13. Rate Recovery, Cost Allocation and Short-Term Rate and Bill Impacts

Pursuant to D.98-03-063, earnings authorized for energy efficiency are collected through electric distribution and gas transportation rates, and allocated to customer classes based on marginal cost allocation factors. We have applied this approach to rate recovery and cost allocation to earnings authorized for non-LIEE under mechanisms in place prior to 2002, as well as to earnings paid out under the performance adder incentive mechanism currently in place for LIEE.

The issue of whether to change this practice was first raised by TURN in its direct testimony. In that submittal, TURN argues that it is unfair because the current approach for allocating shareholder incentive costs to customer classes would assign a greater proportion of incentive costs to residential customers than the percentage of the energy efficiency expenses they pay. Therefore, TURN recommends that "if the Commission is going to burden any ratepayers with these massive incentives, it should charge the incentives in proportion to energy efficiency expenditures...."²⁵⁵

Changes to our rate recovery and cost allocation procedures for shareholder incentives was not a topic identified in any of the scoping rulings for Phase 1, by workshop participants in their pre- and post-workshop filings, or by the Assigned Commissioner in her ruling identifying the issues for Phase 1 testimony and evidentiary hearings. It is therefore beyond the scope of Phase 1 to address such changes in today's decision. We also agree with CLECA and others that cost allocation is an issue to be addressed only after proper notice is given to all potentially affected customers. It is also a complicated one, with multiple possible approaches for resolution and factual information on the impact on various customer classes that we must carefully consider.

Therefore, until further order by the Commission, we will continue to recover shareholder incentives (earnings) associated with energy efficiency activities through electric distribution or gas transportation rates, using the cost allocation methods adopted for that purpose. We encourage the Assigned Commissioner, in consultation with Energy Division staff, to consider how the cost allocation issue that TURN raises in its testimony may be raised for Commission consideration in the future, in the appropriate procedural forum and with proper notice to all interested parties.

As in the past, the rate changes required to recover positive earnings under the incentive mechanism shall be consolidated with the next scheduled change in the utility's electric distribution and gas transportation rates. However, as discussed in Section 8.2.2, any pay-back obligations that might arise in the final true-up claim will be booked against positive earnings in the next energy efficiency program cycle, and not be consolidated with other electric distribution or gas transportation rate changes for the next scheduled change.

More specifically, upon review and authorization of earnings for the interim or final earnings claim, SCE will record the authorized earnings in the distribution sub-account of the Base Revenue Requirement Balancing Account. The year-end balance recorded in this account will be recovered in SCE's annual Energy Resource Recovery Account forecast proceeding, where we consolidate authorized revenue requirement changes (including balancing account balances) for SCE into one rate change that is implemented on (or soon after) January 1^st of each year.²⁵⁶

PG&E consolidates distribution rate changes each year by submitting Annual Gas True-up and Annual Electric True-up advice letters in the fall. This process sets PG&E's gas and electric rates on or soon after January 1^st of each year. Accordingly, PG&E will include the electric revenue requirement and gas incentive amounts that are authorized for a particular interim or final earnings claim in the next scheduled Annual Electric True-up and Annual Gas True-up advice letter. Similarly, SDG&E and SoCalGas will collect authorized shareholder earnings through the advice letter process they use to consolidate rate changes that become effective on or soon after January 1^st of each year. These are the December Consolidated Filing to Implement Electric Rates and December Consolidated Gas Rate Changes advice letter filings.

At the direction of the assigned Commissioner and ALJ, the utilities prepared estimated rate and bill impacts associated with various scenarios of potential levels of shareholder incentives for energy efficiency.²⁵⁷ These projected rate and bill impacts reflect the immediate, short-term impacts associated with increasing funding requirements for shareholder incentives associated with 2006-2008 program accomplishments. They do not reflect the net impact on rates and bills of those programs (including shareholder incentives) over time.

The overall impact of energy efficiency programs-even with the payout of shareholder earnings-will be to decrease utility revenue requirements, customer rates and customer bills relative to the levels without the energy efficiency programs. This decrease occurs because the earnings paid out under a shared-savings mechanism, by definition, are a fraction of the verified net benefits to ratepayers, that is, the verified reductions in supply-side costs less energy efficiency portfolio costs. For example, as shown in Table 1 (in Section 1), earnings of $323 million for the combined utilities will be paid out at 100% achievement of the Commission's 2006-2008 savings goals, if and only if Energy Division verifies that the corresponding net benefits of $2.7 billion will materialize. The return of $2.4 billion on ratepayers' investment (ratepayers' "share" of net benefits) at this level of performance translates into reduced utility revenue requirements and lower bills for customers that far exceed the short-term rate and bill impacts associated with recovering the earnings as they are paid out.

The magnitude of these short-term rate and bill impacts depends upon the actual level of portfolio performance, the associated earnings rate and the earnings recovery schedule. The tables in Attachment 10 present bill impact analyses for the 2006-2008 portfolio performance at 100% of goal achievement assuming earnings rates of 5%, 10%, 15% and 20% under two alternative earnings payout scenarios. One scenario provides the annual impact spread evenly over three years and the other spreads that same impact over four years. Table 4 presents the impacts associated with an earnings rate of 15% and a three-year payout of earnings. These numbers represents the upper bound of impacts, given the earnings rates and earnings recovery schedule that we adopt today.

As Table 4 indicates, the payout of shareholder earnings for 2006-2008 energy efficiency activities is estimated to increase average annual rates to all customers ("bundled change") by no more than 0.41% to 0.69%, depending on the utility. The percentage change in annual residential rates is estimated at no more than 0.44% to 0.66%, which translates to average residential bill increases in the range of 9¢ to 58¢ per month, depending on the utility. Again, we emphasize that these are short-term rate and bill impacts because they do not reflect the much greater decreases in revenue requirements and customer bills that are resulting from the implementation of 2006-2008 energy efficiency activities.

²⁵⁵ Exh. 66, p. 22.

²⁵⁶ The earnings claim (for electric energy efficiency only) is grossed up by the Franchise Fees and Uncollectible factor in effect at the time of collection.

²⁵⁷ July 13, 2007 e-mail ruling of assigned Commissioner Grueneich and ALJ Gottstein. See PG&E, SDG&E and SoCalGas' Joint Response and SCE's Response to this ruling, dated July 19, 2007.