4. Framework for Review of 2009 Energy Efficiency Incentive Award Claims

As a threshold matter, we identify the framework and scope of inquiry that applies in reviewing applicants' 2009 incentive claims. For purposes of evaluating the 2009 incentive claims, our focus is on whether the utilities have properly applied the adopted RRIM formulas consistent with the guidance in D.10-12-049.

D.07-09-043 adopted the initial framework to calculate incentive earnings awards or penalties based on a comparison of achieved efficiency savings relative to the adopted energy efficiency goals. Incentive rewards are calculated as a percentage of the "Performance Earnings Basis" which represents deemed resource savings from deployment of specified energy efficiency measures. As originally designed, if utility programs realized savings greater than 85%-- but less than 100%-- of energy efficiency goals, the utility earned incentives of 9% of total savings. If a utility realized savings greater than 100% of the energy efficiency goals, a 12% shared savings rate applied.³ For the 2006-2008 true-up claim, as well as for the 2009 bridge year, to reflect the reduced investor risk associated with certain modifications in the calculation of deemed savings, the Commission reduced the shared savings rate to 7%.

For the 2009 program cycle bridge funding period and adopted incentive mechanism, utility performance is measured against the cumulative energy efficiency goals. The cumulative period began in 2006, using the goals adopted by D.04-09-060 and modified in D.09-09-047.

In 2008, the Commission modified the measurement of adopted goals from a net to a gross basis, starting in 2009. As a result, the cumulative performance period was calculated to include goals and impacts for the 2006-2008 program cycle measured in net results and the 2009 program period goals and impacts measured in gross results.

The Commission requires the utilities to provide with their applications the Microsoft Access ERT tool used to modify the 2009 ex ante numbers to gross savings in order to facilitate the Commission's review of their incentive claims.

The utilities are required to make up 50% of all savings that expire from measures installed after 2005. The ERT software tool calculates this value and was populated in the Risk Reward Spreadsheet Template)⁴ by the Energy Division for use in this claim.

For purposes of measuring minimum performance standard (MPS), the utilities are allowed to count 50% of verified pre-2006 and 100% of post-2005 Codes and Standards (C&S) advocacy work.

DRA differs with the applicants and NRDC as to the appropriate standard for review of 2009 incentive claims. DRA recommends summary denial of the consolidated applications, or in the alternative, holding them in abeyance pending a complete overhaul of what DRA characterizes as "the fundamentally flawed and seriously outdated energy efficiency incentives structure." (See DRA Protest).

For calculating 2009 incentive claims, the assumed energy efficiency savings are based on utility-reported results utilizing ex ante assumptions.⁵ The ex ante assumptions have not been subjected to an independent ex post evaluation. DRA argues that (1) utility-reported savings for the 2009 bridge funding year are likely overstated such that (2) true utility savings did not reach the MPS required to qualify for incentive payments. Given the performance of the 2006-2008 programs and the fact that the portfolios essentially stayed the same during 2009, DRA argues that it is unlikely that utilities would have been able to compensate for 2006-2008 underperformance and surpass goals in 2009 if actual savings, as determined by independent evaluations, are considered.

DRA asks the Commission to consider the following issues in addressing the utilities' request for 2009 RRIM awards:

(1) The reasonableness and prudency of awarding incentives based on utility-reported savings that were not independently evaluated, measured, or verified;

(2) The reasonableness and prudency of adding further ratepayer expenses on portfolios for which the true cost-effectiveness is unknown;

(3) The applicability of energy efficiency assumptions derived from 2005 and 1990's field studies to determine 2009 savings; (4) The reasonableness and prudency of spending ratepayer dollars on a policy which DRA believes is known to fail in function; and

(4) Whether stakeholder, Commission, and Commission staff should spend more time on a 2009, interim year issue within the Commission's Energy Efficiency program.

In response, the utility applicants argue that DRA's protest fails to raise any legal or factual issues that call into question the authority by which the utilities submitted their respective applications for approval of 2009 energy efficiency incentives. The utilities argue that the Commission specifically considered and rejected DRA's recommendation to rely upon the 2006-2008 Energy Efficiency Evaluation Report of ex post results as a basis for the 2009 incentive applications.

4.1. Discussion

In D.10-12-049, we decided the methodology and formulas whereby RRIM earnings claims for 2009 are to be reviewed and evaluated. As stated in the assigned Commissioner's Ruling dated September 12, 2011, the scope of issues in this proceeding is to review the 2009 incentive claims, including whether the applications for 2009 incentive earnings have appropriately complied with directives in D.10-12-049. The Commission concluded in D.10-12-049 that "the modifications to the incentive mechanism adopted herein" should apply to the 2009 energy efficiency program year (D.10-12-049, Conclusion of Law 9). The Commission set forth specific directives concerning how incentive earnings for 2009 were to be calculated and submitted. (Id., Ordering Paragraph 4).

