Discussion

PY 1998

The following table summarizes the utilities' requested shareholder incentive amounts under consideration for PY 1998 energy efficiency programs, and ORA's recommendations:

The utilities argue that their requested PY 1998 energy efficiency incentives have complied with Commission directives for market transformation and that these incentives should be paid in one installment since no long-term measurement studies or ex post verification of program results are needed. They argue that the incentives may be based on both actual and committed dollars for programs, some of which have not yet taken place. The utilities expected these incentive claims to be approved for recovery in 2000.

ORA argues that ex post verification of the PY 1998 energy efficiency programs is necessary to insure that the programs lead to cost-effective conservation and improve the state's energy efficiency. ORA believes that CBEE failed in its responsibility for verification, and the self-verification proposed by the utilities is inadequate. Therefore, much of the earnings claims of the utilities should be deferred until adequate, independent verification can be accomplished. ORA stresses that the approximate $300 million per year of energy efficiency and low-income programs require verification in order for the Commission to have confidence that the expenditures lead to cost-effective conservation investments and support programs that will improve the overall energy efficiency of the state.

We note that in the Policy Rules appended to D.97-12-103, Policy Rule III.G. states in part, "The CBEE will be responsible for verifying the performance results of the interim administrator and making recommendations to the CPUC on the reward payments."

Subsequently in D.99-03-056 we stated that at mimeo. p. 28,


"We believe that the Commission's decision making process is best served by the current approach to earnings verification. Currently, the utilities present their proposals for earnings claims, based on the earnings verification efforts of their staff and consultants. ORA evaluates those claims using technical consultants where necessary, and those consultants are paid for by the utilities. In addition, the Commission obtains an independent review via the technical consultants procured by the Energy Division. ORA is not required to hire consultants for its part of the review process, and we have never required that they do. However, we remain committed to affording that opportunity, with funding provided for by the utilities." (Id. mimeo. at p. 28.)

Therefore, it is clear that ORA has the responsibility for evaluating the utilities' performance claims, and should have been aware of that fact. D.99-03-056, dated March 25, 1999, not only preceded the utilities' May 1, 1999 filings in this proceeding, but substantially preceded the August 24, 1999 beginning of evidentiary hearings, and more significantly the November 8, 1999 beginning of this Phase 2 of evidentiary hearings. Thus, we deny ORA's request that performance awards be delayed until adequate verification can be accomplished. ORA was responsible for verification and had adequate time in which to accomplish it.

The deferral recommendation of ORA is heavily based on the "committed" status of a portion of the programs, which obviously cannot be verified at this time. ORA notes that once these committed energy efficiency projects are installed it will be possible to subject the programs to verification, and considered in a future AEAP proceeding. ORA states in Ex. 57 (p.11),
" . . . the portion of the earnings claims associated with this deferral category should be considered interim, and `subject to modification.'"

ORA recommends rejection of certain of the earnings claims associated with upstream market transformation programs, based on apparent lack of energy reduction benefits and possibly no recorded net benefits. These amounts are substantially smaller than the amounts ORA recommends for deferral. ORA offers only a few examples; SoCal's claim for American Gas Association (AGA) advertising, and PG&E's program evaluation studies consisting of conducting meetings and paying out-of-state entities to sell lighting fixtures, but offers little detailed justification for these rejections. The total rejections ORA recommends are $2.1 million for PG&E, $1.2 million for Edison, $0.2 million for SoCal, and $1.3 million for SDG&E, while the recommended deferrals range from $1.8 million to $8.1 million. ORA states that the rejection category will not be verifiable for reduced use of electricity or gas. While acknowledging the Commission's goal for upstream market transformation, ORA believes it will be years before evidence of reduced energy usage could be verified, and therefore allowing PY 1998 earnings recovery would be inappropriate.

We believe that ORA's objection is based on a policy-level disagreement with upstream market transformation because it does not produce readily verifiable results, especially in the near term. Nevertheless, the Commission is aware of this fact and considered it in adopting policies that encourage market transformation.

