2. Background
Although the Commission has utilized various approaches to promote energy efficiency goals over time, the program in its current format became effective in September 2007 with the adoption of the energy efficiency risk/reward incentive mechanism (RRIM) in Decision (D.) 07-09-043, as under consideration in Rulemaking (R.) 06-04-010.1 The RRIM was designed to align shareholder and consumer interests by providing a meaningful level of shareholder earnings and a return on ratepayers' investment in energy efficiency as the utilities reach towards and attempt to exceed the Commission's Energy Efficiency goals. The RRIM provides the opportunity for shareholder earnings for Energy Efficiency activity comparable with other supply-side procurement options.
RRIM rewards are calculated as a percentage of the "Performance Earnings Basis" which represents resource savings from deployment of specified energy efficiency measures. As originally designed, if utility programs realized savings between 85%-100% of energy efficiency goals, the utility earned awards equal to 9% of total savings. If savings exceeded 100% of the energy efficiency goals, a 12% shared savings rate applied.2
The RRIM was designed to provide for incentive awards over a three-year cycle, with two interim installments and a final true-up. The RRIM was initially applied to the 2006-2008 cycle. As part of the RRIM adopted in D.07-09-043, the Energy Division was required to produce verification reports of utility energy efficiency costs and installations and services completed. These reports were to serve as the basis for interim and final incentive payments to utilities, if warranted.
2.1. RRIM Modifications in R.06-04-010 (Predecessor to R.09-01-019)
Prior to opening R.09-01-019, the Commission modified the RRIM design through decisions issued in R.06-04-010. In particular, D.08-01-042 modified the RRIM to allow the investor-owned utilities (IOUs) to retain interim incentive awards, not subject to refund in a true up, except where the ex post program performance fell within a penalty band. To mitigate the additional risk to ratepayers of overpayment of incentive awards, the award "holdback" amount was increased from 30% to 35% and ex ante measures used to determine incentives were required to be based on updated estimates.
D.08-12-059 awarded a first round of interim RRIM earnings for 2006-2008. In doing so, the Commission further modified the RRIM, basing incentive awards only on the utility claims, rather than on the Energy Division interim verification report. To mitigate the ratepayer risks of awarding incentive payments based on utility claims, the Commission held back 65% of awards for further review.
2.2. Further RRIM Developments Conducted in R.09-01-019
Since only the first round of 2006-2008 interim incentive claims was awarded in D.08-12-059, in R.06-04-010, the remaining rounds of 2006-2008 incentive claims were addressed in the successor docket, R.09-01-019, as well as consideration of RRIM program redesign. Because the utilities had already received their first interim awards of 35% of their claims in D.08-12-059, we anticipated in opening R.09-01-019, that the Energy Division Evaluation, Measurement and Verification (EM&V) report would be moot as a basis for interim incentive payments. R. 09-01-019 recognized, however, that the EM&V report may be used for informational purposes concerning program performance and future planning.
In D.09-12-045, the Commission awarded a second round of interim incentive payments for the 2006-2008 incentive cycle, applying a 12% shared savings rate to the Energy Division's updated calculation of resource savings. The IOUs received a third and final RRIM payment for 2006-2008 program activity in D.10-12-049, in which the Commission eliminated the requirement to base final incentive awards on updated ex post evaluations. D.10-12-049 also modified D.07-09-043 by reducing the shared savings rate from 12% to 7%. This reduction was intended to reflect the lower risk to the utilities as a result of eliminating the requirement that incentive payments be based on updated ex post evaluations.
Also in D.10-12-049, we authorized the utilities to apply for energy efficiency incentive awards for 2009 program activities using the formulas and framework generally used for the 2006-2008 RRIM true up. In D.08-10-027, the Commission had authorized the utilities to extend their 2006-2008 energy efficiency programs into 2009 as a bridge year pending approval of an updated program portfolio for a subsequent cycle. We awarded the utilities RRIM earnings covering 2009 program activity in D.11-12-036.
2.3. Prospective RRIM Reform Previously Considered in R.09-01-019
The Commission has not yet determined a framework to ensure that the IOUs have the appropriate incentives to aggressively pursue energy efficiency goals for program activity subsequent to the 2009 Bridge Year to the 2006-2008 Cycle. The Commission, however, has previously developed some record on this issue in R.09-01-019.
On April 1, 2009, the Energy Division served a "White Paper on Proposed Energy Efficiency Risk-Reward Incentive Mechanism and [Evaluation, Measurement, and Verification] EM&V Activities." (White Paper). The White Paper was incorporated into the record in R.09-01-0193 via ruling on April 26, 2009. On April 29, 2009, parties filed comments on the White Paper, and on May 11, 2009, filed reply comments.
On May 22, 2009, parties filed proposals for prospective changes in the RRIM. Responses were filed on June 12, 2009. To discuss the proposals, a workshop was convened on July 15, 2009. Parties filed post-workshop comments on August 7, 2009 and replies on August 19, 2009. No evidentiary hearings were conducted.
An Administrative Law Judge's (ALJ) Proposed Decision on prospective RRIM reform was mailed for comment in R.09-01-019 on November 15, 2010, but was subsequently withdrawn without further consideration by the Commission.4
Most recently, Commissioner Ferron issued an Assigned Commissioner's Ruling (ACR) in R.09-01-019 on August 30, 2011, to refresh the record on prospective RRIM issues. Comments on that ACR were filed on September 23, 2011, and reply comments were filed on October 7, 2011. A subsequent ACR, issued on December 16, 2011, called for additional comments and record development. Comments on the December 16, 2011 are currently due on January 17, 2012, and reply comments are due on January 30, 2012.
1 R.06-04-010 was opened on April 13, 2006, to examine the Commission's Post-2005 Energy Efficiency Policies and Programs, Evaluation, Measurement, and Verification (EV&M), and Related Issues.
2 Savings between 65% and 84% were deemed to be a "deadband" range in which a 0% shared savings rate applied. Falling below 65% subjected the utilities to penalties. The penalties were considered to constitute the "risk" portion of the RRIM. Maximum limits on incentive earnings and penalties for all utilities were capped at $450 million for the 2006-2008 cycle.
3 The ruling was jointly issued by assigned Commissioner Bohn in R.09-01-019 and assigned Commissioner Grueneich in A.08-07-021 et al.
4 Between September 2009 and November 2010, the focus of R.09-01-019 was on determining RRIM adjustments for the 2006-2008 Cycle.
