Discussion

Petitioners have raised the following questions regarding the resolution of issues in D.00-05-019 that need to be addressed by today's decision:

1. Is there an inconsistency in the decision language regarding the 7% incentive cap and, if so, how should that inconsistency be resolved?

2. What is the Commission's adopted ratemaking treatment for performance awards associated with programs implemented before PY 1998 and those implemented in PY 1998 or beyond? Should that treatment be continued or modified by the decision?

3. Are there references in the decision that are not in the evidentiary record or do not apply to energy efficiency programs and, if so, should they be removed?

We address each of these issues below.

Basis for Performance Incentive Cap

As Petitioners note, all of the discussion sections of the decision refer to a cap based on program budgets, including the decision summary. (See D.00-05-019, mimeo. at 2, 14, and 18.) However, Conclusions of Law 2 and 3, as well as Ordering Paragraph 1, switch from use of the term "budgets" to "expenditures" in describing the adopted cap. We believe that this switch originates from an inadvertent error in the terminology used in Conclusion of Law 2 to describe prior year incentive caps: "It is reasonable to reduce the performance incentive cap from the 11% of program expenditures used in prior years." (Emphasis added.) In fact, the cap for PY 1999 programs was 11% of authorized program budgets, not expenditures. (See Resolution E-3578, adopted March 18, 1999, Finding 21; Resolution E-3592, adopted April 1, 1999, Findings 59 and 60.)

In view of the above, we will modify Conclusions of Law 2, 3 and Ordering Paragraph 1 of D.00-05-019 to clarify that the adopted performance awards cap will apply to authorized program budgets, not expenditures.

Ratemaking Treatment for Performance Awards

Performance awards, also referred to as "shareholder incentives or shareholder earnings," accrue to utilities based on the measured performance of their demand-side management (DSM) programs.² This performance is measured and reported after the fact, based on Commission-adopted measurement protocols, and presented in our Annual Earnings Assessment Proceedings (AEAP).

Some of the measurement requirements for pre-1998 programs extend for up to 10 years after the programs are implemented, and the utilities make up to four earnings claims for those activities in subsequent years. For PY 1998, PY 1999, PY 2000 and PY 2001 programs there is a single earnings claim made in the year following program implementation. So, for example, the 1998 AEAP addressed the first earnings claim for PY 1997 programs, as well as the second earnings claim for PY 1996. The 2000 AEAP will address the earnings claims for PY 1999 programs, the third earnings claim for certain PY 1997 programs and the fourth earnings claim for certain PY 1996 programs.

Until the passage of AB 1890, discussed further below, rate recovery for shareholder incentives was accomplished via rate increases that were authorized in each AEAP decision and put into effect at the utility's next rate change. However, the rate freeze established by AB 1890 made it impossible to continue this ratemaking approach. Hence, the ratemaking issue raised by Petitioners is inextricably linked to the passage of AB 1890, which was signed into law on September 23, 1996.³

AB 1890 addressed electric restructuring in California by, among other things, establishing a competitive generation market, imposing an electric rate freeze and introducing a nonbypassable PGC to continue ratepayer funding of public purpose programs (e.g., electric energy efficiency and low-income assistance programs). AB 1890 also provided electric utilities the opportunity to recover uneconomic generation-related costs and obligations (referred to as "transition costs") subject to two broad restrictions. The first restriction was that customers would pay a rate for electricity no higher than they paid on June 10, 1996. The second restriction was that the rate freeze would continue until the utilities either 1) fully recovered their transition costs or 2) December 31, 2001, whichever came sooner.⁴ Under the cost recovery strategy outlined in AB 1890, transition cost recovery would come from "headroom," i.e., the difference between recovered revenues at the frozen rate levels and the reasonable costs of providing utility services (authorized revenue requirements).

With the passage of AB 1890 and the rate freeze, we needed to adopt an alternate ratemaking treatment for earnings associated with DSM programs that were already implemented and eligible for shareholder incentives under our adopted AEAP procedures. Since we could not increase rates to recover authorized incentives, our options were to fund shareholder incentives out of PGC funds dedicated to DSM programs, thereby significantly diminishing funds available for these programs, or fund incentives out of utility headroom, which would take funds away from utility transition cost recovery. As discussed further below, we adopted the latter approach in D.97-02-014. In addition, as electric restructuring was unfolding, we decided to shift the focus of DSM programs to activities that would transform the market for energy efficiency services⁵ However, we continued to fund low-income assistance programs that provided rate discounts and weatherization measures to help low-income customers manage their energy use and bills.