We note that some challenges to the verification of the utility programs are not based on parties' review but rather on concerns that the consultants used by the utilities are judged to be not adequately independent. We have no evidence of improper verification by the utilities' consultants and thus have no reason to withhold recovery of performance incentives. We agree that commitments should be subject to verification, but we also believe that the payment of the claims should not be substantially delayed pending this verification. Our intent has been to encourage the utilities in the energy efficiency programs by not unreasonably delaying payment of the shareholder incentives, and we do not intend to change that approach here.

We disagree with ORA's contention that these programs must be reviewed on an ex post basis to determine whether they are cost effective or improve energy efficiency. The transition to market transformation reduces the need for such individual verification. Instead, we require verification that the portfolio as a whole is cost-effective. For example, under Policy Rule IV-1.


"PGC funded activities are expected to be cost effective using the public purpose test8 (as the standard for cost effectiveness) which is defined in rule V-1 and Attachment B. A prospective showing of cost effectiveness for the entire portfolio of PGC-funded activities and programs (i.e., individual programs, plus all costs not assignable to individual programs, such as overhead, planning, evaluation, and administrator compensation and performance incentives) is a threshold condition for eligibility for PGC funds." (Emphasis added.)

We also deny the rejections of the earnings claims based on upstream market transformation programs proposed by ORA. ORA offers no real basis for this disallowance other than a level of discomfort with the approach.

TURN and REECH agree with ORA that earnings claims for committed funds should be deferred until the Commission verifies that the funds were actually expended, to avoid the risk of ratepayers paying for programs that were never started. For the same reason, those parties also advocate that one-year recovery of the claims should not be allowed.

As we indicated above, the utilities should not be paid for programs that never occur. However, rather than separating recorded program expenditures from commitments as of a specific date, we will allow incentives based on both recorded and committed funds at this time. The rates and incentives we authorize in this order for PY 1998 energy efficiency programs will be subject to future true-up based on recorded amounts. ORA should, and other parties may, monitor the utilities to determine whether commitments have materialized and should recommend any shortfall that must be trued-up in a subsequent AEAP proceeding. The utilities must track committed and expended funds in a uniform and transparent way, to facilitate this true-up approach.

We next consider the recommendations of TURN for specific disallowances for certain of PG&E milestones. TURN argues for a disallowance of $73,000 for PG&E's failure to adequately verify three milestones.

First, TURN argues that Milestone 18-MS2 of PG&E fails to link the Energy Star Labeling program activities to potential market transformation. The milestone requires that PG&E demonstrate through a market research survey that 10% of the customers in the market for appliances in 1998 became aware of the Energy Star Label. PG&E's Energy Star Report by a consultant in Exh. 69 summarizes the results of field interviews of outside major appliance department stores shoppers at various locations. The result was that 5% said they knew an appliance was energy efficient by the Energy Star Label, and when shown the Energy Star Label, 43% said the label means that the appliance is energy efficient. TURN argues that the results of PG&E's field interviews do not demonstrate that customers became aware of the Energy Star Label through the program. PG&E counters that the 43% recognition of the Energy Star Label demonstrates that its marketing campaign to increase awareness was successful. We conclude that PG&E met the milestone. The fact that it was a new label, yet 43% of those interviewed recognized it as indicating energy efficiency, offers adequate evidence that PG&E's efforts complied with the milestone, and we will grant the associated incentive of $33,000.

Next TURN argues that the $33,000 incentive for PG&E's Milestone 26-MS2 should be disallowed. This milestone deals with lighting controls, with the stated goal to " . . . Increase the awareness of the new tools and data base developed by the program for at least 30% of the system manufacturers and professional organizations targeted." TURN argues that PG&E furnished only information regarding a roundtable discussion in San Antonio, Texas, with the minutes and data presented there. TURN notes that no survey or quantitative information was furnished to satisfy the requirements of the milestone. PG&E responds that since it addressed most of the firms manufacturing daylighting dimming devices which is the critical component in daylighting systems, it increased the awareness of well over 30% of manufacturers supporting the technology. We find that although this activity has obvious worth, PG&E did not satisfactorily demonstrate the 30% awareness increase. Thus, we will disallow half of the requested incentive, or $16,500. This is a small amount, but it is significant with respect to holding the utilities accountable to the requirements set forth in the milestones.

