4. Discussion

4.1. Total Market Gross Goals for 2012 through 2020

Parties agree that now is the appropriate time to adopt TMG electricity and natural gas energy savings and demand savings goals for the IOU territories for 2012 through 2020, at least on an interim basis. There is consensus among parties and Commission staff that while the general purpose for annual and cumulative goal levels adopted in D.04-09-060 remains of critical importance, the levels adopted are no longer suitable for utility-run programs. This is because the basis and process from which these goals were created in 2004 is not representative of the current trends and interest in energy efficiency savings within a carbon-restricted regulatory regime. Current goals, which were anticipated to be revised every three years, are based on a Potential Study from 2002 which did not consider aggressive action through state building codes and states and federal appliance standards. In fact, since 2002, there have been two significant building code revisions and state appliance standards have been updated nearly annually.

We understand Energy Division's recommendation of a hybrid goal structure as an effort to bring energy efficiency's goal structure into line with our current policy rationale to recognize that energy efficiency occurs beyond IOU programs alone, and to motivate collaboration among regulatory agencies, IOUs, local governments, municipal utilities and private entities. Parties generally support the need to align numerical goals with this policy rationale. They also generally support the Itron Goals Update Report and Appendices, acknowledging that it presents a set of scenarios that model the reality of energy efficiency savings within utility service territories more closely than the past goal setting procedure.

Parties view the proposed hybrid goal structure presented in the Itron Goals Update Report with both agreement and uncertainty. Parties generally agree that it is appropriate to track all savings mechanisms operating within a utility service territory to capture the entire picture of energy efficiency achievements for CARB and for long-term procurement planning. Most agree that gross savings is most relevant for planning purposes and should be measured across the entire economy. The main critique is that proposing a new definition of utility net savings without forecasted estimates of its size, or a perfected ability to measure it, introduces significant uncertainty into the internal business structure of the utilities.

Parties dispute that the Report and its Appendices represent the most recent data. A combination of changing schedules in the release of the Itron Goals Update Report, the Itron California 2008 Potential Study, and the 2008 DEER Update has led to publication dates that suggest each was produced independently and without the benefit of the other. Logically, one should feed into the other starting with the 2008 DEER Update influencing the 2008 Itron Potential Study, and that leading to the Goals Update Report. With Itron as the principal contractor to both the 2008 Potential Study and the Goals Update Report, as well as a major contributor to the DEER Update, we are confident that significant melding of the most recent data occurred.²¹ The 2008 IOU Potential Study is already consistent with major updates to Energy Division regarding DEER values (including compact fluorescent lighting effective useful life and hours of operation), encompassing the majority of the expected impact on the IOU portfolio plans.

The imperfect ability to use the most recent vintage of data in all cases can be a limitation to goal setting. However, in this process, the construction of a framework for goal setting can be done with good, if not perfect, data. For example, parties reached near-consensus that goals at the TMG and IOU-program specific level are needed and that interim TMG goals can be adopted immediately. Parties also agree that the Commission should adopt a revision of the TMG goals with clear data sources and develop IOU-program specific goals for 2012-2014 energy efficiency program planning. Parties are aware that goals for overall savings within IOU territories are necessary for transmittal to CARB for AB 32 implementation purposes at this time.

We will adopt the 2012 through 2020 TMG goals presented as the mid case scenario in the Itron Goals Update Report on an interim basis. Our adopted goals are shown in Table 2 below. These goals are consistent with our intention in D.07-10-032 to establish an energy efficiency regulatory regime, "that transcends regulatory, programmatic and jurisdictional constraints, and emphasizes a broader view of the energy efficiency landscape."²²

By adopting the goals shown in Table 2 below, total energy efficiency savings in the IOU territories are expected to reach over 4,500 megawatts from 2012 to 2020, the equivalent of nine major power plants. Further, we expect savings of over 16,000 gigawatt-hours of electricity and 620 million therms over that period. As shown by Figure 1, these savings are a continuation of the high level of savings achieved and expected to be achieved in 2004 through 2011 through a combination of aggressive Commission action and other market and regulatory factors.