In D.97-02-014, we determined that continuation of an administrative structure dependent upon utility administration and shareholder incentives was incompatible with our goals, and directed that new program administrators be selected via a competitive bid process. We established two advisory boards, the California Board For Energy Efficiency (CBEE) and the Low Income Governing Board (LIGB), collectively referred to as "the Boards." Among other things, the Boards were directed to develop requests for proposals (RFP) articulating policy and programmatic guidelines for new administrators of energy efficiency and low-income assistance programs, subject to Commission approval.⁶

Utilities were allowed to bid in response to the RFP to serve as the new independent administrators. However, D.97-02-014 made it clear that shareholder incentives would not apply to any winning utility bidder under the new administrative structure for energy efficiency and low-income assistance programs.⁷ During the transition to independent administration, we directed that existing shareholder incentive mechanisms would continue to apply to prior program years and programs under utility administrative during the transition to new administrators, but specifically stated that "funding for these shareholder incentives should not come from the levels authorized today for [Pub. Util.] Code § 381(c)(1) energy efficiency programs."⁸

In effect, D.97-02-014 established that recovery of shareholder incentives associated with prior program years and during the transition to independent program administration, would come out of headroom as long as the rate freeze was in place. In Conclusion of Law 7, we also directed that the existing shareholder incentive mechanisms would remain unchanged and apply to programs implemented during this transition. At that time, our goal was to complete the transition to the new administrative structure by January 1, 1998.

In mid-1997, the Boards advised the Commission that the new administrative structure for energy efficiency and low-income programs would not be operational by January 1, 1998, and requested formal Commission action to extend the current utility administrative structure. By D.97-09-117, we extended the deadlines for completion of the transition to the new energy efficiency and low-income program administrators to October 1, 1998 and January 1, 1999, respectively. Rather than retaining the existing utility energy efficiency programs and shareholder incentive structure for PY 1998, we elected to approve a joint planning/application process proposed by CBEE that would move forward with the goals of the Commission during the extension:

"The purpose of the joint planning process is laudable: to start the transition toward a more competitive cost-effective energy efficiency marketplace and move toward programs with market transformation characteristics. Also, the process is intended, appropriately, to deal with 1998-specific issues such as changes to utility incentives in a surcharge environment. We support these ideas and will offer parties the opportunity to develop modifications to current rules in a consensus-building fashion, and in a manner that permits resolution of the issues by the end of 1997....We hope that the process will result in near or full consensus regarding modifications to existing rules, program designs and shareholder incentives, so that we can consider implementing the changes as filed or with revisions for the interim administrative period. We emphasize that such proposals should be developed with the transition deadlines established by this decision in mind." (D.97-09-117, mimeo. p. 18.)

By D.97-12-103, we adopted CBEE's recommendations regarding shareholder incentives and ratemaking treatment for programs implemented in 1998. These recommendations were developed jointly with the utilities and substantial input from the public. Specifically, we adopted a shareholder incentive mechanism for energy efficiency programs that reduced emphasis on resource savings and introduced performance milestones based on criteria more suited to market transformation objectives. We also established earnings caps that substantially lowered the overall level of earnings potential relative to the pre-PY 1998 earnings mechanism. We reduced the multi-year earnings claim process so that the utility could submit a single earnings claim in the year following program implementation.

On the issue of funding 1998 shareholder incentives, we determined that there was a clear distinction between pre-1998 program activities and those being approved by D.97-12-103:

"...the ratemaking circumstances surrounding the utility applications as interim administrators are distinguishable from those related to pre-1998 shareholder incentives. As the Marketplace Coalition points out, in D.97-02-014, Conclusion of Law 7, we stated that funding for utility shareholder incentives `should not come from the levels authorized today for [Pub. Util.] Code § 381(c)(1).' However, at that time we were referring to utility shareholder incentives associated with pre-1998 program activities. We anticipated in that order that the new program administrators for energy efficiency programs would be in place by January 1, 1998. Had that deadline been met, the new program administrators would be conducting market transformation programs, instead of the utility interim administrators. All payments to the new administrators, including profits resulting from the difference between the bid and actual administration costs, would have been funded out of 1998 PGC funds. It is reasonable to fund 1998 shareholder incentives to the utilities as interim administrators in the same manner. This ratemaking treatment will apply only to awards associated with PGC-funded electric energy activities." (D.97-12-103, mimeo. p. 29, emphasis added.)

