Summary .gov

?ALJ/JF2/mph/jnf PROPOSED DECISIONAgenda ID #18834 (Rev. 1)Ratesetting11/5/2020 Item #19Decision PROPOSED DECISION OF ALJ FITCH (Mailed 10/2/2020)BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIAOrder Instituting Rulemaking Concerning Energy Efficiency Rolling Portfolios, Policies, Programs, Evaluation, and Related Issues.Rulemaking 13-11-005DECISION CONTINUING EFFICIENCY SAVINGS AND PERFORMANCE INCENTIVE MECHANISMTABLE OF CONTENTSTitlePage TOC \o "2-6" \h \z \t "Heading 1,1,Title,1,mainex,1,dummy,1" DECISION CONTINUING EFFICIENCY SAVINGS AND PERFORMANCE INCENTIVE MECHANISM PAGEREF _Toc54970609 \h 2Summary PAGEREF _Toc54970610 \h 21.Procedural Background PAGEREF _Toc54970611 \h 22.Framing the Issues PAGEREF _Toc54970612 \h 43.Overview of Parties’ Positions PAGEREF _Toc54970613 \h 73.1.Cal Advocates’ Position PAGEREF _Toc54970614 \h 73.2.NRDC’s Position PAGEREF _Toc54970615 \h 93.3.TURN’s Position PAGEREF _Toc54970616 \h 103.4.CEDMC’s Position PAGEREF _Toc54970617 \h 113.5.IOUs’ Positions PAGEREF _Toc54970618 \h 123.5.1.Past Performance as a measure of ESPI Effectiveness PAGEREF _Toc54970619 \h 133.5.2.Effects of Third-Party and Statewide Programs on ESPI PAGEREF _Toc54970620 \h 143.5.3.Mitigation of Supply-Side Bias PAGEREF _Toc54970621 \h 164.Discussion PAGEREF _Toc54970622 \h 174.mitment to Prioritizing Utility Energy Efficiency Goals PAGEREF _Toc54970623 \h 184.2.Portfolio Shift to Third Parties PAGEREF _Toc54970624 \h 214.3.Portfolio Shift to Statewide Programs PAGEREF _Toc54970625 \h 224.4.Performance Changes for Lifecycle Resource Savings PAGEREF _Toc54970626 \h 244.5.Performance Improvements in the Ex Ante Review Process PAGEREF _Toc54970627 \h 254.6.Academic Studies in Support of Incentive Mechanisms PAGEREF _Toc54970628 \h 274.7.Supply Side Bias PAGEREF _Toc54970629 \h 294.8.ESPI Management Fees PAGEREF _Toc54970630 \h 304.9.ESPI Impacts on Cost Effectiveness Goals PAGEREF _Toc54970631 \h ment Period PAGEREF _Toc54970632 \h 326.Assignment of Proceeding PAGEREF _Toc54970634 \h 35Findings of Fact PAGEREF _Toc54970635 \h 35Conclusions of Law PAGEREF _Toc54970636 \h 38ORDER PAGEREF _Toc54970637 \h 40DECISION CONTINUING EFFICIENCY SAVINGS AND PERFORMANCE INCENTIVE MECHANISMSummaryThis decision declines to make changes to the Efficiency Savings and Performance Incentive mechanism at this time. Instead, the mechanism will be reevaluated after certain other decisions are made about the ultimate structure of the energy efficiency programs administered by the investor-owned utilities, including resolution of issues included in the Administrative Law Judge’s ruling issued March 12, 2020 related to energy efficiency potential and goals policy. Once these issues have been resolved, the Commission will consider potential incentive mechanism reforms consistent with the changes to the potential and goals landscape at that time. In the meantime, rewarding effective regulatory engagement and energy savings results from utilities remains one of the tools in our toolkit to motivate greater energy savings and more effective energy efficiency program delivery, at a time when their importance is greater than ever. Procedural BackgroundThe issues addressed in this decision arise pursuant to the Public Advocates Office (Cal Advocates) Motion, filed December 27, 2019, in the instant Rulemaking (R.) 13-11-005. Cal Advocates asked the Commission to review, or preferably eliminate, the Efficiency Savings and Performance Incentive Mechanism (ESPI).Responses to the Cal Advocates motion were filed January 13, 2020 by the investor-owned energy utilities (IOUs) (i.e., Pacific Gas and Electric Company (PG&E), Southern California Edison Company (SCE), San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company(SoCalGas)). Responses were also filed by the Natural Resources Defense Council (NRDC), the Joint Committee on Energy and Environmental Policy (JCEEP) and the International Brotherhood of Electrical Workers (IBEW). The National Electrical Contractors Association (NECA) Labor Management Cooperation Committee filed a response on January 14, 2020.Cal Advocates replied to parties’ responses on January 23, 2020.On March 18, 2020, an Assigned Commissioner's and Administrative Law Judge’s Ruling (ACR) granted Cal Advocates’ motion, and formulated the scope of inquiry with a series of questions and issues for substantive comment. The ACR determined that any SoCalGas-specific issues related to their conduct in codes and standards advocacy activities (currently, or in the past) was to be considered only within the scope of the Order to Show Cause (OSC) portions of this proceeding. As directed in the ACR, the IOUs each filed a separate response on April 15, 2020, reporting ESPI award amounts received or requested by award categories for the periods from 2015 to 2018. Interested parties filed and served comments on April 29, 2020, in response to the other questions posed in the ACR, with reply comments on May 15, 2020. Comments were filed by the NRDC; California Efficiency +Demand Management Council (CEDMC); and PG&E, SDG&E, SCE, and SoCalGas (collectively the IOUs) filed opening comments on the ACR. The Utility Reform Network (TURN) filed only reply comments. We have reviewed the comments of parties in response to the ACR and determine that they provide a sufficient basis for our decision as rendered herein. Framing the Issues The framework for this inquiry was formulated in the March 18, 2020 ACR, granting Cal Advocates’ motion. The ACR framed the inquiry by soliciting comments on a series of questions. A threshold issue posed in the ACR was: “Given the current management structure of energy efficiency programs, are shareholder incentives, in any form, necessary to ensure the achievement of energy savings? Should the Commission eliminate shareholder incentives for energy savings completely? Should individual ESPI award categories be eliminated? Why or why not?” We affirm the framework of inquiry, as defined in the ACR. Based on the comments filed in response, we consider whether the burden of proof has been met to justify continued investment of ratepayer funding of ESPI awards. We approach this inquiry in the context of the Commission’s history of use of incentive tools to promote prioritizing energy efficiency resource savings consistent with Commission goals. We adopted the ESPI in 2013 after earlier versions of incentive mechanisms had been tried and replaced or discontinued. Our experiments with energy efficiency incentive mechanisms began in the 1990s. Early on, the Commission adopted an incentive mechanism that shared energy efficiency savings between ratepayers and shareholders (as adopted in D.94-10-059). In 1998, the basis for utility incentives was changed by generally de-linking shareholder profits from the measurement of savings. The Commission then introduced performance milestones showing market transformation effects (e.g., increased stocking of energy efficient appliances by retailers, etc.). Beginning with 2002, the Commission effectively stopped offering utility energy efficiency shareholder incentives except for low-income programs. The IOUs continued to earn financial incentives on implementation of low-income energy efficiency programs. Between 2002 through 2006, although without a comprehensive energy efficiency shareholder incentive mechanism, the Commission continued to make energy efficiency and demand response the IOUs’ highest priority procurement resources. The Commission developed evaluation, measurement and verification (EM&V) protocols to hold the IOUs