V. A&M Costs

1. Parties' Positions - A&M Costs

PG&E proposes to spend $16.4 million in A&M over 4 years, while PG&E projects program revenues of $20.3 million (lower end) to $29.8 million

(high end). PG&E's A&M budget breaks down as follows:

Cost Category	2006	2007	2008	2009	Total
Program administration	$700,000	$1,370,000	$1,120,000	$1,070,000	$4,260,000
Marketing	$600,000	$2,400,000	$4,000,000	$5,000,000	$12,000,000
Total Budget	$1,300,000	$3,770,000	$5,120,000	$6,070,000	$16,260,0002

PG&E arrived at its $12 million marketing budget by calculating how many customers it believes it can attract to the program, and assigning a dollar value to acquire each customer. PG&E terms this its "acquisition cost methodology." PG&E decided that for its program to be in the "Top Ten" of "green power" programs across the United States, as reported by National Renewable Energy Laboratory studies,³ it must achieve a 4-5% participation rate among its customers. It then assumes that it will cost a certain amount to acquire each new customer, based on the experience of other programs, and multiplies the two numbers together to come up with its marketing budget.

PG&E's assumptions about the costs to acquire customers are as follows:⁴

Parties principally challenge the amount of A&M costs, the "acquisition cost" methodology, and PG&E's proposal to have all ratepayers pay the costs, rather than charging them to program participants or PG&E shareholders. DRA, for example, questions whether PG&E can truly call its program voluntary if ratepayers as a whole are bearing - without choosing to - the A&M costs of the program. DRA contends that PG&E's shareholders are benefiting from the program, and therefore should bear some of the costs. DRA notes that PG&E's goal of signing up 4.4% of its customers is a "stretch goal" according to PG&E's own testimony, and that if only 3.2% sign up, PG&E will incur more in A&M costs ($16.4 million) than premiums/emissions reductions ($14.5 million).

TURN believes the methodology PG&E uses to develop the revenue requirements for marketing ($12 million) is inconsistent with the traditional budgeting approach used for other general rate case (GRC) revenue requirements. Second, TURN claims, the total budget is excessive relative to other comparable voluntary programs. Third, the level of the total budget is excessive relative to the level of CPT premium revenues and GHG reduction commitments expected during the relevant timeframe. Thus, TURN agrees with DRA that CPT program participants should pay any A&M costs not covered by PG&E shareholders. It also contends PG&E's marketing costs are too high.

CCSF asserts that the portion of PG&E's A&M budget devoted to marketing - $12 million - is too high. CCSF questions the credentials of PG&E's marketing expert and asserts that the budget therefore lacks detail. CCSF also asks that PG&E redirect some of its A&M budget to CCAR. Rather than contributing $900,000 to CCAR's budget, CCSF asks that PG&E devote additional CPT revenue to CCAR. CCSF is concerned that without additional funding, CCAR's efforts to develop new protocols - including protocols in areas the CCSF favors - will be "derailed."

Aglet asserts that "paying $16.4 million of administrative and marketing costs to achieve $20.3 million to $29.8 million of voluntary revenues seems to be a high price. Charitable organizations and professional fundraisers have lower administrative and marketing costs, relative to net income."⁵ Aglet proposes assigning one half of A&M costs to PG&E's shareholders.

2. Discussion - A&M Costs

A. Demonstration Project

While PG&E's A&M expenses are out of proportion to the revenues it will generate from customers who opt for the CPT,we agree with PG&E that this program is a demonstration program, intended to test the waters and determine the availability of forestry and other GHG reduction contracts, and customer willingness to pay extra for climate neutrality. Thus, it may not be possible to hold this project to strict cost-effectiveness rules, to determine how much of PG&E's budget is reasonable, or to predict how many customers PG&E will attract until PG&E has some experience with the program. Furthermore, expertise in the area of GHG reductions will be necessary and useful for all utilities in the near future given the adoption of AB 32.

