ORDER NO. 95-800

ENTERED 7/28/95

(THIS IS AN ELECTRONIC COPY)

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UM 564

DISPOSITION: TARIFFS ALLOWANCE REAFFIRMED

Procedural History

On February 22, 1993, PacifiCorp dba Pacific Power and Light (Pacific), as required by Order No. 92-1673, filed its initial application in this docket seeking approval

of demand-side management (DSM)cost recovery and incentive mechanisms (Advice No.

93-120). A deferred accounting application was separately filed pursuant to ORS 757.259. On September 3, 1993, Pacific filed an amended and restated application together with implementing tariff schedules. On December 10, 1993, Pacific filed its second amended application, appendices and tariff schedules. On December 14, 1993, Pacific filed four substitute tariff sheets to provide additional clarification.

On December 20, 1993, the Utility Reform Project (URP), pursuant to ORS 756.500 and 757.210, filed a complaint against the Pacific application, together with a petition to intervene.

The Commission considered Pacific's filing at its December 21, 1993, public meeting, and adopted the staff recommendation that the Commission authorize Pacific's use of the cost-recovery and incentive mechanisms. The Commission declined to suspend the tariffs or otherwise act on the allegations of the URP complaint at the public meeting.

Pacific timely answered the URP ORS 756.500 complaint and, on January 27, 1994, filed a Motion to Dismiss the ORS 757.210 complaint.

On February 18, 1994, the Commission issued Order No. 94-320, approving Pacific’s use of its DSM cost recovery and incentive mechanism, effective July 1, 1993, and further approving Pacific’s request for deferred accounting. Tariff sheets Schedule 191 (Cost Recovery Adjustment) and Schedule 192 (Incentive Adjustment) were allowed to go into effect. The URP complaint was referred to the Administrative Hearings Division for further proceedings. The docket was assigned to Hearings Officer Simon ffitch. A prehearing conference was held on February 18, 1994.

On April 14, 1994, Hearings Officer ffitch issued a ruling denying Pacific’s Motion to Dismiss URP’s ORS 757.210 complaint. The ruling directed URP to elect between the Chapter 756 and 757 complaints or the Chapter 756 complaint would be dismissed. URP did not respond within the time allowed and on May 26, 1994, the Commission issued Order No.

94-1771 dismissing URP’s 756.500 complaint.

On July 29,1994, the Commission issued Order No. 94-1165 reauthorizing Pacific’s deferred accounting treatment in connection with the DSM cost-recovery adjustment for twelve months beginning July 1, 1994. Deferred accounting treatment was reauthorized for a further six months beginning July 1, 1995, by Order No. 95-693.

Pursuant to the schedule adopted at the prehearing conference, prefiled written testimony was filed by the parties between July and October 1994. An evidentiary hearing was held before Hearings Officer ffitch on December 14, 1994. Following the hearing, opening and responsive briefs were filed by the parties during early 1995 (March-April).

The parties were permitted to submit late-filed exhibits following the December 14 hearing. With respect to late-filed URP Exhibit 7, Pacific filed a written objection to its admission. The objection was overruled but the record was reopened to allow Pacific the opportunity to cross-examine the URP witness, Dan Meek, on the exhibit. The reopened hearing was held on April 10, 1995.

The record was closed on May 10, 1995.

Stipulations

The following stipulations were entered into at the December 14, 1994, hearing:

PacifiCorp’s incentive and lost revenue adjustments in the proposed tariffs apply to installations occurring on or after July 1, 1993.

Where the 1992 Pacific Power and Light Company’s low-income competitive bidding RFP identified initial deemed savings amounts in the contract resulting from the RFP, they are consistent with the savings in the RFP.

 

These stipulations are reasonable and are adopted by the Commission.

Motions to Strike

Pacific’s Reply Brief incorporates a Motion to Strike Section XIV of URP’s Response Brief. Section XIV states in its entirety:

The PP&L Opening Brief contains numerous assertions of fact that are not supported by specific testimony in the record. URP objects to those statements.

