5. Positions of the Parties

In the following sections, we briefly summarize the positions of the parties on the issue of modifying the shared-savings incentive mechanism adopted by D.94-10-059. Because the positions presented by PG&E, SCE, and jointly by SDG&E and SoCal are very similar, we present them collectively as the utilities' position, in our summary below.

5.1 CEC

In the CEC's view, the arguments presented in the March 13, 2002 ruling are insufficient to reopen D.94-10-059. The CEC contends that the ruling does not consider the Commission's rationale in past decisions for adopting a shared-savings mechanism, or include the facts necessary to assess the reasonableness of past and current shareholder earnings. The CEC also argues that it is unreasonable to change the incentive mechanism rules under which the energy efficiency programs have operated for eight years. Rather than seek recovery from past earnings, the CEC suggests that the Commission change the incentive mechanisms prospectively.

5.2 ORA

ORA concurs with the CEC that the tentative findings made in the ruling regarding the Commission's experience with the shared-savings mechanism do not constitute grounds to change the mechanism. In addition, ORA contends that the ruling misinterprets measures designed to protect ratepayers as arbitrarily representing windfalls to the utilities. ORA also argues that the ruling inappropriately concludes that the incentive mechanism is flawed based simply on the magnitude of profits. ORA expresses concern that reopening the docket would affirm the utilities' objections to the lengthy payment period for profits (that ORA supported and the Commission adopted), and make future ratemaking with deferral of utility cost recovery even more difficult. Finally, ORA fears that if the Commission were to modify the shareholder profits for these past years at this time, it might be creating a precedent that the utilities could use against ratepayers in the future.

In sum, ORA believes that reopening the old proceeding would result in costs, both in terms of perception of regulatory risk, and resources of both utilities and the Commission, and would create difficult problems about the role of hindsight in reviews of past utility actions. ORA recommends that the Commission be fully aware of these implications and difficulties, in deciding whether to reopen the proceeding.

5.3 NRDC

NRDC argues that the Commission should not modify D.94-10-059 with respect to the incentive mechanism associated with pre-1998 energy efficiency programs. NRDC contends that the evidentiary record developed in AEAPs since 1995 demonstrates that these programs have produced net benefits to ratepayers of well over a billion dollars. In fact, NRDC argues that the value of the programs to ratepayers is significantly higher than those savings levels when adjusted for actual market prices during the energy crisis. No penalties were assessed because, as NRDC views it, the utilities demonstrated an impressive record of success in administering the programs. NRDC also argues that comparing utilities' earnings with program costs is an outdated, counter-productive perspective that suggests, in effect, that the programs cost too little. Instead of reopening D.94-10-059 or returning to a cost-plus incentive mechanism, NRDC argues that the Commission should focus its attention on establishment of a firm foundation for future energy efficiency programs.

5.4 The Utilities

In the utilities' view, reopening D.94-10-059 is unjustified by the facts and uncalled for under the Commission's own guidelines. They contend that reopening the incentive mechanism for retrospective application to past program years will change the rules for the purpose of punishing program administrators for a job well done.

More particularly, the utilities contend that the circumstances identified in the ALJ's ruling were fully within Commission expectations at the time it adopted the shared-savings incentive mechanism. In their view, D.94-10-059 encouraged utilities to maximize energy savings and incentives and anticipated the level of earnings that occurred. Moreover, PG&E contends that penalties have been assessed under the program, contrary to the ALJ's assertions.

In sum, the utilities argue that there is no valid ground that would justify modifying the incentive mechanism.

5.5 TURN

TURN argues that there is no legal bar to modifying the incentive mechanism adopted in D.94-10-059, especially as it applies to expected future earnings. TURN believes that D.95-05-043, cited in the ALJ ruling, is an appropriate analogous example where the Commission altered the Diablo Canyon pricing mechanism intended to continue into the future before the expiration date, effectively reducing expected future earnings by an amount considerably larger than at issue in this proceeding. TURN also cites D.97-05-088 as an example where the Commission further altered the Diablo Canyon payment mechanism.

In TURN's view, a change in the shared-savings mechanism is warranted because the fundamental assumptions of 1994 regarding the relative risks and rewards between supply-side and demand-side investments were incorrect. In particular, TURN argues that the assumption that shareholders would bear a substantial risk of nonperformance is belied by the fact that the utilities have suffered no penalties for performance below the threshold level, and have received an average return of over 25%. In addition, TURN argues that the assumption that an uncapped incentive mechanism would encourage the utilities to maximize ratepayer net benefits is belied by the drop in program spending in 1995. Overall, TURN argues that by December 1995 at the latest, and probably as early as April 1994, it was clear that the shareholder risk for Demand-Side Management (DSM) versus supply-side investments was substantially different than portrayed during testimonies and pleadings submitted in 1992 and 1993.

In sum, TURN argues that the assumptions underlying the Commission's decision in 1994 have proven to be erroneous and were largely invalidated by events that started in 1995. TURN believes that the potential injustice of forcing ratepayers to pay an additional $175 million to utility shareholders for the pre-1998 programs warrants a review and possible modification of the shareholder incentive mechanism adopted in D.94-10-059.

5.6 WEM

WEM argues that D.94-10-059 should be reopened because the Commission erred in several respects in adopting the shared-savings mechanism. Quoting extensively from TURN's testimony and briefs in R.91-08-003/I.91-08-002, WEM contends that: (1) the 30% shared-savings rate was not justified by evidence that it would improve delivery of demand-side management, (2) the Commission failed to make incentives dependent upon objective verification, (3) the Commission relied on testimony that ignored TURN's perspective on shareholder incentives and program design by failing to adopt TURN's recommendation to suspend shareholder incentives altogether. Finally, WEM argues that deregulation changed all the rules, rendering shareholder incentives obsolete even before the new mechanism began.