11. Incentive Mechanisms
11.1. The Role of Incentives
The Commission has the authority and discretion to adopt incentive mechanisms when it finds that by providing specific, measurable targets, the utility can intentionally improve performance and thereby increase customer satisfaction or employee safety. (Pub. Util. Code § 701.) We are not required to approve incentive mechanisms because properly determined rates are sufficient to provide safe and reliable service. We believe the record for SDG&E and SoCalGas demonstrates that they have continuously improved operations, increased reliability, and improved safety as a result of the prior authorized incentive mechanisms. Earning an incentive requires specific improvements or changes by SDG&E and SoCalGas to try and meet the target. If SDG&E or SoCalGas so choose, they may decline any of the discretionary incentives adopted herein if they are unprepared to undertake those changes likely to achieve the targeted improvement in exchange for the offered reward (or penalty). SDG&E and SoCalGas must affirmatively accept or decline the adopted incentive mechanisms, for the duration of this rate cycle, within 30 days of the date of this decision.34 Acceptance must be for a complete set of customer service incentives or the complete set of reliability incentives, and both safety incentives, because we believe the incentives as proposed are a balanced between the goals - for example an improvement in the number of service interruptions as a single incentive could somehow lead to an unintended increase in the duration of outages. The adopted set of incentives strike a balance between the goals. For the safety incentives we see no merit or justification to adopt a static incentive for one company and an annually adjusted incentive for the other: both companies share essentially the same management team, should logically follow the same or similar policies and practices on safety, and should be equally interested in the safety of the workers of both companies.
In this decision, we adopt the settlements on safety incentive mechanisms (discussed separately), and we adopt customer service incentives and service reliability incentives based on the litigated positions of parties.
We also take the opportunity to inform the parties herein when we see an unacceptable litigation position so that subsequent proceedings are not burdened with the same unpersuasive showings. There are many possible alternatives for incentive mechanisms, including no incentives, but we find the unbalanced incentive proposals as litigated by DRA in this proceeding to be without merit.
Aglet opposed any incentive mechanisms as a matter of policy:
If the Commission approves any corporate performance incentives - which Aglet does not recommend - it should eliminate deadbands, adopt tough but realistic performance targets that include stretch goals, and cap overall financial impacts for each major incentive program (customer service, employee safety and service reliability). The Commission should end the "easy pickings" that SDG&E and SoCalGas enjoy under the current incentive system. (Aglet Opening Brief, pp. 40-41.)
Aglet further argues "SDG&E and SoCalGas have not met their burden of proving that corporate performance incentives are necessary, cost effective or otherwise reasonable." Aglet is consistent in opposing the current proposed incentives as it did in A.02-12-027 and A.02-12-028, the prior rate cases for SDG&E and SoCalGas. As discussed below, we adopt realistic targets and smaller overall rewards and penalties for some measures. We are not convinced to eliminate dead bands: there is likely always a role for chance in the number of injuries (safety) or mechanical failures (performance/outages) which defy management control. A dead band lessens the overall size of penalties or rewards and eliminates some allowance for random chance to affect the incentive. We know not all parties agree with this finding and they may offer any compelling arguments in the future after fully addressing our current conclusions.
As discussed for every incentive, we include an appropriate annual adjustment to raise the bar for rewards and penalties. Without an adjustment, the utilities would not continually "stretch" to improve performance.
34 SDG&E and SoCalGas must affirm or decline the incentives by letter to the Commission's Executive Director within 30 days of this decision. This notice must be served on the proceeding's service list.