accountable for program results. For ratemaking purposes, the Commission decoupled load reductions from utility earnings to neutralize disincentives for IOUs to promote reduced energy consumption. In 2007, the Commission resumed use of a shareholder incentive mechanism, adopting the Energy Efficiency Risk/Reward Incentive Mechanism (RRIM). The RRIM was terminated six years later, however, after the Commission determined that it did not perform according to expectations, but fostered extended controversy over measurements of savings. The RRIM was replaced with the ESPI as adopted in D.13-09-023.The ESPI mechanism differed from the RRIM in several respects, but offered shareholder energy efficiency incentive earnings in four categories:Energy Efficiency Resource Savings award: based on net lifecycle resource program energy savings using (a) estimated (ex ante)“locked down” and (b) evaluated post-implementation (ex post verified) units of savings results. This element constituted about 70% of the total ESPI award earnings potential as originally set forth in D. 13-09-023. Ex Ante Review (EAR) Process Performance award: based on each IOU’s respective performance as evaluated with scoring of specified metrics. The EAR award is aimed at motivating IOUs to produce energy savings estimates more closely aligned with post-project evaluation results. The EAR award is capped at 3% of budgeted expenditures.Codes and Standards Advocacy award: paid as a management fee of 12% of the authorized budget for codes and standards advocacy program expenses, excluding administrative costs.Non-Resource Programs activity award: paid as a management fee of 3% of the authorized budget for non-resource programs (i.e., for which energy savings are not directly attributed, but which supports the energy efficiency portfolio through activities such as marketing, training and education, etc.). In adopting the ESPI in D.13-09-023, the Commission concluded at the time that despite its limitations, ESPI was sufficient “to encourage IOU performance while protecting the interests of ratepayers.” Now seven years later, we reevaluate the effectiveness of the ESPI in light of current conditions, including changes in energy efficiency portfolio design and administration. Overview of Parties’ PositionsCal Advocates’ Position Cal Advocates proposes the elimination of the ESPI, challenging its effectiveness, particularly as IOUs transition from being primarily implementers to primarily administrators of energy efficiency programs. Cal Advocates claims there is no empirical evidence that ESPI motivates the IOUs to prioritize energy efficiency beyond what is already required by statute and Commission decisions. Cal Advocates argues that in view of significant changes in the structure of ratepayer-funded energy efficiency programs, ESPI awards are no longer linked to individual IOUs’ energy savings and performance. When ESPI was initiated in 2013, each IOU was responsible for managing its own energy efficiency programs to achieve energy savings and high portfolio performance. In 2016, however, the Commission directed significant shifts in how the IOUs manage the energy efficiency programs. As a result, a significant portion of the energy efficiency portfolio is intended to be administered on a statewide basis, with third-party design and implementation of most of the budget, and increasing the use of normalized metered energy consumption as a method for calculating energy savings. Under statewide programs, one IOU serves as statewide lead with responsibility for achieving the energy savings while the others only contribute funding. Cal Advocates characterizes the IOUs’ role in managing third-party programs as limited to running solicitations and providing advice on program design after third-party bids are solicited.Cal Advocates argues that an ESPI award should not be paid for merely transferring funds to another IOU without accomplishing a substantive objective. Cal Advocates argues that paying ESPI awards for geographically allocated energy savings via the savings-based ESPI category does not motivate program accomplishments. Cal Advocates also argues that the EAR award does not align award values with portfolio performance objectives, and that scoring EAR performance for individual IOUs is an ineffective way to prompt improvements in statewide workpapers. Cal Advocates makes similar objections to paying ESPI management fees for funding non-resource programs and codes and standards (C&S) advocacy. Cal Advocates further claims that paying ESPI awards for meeting or exceeding energy efficiency goals may create perverse incentives for the IOUs to over-report claimed energy savings and expenditures because inflated numbers benefit shareholders. Cal Advocates further claims that ESPI is counterproductive to planning and delivery of robust energy efficiency programs, and can lead to evaluation, measurement, and verification (EM&V) efforts focused on administrative purposes, rather than improving program design or maximizing benefits to ratepayers. Cal Advocates argues that payment of ESPI awards is inconsistent with the Commission’s cost-effectiveness objectives. NRDC’s Position NRDC recommends that the Commission rethink whether the ESPI is really needed in view of current realities. NRDC notes (1) the robust regulatory process already in place for resource energy efficiency programs and (2) third-party implementation contracts which should reward attainment of cost-effective savings. NRDC proposes an evaluation of the robustness of the existing regulatory process to set goals for and to oversee attainment of those goals for non-resource programs. If the ESPI is not structured to improve the efficacy of current energy efficiency programs, NRDC argues, it becomes a cost without a resulting benefit, potentially becoming an obsolete mechanism that merely transfers public funds to utility shareholders.NRDC warns against trying to prove ESPI effectiveness through analytical or empirical methods. To attribute performance impacts to the ESPI, NRDC argues, it must first be determined whether and by how much program performance has improved over the last ten years. NRDC believes this is a near-impossible task, requiring an understanding of program performance indicators. Selecting such indicators and applying them to demonstrate improvement is analytically burdensome and subjective. NRDC notes that even without ESPI, the shift towards third-party program implementation should naturally encourage attainment of cost-effective savings as long as contracts are thoughtfully crafted by utility program administrators. NRDC believes these contracts should reward attainment of cost-effective energy savings by motivating third-party program administrators to exceed Commission-set energy savings goals.TURN’s Position TURN supports the elimination, or at least suspension of, ESPI. TURN characterizes the responsibility to meet energy efficiency goals cost-effectively as the core function of a portfolio administrator entrusted with ratepayer funds, not a special service warranting shareholder incentives. TURN argues that the IOUs do not require incentive earnings to work effectively with third-party program implementers or to carefully consider third-party program design solicitations. TURN believes that while there is a plausible nexus between ESPI and at least some of the performance benefits reported by the IOUs, continuation of ESPI is unnecessary to preserve any benefits that may have occurred.TURN likewise argues that the IOUs do not require