Energy Efficiency: 
Utility Shareholder Incentive Mechanism

Background

In December 2012, the CPUC adopted a Decision awarding bonuses to shareholders of Edison, PG&E, SDG&E, and SoCalGas for running Energy Efficiency programs, totaling $42.2M for program year 2010. The award was based on 6% of utility program expenditures and a qualitative performance scorecard.  On September 30, 2013, the CPUC issued its Energy Efficiency Financial Compliance Audit Reports  for the 2011 program year. Based on the audit, for 2011 the utilities were awarded:

  • Edison: $13.5 million with the opportunity to earn an additional $5M after a second audit is completed, due to reporting discrepancies.
  • PG&E: $22 million
  • SDG&E: $4 million
  • SoCalGas $3 million

Utility shareholder bonuses for 2012 programs are scheduled to be awarded by the 4th quarter of 2014, once the CPUC’s 2012 program year audit reports are issued.

On April 4, 2013, the CPUC issued a Ruling introducing the Efficiency Savings and Performance Incentive (ESPI) mechanism that proposed awarding utility shareholder bonuses commencing with the 2013-2014 Energy Efficiency program cycle. In September 2013, the CPUC issued a Decision adopting the ESPI mechanism, with some modifications, which capped utility earnings at 10.85% of total expenditures across all 4 utilities (approximately $178 million). ESPI is composed of four parts:

  1. Lifecycle Resource Savings: Awards the utilities for achieving long-term energy savings.
    • Based on a combination of forecasted savings estimates and verified ex post savings values.
    • Includes aggressive net-to-gross (measuring free ridership) and expected useful life values, in order to further encourage investment in measures with long-term savings and market transformation potential. 
  2. Ex Ante Review Process Performance: Rewards the utilities for their diligence in implementing their forecasted energy savings goals.
  3. Codes & Standards: Awards a management fee of 12% based on program expenditures.
  4. Non-Resource Programs:  Awards a management fee of 7% for expenditures on programs that do not result in actual energy savings, but that support programs that do.

The utilities have received a total of $356 million in shareholder bonuses since the 2006 – 2008 program cycle.  

 

ORA Position

ORA generally opposes increasing customer utility bills to pay shareholder bonuses to run Energy Efficiency programs because:

  • There is no demonstrated correlation between shareholder bonuses and achieving energy savings.
  • The CPUC’s Evaluation process has demonstrated increased complexity and contentiousness, compromising verification results.
  • History shows that the process focuses on achieving shareholder awards, rather than achieving energy savings or improving program design.  

Energy Efficiency has grown into a robust, sustainable market that can be implemented and administered by market players beyond the utilities. However, any bonuses awarded to utilities for administering Energy Efficiency programs should be based only on verified energy savings, not utility estimates.

ORA opposed the CPUC’s December 2012 decision, and instead supported the CPUC’s original Proposed Decision that found utility awards for 2010-2012 were not justified because an incentive mechanism cannot impact utility behavior retroactively. ORA further contends that the CPUC’s retroactive finding does not demonstrate benefits to ratepayers for their investment. 

See ORA’s December 4, 2012 Opening Comments to Proposed and Alternative Proposed Decisions.

See ORA December 10, 2012 Reply Comments

 

Given that the CPUC has demonstrated its commitment to shareholder incentives, ORA generally supported the original proposed ESPI mechanism as an improvement over the CPUC’s previous mechanisms. However, ORA recommended critical modifications to the ESPI mechanism that should award utility bonuses based solely on verified energy savings, rather than the CPUC’s decision to make awards based on a combination of forecasted and verified energy savings.

See ORA’s August 15, 2013 Opening Comments to the Proposed Decision.

See ORA’s August 20, 2013 Reply Comments

See ORA April 26, 2013 Opening Comments the CPUC’s April 4 Ruling.  

See ORA May 3, 2013 Reply Comments.  

 

Proceeding Status 

See the Proceeding docket.