Finally, TURN argues that PG&E did not meet the requirements of Milestone Number 35 of the Regional and National Alliances program, for which it claims an incentive of $7,000. This milestone requires that PG&E participate in regional and national collaborative efforts with the goal of producing new program opportunities and/or improving existing programs. Verification requires a report detailing the participation, but TURN notes that no report was offered and apparently none was done. PG&E argues that there is not a single report but a compilation of the source documents describing PG&E's collaborative activities that satisfy the milestone

We find that PG&E adequately complied with the reporting requirements for this milestone. Since, as PG&E notes, the efforts of market transformation are rarely evident in a single year, we don't believe that a separate report is necessary for this milestone. The information provided thus far in separate documents is adequate, and the request for a disallowance for this milestone is denied.REECH argues for a number of disallowances on PG&E and Edison residential programs, as follows:

Table 1 - PG&E Selected Residential Programs

No.

Program/Milestone (MS)

PG&E Award Claimed

REECH Recommendation

2

Res Single Family - EMS

55,000 SFR audits

30,000 Student packets

Transition strategy for

New Admin. Hand-off

$165,000

$82,500

10

CA Home Energy Rating System (CHEERS)

$8,000

-0-

32 MS 1

Energy Information Center Integration Project

$18,000

-0-

    MS 2

All Market-Segment access to Centers

$26,000

-0-

PG&E Source: Exhibit 37; Vol. III, Annual Report, Technical
Appendices, Tables TA6.1, TA6.2

Table 2 - SCE Selected Residential Programs

Program Name

SCE Award Claimed

REECH Recommendation

EMS - Residential

$90,000

-0-

EEI-Residential Financing

6,000

-0-

CHEERS

15,000

-0-

TPI-Energy Design Software

50,000

-0-

TPI-Home Warranty

26,000

-0-

TPI-Software Tool for Residential

    Energy Use Analysis

10,000

-0-

SCE Source: Exhibit 46: 1999 EEAD, Table TA6.2

REECH argues that for Item 2, PG&E could not show any activity associated with the development of a transition strategy to hand off service to a new administrator, and thus the requested $165,000 incentive for the milestone should be halved. PG&E responds that it had begun developing the strategy during the original nine months in which it was to manage the programs, and then turn them over to an administrator. When PG&E's responsibility as program administrator was extended, it ceased developing a written format. PG&E argues that it would have been a waste of ratepayer funds to develop a transition strategy when the new program administrator was not identified, and thus it ceased developing the report. However, PG&E requests the full incentive. Even though the Commission did not transfer the responsibility to a new administrator, the development of a report may have value for the future. However, we find that PG&E is clearly not entitled to the full incentive, and it acknowledges that it stopped activity regarding the transition strategy. We conclude that disallowing half of the incentive is reasonable, and that this amount fairly compensates PG&E for its partial completion of this goal.

Next, REECH argues that PG&E and Edison maintained directors on the board of the CHEERS which did not report performance related to audits, ratings or actual home measure upgrades. Thus, no incentive is warranted. PG&E responds that the milestone requires it to develop upstream partnerships with organizations such as Federal Housing Authority, Fannie Mae and Freddie Mac to bring energy efficiency mortgages to California, and that PG&E did this by supporting CHEERS. In 1998 PG&E signed a Memorandum of Understanding between CHEERS and the United States Department of Agriculture (USDA)/Rural Housing Services (MOU) to use CHEERS as an alternative to the energy standards of the USDA, and to increase awareness of both the loan program and energy efficiency. The USDA/Rural Housing Services offers a government loan program to assist first-time and low to moderate-income homebuyers. PG&E renewed the MOU for 1999 and thus believes that it satisfied the goal of the program, and that REECH's objection is with CHEERS. We find that PG&E and Edison complied with the requirements of the program as demonstrated by the MOU. We will allow this incentive in the full amounts of $8,000 and $15,000, respectively.