ESPI awards to compensate for risk of third-party contractors’ underperformance. TURN characterizes energy efficiency contract risks as similar to other business risks utilities take on when outsourcing work. TURN argues, however, that the utilities face no direct financial consequences for portfolio underperformance warranting ESPI compensation. TURN notes that under the previous incentive mechanism adopted in D.07-09-043, the IOUs faced the risk of financial penalties for substandard performance in achieving savings goals. Under ESPI, however, no such penalty provision exists for failure to achieve goals. Although the Commission could adopt such penalties, as suggested in D.18-05-041, this has not happened yet. Thus, TURN disputes the IOUs claimed need for shareholder incentives to compensate for a future possibility of increased risk. TURN notes that in any case, Commission already has policies to help the utilities mitigate performance risks, such as by encouraging pay-for-performance contracting and improving ex ante estimates. CEDMC’s PositionCEDMC believes that ESPI is conceptually sound, but should be modified to incentivize innovation, rather than merely compliance. CEDMC characterizes ESPI as being more of a reward for good behavior on the part of IOUs in working with Commission staff to meet ESPI reporting requirements, rendering it out of step with the current realities facing energy efficiency portfolios.CEDMC favors disbursement of ESPI funds to third-party program implementers. CEDMC argues that in the current structure of program delivery, third-party implementers take on a significant amount of risk in delivering energy efficiency savings. While the IOUs are financially insulated from the downsides, CEDMC argues that third-party implementers have minimal incentive beyond what is contractually stipulated for even a perfectly implemented program that often takes significant time to evaluate.IOUs’ PositionsThe IOUs all support continuation of ESPI with no interruption in the filing for ESPI awards on the current schedule. PG&E argues that ESPI helps to ensure successful energy efficiency programs, and to meet California’s clean energy objectives. PG&E argues that the policies and goals in D.13-09-023 as justification for ESPI remain valid. PG&E points to the passage of Senate Bill (SB) 350 (DeLeón, 2015), which calls for doubling energy efficiency savings by 2030. PG&E believes SB 350 makes the policies and goals justifying ESPI even more important to meet those energy efficiency savings goals. The ESPI is based on lifecycle energy savings, which is generally the same metric applied under SB 350. PG&E argues that while shareholder incentives may not be necessary to ensure the planning and delivery of robust energy efficiency programs, they signal the importance and support of programs not primarily intended as resource programs, like Workforce Education & Training and Marketing, Education and Outreach. PG&E believes that an incentive for investing in non-resource activities can motivate IOUs beyond minimum compliance obligations, despite internal pressure to reduce impacts to portfolio cost-effectiveness and customer bills. SoCalGas and SDG&E acknowledge that numerous changes have occurred to the role of IOUs in managing the energy efficiency portfolios in recent years and that a review of ESPI is warranted. They oppose, however, elimination of ESPI, but emphasize re-looking at the original objectives of the ESPI mechanism. They argue that the Commission’s desire to set aggressive yet achievable energy savings goals continues to support offering financial incentives. SoCalGas notes that while California and other states have adopted a robust set of energy policies, many others still have not. As states look to California as an example, SoCalGas argues that elimination of the incentive mechanism may not send the right signal.SDG&E recommends that ESPI continue as is, at least through the transition to third party program implementation of energy efficiency programs, mandated to have a minimum 60 percent of the IOUs’ budgeted implementation by January 1, 2023. SDG&E recommends that during the transition, the Commission begin aligning with other state goals, such as greenhouse gas reduction. SCE notes that the IOUs may still be conducting solicitations for 40 percent of their portfolios beyond 2022. As stated in D.18-01-004, the outsourcing of 60 percent of the utility portfolio is only a floor not a maximum percentage. Past Performance as a measure of ESPI EffectivenessThe IOUs point to their past performance as evidence that the ESPI is effective in motivating them to prioritize energy efficiency program goals. SCE notes, for example, that from 2015 through 2018, it achieved, and in most of those years substantially exceeded, the savings goals set by the Commission. PG&E argues that it would not have invested as heavily and consistently into project quality assurance absent the ESPI, given (a) the time and investment required, (b) slowing of project approval, (c) reduced gross savings claims and incentives paid to customers, and (d) reduced customer satisfaction with programs. SDG&E argues that since the inception of ESPI, its portfolio has been trending towards longer measure lifecycles, resulting in longer-lasting energy savings. SDG&E attributes ESPI as motivating the average measure life increase from 2013 to 2019 and improvement in its EAR scores. SoCalGas likewise credits ESPI as motivating improved ex ante review performance and increase average portfolio measure life.SoCalGas includes a category for “ESPI achievement” as an annual performance metric for its Customer Programs & Assistance department. ESPI updates are tracked by financial planning and given to shareholders in the annual report.Effects of Third-Party and Statewide Programs on ESPIThe IOUs dispute Cal Advocates’ arguments as to the effects of third-party and statewide administration of energy efficiency programs on the need for ESPI. In particular, the IOUs dispute Cal Advocates’ characterizations of IOUs’ role and responsibilities within the new structure for energy efficiency program implementation that includes third-party implementation and statewide initiatives. The IOUs emphasize the importance of their responsibility for determining the types and levels of energy efficiency investment that the third parties implement and for quality control and policy requirements for the programs. Even though most, if not all, of the portfolio is implemented through third parties, SDG&E argues that the corresponding responsibility and financial risk still rests with the IOU as contract administrator. The IOUs oversee implementers to ensure they are on track to meet program savings targets and remain cost-effective. For statewide programs, each IOU operates a subset of the statewide programs and solicitations to share workload. The IOUs continue to administer and implement their own local programs.Given their role in this context, the IOUs argue that their performance continues to be of great significance to the success or failure of energy efficiency. Consequently, the IOUs argue that ESPI remains relevant and warranted to motivate them in the prioritization of energy efficiency goals. The IOUs further argue that ESPI is necessary to compensate for risks of a third-party program implementation structure that replaces IOU implementation. SCE claims that performance risk increases with the transition to third-party program implementation as the IOUs have less control over program design and implementation. For