3. The TRC Definitions that are the Basis of the Joint Petition
The TRC test is a measure of energy efficiency program cost-effectiveness to the utility ratepayers to whom the revenue requirements as well as benefits accrue. Accordingly, the opening statement of intent in the SPM emphasizes the inclusion of all program costs associated with this activity:
"The Total Resource Cost Test measures the net costs of a demand-side management program as a resource option based on the total costs of the program, including both the participants' and the utility's costs."8
This all-inclusive theme on costs continues throughout the SPM TRC formulation and discussion:
"The costs in this test are the program costs paid by both the utility and the participants plus the increase in supply costs for the periods in which load is increased. Thus all equipment costs, installation, operation and maintenance, cost of removal (less salvage value), and administration costs, no matter who pays for them, are included in this test. Any tax credits are considered a reduction to costs in this test."9
In simple formula format, the TRC benefits represent the costs of the supply-side resources avoided or deferred by the program activity, while the TRC costs are defined as:
Program Administrator Costs (PRC) + Participant Costs (PC)10
There has been a long history of Commission effort to uphold the integrity of the TRC formulation by ensuring a correct accounting of all costs and all benefits.11 When calculating this summation of costs for various program delivery designs, care must be taken to simultaneously ensure that all costs are counted but that no costs are double counted. This missing or double counting issue can be a problem with any of the terms of this formula.
The Joint Petition proposes that D.06-06-063 be modified to reflect the following rules for defining the cost components of the TRC test:12
· "In situations where a direct install program does not bill or collect from the customer for any portion of the costs, then all the costs except those attributable to free-riders should appear as program administrator costs and the participant cost should be zero."
· "If the incentive is to offset a specific participant cost, as in a midstream/upstream or direct install type incentive, the full customer cost must be included in the TRC test as a participant cost excluding costs attributable to free-riders. When dollar benefits do not go directly to the participating customer, the participant cost must be reduced by the incentive attributable to offsetting or paying for the participant cost."
As discussed below, we examine these proposed changes in the context of our current definitions of TRC cost terms, and examine whether they would act to either double count or exclude some program costs collected from ratepayers and paid to either participants or other market actors. We describe our current definitions of the terms that appear in the TRC formula, including the manner in which we account for free riders pursuant to D.07-09-043.
3.1. TRC Benefits
The TRC test looks at the resource benefits to all ratepayers resulting from the utility program--those that accrue to both program participants and non-participants. More specifically, TRC benefits represent the costs of the supply-side resources avoided or deferred by the program activity.
The SPM defines TRC benefits as "calculated using net program savings, savings net of changes in energy use that would have happened in the absence of the program."13 In D.05-04-051, the Commission makes clear that net savings, in the context of energy efficiency programs, is defined as savings net of "free riders," that is, net of program participants who would have purchased the energy efficiency measure without the utility program. We sometimes refer to the actions of free riders in a resource planning context as "naturally occurring" energy efficiency. Therefore, to calculate TRC benefits, we apply a net-to-gross (NTG) ratio to the resource savings produced by the program activity. The NTG ratio is defined as the proportion of participants that are not free riders, e.g., a NTG ratio of 80% means that 20% of the program participants are free riders. In this way, the TRC formulation only counts the participant savings resulting from program participation, and not any savings that would have occurred anyway including those effects due to free riders.
3.2. Incentives Paid to a Participant (INC Term)
In order to define other TRC terms, it is necessary to describe the "INC" or "incentive" term that is used in the SPM definition of the TRC test. As we discussed in D.06-06-063, the SPM defines the INC term very narrowly as the type of incentive that can be treated as a transfer payment in the SPM TRC formulation. The definition of the INC term, as set forth in the SPM, is restricted to "dollar benefits" such as rebates or rate incentives (monthly bill credits) paid by the sponsoring utility to the customers participating in the program:
"Some difference of opinion exists as to what should be called an incentive. The term can be interpreted broadly to include almost anything. Direct rebates, interest payment subsidies, and even energy audits can be called incentives. Operationally, it is necessary to restrict the term to include only dollar benefits such as rebates or rate incentives (monthly bill credits). Information and services such as audits are not considered incentives for the purposes of these tests. If the incentive is to offset a specific participant cost, as in a rebate-type incentive, the full customer cost (before the rebate) must be included in the PCt term." 14
Moreover, the SPM is very clear that the term "participant" refers to the customer participating in the program, and that this transfer incentive (INC) is one that is paid directly to the participating customer.15 As discussed in the SPM, the INC dollar rebates or rate incentives can intuitively be thought of as cancelling because they appear both as a cost to all ratepayers on the cost side and as a benefit to participating ratepayers on the benefit side of the TRC equation.16
In D.06-06-063, we presented a simplified numerical example to illustrate that if non-participants pay these dollar benefits to participants (in the form of cash rebates or rate incentives), the INC term cancels out completely, assuming that there are no free riders participating in the program. This example is reproduced in Attachment 2. In D.07-09-043, we clarified that when there are free riders, the INC term does not completely cancel out in this way. (See Section 3.3. below.)
