Shareholder Incentives and Milestones

Background

In D.00-07-017 we indicated our intent to simplify the shareholder incentive structure. We also stated our preference for tying performance incentives to energy savings and cost-effectiveness. (Id., mimeo at pp. 194-195.)

Parties agree that incentives should be based on energy and demand savings. The ALJ and Assigned Commissioner have expressed their intention to structure incentives to emphasize programs that reduce peak demand and maximize energy savings.

Utilities' Proposal

The utilities propose a shareholder incentive mechanism that divides milestones into three categories: 1) energy savings; 2) market effects; and 3) a performance adder for information programs. The majority of earnings are based on energy savings.

For programs projected to produce measurable and verifiable energy savings and peak demand reductions, the utilities propose to base earnings on energy savings and peak demand reduction targets at the program portfolio level, and to scale the award based on the ex ante net energy savings and peak demand reductions obtained based upon the most recent load impact studies where available and the adopted net-to-gross ratios.¹⁰ The load impact targets are scaled with the awards, allowing immediate award for energy savings.

For programs that cannot be tied to energy savings but promote market transformation, the utilities propose select market effects milestones and incentives, designed to represent changes in market actor(s) behavior, awareness, knowledge, and market share. They propose two levels of earnings, generally an award for 70% attainment and for 100% attainment.¹¹

For information programs and energy centers, which support program delivery, but do not produce directly measurable energy savings or market effects results, the utilities propose that incentives be paid as a "performance adder." These incentives are based upon total program budget expenditures on the included programs; the utilities propose achievement for recording 60% of the total programs' budgets associated with these activities, increasing linearly to 95% of the recorded target.

The utilities propose the following award weighting among categories:

Milestones: Weighting and Amounts
			PG&E		SDG&E		SCE		SCG
			Mechanism Weighting	Maximum Award	Mechanism Weighting	Maximum Award	Mechanism Weighting	Maximum Award	Mechanism Weighting	Maximum Award
Energy Savings			76.50%	8.278	80%	2.165	80%	4.473	80%	1.665
Market Effects			6.40%	0.688	10%	0.271	10%	0.559	10%	0.208
Performance Adder			17.10%	1.853	10%	0.271	10%	0.559	10%	0.208
Totals			100.00%	10.819	100%	2.706	100.00%	5.591	100.00%	2.081
At 110% of the cap (7.7%)				10.82		2.976		6.15		2.29
7% Cap				9.84		2.706		5.591		2.082
Program Budgets				140.51		38.654		79.869		29.739
Energy Savings and Weightings			PG&E			SDG&E			SCE			SCG
			Award Weight	Target Award	Energy Savings	Award Weight	Target Award	Energy Savings	Award Weight	Target Award	Energy Savings	Award Weight		Target Award		Energy Savings
	MW		22%	$ 1.791	63.9	20%	$ 0.433	18.5	25%	$ 1.118	47.89
	mWh		65%	$ 5.373	210,696	59%	$ 1.277	112,606	75%	$ 3.355	247,566	34%		$ 0.566		13,767
	Therms (000s)		13%	$ 1.114	3,864	21%	$ 0.455	2,809				66%		$ 1.099		7,899

Weighting

We believe that the overall structure and weighting provided is reasonable. However, it should be standardized across all utilities. Further, the proposed incentives should add up to 100% of the 7% earnings cap¹² and not 110% as proposed by PG&E. We do not believe that there is any reason to include a 10% performance factor because earnings are based primarily on energy savings and not on individual milestones that may or may not be met.

Incentives for Energy Savings

PG&E's and Edison's estimated electric energy savings for PY 2001 programs are substantially lower than both recorded electric savings in PY 1999 and projected electric savings for PY 2000.¹³ Only SDG&E's projected electric savings are greater than savings recorded in 1999 and projected for 2000. Further, SoCalGas' estimated therms saved are substantially lower than recorded therms saved in PY 1998 and PY 1999 and projected therms saved for PY 2000. While there have been some changes in the cost-effectiveness inputs on the benefits side, those changes do not explain the drastically reduced energy savings estimated for PY 2001. This is particularly true since we have encouraged the utilities to increase emphasis on energy savings and peak demand savings in PY 2001 while PY 1999 and PY 2000 programs were based to a greater extent on market tranformation programs, under which it is more difficult to assess short-term energy savings.