statewide program administration, the IOU remains responsible for portfolio goal attainment and evaluated savings. SCE claims the IOUs incur risk if third parties are unable to meet contractual obligations so that the IOUs can achieve the Commission’s energy efficiency goals cost-effectively. Although the IOUs can mitigate risk through pay-for-performance contracting, SCE believes uncertainty remains about what risk mitigation measures final contracts will include. Unless the IOUs’ obligation to cost-effectively meet savings goals, as well as any associated potential penalty or disallowance, is removed, SCE argues that ESPI earnings are required as compensation for risk. SDG&E adds that additional risks are introduced with the Lead Statewide Administrator structure that requires one IOU to oversee delivery of cost-effective energy efficiency savings for the whole state.Mitigation of Supply-Side BiasSCE further argues that ESPI is required to compensate for additional risks associated with energy efficiency in comparison to supply-side resources. SCE notes that unlike a supply-side resource, energy efficiency relies on complex and variable evaluation processes to measure and verify the resource delivered through the IOU’s portfolio management. The IOUs’ supply-side resources procurement compliance is governed by the Commission approved Bundled Procurement Plan. Pursuant to AB 57 the Commission established up-front standards and criteria to guide IOUs’ procurement activities. The IOU must comply with these approved procurement plan standards and criteria for its procurement-related expenses to be found eligible for cost recovery.PG&E likewise argues that while the State’s clean energy objectives now include more renewables alongside the doubling of energy efficiency, the fundamental regulatory and financial biases in favor of supply side resources that existed in 1993 and 2007 still exist today. PG&E cites D.07-09-043 in this regard, which stated: The fundamental regulatory and financial biases against energy efficiency (in favor of supply-side resources) identified in D.93-09-078 also exist under the current regulatory framework, in which utilities have returned to their traditional role as resource portfolio managers. PG&E claims that terminating the ESPI would hinder the IOUs’ incentive to overcome the supply-side bias and to vigorously and earnestly support achieving all cost effective, reliable, and feasible energy efficiency.SDG&E argues that ESPI should recognize IOU risk associated with contract administration and contract risk associated with management of local and statewide third-party implementers to ensure state goals and at the same time recognize the IOUs’ support for a successful transition to a robust third-party implementation structure.Discussion As a starting point, we address whether the ESPI mechanism should remain unchanged or be reformed, suspended, or eliminated permanently. As previously noted, we have had a long history of using incentive mechanisms. In view of our past experiences, we recognize the potential usefulness of incentive mechanisms. We also have modified, terminated or replaced incentive mechanisms when we determined a change was warranted. In past Commission decisions and rulings, we have discussed at some length the difficulties and challenges in implementing and sustaining an effective energy efficiency incentive mechanism. As a threshold matter, this is an instance where we are in favor of keeping the ESPI mechanism in place, because the conditions in effect when we instituted the mechanism are still relevant, as discussed in more detail below. Energy efficiency is still our most importance resource in which we are expecting utilities to invest ratepayer funds, and we still need the most effective energy efficiency program possible as the urgency of meeting our environmental goals becomes more critical.At the same time, we acknowledge that, as pointed out by the majority of parties, modifications may need to be made depending on how we resolve issues of potential and goals that were raised in the March 12, 2020 ALJ ruling. For example, SDG&E and SCE have suggested tying ESPI payments to greenhouse gas emissions reductions, instead of or in addition to energy savings. A proposed decision on these and other potential and goals matters is anticipated in early 2021, after which we anticipate entertaining making such potential changes to the ESPI mechanism. For now, we leave the ESPI mechanism in place except for one change related to the role of the lead administrator for statewide programs, as discussed in more detail below. Commitment to Prioritizing Utility Energy Efficiency Goals Energy efficiency is the first cost-effective resource in the loading order of the Energy Action Plan developed almost two decades ago. It is longstanding Commission and California policy to prioritize energy efficiency investments as the most effective we can make to meet our environmental, reliability, and cost-minimization goals in the regulated electricity and natural gas delivery industries. SB 350 renewed and enhanced our commitment to achieving energy efficiency savings by calling for a doubling of energy efficiency contributions in the state by 2030. The SB 350 goals affect all California investments in energy efficiency, not just those within the Commission’s purview or under the control of utility ratepayer investments. However, in our role as a regulatory body, our job under SB 350 is to devise ways to strengthen and encourage effective investment by the utilities we regulate in their customers’ energy efficiency in buildings and facilities. The IOUs are obligated by statutes, state policies, and past Commission decisions to prioritize cost-effective energy efficiency and to pursue specified savings goals. Public Utilities Code Section 454.5, California’s Energy Action Plan, and past Commission decisions (e.g., D.04-09-060) all prioritize cost-effective energy efficiency first in the loading order. The IOUs also receive timely funding for all of their energy efficiency program activities in retail rates. And through the decoupling of sales and generation levels from earnings, any disincentives to reduce load through energy efficiency programs have been neutralized. While all of these factors are necessary conditions to remove the disincentive for utilities to invest in energy efficiency, they are not sufficient conditions to motivate utilities to go above and beyond the minimum requirements to achieve greater and more difficult energy savings.Since we have maintained the regulated utilities as the lead administrators for the majority of our energy efficiency programs, we have entrusted the utilities with an important role as stewards of our most important energy resource. While procurement and construction of renewable energy and storage projects on the supply side are often more widely publicized, the investment in energy efficiency infrastructure is even more important in achieving our SB 350 and SB 100 (DeLeon, 2018) goals toward carbon neutrality.Because of the importance of this resource, one of the Commission’s policy reasons for initiating an incentive mechanism in the past, among many others, was to ensure that utilities were hiring and rewarding the best of their staff to manage the energy efficiency portfolios.Fundamentally, it is important to acknowledge that the utilities we regulate are for-profit entities who have a dual role of ensuring public goods under our guidance, while also earning a reasonable return. Motivating superior