Our adopted goals for 2012-2020 take into account savings from the entire energy efficiency sector. Beyond savings from IOU programs, our adopted goals for the first time include recognition of state building standards and expected federal appliance standards, our BBEES and AB 1109 (requiring improvement in general service lighting). Recognizing the comprehensive nature of energy savings in California provides better information to procurement planners to delay or reduce the future need for supply-side resources, which will result in reduction of GHG emissions.

Table 2: Adopted Total Market Gross Goals²³ (annual)

We will not adopt the "expansive net" recommendation of Energy Division at this time because there is an insufficient record to do so. However, we believe this concept has merit. As discussed above, the energy landscape in California is changing. Energy efficiency will be a central strategy for reducing carbon emissions, and beyond regulation, rising generation costs are driving an awareness and desire for more efficient use of energy. Together these forces are creating a positive environment for rapid efficiency improvements in key end uses and entire systems. As discussed in Section 6 below, we will update and adopt new goals in 2010. At that time, we intend to consider "expansive net" goals as part of adopting IOU portfolio specific goals.

D.07-10-032 directed the four IOUs to produce a single statewide energy efficiency strategic plan to identify opportunities for "innovation, integration, and collaboration" in efficiency statewide. We plan to adopt a strategic plan later this year. Adopting a goal structure for IOU program-specific achievements that recognizes IOU programs are not the only source or driver for efficiency gains and rewards IOUs for their constructive, collaborative efforts is important to keep policy in line with actual market conditions.

Our adopted goals for 2012 through 2020 will bring about 16,000 gigawatt hours of energy savings over that period. When energy savings from 2008 through 2011 (from Figure 1) are included, total energy savings add up to approximately 26,000 gigawatt hours from 2008 through 2020.²⁴ This savings will serve as a foundational contribution to CARB's overall goal (which includes energy savings from municipal utilities) for statewide energy savings (leading to emissions reductions) for approximately the same timeframe.

4.2. Use of Total Market Gross Goals in Procurement Planning

In D.04-09-060, Ordering Paragraphs (OPs) 6 and 7 both indicate that the achievement of energy efficiency goals produces the greatest value when savings offset supply side resources. OP 6 directs the utilities in the 2006 Long-Term Procurement Plan (LTPP) and all subsequent LTPP filings to incorporate the most recently adopted energy efficiency savings goals in order to ensure that ratepayers do not procure redundant supply side resources over the short or long term. Parties voiced concern in this proceeding that there is some risk that 100% or more of the TMG goals may not be met. We recognize that in the event of a savings shortfall, adequate supply side procurement of capacity could be put at some risk. The LTTPs of each IOU must take this potential shortfall into consideration and weigh the level of uncertainty in full TMG goal attainment with the added cost to ratepayers for either over-procurement or emergency just in time procurement of capacity.²⁵ Future LTPP plans are likely to consider the optimal procurement of resources to demonstrate a roadmap to compliance with CARB's final implementation plans. Here, we consider with what level of confidence the Commission and IOUs should treat actual achievement of TMG energy efficiency goals.

A ruling dated March 21, 2008 accompanied the public release of the Itron Goals Update report. This ruling offered a set of questions to consider with the Itron Goals Update report and presented the Staff Recommendations for Goals 2012-2020. A specific question regarding future goal achievements was how to consider the level of certainty necessary for Commission procurement planning decisions. The first recommendation staff made was that the Commission should adopt a TMG goal for each utility service territory and that goal should be used for procurement planning. Parties were asked to comment on the Staff Recommendation as well as other questions.

