4. Framing of the Issues for the True-Up

As a framework for determining the true-up of incentive earnings for the 2006-2008 program cycle, parties present two fundamental disputes: (1) the amount of assumed net dollar benefits subject to the incentive calculation, and (2) the applicable percentage allocation of those benefits to be shared between ratepayers and shareholders. Based on these differences, parties disagree as to whether the IOUs are entitled to additional incentive earnings, or whether penalties apply.

The assigned Commissioner circulated a range of incentive earnings scenarios as set forth in the Energy Division "Scenario Analysis Report" (provided by ACR dated May 4, 2010). This Report illustrated the sensitivity of RRIM earnings over a range of different policy assumptions calculated utilizing the ERT. Each scenario incorporated variations showing incentive impacts assuming:

These assumptions were highlighted to illustrate the effects of various policy disputes previously at issue in interim incentive proceedings. The scenarios drew data from different sources utilizing the ERT as a template, including Energy Division evaluation findings, along with the IOUs' self-reported data.

The RRIM earnings calculated under these scenarios range from less than $1 million to almost $400 million. The scenarios can be grouped into the following general categories:

These scenarios apply ex ante values for all key parameters and exclude updating based on EM&V evaluation studies. These scenarios result in total awards of either about $400 million (all S2 results) or around $300 million (S3 results with updated installation rates). Scenario S2 calculates the results using IOU-reported net savings based on their 4th quarter tracking database, with IOU-reported NTG ratios, without updating for evaluation field research. Scenario S3 utilizes a similar data set as Scenario S2, but with IOU-reported quantities adjusted based on evaluated installation rates.

These scenarios use key parameters updated based on Energy Division's evaluation studies of installation rates and energy savings, but exclude Energy Division's evaluated NTG ratios. These scenarios result in awards totaling around $200 million, though the two sub-scenarios that use a 12% sharing rate result in earnings of about $250 million.

These scenarios apply ex post savings as evaluated by the Energy Division yielding total shareholder incentive earnings of about $29 million for all the utilities for the 2006-2008 cycle. These scenarios replace ex ante utility parameter values with evaluated ex post results based on the most recent studies conducted under the EM&V protocols. None of these scenarios result in awards higher than about $85 million. The sub-scenarios that use a 9% rate result in total incentives of about $30 million, while the use of the 12% sharing rate results in earnings of about $80 million. Scenario 7 shows incentive earnings for all three utilities as $29,101,924, because the Commission has already authorized $143.7 million in non-refundable interim RRIM payments, no further RRIM awards would be due. However, Scenario 7 calculates that PG&E accomplished less than 65% of its demand savings goal, which would place PG&E into the penalty zone, resulting in a refund of $74 million of previous incentive payments.

TURN, DRA, and WEM have argued that the incentive true-up should be determined utilizing the Energy Division evaluation of net savings. The IOUs and NRDC, however, oppose the Energy Division findings as the basis for measuring energy efficiency savings. They criticize the Energy Division Report and the measurement studies that formed the basis for its findings on evaluated savings.

The IOUs and NRDC have argued that the net savings used in the true-up should instead carry forward certain ex ante assumptions previously used in the 2005 Database for Energy Efficiency Resources (DEER) at least for key, highly controversial parameters. The IOUs also argue that incentives should apply using a 12% shared savings rate, while TURN, DRA, and WEM support the use of a 9% shared savings rate, as calculated by the Energy Division based on the RRIM formula.

DRA and TURN contend that the Energy Division Evaluation Report utilizes the most up-to-date and independently verified parameters of energy efficiency savings achievements. DRA argues that ignoring these results or engaging in after-the-fact lowering of goals defeats the purpose of the incentive mechanism to align the interest of shareholders and ratepayers by rewarding innovative and effective performance in achieving the Commission's goals. If the IOUs are rewarded for results that do not achieve the Commission's energy efficiency goals, DRA alleges the incentive mechanism loses its value to promote optimal performance. DRA and TURN support use of the Energy Division's adjusted results in the Evaluation Report for calculating incentives for 2006-2008. DRA and TURN argue that the Energy Division is independent and, unlike the IOUs, has no financial interest in the outcome of the incentives calculation, and is, therefore, the most unbiased source of information. DRA argues that if other assumptions are used to calculate incentives, the shared savings rate established in D.07-09-043 should be lowered to reflect the decreased risk shareholders face by using lowered goals or less accurate parameter measures.

