merit to this argument: EM&V is an integral cost of delivering reliable and verifiable energy efficiency savings, irrespective of who manages those efforts. Just because the utilities may not manage most of those funds, it does not follow that shareholders should be paid a larger share of portfolio net benefits by excluding EM&V costs.

In sum, all EM&V costs should be included in the evaluation of the performance of the energy efficiency portfolio and calculation of PEB, just as those costs are included on a prospective basis when ratepayers are asked to fund energy efficiency activities administered by the utilities. The limited exception we make to this rule is for EM&V directly related to the Emerging Technologies Program. For the reasons discussed above, this program will be excluded from the calculation of PEB. Therefore, it is reasonable to exclude expenditures on the associated EM&V activities from that calculation as well.

10.3. Codes and Standards Advocacy

The treatment of savings from Codes and Standards (C&S) advocacy work was addressed at some length in D.05-09-043, and those determinations were reflected in parties' proposals for how C&S savings should "count" towards the MPS or PEB for the 2006-2008 program cycle. We review those determinations first, before addressing the counting issues.

10.3.1. Determinations in D.05-09-043

As discussed in D.05-09-043, one of the major accounting changes for post-2005 energy efficiency was to stop counting commitments and only count actual installations in evaluating portfolio performance. Based on this change and other considerations, we determined that utilities should be able to credit some portion of the savings attributable to pre-2006 codes and standards advocacy work towards savings goals during the transition (i.e., for program cycle 2006-2008). In particular, we recognized that this was appropriate because the baseline for the potentials studies underlying our savings goals did not consider the increase in appliance/new construction efficiency standards that were put in place near the start of the 2006-2008 program cycle. Now that the new standards are in place, this meant that those standards could actually work against the utilities with respect to their ability to tap that economic potential with other types of energy efficiency activities.217

We also determined that only 50% of the GWh, MW and MTherm savings associated with pre-2006 advocacy work would be counted towards the 2006-2008 savings goals. We established this limit primarily because of certain inherent and potentially significant uncertainties associated with the approach taken to attribute savings to the pre-2006 work. For future C&S evaluation efforts, we directed staff to address how best to verify parameters used to develop the ex ante savings estimates as part of the EM&V protocols, which are now in place.

Because of transition issues218, we also determined that the 2006-2008 PEB would not include the savings associated with the pre-2006 C&S programs in calculating earnings or portfolio cost-effectiveness. On a forward looking basis, we directed that savings from C&S advocacy work undertaken in 2006 and beyond would be counted when calculating either net resource benefits ("performance basis") or cost-effectiveness (TRC or PAC tests).219

10.3.2. Discussion

All parties commenting on this issue recommend that 50% of the savings attributed to pre-2006 C&S advocacy work count towards establishing whether the MPS has been met for the 2006-2008 cycle. They also recommend excluding these savings from the calculation of PEB. We find these recommendations to be fully consistent with our determinations in D.05-09-043, as discussed above, and will adopt them. As stated in that decision, for this purpose the C&S savings are to be verified (as opposed to ex ante estimates used for planning purposes).220 Energy Division's EM&V contractors are in the process of verifying those savings estimates, and Energy Division will be including the verified numbers in its Annual Verification Reports.

There is some disagreement, however, on how to treat the costs associated with 2006-2008 C&S advocacy work. PG&E, TURN, DRA and NRDC take the position that C&S advocacy costs should be booked in the program cycle in which they occur, whereas SDG&E and SoCalGas would apparently exclude those costs in calculating PEB-at least for the 2006-2008 program cycle. Although we recognize that there may be a significant lag between when the costs are incurred and when the savings are actually realized for this program, over time, these "lagged" streams of costs and benefits should tend to even out as they do for commitments to long-lead time projects, such as new construction. Moreover, if the costs of the C&S advocacy work are not reflected in the PEB at the time they occur, when should they be? SDG&E and SoCalGas provide no compelling reason to depart from our practice of including program costs and savings on an "actual" basis in determining portfolio performance for post-2005 energy efficiency. Therefore, we will include C&S advocacy costs as they are incurred in calculating the PEB under today's adopted incentive mechanism.

There is one issue related to our determinations in D.05-09-043, however, that we cannot resolve today. We deferred consideration of whether savings from pre-2006 C&S advocacy work will also count towards the updated goals for 2009 and beyond, pending further consideration of the baseline issues discussed in that decision.221 By ruling dated June 1, 2007, the Assigned Commissioner solicited comment from parties to this proceeding on whether and how to change utility energy savings goals through 2011.222 Therefore, the baseline issues that may affect whether C&S advocacy work will count towards savings goals for the 2009-2011 cycle (and beyond) cannot be addressed until after the Commission has had an opportunity to consider comments in response to that ruling.

The Assigned Commissioner's June 1, 2007 ruling also solicits comment on whether we should reconsider what savings will count toward fulfillment of goals, including those associated with C&S advocacy, irrespective of whether the goals are modified.223 We will be considering these issues as we plan for the 2009-2011 program cycle. Until further order of the Commission, however, determinations we have made to date on these issues remain unchanged.

10.4. Savings from LIEE

The potential studies underlying our savings goals did not distinguish between measures/equipment installed under low-income energy efficiency (LIEE) versus non-low income energy efficiency (non-LIEE) programs. Therefore, in D.04-09-060, we determined that the verified savings from LIEE programs should count towards meeting our energy efficiency goals.224 Accordingly, all parties agree that those savings should also count towards the MPS under the risk/reward incentive program, but not towards the PEB.