Accordingly, while D.10-12-049 recognized that the future design of the incentive mechanism for 2010 and beyond must be subject to subsequent proceedings in R.09-01-019, the methodology for calculating calendar-year 2009 incentive awards has already been prescribed. While DRA might disagree with the concept of awarding the utilities for achieving energy efficiency savings during the 2009 program year, that issue is beyond the scope of these applications. We will not re-litigate the disputes concerning the manner in which an incentive mechanism should be designed for the limited purposes of resolving these consolidated applications.

The scope of this proceeding thus focuses on whether the incentive claims were determined in accordance with the formulas and directives set forth by the Commission in D.10-12-049. The broadening of the inquiry to delve into disputes over the fundamental design of the RRIM, including the metric to measure the energy efficiency savings as proposed by DRA, is also beyond the scope. We believe that D.10-12-049 was clear with its intent to measure 2009 RRIM earnings claims using ex ante metrics. In this proceeding, we will not relitigate the controversy over the merits of using ex ante measures in calculating 2009 RRIM awards. By adhering to the treatment of 2009 incentive claims laid out in D.10-12-049, we underscore our commitment to promoting energy efficiency and preserve credibility in the consistency of our regulatory treatment. We do note, however, that the Commission was only prescriptive for the savings achieved during the 2009 program cycle; subsequent RRIM design for the 2010-2012 program cycle or beyond has not been determined by the Commission. That topic is the subject in R.09-01-019 and our actions today should not be considered to extend beyond these applications.

In the interests of accountability and responsible oversight, the assigned Commissioner directed the Energy Division to independently ascertain that the calculations of 2009 incentive earnings were conducted in compliance with the directives of D.10-12-049.⁶ We recognize that this review is limited to confirming compliance with the directives set forth in D.10-12-049. As such, we acknowledge that the utilities' claims of actual energy efficiency savings achieved for 2009 are merely based on ex ante assumptions; these ex ante assumptions may not reflect actual efficiency savings achieved. Accordingly, we make no findings concerning the actual efficiency savings achieved by the utilities. Our rewarding an incentive for energy savings for activities conducted during the 2009 program year is based on these ex ante assumptions, and we make no determinations about how the utilities' performance should impact future program design. Our findings are limited to confirming that the calculations of savings have been correctly based on the application of ex ante assumptions as specified in D.10-12-049.

As a basis to evaluate the 2009 incentive claims, we apply the following directives in D.10-12-049, Ordering Paragraph (OP) 12, which provides that:

-- In developing and submitting their respective applications, the utilities shall recalculate their 2009 ex ante savings in the ERT tool to reflect gross ex ante savings. The utilities may also incorporate estimated net benefits attributable to post‐2006 Codes & Standards (C&S) program advocacy efforts.

-- No other modifications can be made to the ERT tool or the ERT input sheets, except SCE is allowed to revert some of the Gross Realization rates and [Net to Gross Ratios] back to the values used in the planning of the 2006‐2008 portfolio consistent with the changes identified in Table 5 [in D.10-12-049].

-- The utilities shall use the risk reward spreadsheet template provided by Energy Division which recognizes the removal of 2004‐ 2005 goals and savings, the inclusion of 2006‐2008 net goals and 2009 gross goals, the inclusion of 50% decay from 2006‐2008, and the inclusion of verified C&S savings using 50% for pre‐2006 and 100% post‐2006 as directed in other Commission directives herein. The utilities shall provide the following with their applications in order to facilitate the Commission's review of their incentive claims:

· The Microsoft Access ERT tool the utilities used to modify the 2009 ex ante numbers to gross savings.

· For SCE, any ERT Input Sheets that have been modified.

· The Risk Reward Spreadsheet used to calculate the incentive amounts.

· A document that describes the files or tables that were changed, and what specific changes were made.

³ Savings between 65% and 84% were considered to be in the "deadband" range and a 0% SSR applied. Falling below 65% subjected the Utilities to penalties. Maximum limits on incentive earnings and penalties for all Utilities were capped at $450 million for the 2006-2008 cycle.

⁴ See Exhibit SCE-2.

⁵ 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 35.)

⁶ Assigned Commissioner's Ruling and Scoping Memo, dated September 12, 2011, at 5 and 6.