We agree, therefore, with PG&E's basic concept that as a demonstration project, the CPT should be small in scope and utilize regular reporting as a check on how the program is working and the reasonableness of its expenses. We also condition our approval of the application on several "accountability" measures to ensure funding is spent wisely.

B. Allocation of A&M Expenses

A number of parties argued against PG&E's proposal to allocate the A&M costs across all PG&E ratepayers. TURN argues that program participants and/or shareholders should bear the A&M costs, on the grounds that the benefits that accrue to non-participants in the form of GHG emission reduction benefits, environmental co-benefits and educational benefits are diffuse and/or uncertain compared to the tangible benefits that they believe will accrue to shareholders. ⁶ Furthermore, TURN suggests that provided the program's premiums are tax deductible, the increased costs resulting from assigning some or all of the A&M costs to program participants will not unduly impact program participation. ⁷ Aglet shares TURN's views that the benefits accruing to all ratepayers in the form of GHG emission reduction benefits are of relatively limited value. ⁸ In light of this and the "good will [sic] benefits that will reach [PG&E] shareholders", Aglet advocates splitting the A&M costs between program participants and PG&E shareholders.⁹ DRA takes issue with the characterization of this program as voluntary if non-participating ratepayers bear the A&M costs of the program, since, unlike those that elect to subscribe to the CPT tariff, they would have no choice regarding their participation in terms of paying for the A&M component of the program.¹⁰ Although CCSF does not assert that some portion of the funding for the CPT should come from PG&E shareholders, it does take the position that PG&E shareholders will benefit from the program by virtue of improvements to PG&E's corporate image as well as from the institutional knowledge PG&E will acquire in implementing an offset program.¹¹

While we agree that many, if not most of the benefits of the CPT are widely dispersed, contrary to parties, we believe this serves to reinforce PG&E's suggestion that the A&M costs be allocated more broadly, to all PG&E ratepayers, rather than more narrowly, to program participants and/or PG&E shareholders. The CPT program offers a variety of distinct benefits; direct GHG benefits, in the form of actual GHG emission reductions achieved via offsets procured on behalf of program participants, co-benefits derived from the offset projects themselves, and educational benefits associated with informing customers of the dangers of global warming and what actions will be necessary in a carbon constrained world. In addition, as California implements a statewide cap on greenhouse gas emissions as mandated by AB 32, the CPT will allow PG&E to gain valuable information and experience in understanding the market for offsets and the costs and benefits of using offsets as a risk mitigation tool. None of the parties dispute these specific benefits per se, rather they characterize them us diffuse and uncertain and question whether it is appropriate that ratepayers should bear any program costs.

A costs to all PG&E ratepayers is consistent with how we have assigned costs in the context of other programs that offer substantial public benefits, including energy efficiency, the Self Generation Incentive Program (SGIP), and the California Solar Initiative (CSI). One of the core rationales for ratepayer support in the context of these programs is that the public benefits derived from the deployment of energy efficiency and distributed generation exceed the private benefits. Absent public support, the market would, from a societal standpoint, under-invest in these technologies. Public support is intended to drive more socially optimal levels of investment by internalizing the public benefits and/or by reducing the transaction costs participants may face. The disconnect between public and private benefits is particularly acute in the case of the CPT, where the benefits received by program participants do not significantly differ from the benefits received by all ratepayers, even though the participants will bear the majority of the costs of the benefits for a longer period. Thus there is a strong case from a public policy perspective for offsetting at least some of the costs participants would otherwise incur in order to neutralize their GHG emissions. By covering the A&M costs of the program, ratepayers will be facilitating voluntary actions by others that result in significant public benefits. We expect that the A&M costs will decline significantly after the first years of the program, but participants will continue to pay the offset premium.

