3. Principles Governing the RRIM True-Up Process

As a basis for finalizing the last phase of the 2006-2008 cycle, we modify elements of the RRIM that had been adopted in D.07-09-043. The purpose of the RRIM is to offer incentives to the IOUs in a manner that will encourage and compel them to meet and exceed Commission goals for energy efficiency savings, and to extend California's commitment to making energy efficiency the highest energy resource priority. Under the mechanism, rewards are earned or penalties incurred as a function of the IOU's success in achieving adopted energy savings goals.

More specifically, the magnitude of rewards and penalties is based on some share of the avoided costs that energy efficiency measures are determined to provide. D.07-09-043 adopted an earnings/penalty curve that established the level of efficiency savings attributed to the utility programs relative to the adopted energy efficiency goals that result in penalties or rewards, as well as the magnitude of those penalties or rewards. Incentive rewards are earned as a shared percentage of the net benefits achieved due to deployment of energy efficiency measures, designated as the PEB. The shared savings rate (SSR) varied depending upon the extent of success in meeting or exceeding adopted goals. If the utilities' programs realized savings greater than 85% but less than 100% of the energy efficiency goals, the SSR applied to the PEB would be 9%. If the utilities' programs realized savings greater than 100% of the energy efficiency goals, the SSR applied to the PEB would be 12%. Initially, savings between 65% and 84% were considered to be in the "deadband" range and a 0% SSR applied. Falling below 65% subjected the IOUs to penalties. Maximum limits on incentive earnings and penalties for all IOUs were capped at $450 million for the 2006-2008 cycle.

In D.08-01-042, we modified D.07-09-043 and prescribed a process to update, evaluate and verify the ex ante (pre-installation) assumptions of energy efficiency savings⁶ as programs are implemented during three-year program cycles. First, the utilities report the number and type of measures installed and services rendered, along with associated program costs. This reporting was to occur during the first quarter of each year covering the prior year's accomplishments.

Next, Energy Division and its contractors were to review this information, conduct field research, and release timely reports evaluating the costs of installations and estimate related savings achieved. Program costs were validated through an audit conducted by the Commission Audit Branch. Verification reports were to be released annually during the month of August following the end of each calendar year.⁷

At the end of the program cycle, the Energy Division evaluation results were to be used to "true-up" the ex ante estimates of savings with respect to the number and type of measures installed, and with the associated program costs. Other parameters that were evaluated with respect to measure savings include: (1) per-unit energy savings and peak demand reductions, (2) expected useful lives for installed measures/equipment and (3) net-to-gross (NTG) ratios.⁸

Energy Division and its consultants were to evaluate these parameters on an ex post (post- installation) basis with a variety of field research methods. A true-up of portfolio savings and PEB for the full program cycle was to be based on the parameters evaluated by Energy Division.

The RRIM provides opportunities for earnings (or risk of penalties) at interim points for each three-year program cycle.⁹ Under the adopted process,¹⁰ each IOU is eligible for three awards comprised of two interim incentive installments, and a final true-up. Interim RRIM earnings were to be based on savings achievements measured using ex ante assumptions subject to a holdback of a portion of the claim, pending ex post true-up.

Our rationale for adopting this methodology was premised on the idea that the utilities should be evaluated, and incentive payments/penalties determined, on the basis of energy savings that actually materialize,¹¹ recognizing that over the three year cycle, many of the parameters underlying the portfolios developed by the utilities are subject to change. Implicit in this approach was the notion that over this same period, the utilities would be able to observe or influence many of these changes and modify their portfolios accordingly. However, as described in more detail below, experience has taught us that it was not possible to operationalize the mechanism in a manner that would actually allow such modifications to occur in a timely manner. This aspect of the mechanism proved to be a singular challenge. In addition, changes in the various parameters that influence the assessed efficacy of various efficiency measures in generating energy savings has been subject to extensive and ongoing controversy.

In December 2008, by D.08-12-059, we awarded the IOUs a first installment of RRIM earnings for 2006-2007 mid-cycle performance. In D.09-12-045, the IOUs received a second installment for the 2006-2008 program cycle. The interim incentive awards for the first and second phases totaled $143.7 million, as set forth below:

Table 1: Interim 2006-2008 RRIM Earnings Previously Awarded

Neither the first or second awards were based solely on our Energy Division's EM&V reports. The interim EM&V reports of energy efficiency portfolio performance produced by Energy Division have been the subject of considerable controversy. Due to delays associated with the first interim report, the first installment of RRIM incentives was based on IOU self-reported results and subject to a 65% (rather than 35%) hold back. We utilized self-reported utility claims because the First Verification Report was not available prior to year's end. The holdback of 65% was adopted to protect ratepayers from increased uncertainties associated with self-reported claims.

The Commission formally adopted the Energy Division Second Verification Report by resolution on October 15, 2009. (Resolution E-4272.) The resolution incorporated reference to Verification Report's extensive log of corrections to modeling tools and inputs¹² and itemized responses to criticisms or comments posed by stakeholders.¹³ In D.09-12-045 the Commission upheld the validity of the Energy Division Second Verification Report regarding the dollar value of energy savings subject to the RRIM calculation for the second interim claims.

The second installment of incentive earnings was based on net benefits measured by the Energy Division Verification Report, with additional adjustments for following factors:

(1) Both positive and negative interactive savings effects were applied;

(2) The cumulative effects of 2004-2005 savings goals were excluded;

(3) Savings goals were adjusted for interactive effects that were not originally considered in setting 2006-2008 goals;

(4) A shared savings rate of 12% was used by applying the IOUs' original unmodified ex ante assumptions in comparing the IOUs' reported savings achievements relative to Commission goals;

(5) The NTG ratio applied for savings attributable to SCE's residential lighting program was adjusted to reflect SCE's specific implementation approach to this program; and

(6) The realization rate applied to SDG&E's Energy Savings BID program and SoCalGas' Local Business Energy Efficiency program was adjusted to reflect the unique nature of those programs as compared to more generic statewide programs.

⁶ Ex ante refers to assumed energy savings associated with a particular energy efficiency measure or equipment prior to installation. Thus, ex ante refers to using program metric assumptions based on past program performance. Ex ante measurement relies on engineering estimates or the results of ex post savings measurement (e.g., load impact studies) from previous program years or other program experience. (See D.05-04-051 at p. 35.)

⁷ See ALJ Ruling Adopting Protocols for Process and Review of Post-2005 EM&V activities, January 11, 2006. Energy Division's Verification Report schedule was modified by Administrative Law Judge (ALJ) ruling on January 2, 2007. For the 2006-2008 program cycle, verification of 2006 installations and program costs were combined with the report on 2007 accomplishments. Both were released concurrently.

⁸ NTG 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). NTG 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.

⁹ D.08-01-042 at p. 10, citing D.07-09-043 Conclusion of Law No. 7 at p. 212.

¹⁰ See D.07-09-043, Conclusion of Law No. 7 at p. 212, and Attachments 6 and 7.

¹¹ D.07-09-043, at p. 13.

¹² See Resolution E-4272, October 15, 2009, Energy Efficiency 2006-2008 Verification Report, Section 8.2, at p. 89 (also known as the Second Verification Report).

¹³ Id., Section 9.2, at p. 134.