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Dissent of Commissioner Dian M. Grueneich
Dissent of Commissioner Nancy E. Ryan

COM/MP1/tcg Date of Issuance 12/27/2010

Decision 10-12-049 December 16, 2010


Order Instituting Rulemaking to Examine the Commission's Energy Efficiency Risk/Reward Incentive Mechanism.

Rulemaking 09-01-019

(Filed January 29, 2009)



APPENDIX A - Adopted Assumptions for Assessing Risk/Reward Incentive Mechanism True-Up


1. Introduction

This decision resolves the third and final phase of Risk/Reward Incentive Mechanism (RRIM) proceedings for the 2006-2008 cycle, for savings achieved due to energy efficiency programs administered by Pacific Gas and Electric Company (PG&E), Southern California Edison Company (SCE), San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SCG) (the utilities or IOUs). As adopted in Decision (D.) 07-09-043, RRIM was designed to offer financial incentives or offsets (called penalties) as a function of utility success in achieving and surpassing the Commission's adopted energy savings goals.

In this decision, we complete the true-up of the interim awards for the 2006-2008 period, and determine whether additional incentive earnings are due, or alternatively whether penalties apply. The IOUs were previously authorized interim incentive awards totaling $143.7 million for the first two installments of the 2006-2008 cycle.1 Based on the final results reviewed herein, and summarized in Appendix A, we determine that the IOUs' 2006-2008 energy savings achievements are sufficient to qualify for total incentives of $211,853,077. Subtracting the interim awards the IOUs have already received leaves $68,158,522 in incentive awards to be paid to the utilities. In determining the final phase of the 2006-2008 cycle, we have made modifications to the mechanism that was originally adopted in D.07-09-043. The original mechanism was designed to align ratepayer and utility investor interests by awarding earnings up to 12% of independently verified energy savings attributable to the portfolio of approved programs, with remaining savings going to ratepayers. By modifications we adopted in D.08-01-042, requiring, among other things, updated parameter measures, the utility investor was at risk for lower earnings (or for payment of penalties) to the extent that actual savings achieved, based on updated parameter assumptions (required by D.08-01-042), varied from the original estimates. By the modifications we adopt herein, rather than assessing the performance of the utilities' energy efficiency programs based on updated parameters, as was our original intent, we modify the mechanism such that the performance against the goals, as well as the total savings attributed to the utility programs for purposes of determining incentives are calculated using the parameters that were in place at the time the Commission approved the utility energy efficiency portfolios. This approach, alone, relieves the utilities of the risk that an independent evaluation of updated parameter assumptions will reduce earnings or produce penalties, and, correspondingly, because this increases the risk to ratepayers of providing incentives for savings that, based on updated assumptions may not be attributable to the utility programs (and conversely, reduces the risk to the utilities of incurring penalties), we also make a commensurate change in the shared savings rate applied to the performance earning basis (PEB), reducing it from the 9% and 12% levels adopted in D.07-09-043 to 7%. We appreciate the difficulty in quantifying the appropriate shared savings percentage reduction to offset the impacts of this risk shifting. Based on our judgment, we conclude, however, that an adjustment down to 7%, for all savings over 85%, is justified and reasonable.

Such changes to the incentive mechanism as it applies to the 2006-2008 cycle are warranted because of our experience with this program and consistent with scope of the OIR issued on February 4, 2009, establishing this underlying proceeding (R.09-09-019). We believe the changes to the mechanism are appropriate in light of ongoing concerns about substantial, controversial, and unanticipated swings in a number of the key parameters in Energy Division's recent evaluation studies.

The incentive mechanism reinforces our strong commitment to the goal of decreasing overall future per capita electricity consumption in California by the customers of the IOUs. It cannot be disputed that such reductions benefit the IOUs' customers and California society at large. This decision, which concerns the final phase of the 2006-2006 period, adopts modifications to the incentive mechanism for purposes of calculating the 2006-2008 true-up. Further, we determine that this same mechanism should be applied to the 2009 program year, and establish a process by which incentives for the 2009 program year will be determined. We defer matters concerning energy efficiency achievements in 2010 and beyond to a subsequent decision in this proceeding.

