3. Preliminary Scoping Memo

We include a preliminary scoping memo in this Order Instituting Rulemaking (OIR). (Rule 7.1(d) of the Commission's Rules of Practice and Procedure (Rules).) As discussed below, this is composed of the issues, preliminary determination of category, preliminary determination of need for hearing, and schedule. This rulemaking is instituted on the Commission's own motion to adopt, repeal, or amend rules, regulations, and guidelines for the electric and gas utilities named herein, under the authority of Rule 6.1. The preliminary scoping memo for this rulemaking identifies the issues which are under consideration in the proceeding.

3.1. Overview of Issues

The issues in this OIR relate to the determination and adoption of appropriate reforms for a new or revised RRIM to thereby provide incentives for IOUs to meet and exceed the Commission's goals for verifiable and socially-desirable energy efficiency program savings, while protecting ratepayers through appropriate accountability and cost containment mechanisms. Conservation and energy efficiency are first in the Commission's loading order of electricity and natural gas resources. While the Commission remains fully committed to promoting energy efficiency as a top priority, it is appropriate to reexamine the premise that an annual RRIM shareholder payment is necessary to secure the IOUs' commitment to energy efficiency. As noted above, we shall also consider whether there may be other ways to encourage maximum energy efficiency.

We originally expected the RRIM to function as a ministerial process under the procedures adopted in D.07-09-043. The RRIM processes, however, have proven to be quite complex and not as easily or as timely resolved as originally anticipated. The RRIM has encountered repeated controversy, delay, and attempts to redesign it.

In R.09-01-019 we developed a revised incentive framework for the remainder of the 2006-2008 cycle, and for the 2009 Bridge Year Programs. We have not yet developed a new long-term incentive framework for 2010 and beyond, however. In R.09-01-019, we have completed the review and award of incentives for activities through the program year 2009. We open this successor OIR to consider additional or alternative modifications and streamlining of the incentives applied to energy efficiency activities for program activities for program cycles 2010-2012 and beyond to promote achievement of the Commission's energy efficiency goals in the most effective manner.

3.2. Time Frame for Applying Prospective Incentive Design Measures

Our updated focus for this OIR is to consider how an incentive program should be designed and applied prospectively. In terms of chronological-sequence, we first must consider incentive design for purposes of the 2010-2012 program cycle. In addition, in R.09-11-014, the Commission is currently considering how the energy efficiency program should be changed for the post-2010-2012 program cycle, including the need for a transition period for the 2013-2014 time horizon.⁵

Accordingly, this OIR will also consider further potential incentive reforms or modifications that may be warranted for the 2013-2014 time horizon or beyond. The RRIM needs to be designed contemporaneously in coordination with the guidance and design for the most current program portfolio. Since the 2013-2014 energy efficiency portfolios must be developed and approved in 2012, this OIR shall consider how the RRIM may need to be designed and applied differently in distinguishing 2010-2012 and 2013-2014 program changes.

In the 2013-2014 timeframe, there may be a greater emphasis on programs designed for deeper savings, measures with higher up-front costs and longer design lives, and market transformation efforts (with correspondingly increased challenges associated with program participation levels and achieving savings from these programs). As a result, incentives may need to be calibrated to the different types of programs in the portfolio, with programs addressing harder-to-achieve savings rewarded at a different incentive rate than programs with easier-to-achieve savings.

3.3. Use of Ex Ante Estimates Versus Ex Post Evaluated Savings for Incentives

As the latest attempt to remedy perceived problems with the RRIM design, the Commission modified the RRIM in D.10-12-049 to impute ex ante measures instead of relying on verified ex post results, as originally intended when the RRIM was instituted in D.07-09-043.

Yet, this latest version of RRIM may not be ideal for prospective RRIM design. For example, awarding incentive earnings based on ex ante measures may reduce the motivation for the utilities to be innovative and continuously improve their programs towards achieving higher energy efficiency savings. Designing an RRIM based on ex ante measures with no ex post true-up means that an IOU receives the same incentive earnings whether or not actual results for any given energy efficiency program are inferior or superior relative to an ex ante assumption. On the other hand, basing incentive earnings on the ex ante assumptions used at the time the programs were approved provides greater certainty to the IOU in planning and implementing program goals. Thus, this OIR will consider whether a prospective RRIM based on ex ante assumptions and whether, or to what extent, there should be ex post true-ups.

3.4. Incentive Design Relative to Changing Focus of Program Activities

This OIR will also reexamine the premises underlying the RRIM in view of the changing focus of the approved budget of energy efficiency portfolio programs for 2010-2012, with an increasing emphasis on longer term strategic programs rather than short term savings. Under the current RRIM, earnings are awarded as a percentage of net benefits calculated using the Total Resource Cost and Program Administrator Cost methodology. Relying on the present-value of future savings and the emphasis on first-years savings embedded in these methodologies provides higher net benefits for measures with higher short-term savings. Such incentives may encourage the utilities to shift portfolio resources away from market transformation programs and more comprehensive measures designed to produce long-term savings (i.e., insulation of existing buildings) in favor of programs and measures that produced shorter-term savings that increased RRIM earnings (such as compact fluorescent lights and refrigerator rebates.

Based on the changing emphasis toward longer term strategic market transformation goals, an RRIM premised on rewarding short-term savings may no longer be the most effective tool to promote the Commission's goals as embodied in the California Long-Term Energy Efficiency Strategic Plan.⁶

3.5. Incentives to Facilitate Energy Efficiency through Customized Projects

The RRIM is also not currently well designed to provide the IOUs with an incentive to increase efficiency savings through the provision of customized projects. Because customized projects require unique calculations for each project, the Commission did not adopt ex ante values for the portion of the 2010-2012 portfolio budget related to custom projects. Instead, the Commission adopted a review process for individual projects on a case-by-case basis and a default realization rate for projects that are not reviewed. Since a significant portion of the 2010-2012 portfolio is anticipated to include customized programs, this OIR will consider how an RRIM shared savings percentage could be calculated (or how alternative incentives may be designed) to provide an incentive to increase efficiency savings utilizing all relevant portfolio programs, including custom measures.

⁵ The ACRs issued in R.09-01-019, dated August 30, 2011, and December 16, 2011, respectively, have solicited comments and data to develop the record on these issues. As discussed in this OIR, we incorporate this record from R.09-01-019 into this proceeding.

⁶ On September 18, 2008, the Commission adopted California's first integrated long-term Strategic Plan framework for achieving maximum energy savings as the highest priority resource in meeting energy needs.