3.3. TRC Participant Cost (PC Term) and Program Administrator Cost (PRC Term)
The TRC test measures all the costs paid by the utility and program participants, with the exception that any costs incurred by free rider participants are excluded. More specifically, the SPM states:
"The costs in this [TRC] test are the program costs paid by both the utility and the participants plus the increase in supply costs for the periods in which load is increased. Thus all equipment costs, installation, operation and maintenance, cost of removal (less salvage value), and administration costs, no matter who pays for them, are included in this test. Any tax credits are considered a reduction to costs in this test. For fuel substitution programs, the costs also include the increase in supply costs for the utility providing the fuel that is chosen as a result of the program.17
The SPM defines participant costs (PC term) as those costs paid (or debt incurred) by program participants without consideration of any transfer payment incentive (the INC term, as defined above). These costs account for all labor and materials costs, all tax costs and credits (sales, property and income), any increased or decreased maintenance and operational costs for the life of the measure.18
As discussed above, the savings benefits attributed to free riders are removed from the TRC equation. We remove the total costs that free riders actually incur as well, i.e., the measure cost used for all participating ratepayers less any cost for measure installation reimbursed by the program. Accordingly, we apply the NTG ratio to the PC term (removing these costs for free riders), but then add back the INC costs included in that term that are paid to free riders. As a result, any cash rebates or rate incentives paid to free riders remain in the cost side of the TRC test formulation, along with all other program administrator costs. Attachment 3 presents numerical examples of this treatment from D.07-09-043.19
In D.06-06-063, we reiterated the SPM definition of Program Administrator Cost (PRC) as any program expense except those program expenses that fit the narrow definition of a transfer payment incentive (INC) defined above. This means that the "non-transfer" incentive payments to midstream/upstream market actors and payments to contractors to deliver or install energy efficiency measures at customer premises are included in the PRC term.
More specifically, under the utility "midstream/upstream programs," the utility pays incentives with program funds to manufacturers and distributors in order to buy down the retail price of energy efficiency measures or to stock efficient appliances. Under "direct-install programs," the utility arranges for measures to be either delivered to a participating customer for their installation or to be installed at the customers' premises. As discussed in D.06-06-063, the definition of PRC includes all utility payments to these entities, i.e., to manufacturers, distributors, contractors, builders or energy service companies.
In D.06-06-063 and D.07-09-043, we provided numerical examples to illustrate that inclusion of these non-transfer payments in the PRC term ensures that a direct-install program where the utility or its contractor performs the installation of a measure would not be more cost-effective from a TRC perspective than a rebate program that provides a comparable cash rebate to the customer up to the full cost of installation. We directed the utilities to consistently account for all non-transfer payments in the PRC cost term, and to not treat any direct-install costs or payments to midstream/upstream actors as either participant costs (PC) or transfer incentives (INC) in calculating TRC cost-effectiveness. (See Attachments 2 and 3.)
None of the PRC costs are adjusted downwards by the NTG ratio to account for free riders. As discussed above, we do apply the NTG ratio to the PC term, but only to the un-reimbursed portion of participant costs that free riders pay out-of-pocket to produce the savings they receive.
8 The latest version of the SPM document is entitled: "Economic Analysis of Demand-Side Management Programs," October 2001 (2001 SPM), and can be viewed on the Commission's website at http://www.cpuc.ca.gov/static/energy/electric/energy+efficiency/em+and+v/std+practice+manual.doc. See 2001 SPM, p. 18, TRC chapter opening statement, emphasis added.
9 2001 SPM, p. 18, emphasis added.
10 The SPM formula also includes a "UIC" term that represents any utility increased supply costs associated with the demand-side activity. To simplify our discussion today we do not include this UIC term in the TRC formulation, but in actual application, the calculation of TRC net benefits increase the cost side of the equation (or decrease the benefit side) by any increased utility supply costs.
11 See for example, D.92-09-080, 45 CPUC 2d, p. 569, which is reproduced in Attachment 4 to D.05-04-051: "Total resource costs represents the total cost of obtaining the [demand-side management] program as a utility resource, and include both the program participants' out-of-pocket costs (i.e., customer contribution) and the utility's revenue requirement costs (e.g., rebates, administrative expanse)."
12 Joint Petition, pp. 1-2. Changes to Ordering Paragraphs in D.06-06-063 are indicated in italics.
13 2001 SPM, p. 18.
14 2001 SPM, p. 11, footnote 3.
15 See 2001 SPM, Chapter 2 opening statement and definitions.
16 2001 SPM, p. 18, fourth paragraph, where the SP notes that "the incentive terms intuitively cancel (except for the differences in net and gross savings)." (Emphasis added.)
17 2001 SPM, p. 18 (emphasis added).
18 2001 SPM, p. 11.
19 In D.07-09-043, we discussed how to apply the NTG ratio to the cost terms of the TRC equation in order to ensure that all costs paid by the program that become revenue requirements are included in the TRC cost-effectiveness evaluation.