In its initial comments, SDG&E cites OP 6 & 7 of D. 04-09-060 and states that because the Commission already requires that energy efficiency goals be reflected in IOU procurement plans, the goals should be "achievable and realistic."²⁶ SCE commented that "[s]ince it includes all savings, total market gross potential has great appeal as the theoretically correct value that should be used for procurement planning and carbon emissions regulation."²⁷ However, SCE went on to say it was unclear how the individual components of a TMG would be measured, and therefore questioned the usefulness of setting a TMG goal at this time. WEM commented that "[t]he Commission needs to know that the EE goals will be attained to the same extent that it needs to know that power plants of a certain rating will be online and delivering power." CE Council stated: "The Commission should not be particularly concerned from a long-term procurement perspective regarding setting the IOU EE Savings goals too high because the IOUs currently have a significant amount of spare capacity..." NRDC stated: "It is absolutely necessary that the Commission work with the utilities and others to make sure the goals are attained."

Throughout their comments, parties were generally supportive of the concept of TMG goals being used both for CARB GHG regulatory purposes as well as for procurement planning. Only SDG&E in its June 11, 2008 comments stated that "[g]iven the Joint Utilities (SDG&E and SCG) concern regarding the accountability and potential reliability of realizing the service territory goals, the Joint Utilities recommend that only the utility specific goals be used..."

Because the thrust of this goal structure is to recognize that energy efficiency does not occur solely by utility programs, it is consistent to use TMG as the appropriate goal level for LTPP. We will require that 100% of the interim TMG goals adopted in this decision shall be used in future LTPP proceedings, unless superseded by subsequent goals.

4.3. Gross Goals for 2009 through 2011

In their June 11 comments, parties did not reach consensus on the question of whether to shift to gross goals for 2009-2011. The four utilities and NRDC support use of gross goals, while DRA, CE Council, CCSF and WEM support continued use of net goals.

NRDC argues that if the 2009-2011 goals are defined as net, the goals would be set at such a high level that the utilities would not realistically be able to meet them. Therefore, NRDC believes gross goals will continue to represent stretch goals that are aggressive, achievable, and exceed historical levels of savings.²⁸ SDG&E and SCG state their intention to file proposed program portfolios for 2009-2011 that meet or exceed the adopted gross annual goals.²⁹ SCE claims the establishment of gross goals for 2009-2011 reflects the latest information on energy efficiency potential in California, and these gross goals exceed the updated estimated savings potential from the most recent Itron energy efficiency potential study.³⁰ PG&E believes the current net savings goals adopted in 2004 are unrealistic and adopting gross goals makes them less unrealistic. PG&E also calls for the Commission to modify the risk/reward incentive mechanism (RRIM) to account for the change to gross goals.³¹

DRA does not support changing to gross goals for 2009-2011 because DRA believes this modification will result in a change to the RRIM and a corresponding impact on ratepayers by making it easier for utilities to meet the requirements to earn incentives.³² WEM and CE Council support DRA's views. CE Council calls for a full discussion of the impact on ratepayers before changing from net to gross.³³ WEM states that net savings should be used because this historical standard should not be changed midstream. ³⁴ CCSF opposes using gross goals because of its concern that this will serve as an incentive for the utility to focus on easy-to-achieve short term annual savings to the detriment of more complex and long-lived savings.³⁵

We will adopt the use of gross goals for 2009-2011.³⁶ While we declined to modify these goals in D.07-10-032, no party disputes that the 2004 (net) goals are now out of date. Key assumptions embedded in the current goals do not resemble trends visible in the overall energy efficiency market today. For example, the net-to-gross and expected useful life assumptions in the 2009-2011 goals are about ten years old. Further, the model for current goals assumed there would be no further improvements in Title 24 or state and federal appliance standards.

As noted above, D.04-09-060 called for review of whether the energy savings goals should be gross or net after the next potential study. Upon review of the 2008 IOU Potential Study, the gross potential savings for 2009-2011 in that study more closely align with the currently adopted 2009-2011 goals than do net potential savings. Table 3, derived from D.04-09-060 and the 2008 IOU Potential Study,³⁷ shows that the currently-adopted numeric goals for 2009-2011 are consistent with, and in most cases higher than, recent analysis of maximum achievable utility gross savings potential during these years.