performance in this area was the policy reason for creation of an energy efficiency shareholder incentive mechanism originally in the 1990s. Now, at a time when the importance of the energy efficiency resource has only been heightened, from an overall policy perspective it seems ill-advised to decide to remove the financial upside for utilities at the time that they are being asked to do more than ever. Financial incentives to utilities for superior performance in demand-side programs is one of the tools in our toolbox, representing widely-recognized progressive utility regulation. As a policy matter, we prefer to keep this tool available, even as we seek to improve it continually, to take into account changing portfolios and approaches to energy efficiency.Should the Commission, in the future, decide that another entity or entities besides the utilities should be responsible for administering energy efficiency programs on behalf of utility customers, then the provision of utility shareholder incentives should be reconsidered. But until that time, as long as the utilities remain the entities responsible for delivering energy efficiency results, we are convinced that some opportunity for rewards for positive results should continue to be available.The sections below discuss our more detailed rationale for maintaining and continuing to improve this policy.Portfolio Shift to Third Parties Since the ESPI was adopted in 2013, energy efficiency program structure and management have continued to evolve. As a result, our approach and thinking about ESPI effectiveness needs to change accordingly. IOUs still directly implement some energy efficiency programs, but more program design and implementation functions are being outsourced to third parties, as required by the Commission in D.16-08-019. Further, as designated in D.18-05-041, during the 2018-2022 period, the IOUs are to transition toward running third-party solicitations; evaluating the viability of third parties to perform the program design and delivery functions to achieve energy savings goals; and overseeing those programs.As energy efficiency portfolios shift into third-party implementation, the IOUs remain accountable for portfolio savings and goal attainment. Arguably, the role of the IOUs as program administrators and strategic overseers of the program portfolio has only been heightened. At the end of the day, the IOUs are required to achieve more results with less direct control over program delivery. This requires a higher level of skill in portfolio management than ever before. While some risk may be shifted to third-party contractors through pay-for-performance mechanisms and other contractual terms, utilities are still responsible to this Commission to design and deliver their overall energy efficiency portfolios to meet or exceed energy savings targets, at a time when it is becoming harder and harder to do so, as the most cost-effective energy savings have already been tapped. This situation merits maintaining an opportunity for utilities to receive shareholder rewards for delivering energy savings results.Portfolio Shift to Statewide ProgramsIn addition, in D.16-08-019, the Commission signaled a shift toward more statewide program administration and implementation, to ensure consistent strategies and opportunities throughout all of the IOU service territories. This consistency was designed to allow entities who may have a statewide presence, such as retailers, to more easily access and interact with programs designed to bring energy efficiency to the statewide market. In May 2018 in D.18-05-041, the Commission approved a set of statewide programs and directed each energy IOU to allocate at least 25 percent of its energy efficiency portfolio budget to statewide programs (except SoCalGas, which is only required to allocate 15 percent of its budget). Each statewide program is administered by one of the IOUs designated as the lead statewide administrator by the Commission. This administrative structure leads to the situation where the lead IOU administrator is likely handling the vast majority of the administrative duties for the statewide program, but only earning its proportional share of the ESPI rewards, based on funding contributed. This is the one aspect of ESPI that we know should change quickly, in order to reward the lead IOU for any superior performance as a lead administrator, on behalf of all IOUs. The lead IOU deserves the opportunity to earn a greater than proportional (based on budgets) share of the incentives for statewide programs it is leading; how exactly that concept is implemented will be the subject of additional proposals and vetting in the context of this proceeding, alongside the other modifications we will consider when we decide certain of the other potential and goals policy issues in early 2021.For now, however, we do make one issue very clear, since it has been raised multiple times in the context of both the ESPI issues and the OSC phase of this proceeding related to SoCalGas’ codes and standards activities: in the case of the statewide codes and standards advocacy program in which SoCalGas has been prohibited from participation by D.18-05-041, SoCalGas is not eligible to earn ESPI awards for simply transferring funding to support the program administered statewide by another IOU. This prohibition on SoCalGas’ earnings on the statewide codes and standards advocacy activities (for which other utilities earn a management fee as part of the ESPI structure) applies going forward regardless of the disposition of the other issues being litigated in the OSC phase of this proceeding related to SoCalGas. Performance Changes for Lifecycle Resource Savings The ACR solicited responses to the following directive: “Provide empirical evidence that ESPI has motivated utility investors and managers to prioritize energy efficiency differently from what priorities would have been absent ESPI, or has improved the performance of energy efficiency portfolios overall. “We acknowledge parties’ responses, including the IOUs’ claims of improvements in lifecycle energy savings and attributing them to ESPI. In granting the Cal Advocates motion, the Assigned Commissioner also observed that: “… the ESPI mechanism has performed largely consistently with many of the intentions articulated in the ESPI decision. It has reduced contention associated with Commission-evaluated savings and resulting award payments, improved ex ante savings estimates, encouraged a shift in the portfolio towards measures with longer-lasting savings, and rewarded IOUs for codes and standards advocacy and administering non-resource programs.