 

Pacific argues that the objection is so general that it fails to afford other parties the opportunity to meaningfully respond, nor does it provide sufficient information identifying an URP position. Pacific’s motion is well taken. Section XIV raises no issue of law, fact, or policy with sufficient specificity that it can be addressed by the other parties or the Commission in this order. The motion to strike is granted.

Pacific’s Sur-reply Brief contains a second Motion to Strike. The second motion is directed to statements in URP’s Reply Brief describing alleged failures by Pacific to respond to discovery requests regarding energy service charge contracts and energy education programs. A review of the record indicates Pacific’s objections are well taken. URP’s efforts to raise discovery issues in the briefs are not timely. Discovery disputes are to be presented to the presiding officer by motion as provided in our rules. Discovery motions should be made prior to hearing, not argued indirectly in post-hearing briefs. References in briefs to discovery requests which are not in the record are improper. In addition, Pacific submitted with its motion copies of correspondence which cast serious doubt on the accuracy of URP’s assertions that Pacific failed to provide discovery on energy service contracts. Pacific’s second Motion to Strike is granted.

FINDINGS OF FACT

AND CONCLUSIONS

Applicable Law and Policy

UM 409/Order No. 92-1673

Docket UM 409 was initiated by the Commission in order to develop a set of policies which would encourage utility companies to acquire all cost-effective demand-side resources. The Commission reached four general conclusions:

Existing policy did not entirely remove regulatory disincentives to the acquisition of demand-side resources.

Full attainment of the Commission’s goals required that utilities have positive incentives to acquire cost-effective demand-side resources.

Each utility subject to the order was required to submit a company-specific package of mechanisms to remove disincentives and provide incentives to help accomplish the goals of the proceeding.

Removal of the link between sales and profits was necessary to fully achieve the goals of the proceeding. Pacific and PGE were directed to undertake a collaborative process to develop a proposed mechanism to sever the link.

 

Order No. 92-1673 at 3. In addition to these general conclusions, the Commission set out a list of five specific policy goals for incentive mechanisms. (1) Symmetrical rewards and penalties; (2) Specific benchmarks; (3) Proportionate reward/penalty; (4) Significant but not excessive incentives; and (5) Savings should be based on best estimates. Id. at 6-7. The Commission specifically stated that it would not subject incentives to after-the-fact true-up adjustments as it contemplated for lost revenue proposals. Id. at 7.

Cost Recovery Mechanism

Pacific’s cost-recovery mechanism includes three components: accrual of lost revenue; delayed amortization; and accrual of carrying charges.

A. Accrual of an Allowance to Compensate for Lost Revenue

DSM results in the loss of the margin on the electricity sales which Pacific would have otherwise made (lost revenues). Absent a cost recovery mechanism, this revenue loss would continue until the company's next rate case, when reduced sales could be reflected in rates. This creates a disincentive for a company to invest in demand-side resources. This disincentive is removed by allowing Pacific to recover the lost revenues as part of DSM program costs over the life of the programs.

Under this component of the mechanism, margins lost to installed demand-side measures are estimated, subject to verification and true-up, for later rate recovery.

B. Delaying amortization. Amortized program costs are accumulated for later collection in rates.

C. Accrual of carrying charges. Pacific earns a return on each year's DSM investment until the earlier of December 31, 1995, or the date of an order in a general rate case where DSM cost recovery is included. This removes the impact of the costs on earnings before the costs are reflected in rates. Each of the components is placed in a separate subaccount of Account 182.2, Regulatory Assets. Interest is earned on the balances in these deferred accounts at the rate of return adopted for Pacific's other deferred accounts.

Under Schedule 191, the Cost Recovery Adjustment, customer rates are adjusted annually to reflect amortization of the account balances. For lost revenues, Pacific will collect only 75 percent of estimated lost revenue in the year following installation, with the remainder collected after verification. Accruals (other than carrying charges) under the cost recovery mechanism would end December 31, 1995, unless extended by subsequent Commission action. The tariff would remain in place until the account balances are fully amortized.