It is worth noting that the argument that GHG emission reduction benefits are diffuse and/or uncertain and therefore should not receive ratepayer support also conflicts with other policies implemented by this Commission, inasmuch as many of these policies have used ratepayer dollars to reduce the carbon footprint of the energy sector. The Commission has recognized that it is in the long term interests of ratepayers to require the utilities to factor in the significant risk of future carbon regulation in their procurement decisions. For example the carbon cost adder, adopted in 2004, incorporated the price of carbon into the bid evaluation process for resource procurement. This policy could increase ratepayer costs by compelling the utilities to select less carbon intensive generation over more carbon intensive generation, even if the more carbon intensive resource offers lower prices in the short term. The exclusive purpose of this policy is to reduce GHG emissions.

DRA's argument that a voluntary program cannot, by definition, assign the A&M cost to all ratepayers regardless of whether they have signed up for the program, ignores the practical realities of such an approach. Whereas assigning all of the A&M costs to program participants will significantly boost the monthly premiums of program participants, from $4.31 to $7.33¹², the monthly bill impacts associated with assigning these same costs to non-participants are negligible, on the order of $.02 to $.04.¹³ We expect this amount to significantly decrease over time, while the emissions reductions will be permanent. While it is true that non-participants would not have a choice regarding paying this amount, on an individual ratepayer basis the impact is de minimus in comparison to the $4.31 in monthly premiums that program participants would voluntarily pay to secure environmental benefits that accrue to everyone. Thus, from a material standpoint, the program remains very much voluntary with non-participants facing negligible monthly bill increases while program participants voluntarily expose themselves to substantially larger increases.

It is also important to recognize that at this point, it is unclear how sensitive prospective participants are likely to be to program costs. The point of departure on this issue is the Hiner study that PG&E submitted in its rebuttal testimony. The study's results indicate that there is a marked decrease in customers' stated willingness to participate in the CPT if doing so will cause their bills to rise by more than 4 percent. The study thus recommends that PG&E set the premium such that the typical bill will not increase by more than this amount.¹⁴ TURN specifically cites to this when it proposes that premiums could be increased from the $4.31 per month that PG&E proposes to $5.75 or $8.00 per month (depending on the whether the premiums are tax deductible) without violating the 4 percent threshold identified in the study. According to TURN this would allow at least some of the A&M costs to be born by program participants without adversely affecting program participation.¹⁵ While TURN's argument is not without merit, the study itself indicates that the 4 percent threshold should be used with caution noting that, "Many other factors will determine actual marketplace acceptance, such as actual tariff design, marketing and communications and changes in base rates. The [results] should be considered an optimistic `best case'."¹⁶ Elsewhere the study indicates that the results should be used as "best case maximums"¹⁷ and that "actual sign-ups might not approach these estimates."¹⁸ The study also notes that the business sample, at only 100, is "relatively small".¹⁹ In light of this uncertainty and the relatively minimal bill impacts of allocating the A&M costs across all ratepayers, we conclude that it is reasonable to assign these costs accordingly, rather than risk program failure by forcing program participants to bear a large share of the A&M costs. As we gain more experience with the costs involved with implementing this program and the level of consumer interest in the program, we can revisit the allocation issue.

C. Shareholder Contribution Not
Required, But Strongly Encouraged

We are not prepared to require PG&E at this juncture to have its shareholders bear the A&M costs. We do agree with several of the parties that a successful anti-global warming program would bring PG&E goodwill, especially in the current environment where such programs are front page news.²⁰ PG&E also provided precedent for shareholder funding of other programs, such as its

Solar Schools and REACH programs.²¹

Of course, nothing in this decision prohibits PG&E from using shareholder funding to bear costs of the program, and we strongly encourage PG&E to consider such funding here. We do not find that PG&E's arguments against shareholder funding have merit. PG&E states that shareholders never pay the costs of its public purpose programs, such as its energy efficiency program or its low income programs such as California Alternative Rates for Energy (CARE) and Low Income Energy Efficiency (LIEE). However, the public purpose programs are not voluntary programs such as PG&E's proposed CPT. Rather, we require PG&E to spend hundreds of millions of ratepayer dollars on energy efficiency and CARE, and give PG&E significant financial incentives to compensate it for lost revenue from lower energy use attributable from energy efficiency. These mandatory programs are far different from a voluntary program where PG&E makes the rules. If PG&E wants to design its own program, it is reasonable for PG&E to make a contribution to the program's success.