REECH recommends that no incentive be granted for PG&E's Energy Center milestones MS-1 and MS-2. MS-1 is defined as: "A comprehensive analysis and implementation plan for state-wide integration of energy centers will be complete by June 1, 1998, with recommendations as to their organizational structure, funding, staffing, facilities and target markets." MS-2 is defined as: "Ensure that all market segments have access to resources of an energy center for those who live within major metropolitan centers in the state, including SF/Bay Area, LA Basin, Sacramento/Stockton, Bakersfield/Fresno, Redding/Chico/Eureka." REECH argues that no evidence or awareness of integration of the utility energy information centers was offered, and that only a report that senior program managers are unaware of was produced. PG&E states that the each of two reports it produced on energy centers in a deregulated environment make recommendations for development of energy centers. We conclude that the reports produced satisfy the milestone requirements by making the required recommendations. REECH's request for disallowance for these PG&E milestones is denied.

REECH is troubled by the verification problems for some of the PY 1998 residential energy efficiency programs, which were not subject to independent verification. REECH argues that programs that are reviewed internally or by third-party firms under contract to the utilities, cannot be independently reviewed. We disagree. As we stated earlier we have no evidence that the utility consultants are not adequately independent.

REECH argues that no award is justified for Edison's Energy Management Services (EMS) verification, which were self-verified with inadequate submittals, in REECH's view. Edison responds that it supplied the same verification documentation, in this earnings claim that it supplied in each of the last four AEAP proceedings. This verification has been deemed acceptable by ORA and adopted by the Commission in those proceedings. If REECH was not satisfied with this information, it could have further researched the matter and brought forth recommendations based on its own findings for the Commission to consider, in Edison's view. The documentation was provided in Exhibit 9 with errata in Exhibit 71, detailing the goals, pre-verified, and verified results. We note that the actual results exceed the goals with one exception, kilowatt (kW) saved in turnkey in-home audits. However even in that category, the kilowatt-hours (kWh) saved exceeds the goal. For the total EMS portfolio, kWh saved and kW saved exceed the goals by 44% or more. The total budget for the EMS portfolio is approximately 15% less than the estimate. Considering these results, we disagree with REECH, and conclude that the evidence submitted by Edison is adequate and that the incentive should be granted in full.

Next, REECH argues that Edison's residential financing and the home warranty projects were failures and deserve no shareholder incentives. REECH notes that there were only seven loans and no warranties sold, and neither program was renewed.

Edison argues that these are innovative programs, and that the residential financing program was a result of recommendations by CBEE and delivered by a third-party vendor. Edison notes that the Commission desired to promote third-party initiatives in order to foster innovation in the energy efficiency industry, and that not all third-party ideas will be successful. The reasons for the limited success of the home financing program were stringent Fannie Mae loan requirements, and competing loan options. In an attempt to overcome these obstacles, Edison offered contractor incentives for most of the loans, negotiated a reduced interest rate, and offered a free CHEERS rating on the financing process. The lender finally reduced the stringent financing requirements but by then interest rates had increased.

Similarly, Edison notes that the home warranty program, approved by the Commission, was designed and delivered by a third party. In addition to offering the ease of mind associated with a warranty, this program offered free services that included a home energy audit, recommendations for improving energy efficiency, and specified home equipment upgrades. Because of the complexity of the program, much of 1998 was spent in setting up the necessary infrastructure for the program, and no warranties were sold. Edison argues that denying incentives for these programs will only stifle innovation.

We conclude that the difficulty in making loans more attractive resulted in changes that were implemented too late to result in success. This was beyond Edison's control. Similarly, the home warranty program arrived too late in PY 1998 to be effective due to the complexities of the program. Nevertheless we conclude that Edison is properly entitled to the incentives for these programs, to the extent that they met the milestones. The fact that neither program was very successful does not detract from the intent and apparent good faith effort put forth into the programs. For the residential financing program, Edison met only the performance adder milestone with a 5% shareholder performance incentive, and failed to meet the shared savings milestone. The home warranty program met the performance adder milestone for a 10% shareholder performance incentive. No other milestone applies to the home warranty program.

Finally, REECH argues that Edison has provided no disclosure of rights or protections to the public regarding license control and software pricing associated with third-party initiatives for energy design software and the software tool for residential energy use analysis, and therefore its claims should be denied. Edison responds that this issue has nothing to do with milestones. We have not required the protections and conclude that Edison is entitled to the incentives for both of these third-party initiative software milestones.