Table 3: 2008 Gross IOU Potential Savings vs. Adopted Goals

		2009	2010	2011	Cumulative 2009-11	Goals as % of Potential
Currently Adopted Goals (annual savings)	GWh	2,538	2,465	2,513	7,516	112%
	MW	535	519	530	1,584	109%
	Therms	52	54	57	163	97%
Gross Annual Savings Potential (full incentives)	GWh	2,496	2,227	1,993	6,716	NA
	MW	510	486	462	1,458	NA
	Therms	55	56	57	168	NA

We find that a shift from net to gross savings goals should bring the currently adopted goals in line with the range of efficiency potential identified by the 2008 IOU Potential Study, reflecting market conditions for 2009-2011. The shift from net to gross goals requires that we adjust our definition of cumulative savings so as to include this change. All that changes is that, unlike savings from program years 2004-2008 (which are measured as ex-post net cumulative savings),³⁸ 2009-2011 savings will be measured as ex-post gross and layered on top of 2004-2008 savings to measure cumulative savings for the purpose of calculating the Minimum Performance Standard (MPS) for the final true-up payment.

In its comments on the Proposed Decision, DRA expresses concern that shifting from net to gross goals will only bring current goals into alignment with existing market potential if the full incremental cost of energy efficiency measures are funded by utility ratepayers (expressed as "full incentives" in Table 3 above). However, the Goals Update Study does not assume the adoption of full incentives. The Study describes the full incentive scenario as maximizing the level of cost-effective savings achieved in the short to medium term and suggests that such levels could also be achieved through a combination of highly effective program efforts without full incentives.³⁹

The opportunity for portfolio benefits is greater as utilities find it easier to support more strategic long-term energy efficiency programs - a major goal for our future activities - using gross energy savings goals for 2009-2011. SCE comments that utilizing gross goals for the 2009-2011 period may open up the opportunity for more program options which support the long-term goals for energy efficiency than the use of net goals, because the use of gross goals should allow for parties to focus more on maximizing the energy savings potential of energy efficiency programs. We agree, and therefore we expect to allocate funds reflecting, for example, less reliance on upstream compact fluorescent lighting programs, and greater emphasis on heating, ventilating and air conditioning (HVAC) and other programs with on-peak savings, in the 2009-2011 utility portfolios as compared to their current portfolios. Most importantly, we anticipate approving an expanded set of integrated, long-term activities reflecting the forthcoming long-term California Energy Efficiency Strategic Plan currently being considered in R.08-07-011 and Application 08-06-004. We give notice that continued IOU program administration and funding is contingent upon the IOUs implementing expanded, integrated long-term energy efficiency activities as a key focus of their 2009-2011 program portfolios.

At the same time, the concern of DRA and others about ratepayer impacts of changing to gross goals on the RRIM may be legitimate. We appreciate the comments of several parties that the relationship between the RRIM and changing the measurement of goals needs to be considered. It is possible that the change from net to gross energy savings goals for 2009-2011, while necessary to reflect realistic changes in the measurement of energy efficiency potential, may result in an imbalance of risks and rewards for utilities if other corresponding adjustments are not made, so that earnings are too easily achieved.⁴⁰ While some parties call for waiting to consider the net versus gross issue until the RRIM is reconsidered, we believe it is important to act on the goals issue now so that the utilities can have clarity in their 2009-2011 portfolios.