Given the above, we have substantial doubts regarding the legitimacy of PG&E's, Edison's, and SoCalGas' estimated energy savings for PY 2001. We also have substantial concerns about the proposed design of the performance award mechanism. While it appropriately is based on energy and peak demand savings, the estimated savings are very low and the mechanism provides for scaled performance awards with the attainment of minimal energy savings. This proposal neither meets our objective of encouraging maximum energy and peak demand savings in PY 2001 programs nor provides a fair balance of risk and reward. Thus, we conclude that this proposal is not appropriate for use with PY 2001 programs.

We believe that the utilities should take every effort to maximize energy savings and peak demand savings for PY 2001 and that energy and peak demand savings should meet or exceed prior years' savings. The utilities' historical experience provides an appropriate starting point for setting milestones based on energy and peak demand savings. Further, to encourage the utilities to maximize savings, we believe that the utilities should meet a threshold before earnings are awarded.

Thus, we will set the energy and demand savings portion of the milestones to absolute savings targets. This mechanism will ensure that each utility has a clear goal and clear metrics for earning shareholder incentives. By adopting the mechanism set forth below, we believe that earnings appropriately will be based on a balance of risk and reward. While we increase the energy savings that must be attained before an award is earned, for all utilities except SDG&E, we also give the utilities discretion to manage their programs and shift program funds as the need arises. Thus, the utilities are provided with both the incentive and the means to earn these awards, while producing increased energy and peak demand savings to their own benefit and the benefit of ratepayers. This mechanism also obviates the need to address TURN's and REECH's objection to providing incentives on budgets based on carry-over funds because it ensures that the utilities have the incentive to maximize energy savings while providing a stretch over the utilities' estimated energy savings.

The table below summarizes the electric energy (kWh), electric peak demand (kW), and gas (therms) savings goals for each utility. The first set of columns represents the minimum or threshold level of savings that each utility is required to meet in order to earn any shareholder incentives. Once the utility has met this threshold, they will automatically be eligible for 50% of the 80% of shareholder incentives allocated to energy or demand savings. If the utility meets the maximum savings targets in the second set of columns, they will be eligible to earn 100% of their 80% of savings-related shareholder incentives. Shareholder incentive awards will be scalable between the minimum and maximum savings levels reflected in the table below, and between 50% and 100% of potential earnings, respectively. Thus, for example, a 1% increase in savings over the minimum threshold level will result in 52% of shareholder earnings awarded, once savings are verified and reported.

Shareholder Earnings Targets

	Minimum/Threshold (50% earnings)				Maximum (100% earnings)
Program Area	Million kWh	MW	Million therms		Million kWh	MW	Million therms
PG&E
Residential	116.2	44.2		3.1	145.2	55.3	3.9
Nonresidential	295.9	48.3		3.9	369.9	60.3	4.9
New Construction	35.2	8.9		0.2	44.0	11.2	0.3
Total	447.3	101.4		7.3	559.1	126.7	9.1
SCE
Residential	83.4	31.7			104.3	39.7
Nonresidential	185.3	30.2			231.7	37.8
New Construction	42.1	10.7			52.6	13.4
Total	310.9	72.7			388.6	90.8
SDG&E
Residential	17.8	6.8	0.7		22.3	8.5	0.8
Nonresidential	44.8	7.3	0.3		56.0	9.1	0.3
New Construction	18.4	4.7	0.1		23.0	5.8	0.2
Total	81.0	18.8	1.1		101.2	23.4	1.3
SoCalGas
Residential	4.6	2.4	1.8		5.7	3.1	2.2
Nonresidential	2.3	0.5	4.3		2.9	0.7	5.3
New Construction	10.4	3.7	0.3		13.0	4.6	0.4
Total	17.4	6.7	6.4		21.7	8.4	7.9
Grand Total	856.5	199.5	14.7		1,070.7	249.4	18.4

These targets are based on an analysis of historical effectiveness of utility investment in energy efficiency programs (measured in dollars per kWh or dollars per therm)¹⁴. We direct the utilities to provide estimations of energy demand savings for the first half of 2001 in their June quarterly reports.

For achievement of the savings goals above, each utility will be eligible for the following maximum award levels. The percentage earnings are weighted appropriately for each utility, as shown in the table. The energy and demand savings reflected in the table above have also been revised to take into account comments received on the draft version of this Decision. First, based on comments from PG&E, an increase in the adjustment/uncertainty factor described above, from 10% to 20%, was included to account for the larger effect of the change in net-to-gross ratio assumptions.