When we opened this rulemaking in February 2009, we were cognizant of the contentious character of the prior proceeding, R.06-04-010, with respect to calculating and awarding incentive earnings to the IOUs.2 This controversy has continued unabated. When applied, the RRIM methodologies for assessing incentive earnings have proven far more complex and contentious than we had originally contemplated.

In this proceeding we sought to develop a new framework for the determination of 2006-2008 energy efficiency incentives.3 In developing this new framework, we left open the possibility of reexamining and changing, as warranted, the mechanism adopted in D.07-09-043. Specifically, in the OIR issued February 4, 2009, we stated,

(R.09-01-019 at pp. 4-5.)

We further stated: "It is our intent to adopt a new framework for the review of the remainder of 2006 through 2008 energy efficiency activities in a timeframe consistent with interim payments for 2008 no later than December 2009, and any final payments for 2006 through 2008 no later than December 2010."4

The modifications reflected herein are made with the intent of reforming a mechanism that has proven unwieldy in ways that we find compromise its central purpose, namely, motivating the utilities to embrace energy efficiency as a core part of their business. This is a critical objective for Californians, given the central role energy efficiency must play in California's energy future, particularly as the state seeks to dramatically reduce the carbon intensity of its energy system, pursuant to Assembly Bill 32 (AB 32). Energy efficiency remains one of the most cost effective approaches to reducing carbon emissions and providing energy services, which is recognized in the state's loading order and in the California Air Resources Board's AB 32 Scoping Plan. In order to be effective, an incentive mechanism for energy efficiency investments by the IOUs must provide rewards or impose penalties on the basis of factors that are reasonably within the control of the entity to which it is being applied.

As described in more detail below, we find that the RRIM as adopted and implemented to date, has not reflected this fundamental criterion of an effective incentive mechanism. In particular, we find that the expectations regarding the ability of the utilities to modify their portfolios in response to changes that were ultimately found to have taken place over the three-year program cycle were unreasonable, particularly given the timing of availability of information regarding these changes, the substantial controversy surrounding their accuracy, and their magnitude. The modifications made in this decision result in an appropriate level of incentives based on what the utilities could have been reasonably expected to know and respond to during the 2006-2008 program cycle. We are of the opinion that subjecting the IOUs to penalties or substantially reduced incentives based on factors they could not reasonably be expected to anticipate or effectively respond to will do little to motivate them to aggressively pursue energy efficiency, and may undermine the interests of the people of the state of California in placing energy efficiency on a par with "steel-in-the-ground" supply-side resources. By adopting this approach, we ensure the mechanism remains effective in aligning utility and ratepayer interests with respect to the resource priorities of the state.

Although we have repeatedly encouraged parties to pursue settlement discussions of these protracted issues, unfortunately, the resulting efforts to seek resolution have not been successful. We have also explored possible alternative policy assumptions to streamline the derivation of incentive amounts while maintaining the integrity of the process.

We continue to believe that the Commission should pursue prospective reforms to the incentive framework that will accomplish the State's energy efficiency goals while avoiding the protracted controversies over technical methodologies that have characterized the RRIM process. We intend to address needed reforms in the prospective redesign of the RRIM in the next phase of this proceeding.

1 The first interim awards were authorized by D.08-12-059, and the second interim awards were authorized by D.09-12-045. In each instance, a portion of the awards was held back from distribution. Together, the interim awards total $143.7 million.

2 This rulemaking is the successor to Rulemaking (R.) 06-04-010, our inquiry into post-2005 energy efficiency policies, programs, evaluation, measurement and verification (EM&V), and related issues. We issued a number of decisions in R.06-04-010 on topics ranging from energy efficiency goals (e.g., D.08-07-047) to the RRIM.

3 R. 09-01-019 at p. 5.

4 R.09-01-019 at p. 5.

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