“ The ACR referred to life cycle savings data trending upward with the average portfolio measure effective useful life (EUL) increasing from 10.59 years in the 2010-12 portfolio cycle to 11.06 years for 2017. At the same time, however, the ACR acknowledged that “many factors affected these changes and we are unable to state with certainty whether and to what extent the ESPI mechanism influenced them…” Based on the subsequent comments filed by parties, we echo the observations of the ACR, which is that EUL improvements have occurred, but we likely cannot be sure that the ESPI mechanism was the cause. As noted by NRDC, improvements in IOU performance should occur naturally as knowledge and experience are gained in designing, implementing and overseeing energy efficiency programs. Such improvements translate into policy refinements and better decision making. Even assuming some linkage could be inferred between the EUL changes and ESPI awards, we will continue to study this aspect to understand what measures contribute to the averages and how much. Still, this metric is trending in the right direction, which is different than in the past, and therefore we do not see anything negative in maintaining the status quo of ESPI in this regard. Performance Improvements in the Ex Ante Review Process The ex ante review (EAR) component of the ESPI was intended to motivate each IOU to produce ex ante estimates more closely aligned with ex post evaluations. Previously, D.12-12-032 had incorporated performance metrics and a scoring scale to derive an incentive payment relating to EAR processes. The ESPI utilized a similar scoring scale to rate and award IOU performance, based on performance scores from the 2010 program year shareholder incentive mechanism decision. The EAR award level was capped at 3% of resource program expenditures. We note the IOUs’ claims of EAR process improvements as evidence of ESPI effectiveness. For example, SCE has doubled its EAR performance score since 2015. SDG&E’s reported EAR scores also show upward movement over time. SDG&E argues that the ESPI incentive encouraged it to continue improving conformance of ex ante assumptions with ex post savings.SoCalGas notes that in its 2019 EAR Memo, the Commission recognized SoCalGas’ leadership in statewide workpaper development and noted “SoCalGas continues to demonstrate efforts to improve its performance,” and called out the successful transition to statewide workpapers and SoCalGas’ role in making this submission cycle successful and timely, which contributed to a score of 41.33 out of 50.PG&E claims that the ex ante review component of the ESPI has resulted in a much narrower range between ex ante savings and ex post evaluated results. Between the 2010-12 portfolio and 2017, PG&E’s evaluated MWh savings relative to ex ante estimates increased from 77% to 91%, the ratio of evaluated MW savings to ex ante estimates increased from 72% to 94%, and the ratio of evaluated therm savings to ex ante estimates increased from 92% to 95%.We acknowledge these EAR improvements and note that this aspect of the ESPI appears to be working as intended. The EAR incentive component was a response to ex post true-up challenges associated with the 2006-2008 RRIM. The EAR award was intended to motivate the IOUs to apply due diligence and engineering rigor in locking down ex ante savings. This appears to be happening, and removing ESPI awards for this quality control now could potentially risk moving IOU attention away from effectively administering and reviewing the ex ante savings estimates as part of the EAR process. Academic Studies in Support of Incentive Mechanisms PG&E cites academic studies regarding the merits of incentive mechanisms for advancing demand side management goals. As part of the National Action Plan for Energy Efficiency, the EPA produced the report “Aligning Utility Incentives with Investment in Energy Efficiency” in 2007. The report addresses shareholder incentives as an appropriate and effective use of ratepayer funds. PG&E also cites a 2011 American Council for an Energy-Efficient Economy (ACEEE) report concluding that “shareholder incentives influence utility behavior and are correlated with higher per person investment in efficiency programs by utilities,” and “that even when compared to states that have attempted to align incentives to encourage efficiency through such mechanisms as decoupling or lost revenue recovery, per capita spending is notably higher in states that have adopted a shareholder incentive mechanism.” PG&E notes that in 2015, ACEEE produced a follow up report that showed “states with incentive policies had somewhat higher spending as a percentage of revenues (2.0%) than states without incentive policies (1.4%); and substantially higher savings (0.9%) than states without incentives (0.5%).” The report concluded that “shareholder incentives influence utility behavior and are correlated with higher per person investment in efficiency programs by utilities,” and “that even when compared to states that have attempted to align incentives to encourage efficiency through such mechanisms as decoupling or lost revenue recovery, per capita spending is notably higher in states that have adopted a shareholder incentive mechanism.”As NRDC notes in its comments, to determine the specific impact of the ESPI on the behavior of IOUs, California’s energy efficiency program performance would have to be compared with a control state or region with similar policy and market characteristics, but which does not offer utility shareholder incentives. Conducting such an empirical study would not be an efficient use of resources and a relevant control state may not exist.However, the studies cited by PG&E provide a reasonable policy justification, based on empirical data and national experience, to suggest that utility shareholder incentives are an appropriate an effective use of ratepayer funds and part of the toolbox of progressive regulatory regimes supporting energy efficiency investment. Supply Side Bias As noted in D.13-09-023, IOUs generate earnings when they invest in supply-side resources and infrastructure, but not when promoting energy efficiency to reduce demand. To address this disparity inherent in the different approaches to addressing energy requirements, an incentive mechanism may help offset this bias by offering earnings for energy efficiency investment. In D.13-09-023, we previously acknowledged the limitations of ESPI awards in actually counterbalancing this IOU financial bias in favor of supply side resources. Rather than setting incentive earnings potential by attempting to match earnings from supply-sided resources, ESPI earnings potential was merely capped at 10.85% of the energy efficiency budget. In this circumstance, the incentive does not need to be precisely equivalent in order to produce the desired result, which is IOU attention and focus on delivering the best and most effective energy efficiency programs. While the incentives may not be exactly the same for demand-side and supply-side resources, having demand-side incentives available at all serves the purpose of attracting IOU management focus on the quality delivery of energy efficiency to customers. As noted earlier, it also serves as a reason to attract IOU staffing talent to demand-side programs rather than supply-side investments. Removing the incentives would send the opposite message, that supply-side investments are the more critical, creating more shareholder value for utility investors. This is the opposite of the impact we desire, and is another reason to leave the ESPI mechanism in place. ESPI Management Fees The ESPI award includes the payment of “management fees” to the IOUs for (a) codes and standards (C&S) advocacy; and (b) non-resource programs (i.e., programs for which energy savings are not directly attributed, but which support the energy efficiency portfolio through activities such as marketing, training and education, or emerging technology). C&S advocacy work is different from other resource-based activities, because expenditures incurred during each cycle do not result in resource savings until after the cycle ends. Calculating savings associated with the these activities involves additional, complicating factors, including code compliance estimates, attribution factors that estimate how much of the IOUs’ efforts contributed to the code development, and estimates of measures captured by code that were naturally occurring