This means that LIEE savings will count when determining whether the utilities have met at least 85% of the savings goals (the MPS), and are thus are eligible to share a percentage of the net benefits (PEB) achieved at that level of performance or higher. Energy Division's Annual Verification Reports and Final Verification and Performance Report should reflect the results of the most recent LIEE load impact studies and any other completed Energy Division LIEE verification activities in reporting the savings for this purpose. However, in the calculation of the portfolio net benefits, to which the shared-savings rate(s) will apply, neither the savings nor the costs associated with LIEE programs will be included. Only the savings and the costs associated with the non-LIEE portfolio will be used to calculate the PEB net benefits and associated earnings under today's adopted incentive mechanism.

10.5. Augmented Funding for Programs During Program Cycle

The issues discussed above concerning "what counts" raise a corollary issue: How should we consider augmented program funding during the program cycle in the context of today's adopted incentive mechanism? We establish energy efficiency funding levels for each three-year program cycle after an extensive program planning and compliance process. During that process, we evaluate on a prospective basis the ability of portfolio activities to achieve the three-year savings goals cost-effectively with the funds authorized, with the input of all interested stakeholders and program advisory group members, including Commission staff. Therefore, we expect utility requests for funding augmentation once the Commission has approved funding levels and utility program portfolios for a particular program cycle to be limited to extraordinary circumstances.225

In the 2009-2011 planning phase of this proceeding, parties have submitted specific recommendations for the treatment of savings and costs associated with energy efficiency funding augmentations during the funding cycle (referred to as "mid-cycle" funding augmentations). In a subsequent decision, we will address parties' proposals and adopt policy rules that establish how to count savings and costs associated with mid-cycle funding augmentations in the context of today's adopted incentive mechanism. We prefer to adopt a generic approach to this issue by adopting policy rules, rather than addressing these issues on a case-by-case basis for each mid-cycle funding augmentation request, as suggested in the Proposed Decision.

Nonetheless, we will need to carefully examine each request for LIEE program funding to ensure that it is properly classified as LIEE. As discussed below, there are implications associated with classifying a program as LIEE and augmenting its funding that now carry over to the risk/reward incentive mechanism adopted today.

One such example is the May 10, 2007 application filed by SCE for approval of a "change a light, change the world" compact fluorescent lamp (CFL) program. In this application, SCE requests $22 million in augmented LIEE funding to achieve additional kWh and kW savings through the distribution of approximately one million CFLs to homes in low-income neighborhoods by December 31, 2008.226 If this augmentation is treated as an LIEE program, as SCE requests, then the additional program costs and savings will be handled in the manner described in Section 9.4 above. However, we need to consider this treatment on a case-by-case basis, because of the following implications.

If the proposed funding is approved as LIEE, then the utility is authorized to spend more ratepayer funds on activities that will make it easier for the utility to meet the MPS and become eligible for shared-savings. However, as discussed above, the net benefits (either positive or negative) associated with the program augmentation would not be reflected in the PEB calculation and subject to the earnings true-up process. Because LIEE programs are undertaken to meet equity as well as resource objectives, they provide energy efficiency measures and services at no cost to eligible, low-income households. LIEE programs are generally much less cost-effective relative to activities funded through non-LIEE energy efficiency programs (where participants are generally required to pay a significant portion of the measure installation cost), or not cost-effective at all. Therefore, as we review funding requests for energy efficiency, we must carefully and consistently distinguish between LIEE and non-LIEE programs. Otherwise, utilities could end up earning more than their authorized "share" of net benefits due to misclassification of programs as LIEE, which would not be fair to ratepayers.

211 D.05-04-051, mimeo., p. 43.

212 See ALJ Ruling on EM&V Protocol Issues, September 2, 2005, p. 12.

213 SCE adds the following caveat: In the future, if measurable savings can be attributed to non-resource programs, both the costs and benefits of these programs would be included in calculating the MPS and PEB.

214 D.05-04-051, Attachment 3, Rules II.8 and IV.9.

215 D.05-04-051, Attachment 3, Rule II.7.

216 See D.05-09-043, Table 8. For example, the utility must file an advice letter for any proposed fund shifting of more than 1% out of statewide marketing and outreach, emerging technologies, or codes and standards advocacy programs. An advice letter process is also triggered with shifts among program categories of over 25% on an annual basis. (See D.05-09-043, Table 8.)

217 See D.05-09-043, mimeo. pp.123-125.

218 Namely, because counting savings associated with this work towards PEB, upon which the risk/reward performance mechanism would be based, created a fundamental policy inconsistency with respect to the cessation of shareholder earnings during the program years when these pre-2006 investments were made. Ibid., p. 130.

219 Ibid., pp. 132-133. See also Attachment 10 to D.05-09-043.

220 Ibid,. p. 132.

221 Id.

222 Assigned Commissioner's Ruling Soliciting Questions on Whether and How to Change Utility Energy Savings Goals, June 1, 2007.

223 Ibid., pp. 3-4.

224 D.04-09-060, p. 134.

225 This expectation applies to requests for funding augmentation that would require either approval to increase revenue requirements or approval to carryover unspent funding authorized for an earlier program cycle.

226 See Application for Approval of SCE's "Change a Light, Change the World" Compact Fluorescent Lamp Program, A.07-05-010, dated May 10, 2007.

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