7. Comments on Proposed Decision

The proposed decision of assigned Commissioner Grueneich and ALJ Gottstein in this matter was mailed to the parties in accordance with Section 311 of the Public Utilities Code and comments were allowed under Rule 14.3 of the Commission's Rules of Practice and Procedure. Comments were filed on January 10, 2008, and reply comments were filed on January 15, 2008 by DRA, TURN, NRDC and the Petitioners. Based on comments, we modify the proposed decision to change the hold-back to 35% (from 30% at present and 50% in the proposed decision) to take into account interactions between the hold-back and other parts of the incentive mechanism.

Findings of Fact

1. To provide effective financial feedback to utility managers and investors, a risk/reward incentive mechanism for energy efficiency must include provisions for earnings (or penalties) at interim points during the three-year program cycle.

2. Uncertainty over ex post measurement results coupled with the "all or nothing" nature of the MPS, makes it unlikely that the utilities will in fact be able to book any authorized interim earnings during the program cycle, given the true-up provisions adopted in D.07-09-043.

3. As a result, the effectiveness of the incentive mechanism we adopted in D.07-09-043 will be seriously undermined unless we take steps to ensure that the utilities are able to book any interim earnings that we may authorize for portfolio performance.

4. None of the arguments that TURN, DRA or CE Council present in their opposition to the Joint Petition addresses this fundamental problem to our satisfaction.

5. The utilities' proposed modifications to the MPS true-up provisions permits the booking of authorized earnings, but their recommendation to retain a 30% hold-back of interim earnings does not sufficiently mitigate the risk of earnings overpayment.

6. With a 30% hold-back, there is a potential for earnings overpayment under the utilities' Scenario A and C if the ex post level of PEB (net benefits) is less than 80% of the PEB estimated in the interim claims, depending upon the probability one assigns to that outcome.

7. The "worst case" scenario evaluated by the utilities in their Joint Petition is a 30% reduction in ex ante portfolio PEB based on the final true-up of ex post load impacts, including net-to-gross ratios. However, by the utilities' own calculations in an earlier phase of this proceeding, decreases in net-to-gross ratios are amplified when carried through to PEB. For instance, those calculations indicate that a 25% drop in net-to-gross ratios for the utilities' 2006-2008 portfolios results in a 33-48% drop in PEB, depending on the utility.

8. The utilities' conclusion that portfolio diversification will mitigate the overall impact of forecasting uncertainty on portfolio PEB, thereby making it unlikely that ex post PEB will vary more than 30% of the ex ante value, appears to be highly sensitive to how program elements are defined and the data sources used to identify them. Defining the top five program elements for PG&E by end-use and using reported (versus planning) data, for example, produces a much higher level of variability in PG&E's PEB than the scenarios presented in the Joint Petition.

9. NRDC presents alternative scenarios that illustrate potential reductions in ex post PEB on the order of 60% of ex ante PEB, where a 30% hold-back provision results in earnings overpayment.

10. The utilities' scenario analysis do not appear to include a sufficiently broad range of possible reductions in PEB that may arise due to decreases in ex post net-to-gross ratios and other load impact assumptions, and therefore underestimates the risk to ratepayers of overpaying earnings when the hold-back amount is only 30%.

11. A combination of updated ex ante values combined wit h a larger hold-back will substantially mitigate ratepayer risk brought upon by the changes we adopt to the true-up mechanism.

12. There is an overlap between the ex ante update and increasing the hold-back percentage. Both mechanisms are intended to balance the ratepayer interest of limiting overpayment with the utility interest in assuring revenues can be booked in a timely manner.

13. Approving the Joint Petition subject to a 35% hold-back of interim claims will provide the utilities with an opportunity to book meaningful earnings during the program cycle, based on verified measure installations and program costs, and at the same time will minimize the potential risk of earnings overpayment once the final ex post load impact studies are completed. These modifications will also mitigate the largest earnings transition in the adopted earnings mechanism at 85% of the Commission's goals, which could cause a large change in earnings for a very slight change in energy savings.

14. The ex ante load impact data contained in the utilities' compliance filings for the 2006-2008 program cycle is too aggregated for the purpose of extracting ex ante savings assumptions by installed measure for a significant number of programs. Moreover, consistent with the agreements reached during the development of the CMS, some of the utilities have already updated their ex ante savings parameters in consultation with Energy Division since submitting their compliance filings in order to reflect more recent and realistic values for net-to-gross ratios. It makes no sense to undo this work by relying on earlier planning assumptions that have since been superceded by the inclusion of more realistic ex ante values in some of the utilities' E3 calculators.

15. Updating ex ante load impacts using the DEER database prior to the payout of interim claims in 2008 and 2009 should help to mitigate the risk of extremely large swings in earnings (positive or negative) at the final earnings true-up, which serves the interests of both utility shareholders and ratepayers.

16. Incorporating updated DEER ex ante values into the interim claim calculations will improve the consistency between the ex ante load impact assumptions we will be using to calculate interim earnings during 2008 and 2009 and the ex ante load impact assumptions being used to develop the 2009-2011 portfolio plans. In addition, this direction ensures that all the utilities, without further delay, will adjust their lighting savings estimates to reflect more realistic and updated assumptions on net-to-gross ratios, consistent with the agreements reached in the CMS.

Conclusions of Law

1. The modifications proposed by the utilities to the true-up provisions in D.07-09-043 are reasonable and necessary to improve the effectiveness of the risk/reward incentive mechanism adopted in D.07-09-043.

2. Increasing the interim earnings hold-back provision to 35%, rather than the 30% level adopted in D.07-09-043 and recommended in the Joint Petition, is reasonable and necessary to protect ratepayers against the risk of earnings overpayment.

3. The direction we provide today on the ex ante assumptions to use for the 1st and 2nd Claim during the 2006-2008 program cycle are reasonable and should be adopted.

4. In order to move forward as expeditiously as possible in implementing D.07-09-043, this order should be effective today.