market development. Because of the complications associated with measuring savings from C&S advocacy as part of the resource savings calculations, the Commission adopted a simplified incentive approach in D.13-09-023, paying a management fee. Likewise, payment of a management fee was adopted as a means of encouraging the IOUs to focus on funding non-resource program goals rather than shifting funds and resources away from non-resource programs. SoCalGas, in particular, argues that its spending on non-resource programs and C&S advocacy has led to significant savings for ratepayers. We recognize the importance of C&S advocacy and non-resource program goals, such as workforce education and training and local government partnerships. Many of these non-resource programs are requirements imposed by the Commission, rather than proposed by the IOUs, and because we continue to value these programs, we should continue to value giving utilities incentives to manage them effectively. Payment of a management fee as a fixed percentage of program expenditures is administratively simple, while remaining a small percentage of the potential financial rewards overall. The ESPI management fees account for a small fraction of the total ESPI award and will therefore be maintained. Removing them may ultimately be counterproductive and, as the saying goes, penny wise and pound foolish.ESPI Impacts on Cost Effectiveness GoalsIn the March 18, 2020 ACR, comments were solicited regarding how ESPI has affected the cost of obtaining energy savings. ESPI awards negatively impact the cost-effectiveness of energy efficiency portfolios because incentive awards are included in the Total Resource Cost (TRC) and Program Administrator Cost (PAC) tests as a cost, with no corresponding benefits. Based on the IOUs responses to the ACR, Question 1, ESPI award payments have reduced TRC scores by an average of 3% and PAC scores by an average of 6% over the past few years. This is a small impact that is dwarfed by other challenges to program cost-effectiveness, including decades of investments in energy efficiency already, coupled with aggressive codes and standards adoption and numerous other factors. However, the cost-effectiveness impact of the ESPI deserves consideration alongside the potential and goals policy questions included in the March 12, 2020 ALJ ruling. Depending on the outcome of some of those policy questions, the most logical conclusion may be to adjust the amount of the ESPI earnings potential, mitigating its cost-effectiveness impact, rather than eliminating the mechanism altogether. Comment Period The proposed decision of ALJ Fitch in this matter was mailed to the parties in accordance with Section 311 of the Public Utilities Code and comments were allowed under Rule 14.3 of the Commission’s Rules of Practice and Procedure. Comments were filed on October 22, 2020 by Cal Advocates, CEDMC, Enovity, PG&E, SDG&E, SCE, SoCalGas, and TURN. ACEEE also sent a letter to the Commissioners, with a copy to the service list of the proceeding. Reply comments were filed on October 27, 2020 by Cal Advocates, CEDMC, PG&E, SDG&E, SCE, and TURN.Cal Advocates and TURN both oppose the proposed decision. Cal Advocates argues that the utilities do not receive shareholder incentives for performing core responsibilities related to safe and reliable service, and therefore should not require incentives for energy efficiency. Cal Advocates argues that the incentives cannot be part of just and reasonable rates for ratepayers, and that since there are no downside risks for utilities for energy efficiency, shareholder incentives are unnecessary. Cal Advocates otherwise reiterates most of the arguments in its original motion, which are already addressed within the text of the proposed decision.TURN argues that the proposed decision fails to show that incentives are necessary to ensure achievement of energy savings or drive incremental program performance beyond the cost to ratepayers. TURN argues that the burden of proof is on the Commission to show that the ESPI mechanism is necessary to achieving the results detailed in the proposed decision, including EUL improvements, ex ante review process improvements, or successful non-resource and cost and standards programs.On this argument, we conclude that the burden of proof should actually be on the parties that wish to remove the ESPI mechanism. ESPI was already adopted by the Commission in 2013, after a long process of evaluating alternatives and a long history of having similar mechanisms in place. Given that this decision cites to several improvements in the energy efficiency program administration since the advent of the ESPI mechanism, the Commission does not need to continue proving the value of something that is already established policy. In addition, it is equally impossible for TURN or Cal Advocates to show that the ESPI mechanism has not improved the delivery of energy efficiency portfolios. There is simply no controlled comparison that is possible, and therefore it comes down to a policy call rather than an evidentiary one.Finally, while the Commission has an ongoing obligation to ensure just and reasonable rates, the Commission evaluates the ESPI claims on an annual basis and decides whether to award the funds to the utilities. This annual activity satisfies the Section 451 requirements of the Public Utilities Code. Other parties and ACEEE support the proposed decision and the continuation of the ESPI mechanism in their comments. CEDMC points out that regardless of changes in the portfolio delivery, utilities are still responsible for delivering cost-effective programs. CEDMC also supports re-looking at the design of the ESPI mechanism after resolution of the policy issues surround the setting of energy efficiency potential and goals.Enovity argues that placing a moratorium on or eliminating ESPI should only occur if there is clear evidence that the mechanism does more harm than good. ACEEE is concerned that program performance may slip if the ESPI is eliminated at this juncture, during the critical transition period where many portfolio changes are taking place. In reply comments, CEDMC endorses this concern. PG&E supports the proposed decision, with some minor wording corrections which have been incorporated herein. SoCalGas also supports this decision, while suggesting clarifications with respect to the role of SoCalGas in codes and standards advocacy programs, which have been incorporated. SDG&E and SCE also support the proposed decision and do not recommend any changes. Assignment of ProceedingLiane M. Randolph is the assigned Commissioner and Julie A. Fitch and Valerie U. Kao are the assigned Administrative Law Judges in this proceeding.Findings of FactThe Efficiency Savings and Performance Incentive (ESPI) mechanism was adopted in D.13-09-023 to offer incentive awards to the major investor owned energy utilities, based on performance in four categories: (1) energy efficiency (EE) resource savings; (2) ex ante review performance; (3) energy efficiency building codes and standards advocacy; and (4) non-resource programs (which support savings based programs but in which there are no direct savings).The Commission’s purpose in implementing the ESPI mechanism was to motivate utility investors and managers to view energy efficiency as a core part of the utility’s regulated operations. At the same time, the ESPI was designed to protect ratepayers’ financial investment and ensure that program savings are real and verified.The California Energy Action Plan, the first version