In view of the above, we conclude that our direction in D.97-02-014 (Conclusion of Law 7) was modified by our subsequent order in D.97-12-103 with respect to PY 1998 programs. Therefore, we need to clarify that our determinations in prior AEAPs to fund earnings out of headroom was consistent with Commission policies with respect to the program years being considered, i.e., all pre-PY 1998. (See D.98-03-063 and D.99-06-052.) However, it would not be consistent with adopted Commission policy to apply that same ratemaking treatment to earnings associated with PY 1998.

However, we note that our ratemaking determinations in D.97-12-013 did not extend to shareholder incentives associated with PY 1998 low-income program assistance programs, as we clarified in D.98-06-063. Moreover, nothing in D.97-12-103 or D.98-06-063 implied that this ratemaking treatment would be extended beyond PY 1998. In fact, as we stated in D.98-06-063, "[o]ur approval of the joint proposal was limited to the electric energy efficiency activities funded by that decision." (D.98-06-063, mimeo. p. 5.)

Nonetheless, by Resolution E-3578 issued on April 1, 1999, we adopted the utilities' proposed PY 1999 energy efficiency budgets, which included funding for the projected shareholder incentives associated with that program year.⁹ Hence, in that Resolution we did continue the policy adopted in D.97-12-013 of funding shareholder incentives out of energy efficiency budgets, rather than out of headroom, during the rate freeze.

For the consolidated PY 2000/PY 2001 planning cycle, CBEE was directed to initiate a public input process and then develop recommendations for specific, selective changes to current policy rules, guidelines on programs, budgets and program administrative issues. The selected changes were to be limited in number and focused on the highest priority modifications. Issues debated and addressed during the PY 1999 Advice Letter planning process were not to be relitigated.¹⁰ Neither CBEE nor any interested party proposed that the current ratemaking treatment adopted for shareholder incentives be modified for the PY 2000/PY 2001 planning cycle. Moreover, since that issue was addressed in Res. E-3578, such a modification was arguably beyond the scope of the proceeding. As a result, the selected changes adopted in D.99-08-021 for PY 2000/PY 2001 did not direct any modifications to the manner in which utilities would fund shareholder incentives for energy efficiency programs in PY 2000 and PY 2001. Accordingly, the utilities' compliance filings, submitted on September 27, 1999, included funding for shareholder incentives in their proposed PY 2000 and PY 2001 program budgets.

Based on the above, we conclude that our ratemaking determinations in D.00-05-019 need to be clarified so that they are consistent with Commission-adopted policies. First, we need to clarify that the ratemaking treatment adopted in that decision applies only to shareholder incentives associated with energy efficiency programs, and not to low-income assistance programs which are being addressed in Phase 2 of the proceeding. As discussed above, funding for shareholder incentives associated with low-income assistance programs has never come from program budgets, even during the rate freeze period imposed by AB 1890, and will continue to come from headroom during the rate freeze period. As D.00-05-019 already notes, shareholder incentives for gas DSM programs should continue to come out of gas rates using the same regulatory mechanisms as are used today.

Next, we need to clarify that authorized earnings associated with pre-PY 1998 energy efficiency programs are to be recovered from headroom during the rate freeze period. As we determined in D.98-03-063, and reiterated in D.98-09-004 and D.99-06-052, these earnings should be used to adjust the distribution revenue requirement in calculating headroom.

In addition, we need to clarify that we have authorized the utilities to fund shareholder incentives out of energy efficiency budgets, rather than headroom, for PY 1998, and have extended that ratemaking treatment by subsequent Commission directives to PY 1999, PY 2000 and PY 2001. We have no basis in the record in this proceeding to modify this treatment.

We note that today's clarifications affect the level of funding we estimated would be available for the "Summer 2000 Energy Efficiency Initiative" (Initiative) described in D.00-07-017. This is because, in arriving at our estimate of $67 million for the Initiative, we included PY 2000 funds budgeted for electric energy efficiency shareholder incentives. However, we also noted that these estimates would change as actual costs for PY 1998 and PY 1999 were finalized. ¹¹

We do not intend today's clarifications to reduce funding for the Initiative. Instead, should the final amounts available for the Initiative prove to be less than $67 million as a result of today's decision, we intend to fund the difference out of PY 2001 energy efficiency budgets or any additional carryover funds beyond those included in our estimates.

