6. Discussion

As described in Section 2, the LIEE earnings claims presented in this proceeding are the result of three different incentive mechanisms, applied to different program years. They evolved due to changes in statutes (i.e., the elimination of the distinction between mandatory and non-mandatory measures), increased experience in implementing programs and incentive mechanisms, and other considerations. However, the reasonableness of the utilities' LIEE earnings claims requires the verification of two basic parameters, irrespective of which of the LIEE incentive mechanisms applies. Program participation (i.e., the type and quantity of measures installed) needs to be verified to determine whether the minimum threshold of performance (the MPS) is achieved for PY1998, PY1999 and PY2001 program activities, as well as to verify the earnings claims for savings-measures under the PY2000 incentive mechanism. LIEE program expenditures must also be verified in order to calculate the "management fee" under the PY1998, PY1999 and PY2001 performance adder mechanisms, and to calculate earnings associated with non-saving measures under the PY2000 mechanism.

Verification of both expenditure and installation data has traditionally been conducted in the AEAP where first year claims are considered. However, during the agreements reached in the 1999 AEAP, ORA reserved the right to verify program participation for PY1998 during the second earnings claim and, based on the results of the verification, recommend adjustments to that installment.¹⁶ The second earnings claims associated with PY1998, PY2000 and PY2001 LIEE activities are also contingent upon completion of a first-year load impact study for each of those program years. Finally, the calculations required by each incentive mechanism must be reviewed for accuracy in each AEAP.

We are persuaded by ORA's statements regarding the nature of its review, as well as by our review of the utilities' applications, that the utilities have accurately "done the math" to calculate their LIEE earnings claims in this proceeding. ORA has reviewed all of the E-table calculations for all program years and, for PY2000, has reproduced the calculations in the joint recommendation to verify the percentages to be applied to year-2000 expenditures on non-savings measures. ORA also applied these percentages to the utilities' claimed year-2000 expenditures to verify the incentive amounts claimed for non-savings measures. In addition, for PY2000 incentive amounts associated with savings measures, ORA checked the unit incentive amounts in the utilities' applications against those in the joint recommendation to ensure that they were identical.¹⁷

Based on ORA's position in this proceeding and our review of the studies, we are also satisfied that the utilities have completed their load impact studies in compliance with the requirements of Table C-10 of the adopted Measurement and Evaluation Protocols and, hence, have met that contingency for PY1998, PY2000 and PY2001 second-year claims.¹⁸

With regard to measure installations, we generally find that ORA has reviewed and verified this parameter to our satisfaction. For the program years in which a MPS applies, ORA's typical review is to go through the utilities' calculations to verify that the MPS has been met. If the calculations indicate that the claimed number of installations (times the ex ante savings per measure) is close to the MPS, then ORA conducts a careful review of the installation documentation, along with other supporting estimates of savings that have been filed at the Commission.¹⁹ This is the type of review of LIEE earnings claims that ORA has conducted in prior AEAP proceedings, the results of which have been presented in Case Management Statements approved by the Commission.

However, with respect to the PY2000 mechanism, ORA's typical review approach is not sufficient because there is no MPS threshold under that mechanism. In fact, nothing in the record in this proceeding describes how ORA actually reviewed the installations claimed by the utilities for their PY2000 LIEE earnings claims. Because of the structure of the PY2000 mechanism, the number (and type) of installations does much more than serve as a minimum performance threshold-it drives the calculation of PY2000 earnings for the savings measures.

At the direction of the ALJ, ORA and other parties were requested to comment on how the verification efforts in the pending AEAPs could be supplemented to enhance the existing record. In response, ORA acknowledged that it could confirm that the installation frequency data submitted by the utilities for their PY2000 LIEE claims was "actual rather than estimated."²⁰ However, ORA did not supplement its showing in this manner. We believe that such verification is necessary before we can authorize earnings recovery for the savings measures under the PY2000 incentive mechanism.