Comparability of Investment Earnings. Order No. 92-1673 established a policy that removing disincentives to acquiring demand-side resources means enabling the utility to earn approximately the same return on its energy efficient investments as it would on a comparable supply-side (generation) investment. The Commission has acknowledged that this comparable earnings rate may not be at or near the utility's authorized rate of return until the costs have been incorporated in a general rate case. Under current accounting for DSM, Pacific estimates it receives a negative return on DSM investments. Pacific's set of cost-recovery mechanisms should produce a rate of return for its DSM investment of approximately 6.0-6.5 percent. A similar rate of return would be earned by a supply-side investment with a construction period of approximately four years and regulatory lag of one year.

Incentive Mechanism

Pacific's incentive mechanism would share the net benefits from the acquisition of DSM - the annual cost savings - between the company and its ratepayers. Net benefits are defined as the difference between Pacific's conservation cost effectiveness level, excluding the 10 percent conservation advantage and the actual cost of DSM programs reduced by associated Energy Service charge (ESc) revenues.

The incentive calculation consists of two phases. In both phases the net benefits are compared to a net benefit target of 65 percent of the total net benefit which would be realized from acquiring the planned level of DSM included in the company's most recently acknowledged Resource and Market Planning Process (RAMPP) report, adjusted for construction starts. The incentive is calculated for each major DSM program category, with the exception of non cost-effective residential retrofit programs.

First Phase. The incentives in the First Phase are "derated" in that Pacific would receive, as a reward or penalty, 30 percent of a fixed percentage of the difference between estimated annual savings (calculated using actual numbers of measures installed and estimated savings per measure) and the pre-established net benefit target. The fixed percentage varies by class: residential - 70 percent, industrial - 70 percent, commercial - 50 percent. The Phase I estimates of savings are derived from "deemed" savings amounts for the residential class and ESc savings estimates for the commercial and industrial classes. The Phase I incentive is paid in the year following the year of installation.

Second Phase. In the second phase, after measurement and verification of actual kWh savings, Pacific would receive as a reward, the difference between the incentive calculated based on deemed savings (paid in Phase I) and the incentive calculated using verified savings. If actual per measure savings exceed the agreed percentage of deemed savings in Phase I, Pacific receives an additional reward. In no case does the Phase II calculation result in a penalty to the company. Measurement, verification, and calculation of the second phase incentive are to be completed by the third year following installation. The mechanism also includes an incentive limit test by which the level of Pacific's incentive is limited to 30 percent of the actual total resource benefit, calculated where Conservation Cost Effectiveness (CCE) includes the 10 percent conservation cost advantage and total resource costs are not reduced by contract revenues.

Incentives would be collected through Schedule 192, the DSR Incentive Adjustment. As with the Cost-Recovery Adjustment, the rate is subject to revision annually.

Issues

There are two primary issues in this case.

1. Do Pacific's DSM Cost-Recovery and Incentive Mechanisms comply with the Commission's order in UM 409, Order No. 92-1673?

 

2. Do the DSM mechanisms result in just and reasonable rates for Oregon customers?

 

Under these general headings, there are a number of more specific issues that have been raised by the Utility Reform Project. In general, the discussion will follow the issues list raised by URP, consistent with the briefing of the parties.

Discussion

1. Decoupling Sales and Profits

URP asserts that the system proposed by Pacific would not remove the link between sales and profits, taking the position that decoupling was the "fundamental instruction

of Order No. 92-1673." Staff and Pacific disagree with this characterization of the order. They concede that the Pacific filing does not address decoupling, but argue that it is not required to

do so.

URP misreads the UM 409 order. The first General Conclusion of Order No.