Next, we consider whether the utilities should collect the incentives over a period of one year or longer. We believe it is appropriate to use a period shorter than the ten years used previously, consistent with our determination stated in D.97-12-103, that it is reasonable to reduce measurement studies and payment installations in return for a signification reduction in potential rewards. The Commission also concluded that:


"Reducing the utility's earnings potential for 1998 programs without modifying other aspects of the incentive mechanism would create an unacceptable imbalance in risk and rewards." (Id., mimeo. at p. 25, Finding of Fact 19, p. 34.)

The utilities argue that the only suggestion for a change in recovery period on the record in this proceeding, is one year, and thus the Commission must adopt it if it changes the period. D.97-12-103 defines the length of measurement period as one year. Attachment 5, Table 5, "Summary of Proposed 1998 Shareholder Incentive Mechanisms", item 4.

"After completion of the program period, all milestones would be verified immediately and no further measurement would be conducted." (Id., mimeo. at Attachment 5, Table 5.) We conclude that the Commission has already decided this issue and the one-year recovery period sought by the utilities is correct."

To summarize, the following are the amounts we will authorize to be collected in 2000 for PY 1998 non-LIEE programs:

PG&E = $10.451 million

SDG&E = $3.790 million

SoCal = $1.965 million

Edison = $8.104 million.

We have awarded these incentives based on the Commission's policies regarding market transformation, as stated in D.97-12-103.

PY 2000 LIEE Shareholder Incentive Mechanism

The parties propose that we adopt the Joint Recommendation for PY 2000 LIEE shareholder incentives, attached hereto as Attachment A. This is recommended as a trial mechanism applies to both mandatory and non-mandatory measures, for PY 2000 only. For PY 2001 and beyond the parties will work on and recommend a longer-term performance incentive mechanism.

The Joint Recommendation proposes a 25%/75% split of shareholder earnings. The shareholder earnings are forecasted based on the previous mechanism at a level of 5% of expenditures. Out of this forecasted amount, 25% of shareholder earnings are attributable to mandatory items that either produce no energy savings such as furnace repair and replacement, or produce savings that are difficult to measure, such as energy education. This portion of shareholder incentives is based on the performance adder approach and uses a percentage of program expenditures. Performance adders are used where savings are difficult to measure or where programs may not be cost effective.

The remaining 75% portion of shareholder earnings are called shared savings. These incentives are paid on the basis of a percentage of energy savings, with each utility determining the allocation of this portion among its eligible measures. There is no opposition to the Joint Recommendation.

We find that the recommended split of 25% for mandatory and 75% for non-mandatory programs, emphasizing the non- mandatory programs, is reasonable. We believe that the 25% level for mandatory programs is sufficient for programs that produce no measurable savings, yet are beneficial to utility customers through improved comfort levels as in furnace replacements or in knowledge of conservation and efficient usage from education. The 75% level is reasonable in order to encourage utility efforts in market transformation, a major goal of the Commission.

We further find that it is reasonable to allow each utility the latitude to determine its own non-mandatory measures under the 75% allocation.

At the present time we believe that the individual utilities can best allocate to appropriate non-mandatory measures based on each utility's recent experience in this area. Thus, we will not order specifically detailed allocations.

The following are amounts allocated to mandatory and non-mandatory programs for PY 2000 LIEE, based on the supplemental utility filings in Attachments D, E, F, and G to this decision.

Authorization for recovery of the first 50% of these shareholder incentives will be handled in the AEAP proceeding after PY 2000 in which the Commission will adopt the earnings claim and authorize that collection. The remaining 50% of the earnings claim will be authorized for recovery in the AEAP proceeding following completion of the program evaluation. The program evaluation will not affect the amount of earnings claim recovery, but rather will be used to guide future program development.

7 ORA recommendations in Exh. 57 are based on earlier utility requests. ORA totals do not correspond with updated utility requests. The Independent Reviewer reviews only pre-1998 claims. 8 The public purpose test is a broad test that considers non-energy and environmental benefits in addition to economic costs and benefits.

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