of which was adopted in 2003, prioritizes energy efficiency first in the loading order. California has a history going back at least four decades of emphasizing the importance of energy efficiency investments to serve load, reduce costs, and protect the environment.The Commission has maintained the investor-owned utilities as the administrators of energy efficiency programs during the last two decades.Regulated electricity and natural gas utilities earn rates of return, leading to shareholder profit, on electricity infrastructure, which does not include energy efficiency investments, absent a shareholder incentive mechanism such as ESPI.Over the past several years, some changes have occurred regarding how the energy efficiency portfolio is designed and administered. These changes impact the manner and degree of IOUs influence over program designs and portfolio savings, but do not change the IOUs’ ultimate responsibility for delivering energy savings. A significant portion of the energy efficiency portfolio has been mandated to be administered on a statewide basis, with third-party design and implementation of a majority of the energy efficiency budget.Pursuant to D.16-08-019 and D.18-05-041, each utility is required to allocate 25 percent of its energy efficiency portfolio budget to statewide programs, except SoCalGas, which is required to allocate 15 percent of its budget to statewide programs.Under the statewide management structure, the statewide lead utility has responsibility for program success, though under the current ESPI structure every utility program administrator gets allocated a portion of the savings and receives a corresponding ESPI award.In D.16-08-019, each of the IOUs was directed to outsource a minimum of 60 percent of its portfolio by the end of 2020, up from the previous 20 percent requirement. In D.18-01-004, the deadline was extended to December 2022 for outsourcing 60 percent of each IOU portfolio. The shift from utilities managing energy efficiency programs to procuring third-party programs does not reduce IOU responsibility for performance outcomes used to determine ESPI awards, and in many ways makes the delivery of successful outcomes more challenging. Lifetime energy resource savings measures have increased since ESPI was adopted. The ex ante review component of the ESPI was intended to motivate each IOU to produce ex ante estimates more closely aligned with ex post evaluations.EAR process improvements have occurred since ESPI was adopted. To the extent ex ante quality control improvements may have been influenced by ESPI, such improvements will likely continue to support quality control effectiveness; removal of ESPI could create negative consequences in this area. There is value in continuing to evaluate and report on IOU performance relating to the ex ante processes. Numerous national studies on energy efficiency policies point to shareholder incentives as a part of effective regulatory policy leading to greater and deeper results of energy efficiency investment.Decoupling and cost recovery are necessary conditions for effective energy efficiency policies, but they are not sufficient to produce superior performance in the delivery of our most important resource.A management fee for non-resource programs was adopted as part of the ESPI in D.13-09-023 as a tool to encourage greater focus on achieving non-resource program goals while removing a disincentive to shift funds and resources away from non-resource programs. One rationale for awarding shareholder incentives for energy efficiency using a mechanism such as ESPI is to attract capable personnel within the utility to take on the challenge of delivering customer energy efficiency programs.Because of the complications associated with measuring savings from codes and standards advocacy as part of the resource savings calculations, in D.13-09-023, the Commission adopted a management fee approach. The situation that led to this choice still exists.ESPI award payments reduce the cost effectiveness of energy efficiency portfolios but are small enough that this effect is dwarfed by other, larger drivers of portfolio cost-effectiveness. This factor influences the size of the ESPI potential awards available, but does not justify the complete removal of the ESPI mechanism.The Commission is considering foundational changes to energy efficiency via the March 12, 2020 ALJ ruling related to potential and goals, including optimization of energy efficiency in the Commission’s Integrated Resource Plan (IRP). Conclusions of LawConsideration of changes to the ESPI Mechanism is within the scope of this rulemaking, pursuant to the Assigned Commissioner’s April 26, 2018, Amended Scoping Memorandum, which included “updates to the ESPI mechanism” in the scope of this proceeding as an ongoing policy issue. The Assigned Commissioner’s Ruling dated March 18, 2020, framed the focus of inquiry for purposes of this decision with the question: “Are shareholder incentives, in any form, necessary to ensure the achievement of energy savings?”Parties’ comments filed in response to the ACR granting the Cal Advocates motion provide a sufficient basis for the Commission’s decision as rendered in the instant order. An incentive mechanism is an appropriate use of ratepayer resources, to the extent that the mechanism drives incremental program performance resulting in net-positive benefit for California’s energy customers. SB 350 in 2015 required the Commission and California to double the amount of energy efficiency achieved in the economy by 2030.Public Utilities Code Section 454.5 requires electrical corporations to meet unmet resource needs through all available energy efficiency and demand reduction resources that are cost-effective, reliable, and feasible.The shift toward third-party design and implementation of energy efficiency programs begun in D.16-08-019 serves to heighten the importance of the IOU role in designing and administering effective energy efficiency portfolios that deliver superior results.Because SoCalGas is prohibited by D.18-05-041 from participating in the statewide codes and standards advocacy program, other than providing funding from its ratepayers, SoCalGas should be prohibited from earning a management fee on this program as part of the ESPI.With the shift toward the statewide administrative structure with lead IOU administrators, the ESPI should be reformed to recognize the larger role of the lead IOU. Further consideration of other possible reforms to the ESPI is appropriate after the issues in the March 12, 2020 Potential and Goals ALJ Ruling have been addressed. This order should be effective immediately. ORDERIT IS ORDERED that:The Efficiency Savings and Performance Incentive (ESPI) mechanism shall remain in effect in its current form, until such time as the issues raised in the March 12, 2020 Administrative Law Judge’s Ruling Inviting Responses to Potential and Goals Policy Questions have been resolved by the Commission, anticipated in early 2021, with one exception given in Ordering Paragraph 2. Southern California Gas Company shall be prohibited from earning the portion of the management fee as part of the Efficiency Savings and Performance Incentive mechanism on its funding of the codes and standards advocacy activities, as long as the ban on its participation in the statewide program instituted in Decision 18-05-041 remains in effect.This proceeding remains open.This order is effective today.Dated , at San Francisco, California. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download