The IOUs propose that instead of the Energy Division ex post evaluations for certain specified measures, incentive earnings should be quantified by applying the ex ante values that were assumed at the time that the 2006-2008 program cycle funding was initially established, as reflected in the 2005 DEER. The IOUs contend that the 2005 DEER values are the only ones that have been properly vetted and accepted. Nevertheless, the IOUs propose the use of updated data for computing avoided costs and greenhouse gas (GHG) adders.

The IOUs and NRDC argue that the Energy Division evaluation studies completed in 2008 and 2009 are not reliable sources of certain key parameters, such as NTG ratios. In the interests of compromise, however, the IOUs accept certain assumptions in the Energy Division Report except as detailed below. The IOUs allege that a final installment of RRIM earnings should be awarded based upon their own proposed calculation scenario, arguing that their calculation produces an appropriate outcome given the current policy and intent of the Commission. The IOUs' calculation scenario uses the Energy Division's Final Evaluation Report as a foundation, but applies different assumptions for factors that the Joint IOUs have alleged to be errors in the Energy Division Report. The Joint IOU Scenario:

· applies a 12% shared savings rate in accordance with D.09-12-045 (citation included above);

· does not compare energy savings against 2004-2008 cumulative goals;

· includes 100% of the savings from 2006-2008 C&S activities; and

· applies ex ante values for NTG ratios, Expected Useful Life (EUL), In-Service Rates (ISR) for upstream-delivered Compact Fluorescent Light bulbs (CFLs), and Interactive Effects as found in the 2005 DEER.15

Based on these assumptions, the Joint IOUs argue that they are entitled to an additional $112.3 million in RRIM earnings. When added to the $143.7 million previously awarded, the IOU allegation that they should be awarded an additional $112.3 million would result in cumulative RRIM awards for 2006-2008 totaling $256 million, summarized as follows:

Table 3: Joint Utility Scenario Results

(Dollars in Millions)

Utility

PEB

Earnings %

Total 2006 - 2008 Earnings

Interim RRIM Earnings

Final True-Up Payment

PG&E

$1,146.7

12%

$137.6

$75

$62.6

SCE

752.5

12%

90.3

50.4

39.9

SDG&E

128.3

12%

15.4

11.1

4.3

SoCalGas

106.7

12%

12.8

7.3

5.5

Totals

    

$256.1

$143.7

$112.3

Because the Joint IOU Scenario was not pre-defined within the ERT, the IOUs customized the ERT to run their scenario. The ERT allows users to run some aspects of the IOU scenario, including ex ante NTG ratios, ex ante effective useful lives, and ex post unit energy savings. However, to include ex ante in-service rates for upstream delivered CFLs, the IOUs modified the ERT Input Sheets to reflect the ex ante values, while retaining the ex post installation rate values for all other measures. Similar customization was required to address ex ante interactive effects.

PG&E also attempted to modify the ERT to include these interactive effects in calculating earnings under the IOU scenario. As an electric utility, therm interactive effects were not included in SCE's ex ante estimates. Therefore, SCE ran its calculations "with interactive effects" scenario and removed all therm benefits from the ERT. Upon running the scenario through the ERT, the IOUs applied an average factor to the net resource benefits to estimate the affect of increasing the GHG adder to $30 a ton.

14 The Energy Division's responses to claimed technical deficiencies are discussed in Section 5.2 below.

15 The IOU Scenario accepted the Energy Division evaluated results for remaining parameters including: (1) Unit Energy Savings (UES), (2) Installation rates (except for upstream CFLs), (3) Incremental Measure Costs (IMC), (4) Load Shapes, (5) Residential/Non-Residential split for upstream CFLs, (6) Realization Rates, (7) Program Costs, (8) Makeup of PEB: TRC/PAC split, and (9) Goals.

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