92-1673 states:

Present policy does not entirely remove regulatory disincentives to the acquisition of DSM. This order commits us to the elimination of remaining disincentives to the extent they are the result of our policy or practice. This task will be given priority over any other goals we set out in this order. (emphasis added)

 

Id. at 3.

While the order did state that "[r]emoval of the link between sales and profits is necessary to fully achieve the goal of this proceeding," it did not require that decoupling of sales and profits be accomplished in the context of a plan to remove disincentives to DSM. That goal is being pursued in another forum. Id. The Pacific plan filed here is responsive to the Commission’s directive "to submit to the Commission within 90 days of the date of this order a proposal for a utility-specific package of mechanisms to remove disincentives and provide incentives to help accomplish the goals of this proceeding...." Id.

The subject matter of Pacific's plan complies with the Commission's order. Accordingly, there is no issue in this proceeding about whether the plan successfully delinks sales and profits.

2. Unproven Savings/Deemed Savings

Use of Deemed vs. Actual Savings

URP next argues that the plan rewards shareholders for unproven savings. In support of this argument URP asserts that: the methods for calculating lost revenue and the incentives rely upon unproven DSM savings; the system would discourage program quality by rewarding shareholders without regard for actual DSM savings; all calculations should be "trued up" to ex post studies; DSM savings should be documented by independent studies, including at least 3 years of post-treatment data.

The underlying premise to much of URP's argument is that the use of estimates or deemed savings in Pacific's plan is per se improper, because it may result in rewards for "nonexistent" savings. In URP's view, "the solution is to require that actual DSM savings be determined by independent studies...." URP Exhibit 1, pp.2-3.

Pacific responds that the Commission specifically contemplated and approved this type of incentive mechanism in Order No. 92-1673. Pacific is correct on this point. URP's argument was rejected by the Commission in UM 409. In that docket the Commission concluded that incentives should be based on the best estimates of measured savings available at the time of installation. Order No. 92-1673 at 7. On this basis, it is clearly reasonable for the company to develop a plan incorporating recovery and incentives based on deemed savings. URP’s concerns about the accuracy of estimates are discussed further below.

Deemed Savings For Residential Customers

The deemed savings used in the mechanisms for residential customers are contained in Schedule 191. These were derived from consultations and negotiations involving Pacific, the Commission staff and the Oregon Department of Energy. Staff Exhibit 4, a table describing the various sources for Pacific's deemed savings estimates is attached as Appendix A and incorporated by this reference.

Residential and Low-Income Customers

URP's general approach to deemed savings for residential customers is to provide examples of energy savings estimates from a variety of sources that purport to show lower savings than the deemed amounts in Pacific’s plan. Pacific takes strong issue with URP’s challenges to its supporting studies, and takes the position that its plan places reasonable reliance on the estimates available.

Staff takes the position that the comparability of the studies and data cited by URP to each other, and to Pacific's deemed savings is minimal. Staff argues that large variations in programmatic time periods, design, incentive levels, cost-effectiveness levels, measure technology and costs, delivery methods, and evaluation approaches, make the information of questionable value in evaluating the Pacific estimates.

(a) Pacific Studies

Among the studies relied on by Pacific in devising its plan were Results of a Decade of Weatherization ("Decade" study) and Water Savings and Related Energy Savings in a Multifamily Conservation Program ("Sumi study "). The Decade study was performed by Pacific and completed in 1991. The study reviewed the company’s residential energy conservation efforts between 1978 and 1989, using a quasi-experimental pre/post (before/after) design to estimate energy savings. The study reviewed a number of programs, including: Home Energy Analysis (HEA), Zero Interest Program (ZIP), 6 1/2% Interest Program, Cash Rebates, BPA Rebate/Low Income, Rental Incentive Program, and the low income program. Kilowatt hour consumption of program participants one year after (and five years after) was compared to consumption in the year prior to installing weatherization measures. A control group was used. The study concluded, inter alia, that first year annual net savings averaged just under 3600 kWh per weatherization. The study also concluded that energy savings are sustainable.