Indeed, as Aglet points out, PG&E's own marketing study conducted to test customer willingness to buy the CPT found that more than 60% of PG&E customers say they would be more likely to sign up for the voluntary rate premium if "PG&E would contribute some of its own shareholders' profits to the fund."²² PG&E may have greater success with the program and gain a great deal of public goodwill if it demonstrates its commitment to its own program by making this shareholder contribution.

² The difference between this total and $16.4 million is attributable to franchise fees and uncollectibles.

³ PG&E's program is not technically a "green power" program. CPT premiums will purchase emissions reductions from reforestation, not clean/green power such as wind or solar.

⁴ PG&E Exhibit 1, at 3-21.

⁵ Aglet amended opening brief at 2.

⁶ TURN opening brief, at 28-37.

⁷ Id. at 29-30; TURN reply brief at 16-17.

⁸ Aglet reply brief, at 7

⁹ Id.

¹⁰ DRA opening brief at 11.

¹¹ CCSF opening brief at 28-30.

¹² Ex. 3 at 1-8.

¹³ PG&E opening brief at 59.

¹⁴ PG&E rebuttal testimony A-1, "Pacific Gas & Electric Company: 2005 Climate Protection Survey", at 12, 15.

¹⁵ TURN opening brief at 29-30.

¹⁶ PG&E rebuttal testimony A-1, "Pacific Gas & Electric Company: 2005 Climate Protection Survey", at 42.

¹⁷ Id. at 12.

¹⁸ Id. at 28.

¹⁹ Id. at 42.

²⁰ Aglet cites a number of reasons it contends shareholders will benefit from the CPT. PG&E highlights its leadership role in energy efficiency programs and procurement of renewable energy; leadership leads to goodwill benefits. PG&E is proud of its contributions to environmental causes. In a customer survey about the CPT, more customers than not said their opinions of PG&E would improve as a result of the program. PG&E states that "the utility will be known for supporting preferred public policies" and "perhaps there is some difficult to quantify shareholder benefit from early action by pro-active companies such as PG&E." PG&E has an "ambitious vision ... to be the leading utility in the United States." Achievement of that vision includes commitment to the environment and "funding for a number of `beyond compliance' activities, chief among them [being] those efforts intended to address the very serious global issue of climate change." (Citations omitted; see Aglet amended opening brief at 11.)

²¹ PG&E's Solar Schools program funds solar energy installations in underfunded schools, as well as teacher science training and grants for solar science projects. Under the REACH program, PG&E partners with the Salvation Army to provide financial assistance to low-income customers. PG&E's shareholders fund the A&M costs, while PG&E's customers make tax deductible donations to the program on their utility bills. TURN cited several other shareholder-funded utility projects:

PG&E has also provided shareholder contributions to support conferences held by CCAR. Additionally, PG&E shareholders pay for a variety of company activities including political donations and all costs associated with fighting municipalization efforts. Other utilities in California have made shareholder contributions to support demonstration programs. For example, San Diego Gas & Electric spent "several million dollars of shareholder money" on a pilot project to test broadband over power lines. (TURN opening brief at 36.)

Aglet notes another shareholder-funded PG&E program. In D.00-02-046, 4 CPUC3d 315, 473-75, the Commission denied PG&E's request for rate recovery of business retention and attraction expenses. PG&E continued program activities despite lack of rate support. Ratepayers have not paid for PG&E's customer retention efforts since before 1999, if at all. (Aglet amended opening brief at 13.)

²² Exhibit 3, Appendix A-1, p. 23.