Further, as also acknowledged by ORA in its November 14, 2001 comments, there is nothing in the record to confirm that all four utilities' expenditure data for their first year claims is actual recorded data, rather than estimated or budgeted.²¹ Confirmation could be made by a combination of methods-such as comparing the expenditure data submitted in the AEAP with data submitted on LIEE recorded expenditures in other filings at the Commission, coupled with a review of underlying expenditure and billing records. To our knowledge, ORA did not conduct such a review of expenditures for any of the first year claims in question in this consolidated proceeding.

We do not fault ORA for trying to allocate its limited resources across this and other proceedings at the Commission, and therefore determining that there were certain verification efforts that it could not undertake. However, we cannot reach the conclusions that ORA has regarding the reasonableness of the utilities' earnings claims without a sufficient showing of earnings verification.

Therefore, we authorize recovery for only the PY1998 second-year claims in today's decision, which total $453,287 for all four utilities, including FF&U and interest. The Commission's ratemaking policy for LIEE programs has been to fund shareholder earnings associated with electric measures out of "headroom" until PY2001, at which time the Commission elected to fund earnings out of PY2001 LIEE program budgets. ²² Under either treatment, electric ratepayers have not experienced rate changes in order to fund the LIEE incentives. We note that the issue of how these incentives should be recovered when the rate freeze has ended for all of the electric utilities (LIEE and energy efficiency) is currently being addressed in the 2003 AEAP. ²³ Since "headroom" is no longer a relevant concept for any of the electric utilities, we are left with basically two ratemaking options on the electric side: to authorize an increase in electric rates (via distribution rates or via the public goods charge) or to fund the authorized incentives out of existing LIEE program budgets, without rate increases. Given the relatively small size of the dollars involved, we believe that the LIEE incentives authorized today should be funded out of current LIEE program budgets. This approach is consistent with the effect to date of LIEE earnings recovery on the electric side (i.e., no electric rate changes), and avoids prejudging the inquiry underway in the 2003 AEAP.

Accordingly, the utilities should fund the PY1988 second-year claims associated with electric LIEE program expenditures out of their annual public goods charge LIEE budget. Those incentives associated with gas measures shall continue to come out of gas rate increases, e.g., rate adjustments in the Biennial Cost Adjustment Proceeding.

As discussed above, based on the record in this proceeding, we find that the number of installations claimed by the utilities for PY2000 has not been adequately verified. In addition, we find that the utilities' expenditure data for PY1999, PY2000 and PY2001 require further examination before we can authorize rate recovery for the first and second year claims associated with these program years. In particular, the record lacks independent confirmation that all four utilities' expenditure data is actual recorded data, rather than estimated or budgeted.

We direct the utilities to track the earnings claims for PY1999, PY2000 and PY2001 in a memorandum account until Energy Division verifies the installations for PY2000 and expenditure data for PY1999, PY2000 and PY2001. Energy Division may conduct these efforts itself, or hire consultants for this purpose. The costs of these verification activities should be funded with LIEE program funds, in proportion to each utility's relative share of authorized program budgets.²⁴ We delegate to the Executive Director the task of establishing the scope, schedule and budget for Energy Division's evaluation, and leave this consolidated proceeding open to consider Energy Division's recommendations.

Finally, with regard to WEM's position regarding LIEE earnings claims, we note that the assigned ALJ afforded WEM along with other interested parties the opportunity to provide comment on "any additional technical or factual issues related to the specific claims submitted by the utilities under the LIEE shareholder mechanisms in place."²⁵ As the ALJ has noted, WEM instead presented a series of very general accusations about program details that, if true, would be properly raised in proceedings examining the best way to deliver the programs, and not the AEAP proceeding.²⁶ We advise WEM to focus its participation during future phases of this consolidated AEAP on the specific issue before us for consideration.

²⁴ We prefer this allocation approach to using the co-funding allocation adopted in Resolution E-3585, as suggested by SDG&E in its comments on the draft decision, for two reasons. First, the allocation percentages adopted in Resolution E-3585 were based on both CARE and LIEE budgets at the time, and the verification efforts to be funded here relate only to LIEE programs. Second, those allocations do not reflect current program budget levels for either program.