URP challenges the Decade study on the grounds that the underlying documentation is no longer available and that the study cannot be replicated. Pacific responds that the source billing remains available and the treatment group could be recreated. URP criticized the study on control group issues. Pacific notes that URP Exhibit 7, a BPA study relied on by URP, did not employ a control group.

The Sumi study analyzed the effects of the installation of low-flow showerheads as part of the Multifamily Conservation Program operated by Seattle City Light and the Washington Department of Human Resources between 1985 and 1987. The study concluded, inter alia, that the energy savings ranged from 465 kWh in 1986 to 754 kWh in 1988. Pacific’s deemed savings amount for low-flow showerheads in this docket is 600 kWh.

URP challenges the Sumi study on several grounds. URP argues that the study relates to a period before most dwellers had already installed low-flow showerheads and that the study’s pre-retrofit flow rates are not found in modern plumbing, implying that the savings results are no longer relevant. Pacific responds that that there is no evidence of record to support the assumptions underlying URP’s arguments. URP argues that the Sumi study is not an ex post evaluation of energy savings because the savings were measured indirectly, based on water savings. Pacific responds that the study was clearly performed after the conservation measures were installed and notes that extrapolation from water to energy savings takes place in URP’s own supporting study, URP Exhibit 7. URP argued that the BPA study was larger than the Sumi study, examining 93 apartments in 7 buildings on 5 sites over 90 days. Pacific responds that the Sumi study analyzed 72 buildings containing 868 apartments over 5 years.

In support of its plan, Pacific cites estimates by the Northwest Power Planning Council in a 1991 study which are higher than Pacific’s deemed savings amounts. For example, NWPPC estimated efficient water heater tank savings at 288 kWh, compared with Pacific’s deemed savings of 160-180 kWh. A manufactured home produced under the MAP program is estimated to save 6900 kWh, compared with Pacific’s deemed savings of 6154 kWh. URP’s primary objection to the NWPPC study was that it was "outdated." As discussed below, NWPPC’s showerhead figure was higher than Pacific’s.

(b) URP Studies

URP placed two studies in the record in support of its position, the "ORNL" weatherization study, and the Energy Efficient Showerhead and Faucet Aerator Metering Study ("Showerhead" study). URP asserts that the ORNL study contradicts Pacific's deemed savings amounts. Pacific argues that the ORNL study examined savings from BPA rebate programs, while Pacific's deemed savings were derived from loan programs. A like-to-like comparison of the BPA study figures with Pacific's rebate program, however, indicates that the company's deemed savings are more conservative than the BPA study. The company proposal is 1403 kWh. Application, Appendix 1, p.3. Phase 1 incentives are based on 70 percent of this figure, or 982 kWh. This is more conservative than the BPA study estimate of 1330 kWh. The figures, and those throughout the order refer to annual kWh savings per unit, unless otherwise specified. Pacific also cites language in the ORNL study which indicates statistical uncertainty in some of the study results.

The Showerhead study relied on by URP reviewed a cooperative project of BPA, Seattle City Light and the Seattle Water Department to evaluate the energy and water impacts of selected water conservation measures installed in multifamily buildings in the Seattle area, primarily efficient showerheads and faucet aerators that were retrofitted on a sample of units. The study, conducted over two months, showed lower savings amounts than the deemed savings amounts used by Pacific. Pacific makes several arguments with regard to the Showerhead study. Pacific points out that, unlike the Sumi study, the Showerhead study did not employ a multiple group/time-series design (consumption data across multiple groups and several years). The Sumi study had identified the failure to use such a methodology as creating only a fair likelihood of detecting a statistically significant water savings. The Sumi study corrected for this problem, but Pacific observes that the Showerhead study used neither a control group nor a multi-year set of data. As noted above, the Sumi study relied on water savings to extrapolate to energy savings. Although this was cited as a flaw by URP, the Showerhead study used the same approach.

