California’s Energy Efficiency Shareholder Incentive Mechanism CSEM Policy Conference December 9, 2008 Tom Roberts, Regulatory Analyst (415)

2 Overview DRA Views Regarding California’s Risk Reward Incentive Mechanism (RRIM) Answers to Karen’s Questions Next Steps

3 Division of Ratepayer Advocates (DRA) and Energy Efficiency (EE) DRA is an independent ratepayer advocacy group within the CPUC DRA fully supports the lead role of EE in the Energy Action Plan (EAP), and California’s EE Strategic Plan (CEESP) DRA believes there are significant EE savings outside of direct utility control

4 DRA’s View of California’s Adopted Incentive Mechanism - RRIM RRIM increases the $2.1 billion cost of EE programs by up to $450 million, or 21% of adopted program costs This added cost of RRIM is only required for utility administered EE programs Costs of EE programs are real, immediate, and certain, while most benefits of EE occur only if/when power plants and power lines are avoided EE savings must be real, as verified through independent studies, or their benefits are uncertain, and may not displace investment in supply-side assets The CPUC agreed: “our adopted incentive mechanism protects ratepayers’ financial investment [and] ensures that program savings are real and verified” [D ] Even if an incentive mechanism is deemed necessary, a perfectly crafted “shared savings” mechanism is best suited for “resource programs,” not for market transformation

5 Can RRIM Motivate Utilities to Excel at Saving Energy? Programs for focused on “resource acquisition” CPUC set MW, MWh, and Therms savings goals; utilities determined budget to meet goals. RRIM provides rewards or penalties based on utility performance toward these goals. Reward level was subjected to hearings and “supply-side comparable earnings” were considered in developing RRIM CPUC balanced ratepayer and shareholder interests in setting reward levels much lower than the utilities requested (12% vs. 20% of net benefits) One rationale: EE is ratepayer financed via monthly bills and is less risky than raising capital for supply-side investments

6 California EE Strategic Plan (CEESP) Changes EE Program Focus Resource Acquisition ( ) –EE devices or programs with quantifiable energy savings which can be attributed to utility efforts (e.g. rebates for high efficiency air conditioner) –“Easy” to measure savings, but utility performance is still contentious Market Transformation (2009 and beyond) –Changes supply and demand curves for EE devices Emerging technology support Education & Marketing to influence behavioral changes Design assistance Workforce Development Local Government Strategies: city ordinances, enforcement, financing –Market Transformation criteria and goals not established. –Performance cannot be measured until goals are established

7 Is RRIM Fully Aligned With the Strategic Plan? “Activities in Direct Support of the Strategic Plan That Do Not Produce Measurable or Minimal Cost-Effective Savings in Should Be Exempt From the RRIM” “IOUs Should Receive EE Savings Credit for EE Actions Taken by Customers Who May be Motivated by State Policies or Legislation, Local Codes and Ordinances, or Multiple Sources of ‘Green’ Messaging” Source: EE Portfolio Applications, joint utility chapter on new policy requirements

8 How is Performance Towards Goals Determined? Longstanding CPUC policy requires “ex post” (after the fact) independent evaluation Evaluation process for has begun, has a budget of over $95 million, and will be completed in 2010 Issues with interim incentive payments have prompted two utility requests to change the adopted RRIM

9 Utilities’ Efforts to Change RRIM October 31, 2007 Petition for Modification (PFM) –Adopted in part in January 2008 CPUC decision –Rewards are generally non-refundable –Interim awards trigger a “lowering of the bar” to 65% of goals based on ex post savings August 15, 2008 PFM –Requests $152 million reward for based on self-reported energy savings –Requests change to RRIM to allow future rewards based on self-reported savings

10 Are We Situated to Achieve the Savings Goals We Have Set? For – Depends on who you ask: –Utilities – claim they have exceeded goals and deserve a reward –NRDC – claim that IF THE RULES ARE CHANGED the IOUs have exceeded goals and deserve a reward –CPUC staff and independent consultants – draft report shows electric utilities near penalty threshold of 65% of goals –DRA, TURN, and Community Environmental Council – Need finalized independent performance assessment, but high probability utilities have not earned rewards For programs – Not at this time

11 Tom Roberts, Regulatory Analyst (415) Decision on second utility petition for modification held from CPUC Dec. 4 meeting to Dec. 18 meeting Final report on utility performance due in less than six weeks, on Jan. 15 –If the CPUC votes on this at the Dec. 18 meeting, it will do so without a full vetting of the Draft CPUC Staff verification report Establish market transformation goals and adapt or replace RRIM to focus utility efforts on meeting new goals Next Steps