8. Assignment of Proceeding
Loretta M. Lynch is the Assigned Commissioner and Meg Gottstein is the assigned ALJ in this proceeding.
1. The shared-savings mechanism adopted in D.94-10-059 applies to energy efficiency programs implemented or, in the case of long lead-time new construction projects, initiated during PY1995-PY1997.
2. The shared-savings mechanism adopted in D.94-10-059 has functioned as expected: Utilities earn only when the programs are cost-effective and produce net benefits to ratepayers on a portfolio basis, as verified through ex post verification over a 7- to 10-year measurement period. Consistent with D.94-10-059, shareholder earnings vary in direct proportion to portfolio performance, i.e., realized net benefits, even when factors entirely beyond the utility's management or control affect that performance (such as equipment degradation).
3. Contrary to WEM's assertions, the Commission did not proceed under a misconception of fact or law by not adopting TURN's position in D.94-10-059. Rather, the Commission considered TURN's testimony during both the threshold and implementation phases of R.91-08-002/I.91-08-003 and concluded that it was not persuasive.
4. The utilities' earnings claims under the shared-savings mechanism are in line with the monetary value that the Commission projected in adopting the mechanism, assuming that the utilities deployed cost effective programs based on verified savings. They are not unexpected.
5. For PY1994, the Commission transitioned from experimental shared-savings mechanisms that relied on ex ante savings estimates to mechanisms based on ex post verification of savings. Therefore, there are some outstanding claims for utility profits associated with energy efficiency activities implemented in that year, as well as during the 1995-1997 period, in this AEAP proceeding.
6. Based on the verified results to date, the Commission has not had to impose any monetary penalties under the shared-savings mechanism, i.e., required the utilities to reimburse ratepayers in full or in part for their investment in energy efficiency. This indicates that utilities have implemented pre-1998 energy efficiency programs that are cost-effective to ratepayers on a portfolio basis.
7. A retrospective evaluation of earnings from a rate-of-return perspective is counterproductive because it suggests that the programs cost too little. As discussed in this decision, the rate-of-return figures presented in the March 13, 2002 ruling do not reflect the fact that the life of the program (both the benefits of the energy savings and the incentive payment period) is considerably longer than one year. The rate-of-return calculations presented in the ruling represent a ten-year (as opposed to an annual) return. Even under a rate-of-return approach, the 44% earnings rate achieved by the utilities for 1994-1997 program activities is within the range of effective earnings rates allowed for supply-side investments during that period.
8. None of the data submitted on the performance of pre-1998 programs suggest that the incentive mechanism rewarded utilities for programs that are not cost-effective, or produced a shared-savings rate that is higher than the rate authorized.
9. Utility profits under the shared-savings mechanism should be compared to how much ratepayers would have had to pay if the program savings had not been realized. Based on ex post verification efforts to date, we estimate that the 1995-1997 energy efficiency programs will yield net benefits after the payout of utility profits of approximately $795 million to ratepayers over the life of the measures. This represents benefits to ratepayers over and above program costs of $531 million and utility profits of $315 million. When PY1994 shared-savings programs are added to this calculation, net benefits to ratepayers (after program costs of $780 million and utility profits of $346 million) increase to approximately $1.4 billion.
10. Ratepayer expenditures for energy efficiency during 1995-1997 dropped relative to 1994 levels due to various factors, as discussed in this decision. Despite this reduction in expenditures, no parties assert that the energy efficiency programs implemented after 1994 have not produced net benefits to ratepayers, even after the payment of utility profits.
11. As discussed in this decision, the Commission anticipated changes in industry structure that might warrant revisiting the shared-savings mechanism adopted in D.94-10-059 before the end of 1997. The Commission considered the changes in risks and rewards for utilities under electric restructuring, and concluded that restructuring created greater disincentives than in the past for utility development of energy efficiency. Consistent with those conclusions, the Commission elected to retain the shared-savings mechanism adopted in D.94-10-059 without modification through 1997, as it shifted program emphasis to market transformation efforts.
12. As discussed in this decision, it appears that the actual costs avoided by the pre-1998 energy efficiency programs under a restructured industry are higher than expected when these programs were initiated, to the benefit of ratepayers.