Low Flow Showerheads

The deemed savings for low-flow showerheads were a particular area of dispute. Pacific proposes a deemed energy savings for low-flow showerheads of 600 kWh per housing unit. This figure was arrived at in consultation with Commission staff and the Oregon Department of Energy and was based upon a range of estimates from a variety of sources, including the Sumi study, which found a range of savings between 465 kWh and 754.2 kWh. The showerheads used in the Sumi study allowed a greater water flow than those used in Pacific's plan. The 1991 Northwest Power Planning Council study, similarly, estimated higher savings than Pacific's plan, predicting savings of 930 kWh for retrofitted showerheads with a higher flow rate than proposed here.

URP counters that the figure of 208 kWh is more appropriately used, since that is the figure used in Pacific’s competitive bid program. Staff and Pacific challenge the validity of the comparison of the bid figure to the deemed savings here because the estimates are not in the same unit of measurement. The 600 kWh estimate is per household, whereas the 208 kWh figure for competitive bidding is on a per showerhead basis.

Low-Income Weatherization

Pacific proposes deemed energy savings for low-income weatherization at 950 kWh. The source of Pacific's deemed energy savings proposal for this area is Pacific Power and Light Company Oregon Low-Income Program, Impact Evaluation. The company study analyzed the actual savings from a variety of weatherization measures provided to Oregon residences in 1989 and 1990. The overall net annual actual savings was estimated at 950 kWh.

URP challenges the Pacific assumptions, pointing to figures in the record showing that company actual savings were only 23.2 percent of deemed savings. In this instance, however, as noted above, Pacific’s deemed savings amount of 950 kWh was based on actual savings in its prior programs, not upon a ratio of past projected to actual savings.

The company estimates deemed savings for low-income education efforts at 1200 kw/house/year. The figure is based on the "North Coast study" which compared differences in energy consumption between households receiving energy conservation case management and a control group. The study found annual savings of 2157 kw per household.

Deterioration/Decay of Conservation

"Deterioration" in the conservation context means that there may be a reduction in realized savings following the first post-retrofit year. URP challenges Pacific’s plan because it fails to take this factor into account. Pacific takes issue with the premise, arguing that the deterioration effect is not proven. The studies in the record are mixed. The Decade study concluded that a "key finding of this study is that energy savings are sustainable." The report shows that average household savings were 3582 kWh in the first year after weatherization and 4224 kWh in the fifth year. The Sumi study, as stated above, showed increased savings over a three year period. The ORNL study, on the other hand, showed a downward trend over the years in net savings achieved during the first post-retrofit year in BPA conservation programs. The ORNL study also documents significant cutbacks in BPA home weatherization programs in the mid-1980s, however, resulting in reductions in both program features and measures.

Conclusion

The Commission will not devote this order to an exhaustive analysis of the various competing studies referenced in the record. For at least two reasons, it is not necessary to do so to reach a conclusion as to the reasonableness of Pacific’s plan. First, the Commission must only determine the reasonableness of Pacific’s proposal, not whether it is the only possible approach to demand-side management. Second, the estimates in Phase I of the plan are only a portion of the proposal, and are based on "derated" portions of the underlying estimated savings. All other components of the plan include true-ups based on verification. The incentive plan after the first year is based on actual measurement and verification. This conservative approach gives additional assurances that the overall plan will be fair to ratepayers.

There is at least the implication in URP’s arguments that a correct mathematical answer can be determined for the conservation effects of specific measures. The variety of estimates on the face of this record casts doubt on such a notion. At best, URP has established that other studies are in existence which contain differing estimates than those relied upon by Pacific. This does not, however, require a finding that Pacific’s deemed savings amounts are unreasonable. Each of the studies in the record contain differences in methodology, length of time, location, characteristics of subjects, age of data, conservation measures, nature of promotion (e.g. loan vs. rebate) and other factors.