Finally, we believe that the issue of how energy efficiency shareholder incentives should be recovered beyond PY 2001, when the rate freeze will have ended for all of the utilities, should be considered as part of the program planning process for PY 2002. There will be many issues to consider at that time, including the level of post-freeze rates, the appropriate funding level for energy efficiency programs in the future and how these programs will be administered.

Other Language Modifications

We have reviewed the language that SDG&E/SoCal contends is not supported by the evidentiary record or does not apply to the energy efficiency programs being reviewed by D.00-05-019. We find that SDG&E/SoCal's objection has merit. Moreover, the specific sentences that SDG&E/SoCal propose to remove or correct are superfluous to the discussion and conclusions of the decision. We will make SDG&E/SoCal's recommended modifications.

This is an uncontested matter in which the decision grants the relief requested. Accordingly, pursuant to Pub. Util. Code Section 311(g)(2), the otherwise applicable 30-day period for public review and comment is being waived.

Findings of Fact

1. Conclusion of Law 2 of D.00-05-019 characterized the prior year incentive cap inaccurately as having applied to program expenditures. The prior year incentive cap of 11% applied to authorized program budgets, not expenditures, pursuant to Resolution E-3592.

2. The 7% performance incentive cap adopted by D.00-05-019 was intended to apply to authorized program budgets, as discussed in the text of that order.

3. By D.97-02-014, the Commission directed that shareholder incentives for PY 1998 energy efficiency programs be funded out of authorized PY 1998 energy efficiency program budgets, and not out of headroom. This ratemaking treatment was continued for PY 1999 energy efficiency programs, per Resolution E-3578. The ratemaking treatment was not modified by the Commission in its selective review of program design and policies for PY 2000/PY 2001 energy efficiency programs and, therefore, remains in effect for these program years, pursuant to D.99-08-021.

4. Pursuant to D.97-12-013, performance awards associated with pre-1998 energy efficiency programs should be funded out of headroom.

5. Performance awards associated with low-income assistance programs continue to be funded out of headroom, as clarified by D.98-06-063.

6. D.00-05-019 assumes that the ratemaking treatment for pre-PY 1998 energy efficiency performance incentives is identical to the ratemaking treatment adopted by the Commission for PY 1998 and beyond.

7. There is no basis in the record in this proceeding to modify the adopted ratemaking treatment for performance awards for PY 1998, PY 1999, PY 2000 or PY 2001.

8. Today's adopted modifications of D.00-05-0019 may affect the level of funding estimated in D.00-07-017 to be available for the Summer 2000 Energy Efficiency Initiatives. However, reducing funding for this Initiative would not be practicable since the Summer Initiative programs have already been authorized and are being implemented.

9. Certain statements in D.00-015-019 are not supported by the evidentiary record or do not apply to the energy efficiency programs being reviewed by D.00-05-019.

Conclusions of Law

1. The Petitions For Modification of D.00-05-019 filed by SDG&E/SoCal and SCE/PG&E should be approved.

2. Conclusions of Law 2, 3 and Ordering Paragraph 1 of D.00-05-019 should be modified to clarify that the adopted performance awards cap applied to authorized program budgets.

3. D.00-05-019 should be modified to distinguish between the Commission's adopted ratemaking treatment for performance incentives associated with pre-PY 1998 energy efficiency programs and those implemented in PY 1998, PY 1999, PY 2000 and PY 2001.

4. Any difference between the level of funding estimated for the Summer 2000 Energy Efficiency Initiative and funds available for that purpose based on today's decision should be funded out of PY 2001 energy efficiency budgets or any additional carryover funds beyond those included in our estimates.

5. The issue of how energy efficiency performance awards should be recovered beyond PY 2001, when the rate freeze will have ended for all of the utilities, should be considered as part of the program planning process for PY 2002.

6. In order to proceed with the appropriate ratemaking of authorized earnings, this order should be effective immediately.

ORDER

IT IS ORDERED that:

1. The Petition For Modification of Decision (D.) 00-05-019 that was jointly filed on June 5, 2000 by San Diego Gas & Electric Company and Southern California Gas Company is approved.

2. The Petition For Modification of D.00-05-019 that was jointly filed on June 16, 2000 by Southern California Edison Company and Pacific Gas and Electric Company is approved.

