V. Funding Levels and Sources

D.05-12-044 authorized $300 million for solar incentives in 2006 in addition to the approximately $42 million already authorized for solar projects in the SGIP. During the course of the SGIP program, the program administrators have found it necessary to move funds from non-solar technology program elements to keep pace with demand for solar project incentives. There have been periods where SGIP funding for solar incentives has been exhausted, requiring a large number of projects to await additional funding. SDREO comments that its own program has stalled because it has funding for only half of pending incentive requests. Our augmentation of 2006 solar funding by $300 million should mitigate this problem over the next year. Indeed, TURN suggests there may be more funds available than qualifying projects.

SB 1 would have funded solar project incentives at a level of $1.1 to $1.8 billion over 10 years. We have stated our objective of promoting the development of a solar market that eventually thrives independently and without government subsidies. We also hope to satisfy the objectives of the Governor toward installation of 3,000 MW of solar over 10 years.

ASPv and PV Now (which filed comments jointly and are hereafter referred to as ASPv/PV Now) advocate for a 10 year budget of $2.3 billion for the PV portion only, plus unspecified additional funding for other technologies. ASPv/PV Now comment that the staff's recommended funding levels would not be adequate to support development of 3,000 MW.

PG&E, SDG&E/SoCalGas and Energy Innovations in the past raised concerns that the program could cost much more than $1.8 billion to reach the stated 3,000 MW goal. PG&E recommends the Commission adopt a firm limit on the amount of rate increases imposed on nonparticipating customers. We do that today, through this order, which specifies the amount of funding we intend to spend on the CSI.

CLECA raises concerns about the impact of CSI on customers and shares utility concerns that the CSI budget would represent only a portion of the subsidies going to solar development, noting the costs of net metering and waivers of standby charges.

CMTA supports using distribution rates to fund the program but expresses concern that the cost not be allocated on an equal cents per therm basis because the cost would be disproportionately borne by large industrial customers, even though residential and commercial customers drive peak use. SDG&E/SoCalGas raise similar concerns, noting that AB1x limits rate increases for residential customers to 130% of baseline, which means rate increases attributable to CSI may be disproportionately borne by larger customers.

PG&E also proposes that the Commission require funding from the state's municipal utilities by supporting associated legislation. Recognizing that the Commission has no ratemaking authority over municipal utilities, PG&E believes that the Commission should at least restrict program participation to customers of utilities contributing to program costs.

Environment California presented an analysis to show that the Commission may need to spend $2-3 billion to reach its objectives depending on the impact of such variables as federal tax credits.

PG&E and SDG&E also raise the issue that ratepayer funding of solar incentives should result in credit to the utilities in their RPS requirements for the funding of this program. Although a prior Commission decision, D.05-05-011, determined that renewable energy credits, or RECs, for distributed generation belong to the distributed generation owner, the Commission has not addressed how this will apply to renewable distributed generation which receives incentives through ratepayer-funded programs. This is an issue we cannot fully resolve today, but will address in this proceeding, in coordination with our RPS proceeding R.04-04-026. However, in past procurement decisions, we have stated our intent to provide some RPS credit for support of incentive programs, and we reiterate that intent here.

Discussion. We commit $2.5 billion over the next 10 years for this program using distribution revenues from all gas and electric options of PG&E, SCE, SDG&E and SoCalGas. We believe the sum we adopt today, while higher than that anticipated by the Legislature, may be needed to assure optimal solar development and confidence in the industry. We agree with PG&E and others that it would be best to have a statewide solar program, supported by municipal utility customers in additional to investor-owned utility customers.

We also understand the concerns of parties who question the cost-effectiveness of a CSI program and the solar technologies it would support. However, the matter of cost-effectiveness is one we cannot finally resolve at this time. Some parties argue that the original staff report's cost-benefit analysis was too optimistic and others believe it ignored significant benefits of solar development. The analytical framework for measuring solar cost-effectiveness is a topic in this proceeding that is yet unresolved. It has been the subject of two consultant reports, hearings and a proposed ALJ decision and may require additional work before we are able to adopt a cost-benefit methodology that fairly captures costs and benefits of solar technologies. While the cost-effectiveness of the solar program is not now quantified with certainty, we are encouraged that solar technologies can improve and become more cost-effective with a "push" from an incentive program and the "pull" of a program design that encourages technological improvements. We consider this issue in our program design and in the way we plan to monitor and modify the program in the coming years.

We understand concerns raised by CMTA, SDG&E/SoCalGas about the allocation of program costs to customer classes. Currently, SGIP costs are allocated to electric customers according to a method we refer to as "equal percent of marginal costs" and to gas customers on the basis of equal cents per therm. We do not here change these allocations partly because we do not have an adequate record for doing so, but we will consider whether to change them in each utility's general rate case or rate design window. We do, however, exempt CARE customers from the costs of this program as a matter of equity, especially since CARE customers are the least likely to be beneficiaries of the incentives. Consistent with the allocation of SGIP costs between PG&E, SCE, SoCalGas and SDG&E, the total revenue requirement we authorize today for the CSI will be allocated to the utilities based on their proportionate shares of energy efficiency funding. We are interested in PG&E's proposal to consider an auction mechanism and discuss it below in the section addressing the structure of incentives.

As several parties propose, we intend to monitor the progress of the program with a formal evaluation and report at least every two years. On the basis of those evaluations, we may calibrate funding and incentive levels to assure a program that promotes solar investments but one which works toward a self-sustaining market and cost-effective technologies. While we retain a general goal of 3,000 MW, this goal may be too ambitious with the level of funding we believe we can justify at this time and while cost-effectiveness is not assured. We may modify annual funding levels if we find that solar technologies are more cost-effective, whether independently or relative to other energy resource options. We may reduce funding if we find the market for solar or individual solar technologies is robust without incentives. We discuss our evaluation process in more detail below.