BILL ANALYSIS                                                                                                                                                                                                              1
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                SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                                 ALEX PADILLA, CHAIR
          

          SB 806 -  Wiggins                                 Hearing Date:   
          April 21, 2009             S
          As Amended:         April 13, 2009           FISCAL       B
                                                                        
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                                      DESCRIPTION
           
           Current law  establishes minimum expenditures by investor-owned  
          utilities (IOUs) for cost-effective energy efficiency.

           This bill  requires the California Public Utilities Commission  
          (CPUC) to limit the IOU administrative costs for energy  
          efficiency programs to 5%.

           This bill  requires the CPUC, in awarding incentive payments to  
          the IOUs for the performance of their energy efficiency  
          programs, to ensure that:

                 No incentive payment is awarded unless an independent  
               audit verifies the energy savings;
                 Incentive payments are awarded only upon actual  
               achievement of the specified goals;
                 Incentive payments are awarded only for long-term  
               cumulative energy efficiency goals; and
                 Any incentive overpayments are returned to customers.

                                      BACKGROUND
           
          Energy efficiency is a critical measure for meeting our energy  
          demand, reducing greenhouse gas emissions, and controlling  
          energy bills.  California policy has long supported energy  
          efficiency programs, and the CPUC is in the process of  
          establishing the most ambitious energy efficiency goals ever for  
          the IOUs.

          The CPUC has determined that providing IOUs with financial  
          incentives will provide the best chance of meeting their energy  











          efficiency goals.  These incentives typically have carrots and  
          sticks:  additional profits if goals are exceeded, penalties if  
          goals are not met.

          This bill results from concerns that the CPUC's energy  
          efficiency programs are being poorly administered.  In  
          particular, the CPUC's most recent energy efficiency incentive  
          payment decision awarded $82 million to the IOUs in  
          non-refundable bonuses without verifying that the energy  
          efficiency savings were achieved and therefore the incentive  
          payments were earned.   A subsequent third-party analysis found  
          that the IOUs did not earn the $82 million and perhaps should  
          have been penalized.  However, since the CPUC made the award  
          non-refundable the IOUs were able to keep the bonus.

          Criticism of the CPUC's energy efficiency incentive mechanism  
          has led to a reexamination of the mechanism.  This couldn't be  
          more timely as the CPUC will soon launch a $3.7 billion energy  
          efficiency program for the IOUs for 2009-2011.

          Responding to a legislative request, the CPUC has provided  
          information on the IOUs overhead costs for administering the  
          energy efficiency programs from 2006-2008.  Those costs range  
          from a low of 8.8% to as much as 15.1%.  Between the four  
          largest IOUs the total administrative costs for the energy  
          efficiency programs was $238 million.

                                       COMMENTS
           
              1.   Only 5%  - This bill limits overhead, or administrative  
               costs, to 5% of the funds expended.  "Administrative costs"  
               are defined as personnel and overhead costs associated with  
               the implementation of each measure, but does not include  
               the costs associated with market and program evaluation.   
               Under this definition the IOUs would need to reduce their  
               current levels of overhead.  However, with the CPUC  
               considering approval of a $3.7 billion program, a 5%  
               overhead cap leaves the utilities with $185 million.  The  
               CPUC is currently evaluating its policy on administrative  
               costs.

               The Legislature has agreed with a 5% overhead cap before.   
               Last year AB 2176 (Caballero) was signed into law.  That  
               bill limited the California Energy Commission's overhead  










               expenses for administering certain federal funding to 5%.

              2.   Show Me the Money  - The restrictions that this bill  
               places on incentive payments in many ways reflect what had  
               been CPUC policy prior to their latest decision.

               The bill provides that incentive payments must be based on  
               actual achievement and not as a means of providing earnings  
               to the utility.  However, if the utility earns an incentive  
               payment it will result in earnings.   The author and  
               committee may wish to consider  fixing this conflict by  
               deleting the phrase beginning on page 3, line 28 "not as a  
               means of ?"

               The bill provides that incentive payments can only be  
               awarded based on "long-term cumulative energy efficiency  
               goals."  Provided that they are both cost effective, it is  
               not clear why long-term savings are superior to short-term  
               savings, given that all savings reduce customer bills and  
               greenhouse gas emissions.  A bias towards long-term savings  
               may cause the utilities to miss more cost-effective  
               short-term savings.   The author and committee may wish to  
               consider  deleting this subdivision, beginning on page 3,  
               line 33.

               The bill requires that any overpayment of incentives be  
               returned to customers.  There were overpayments in the  
               CPUC's 2006-08 energy efficiency incentive awards, based on  
               the staff analysis.  Because the award was non-refundable  
               those awards could not be returned to ratepayers.  But  
               under this bill incentive payments can only be made based  
               upon actual energy savings and after an independent audit.   
               Given this a requirement to return overpayments to  
               customers is unnecessary.   The author and committee may  
               wish to consider  deleting this provision, beginning on page  
               3, line 38.



















                                       POSITIONS
           
           Sponsor:
           
          The Utility Reform Network

           Support:
           
          Division of Ratepayer Advocates

           Oppose:
           
          None on file

          






































          Randy Chinn 
          SB 806 Analysis
          Hearing Date:  April 21, 2009