3. D.00-05-019 is modified as indicated below:

a. Page 2, first full paragraph is replaced in its entirety with the following:




"This decision adopts a performance cap at 7% of the energy efficiency program budget for program year (PY) 2000 and PY 2001 for applicant utilities, in order to encourage continued progress in the Commission's goal of market transformation. These incentives apply to energy efficiency programs for Southern California Edison Company (Edison), Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCal). Consistent with prior Commission determinations, incentives for the electric energy efficiency programs associated with PY 1998, PY 1999, PY 2000 and PY 2001 activities will come out of Public Goods Charge (PGC) funds, while incentives for the gas programs will continue to be funded from gas rates. We will address the ratemaking treatment for incentives associated with PY 2002 energy efficiency activities in PY 2002 program planning cycle."

b. Page 19, first full paragraph is replaced in its entirety with the following:




"We will continue our current ratemaking treatment of energy efficiency incentives, which has been addressed in D.97-12-013, D.98-06-063, and Resolution E-3578. By those decisions, we established that incentives associated with pre-PY 1998 energy efficiency programs would be funded out of headroom. However, for PY 1998 and PY 1999, we elected to fund energy efficiency incentives for those program years out of PGC energy efficiency budgets. This policy has been continued for PY 2000 and PY 2001 by our decision to adopt only selective program and policy modifications for those programs, per D.99-08-021.




"The issue of how energy efficiency incentives should be recovered beyond PY 2001, when the rate freeze will have ended for all of the utilities, should be considered as part of the program planning process for PY 2002. There will be many issues to consider at that time, including the level of post-freeze rates, the appropriate funding level for energy efficiency programs in the future and how these programs will be administered.




"Shareholder incentives for gas energy efficiency programs will continue to come out of gas rates using the same regulatory mechanisms as are used today. We also note that incentives for low-income assistance programs in PY 1998 and beyond are being funded out of headroom, and not out of PGC funds (see, for example, D.98-06-063)."

c. Page 24, second to last paragraph is replaced in its entirety with the following:




"We will not change the current, Commission-adopted ratemaking treatment for performance incentives. We also clarify our view and expectations of CALMAC."

d. Page 18, first full paragraph, third sentence, is corrected to read:




"We believe that the utilities may have a somewhat easier job in this area then they have in the past."

e. Page 18, first full paragraph, last sentence, should be deleted in its entirety.

f. Finding of Fact 6 is deleted in its entirety, and the remaining Findings of Fact renumbered.

g. Conclusion of Law 2 is corrected to read as follows:




"It is reasonable to reduce the performance incentive cap from the 11% of program budgets used in prior years."

h. Conclusion of Law 3 is corrected to read as follows:




"Based on the range of options before us, a 7% performance incentive cap based on program budgets is reasonable for PY 2000 and 2001."

i. Conclusion of Law 4 is replaced in its entirety with the following:




"Performance incentives for pre-PY 1998 energy efficiency electric programs should continue to be funded from headroom. For PY 1998, PY 1999, PY 2000 and PY 2001, performance incentives should be funded out of PGC funding for energy efficiency programs, consistent with Commission determinations. The issue of how energy efficiency incentives should be recovered beyond PY 2001, when the rate freeze will have ended for all of the utilities, should be considered as part of the program planning process for PY 2002."

j. The word "expenditures" in the first sentence of Ordering Paragraph 1 is replaced with "budgets."

k. Ordering Paragraph 2 is deleted and replaced in its entirety with the following:




"Performance incentives for pre-PY 1998 energy efficiency electric programs shall continue to be funded from headroom. For PY 1998, PY 1999, PY 2000 and PY 2001, performance incentives shall be funded out of PGC funding for energy efficiency programs, consistent with Commission determinations. The issue of how energy efficiency incentives should be recovered beyond PY 2001, when the rate freeze will have ended for all of the utilities, shall be considered as part of the program planning process for PY 2002."

4. Any difference between the level of funding estimated for the Summer 2000 Energy Efficiency Initiative in D.00-07-017and funds available for that purpose based on today's decision should be funded out of PY 2001 energy

efficiency budgets or any additional carryover funds beyond those included in our estimates.

This order is effective today.

Dated October 5, 2000, at San Francisco, California.

LORETTA M. LYNCH

President

HENRY M. DUQUE

JOSIAH L. NEEPER

RICHARD A. BILAS

CARL W. WOOD

Commissioners

4 Recovery of certain specified transition costs could be extended to March 31, 2002, pursuant to Pub. Util. Code § 367(a). Other specified transition costs are allowed to be recovered after this time frame. (See, e.g. §§ 375 and 376.)