The new construction targets for all utilities were also revised on the basis of comments from SCE and several other parties. In particular, the new targets utilize the following methodological changes:

· On the assumption that the utilities' proposed PY2001 energy savings and budgets took into account likely changes to building codes (Title 24) in 2001, as the utilities state in their comments, a statewide projected average $/kWh for PY2001, as included in each utility application, was calculated.

· The statewide average projection was then combined with each utility's three-year historical average $/kWh effectiveness for new construction. This approach balances utility-specific considerations with SCE's concern that it not be held to a higher standard than other utilities based on past performance.

· This approach also acknowledges that changes to building standards are not likely to begin to affect utility savings calculations until at least the middle of 2001.

In addition, for SoCalGas in particular, the balance between electric and gas savings targets was revised to account programmatic changes SoCalGas has made under the direction of the Commission, as detailed in their comments, to emphasize electric savings over gas savings. Specifically, SoCalGas' electric savings targets were increased by 40%, while their gas savings targets were decreased by 40%.

Shareholder Incentive Maximum Earnings: Energy and Peak Demand Savings

	Maximum Earnings Potential for Energy and Demand Savings ($ million)
Program Area	kWh savings	Peak MW savings	Therm Savings	Total, Savings
PG&E
Residential	1.69	0.56	0.56	2.82
Nonresidential	2.09	0.70	0.70	3.48
New Construction	0.94	0.31	0.31	1.57
Total	4.72	1.57	1.57	7.87
Weighting	60%	20%	20%
SCE
Residential	1.22	0.41		1.62
Nonresidential	1.47	0.49		1.96
New Construction	0.67	0.22		0.89
Total	3.35	1.12		4.47
Weighting	75%	25%
SDG&E
Residential	0.50	0.17	0.17	0.83
Nonresidential	0.53	0.18	0.18	0.88
New Construction	0.27	0.09	0.09	0.46
Total	1.30	0.43	0.43	2.16
Weighting	60%	20%	20%
SoCalGas
Residential	0.10	0.10	0.30	0.50
Nonresidential	0.16	0.16	0.49	0.82
New Construction	0.07	0.07	0.21	0.34
Total	0.33	0.33	1.00	1.67
Weighting	20%	20%	60%
Grand Total	9.71	3.46	3.01	16.17

Utilities will be eligible to earn these incentives on a program area basis, and not on a portfolio basis. In order to encourage the utilities to meet all of their targets, however, we will give utilities who meet all of their program area and kWh, MW, and therm savings targets a 5% shareholder incentive bonus. The bonus will be equal to 5% of the 7% of program budgets, and will reduce to 5% the amount of shareholder incentives available under the performance adder mechanism, as detailed below. Thus, each utility will be eligible for the 5% bonus, as shown in the table below.

Utility	Potential bonus for meeting all program area savings targets ($million)
PG&E	0.49
SCE	0.28
SDG&E	0.14
SoCalGas	0.11
Total	1.02

Shareholder Incentives for Market Effects and Information Programs

We will adopt the market effects and performance adder awards as proposed by the utilities. We will reduce the level of potential earnings through the performance adder mechanism to 5%, as discussed above, to accommodate a potential bonus for meeting all energy and demand savings targets shown above. The shareholder incentive for each utility is described as follows:

Shareholder Incentive Maximum Earnings: Market Effects (10%)

and Performance Adders (5%)

Utility	Market Effects Incentives ($million)	Performance Adder Incentives ($million)	Total Potential Earnings ($million)
PG&E	0.98	0.49	9.84
SCE	0.56	0.28	5.59
SDG&E	0.27	0.14	2.71
SoCalGas	0.21	0.11	2.08
Total	2.02	1.0	20.21

We recognize that information programs are an essential part of the utilities' programs. The fundamental issue to be addressed concerns the type of information program and the success of the program in reaching customers. We expect that the utilities will tie the performance adder to targeted outreach of underserved communities and new distribution/marketing methods instead of on spending funds for more bill inserts or other information programs that have not produced results in the past.

No Ex Post Measurement of Net Benefits

We do not adopt ORA's proposal to return to pre-1998 recorded net benefits milestones for calculating shareholder incentives based on ex post savings measurement. While there is merit to this approach, we believe that it is best considered with respect to post-PY 2001 program planning.