There is sufficient time to make necessary changes to the RRIM (and other aspects of the energy efficiency regulatory structure, if necessary) before any potential unreasonable earnings outcome would occur, since earnings for 2009 (and later) programs will not be calculated until after 2010. We intend to reconsider aspects of the RRIM far sooner, starting with an Energy Division study later this year, with the formal portion of the inquiry beginning later this year leading to a decision early in 2009. This limited RRIM relook will reconcile changes in goal measurement with the way incentives are calculated, so as to ensure both ratepayer and utility administrator interests are fairly met. We direct staff to analyze, at minimum, the impact of lowering the $450 million earnings cap in the RRIM and the impact of lowering the 9% and 12% incentive earnings rate as methods for mitigating potential unfair earnings outcomes.⁴¹ We may also consider - and we direct staff to analyze - the possibility of changing the way certain energy efficiency activities should be counted toward satisfying 2009-2011 portfolio goals ("counting rules") if such changes are needed to mitigate any unreasonable outcome.⁴²

²¹ A technical discussion of this point can be found in "Energy Division Staff Paper 2012-2020 Energy Efficiency Goal Setting: Technical and Policy Issues" dated May 12, 2008, as referenced by SDG&E and SCG in their June 11 comments.

²² D.07-10-032, p. 4.

²³ Table 2 is derived from the data presented in the Appendix tables of the Itron Goals Update Report. For a further breakdown of the savings associated with each delivery mechanism see the Mid-Case scenario rows for the years 2012-2020 in the following tables: C1-18, C2-18, and C3-18 for GWH savings; E2-18, E3-18, E4-18 for MW savings; and G1-18, G2-18, G3-18 for gas savings. This data is presented together in Appendix 1.

²⁴ The Itron Goals Update Report incorrectly used the figure of 28,000 gigawatt hours for this period. PG&E and SCE pointed out in comments to the Proposed Decision that this figure was incorrect because it included 2007 lighting savings. We have reviewed the Itron Report and use the correct figure here.

²⁵ The most current LTPP Order Instituting Rulemaking discusses this issue specifically. See R.08-02-007 OIR, p. 21 Appendix A: "In general, the trade-off continuum before us is between overprocuring resources (in a conservative view of firm capacity) at risk of crowding out preferred resources that have shorter development timelines (or causing excess ratepayer costs due to excess resources), or underprocuring resources at the risk of poorer environmental performance from more aging plant generation, higher costs and poorer environmental performance from "just-in-time" procurement resources, or reliability problems."

²⁶ SDG&E Comments, April 25, 2008, p. 5.

²⁷ SCE Comments April 25, 2008, p. 7.

²⁸ NRDC June 11, 2008 Comments, p. 3.

²⁹ SDG&E/SCG June 11, 2008 Comments, p. 7.

³⁰ SCE June 11, 2008 Comments, pp. 3-4.

³¹ PG&E June 11, 2008 Comments, p. 8.

³² DRA June 11, 2008 Comments, pp. 7-8. DRA also proposes an alternative of using the 2008 Potential Study High Case savings scenario for 2009-2011 savings goals and regarding those goals as net. However, this proposal is beyond the scope of this decision because we are only considering here whether already adopted savings goals should be gross or net of free riders. (Ibid, pp. 10-11.)

³³ CE Council June 11, 2008 Comments, p. 13.

³⁴ WEM June 11, 2008 Comments, p. 9.

³⁵ CCSF June 11, 2008 Comments, p. 2.

³⁶ The change from net to gross goals only affects the calculation of the minimum performance standard of the Risk/Reward Incentive Mechanism adopted in D.07-09-043 and does not impact the calculation of the performance earnings basis also adopted in that decision. The performance earnings basis remains calculated using net benefits.

³⁷ Data used in Table 3 can be found in Section 4.2, and Tables 4.2, 4.3, and 4.8 in the 2008 IOU Potential Study.

³⁸ For 2004-2005, the utility-reported format of "actuals-plus-committed" savings will be ex post verified by 2009, and become compatible with utility-reported "actual" savings for 2006-2008 for the purposes of cumulative savings.

³⁹ Itron Goals Update Study, pp. 83 - 84.

⁴⁰ It is also possible that the utilities would have been unreasonably at risk to not achieve earnings or to incur penalties had we not changed the energy savings goals from net to gross.

⁴¹ A broader review of the RRIM is set to occur in 2010.

⁴² For a discussion of the current counting rules, see Section 7.3 of D.07-10-032.