PBI Discount Rate

The ACR proposed the Commission consider modifying the 8% discount rate built into the PBI incentive payments originally adopted in D.06-08-028. As noted above, the 8% discount rate was included in the levelized monthly PBI payment to ensure that customers receiving PBI incentives would be indifferent to receiving an upfront incentive versus an incentive paid out over five years. Given changes to the economic climate since 2006, it may no longer be appropriate to employ a discount rate of 8%. To the extent actual interest rates are lower than what had been anticipated when the program was initially established, the net present value of PBI payments is higher than the otherwise applicable EPBB incentive, in conflict with our policy intent of ensuring equivalency between upfront incentives and those received on a performance basis over a five year period.

In comments, no party outright supported this change. The City of San Jose expressed concerns that elimination of the 8% discount rate would increase the cost of energy under third party, power purchase agreement (PPA) arrangements, making these non-viable for local governments to pursue. The Solar Alliance and ACWA suggest that any changes to the incentive schedule would be disruptive to the market and create market uncertainty. PG&E argues that given the various sources of uncertainty, in particular unknowns regarding the number of projects that may drop out in the future, taking action now is premature. CALSEIA makes similar arguments in its comments. Both CALSEIA and TURN argue that insufficient information was provided in the ACR to assess the reasonableness of this proposal given the unclear magnitude of the problem and the extent to which this, and the other proposed modifications contained in the ACR, address the concern. SCE, while supporting the proposal in concept argues that any changes to the incentives should be done so in a manner that preserves equitable treatment of program participants across the various utility service areas.

We determine that in the interests of maintaining incentive levels that reward performance, we will not modify the PBI payments to remove the 8% discount rate at this time. Parties express concern with market disruption and uncertainty caused by making this change at this stage of the CSI program. They also contend that insufficient information was provided regarding the magnitude of any budget shortfall that this change is designed to fix. Commission analysis of the budget status indicates that removing the 8% discount rate for future applicants could provide as much as $50 million more for the incentive budget. Indeed, we are concerned that payments to PBI systems are significantly higher than payments made on an up-front, or EPBB basis. Nevertheless, we agree that modifying PBI payments at this time will cause some market disruption. Some of the savings we would realize if we lowered PBI payments can be achieved in a combination of other ways, such as by shifting administrative funds and by continued monitoring of applicants that dropout and applying those reserved funds to new applicants. Therefore, we will not change PBI payments at this time.

Furthermore, given the magnitude of this potential shortfall and its implications on the program's ability to achieve the overall capacity goals, we are somewhat disappointed that this issue was not flagged earlier by the PAs as it became apparent. We reiterate that one of the basic functions of the PAs is to monitor the program to ensure it operates within it budgetary constraints while also fulfilling its overall programmatic objectives.

Therefore, we reaffirm that pursuant to statute, the CSI program, inclusive of its various programmatic elements, including the General Market Program, the Single Family Affordable Solar Homes Program, the Multi-Family Affordable Solar Homes Program, the Research, Development and Demonstration Program, and the Solar Water Heating Pilot Program, is limited to an overall cost cap of $2.1668 billion. We caution the PAs that they must keep a close and careful watch on the funds reserved for CSI applications to ensure they do not exceed the CSI statutory spending cap of $2.1668 billion. The PAs must effectively manage the program budgets, including their respective incentive allocations, to ensure that the program's total budget liabilities do not exceed the spending cap. The PAs should ensure they adhere to CSI Handbook project deadline requirements so that incentive funds reserved for inactive and cancelled projects can be made available to other projects before the CSI total spending cap is reached.

Specifically, the PAs must ensure they stop issuing additional incentive reservations to a given customer segment (e.g. residential or commercial) if doing so would result in budget liabilities exceeding the amount of funding authorized and available to support incentives for that customer segment. We will require the PAs, on a weekly basis, to publicly post their remaining incentive budget, including how much funding and how many megawatts remain available in each sector, as well as an estimate of how far the remaining incentive budget will last through the step table. In the case of PBI systems, the PAs have already been directed to set aside funds sufficient to cover the anticipated PBI payment amounts based on estimated performance for each PBI project. We know from experience that these estimates are necessarily imperfect. As such, prudent management of the program suggests the PAs may wish to build in some buffer to account for potential overproduction relative to those estimates. While we do not require the PAs to establish a specific buffer, we remind the PAs to be mindful of this issue, given the overall cost cap to which this program is subject.

Finally, we will require the PAs to file a report on a quarterly basis in this proceeding or any successor proceeding indicating all dollars encumbered by the program by customer segment (i.e., residential and non-residential), including total incentives paid and reserved. The PAs should also attempt to report incentives paid and reserved by step level, to the extent possible. This report should include the full amount of monies that are anticipated to be required for PBI payments to systems subscribed under the program as well as an estimate of the monies that will be needed for each PA to reach its megawatt program goals. The PAs should coordinate with Energy Division staff on all CSI reports to ensure consistency of format wherever possible. The first report should include data through September 30, 2010 and will be due on October 20, 2010. The reports should be filed quarterly thereafter, 20 days after the end of the quarter on a calendar year basis.

In comments on the proposed decision, PG&E again recommends a specific buffer amount for each PA to help ensure it does not exceed budgeted incentive funds. Moreover, PG&E suggests a public process to discuss and clarify any budget buffer as well as numerous details the PAs will need to engage in as the CSI program nears the end of its incentive funding. We will not specify an exact buffer percentage at this time, but we agree with PG&E that a public process would be useful for discussion of administrative details such as mechanisms to forecast remaining funds, cease processing reservations when funds are no longer available, reallocate funds should they become available due to applicants that drop out, and potentially create a waiting list of applicants. Therefore, we will direct the PAs to coordinate with Energy Division to propose CSI Handbook revisions, to be filed by Advice Letter no later than January 15, 2011, to explain the administrative details described above and any other mechanisms or processes that need to be considered as the CSI general market program approaches its statutory spending cap.