The Commission concludes that the deemed savings proposed by Pacific are reasonable. The studies and other information set forth in Appendix A provide adequate justification for the deemed savings amounts. In addition, the availability of verification and measurement in later years of the program provides protection for ratepayers.

3. Savings Estimates for Commercial and Industrial Customers

The deemed savings for commercial and industrial customers are based on amounts specified in energy contracts between the customers and Pacific. URP contests the validity of using the contract amounts as savings for the commercial and industrial customers, arguing that the contracts are not in the record. Pacific responds that the contract amounts result from aggressive negotiations between large customers and Pacific, and that the interests of those customers in preventing overstatement of assumed savings results also protects customers in general. Staff notes that the individual contracts are commercially sensitive. Staff states:

Pacific's actual ESc contracts documentation provide [sic] detailed information on the modeling of commercial and industrial savings....[t]his information may be reviewed in the course of determining the reasonableness of cost recovery and incentives.

 

(Staff Reply Brief, p. 3). Staff and Pacific both argue that the use of individual contract amounts is appropriate for commercial and industrial customers because of range of results and the unique characteristics of each project. Individual contracts may be reviewed by staff at any time as part of the evaluation process. The Commission concludes that reliance on the commercial ESc data is reasonable.

4. Independent Studies and True-Ups

The Pacific plan provides that all lost revenue and Phase II incentive calculations be trued-up based on post-installation measurement and evaluation. Only Phase I incentive calculations are not subject to true-up.

URP takes the position that all savings estimates should later be trued-up to actual measured savings. The Commission's Order No. 92-1673 specifically contemplates the deemed savings approach taken by the company, which is not subject to true-up in the first year. While the Commission could have adopted a first year true-up, it chose not to do so, stating:

In contrast to our decision above requiring an after-the-fact adjustment of lost revenue estimates to actual performance, we will not engage in attempting to true-up performance relating to incentives. We do not wish to penalize a utility which makes a prudent decision to attempt to go beyond the expected band of achievement. To hold that possibility over the head of the utility would discourage such attempts and defeat the policy underlying the incentive program.

 

Id. at 7. Pacific's deemed savings amounts in Phase I are reasonable, as discussed above. All subsequent incentive payments are based on verified savings.

URP argues that the Commission should require DSM savings to be documented by independent studies, using consultants selected by the Commission staff and compensated by the company. Both staff and the company object to this approach as unnecessary and burdensome. The Pacific application includes a process for evaluation. The company would use three areas of program review: program evaluation plans and reports; annual reporting of conservation program activity compared to the Integrated Resource Plan’s two-year action plan; and the consensus evaluation methodologies produced by the Northwest DSM Evaluation work group. The work group is composed of representatives from the company, the Commission staff, Oregon Department of Energy (ODOE), the Pacific Northwest Utility Coordinating Council, Bonneville Power Administration, Natural Resources Defense Council, Solar Energy Association of Oregon, Washington Utilities and Transportation Commission, the Washington State Energy Office, and the Washington State Attorney General’s office.

The Commission will not require the use of independent consultants in this order. The plan currently provides for an evaluation that includes review by staff of the Commission and the ODOE, as well as other outside entities. The Commission staff, at its option, may call upon the services of outside experts to independently evaluate the company's work, but the Commission will not impose this as a blanket requirement.

5. Utility Cost and Total Resource Cost

Pacific's plan uses Utility Cost (UC) to calculate the incentive amount, but places an incentive upper limit using the Total Resource Cost (TRC). This is consistent with the fact that the Commission's approval process expects programs to be TRC cost-effective. Pacific should not be penalized if it implements a Commission-approved program that is expected to be cost-effective on a TRC basis, but does not turn out to be. The remedy is redesign or elimination of the program. Order No. 92-1673 states that the Commission wishes to avoid penalizing companies who implement conservation activities that were presumed to be cost-effective. While URP would prefer its own approach, with benefits calculated on a 2/3 TRC, 1/3 UC basis, the company proposal is consistent with Commission policy and is reasonable.

6. Penalty for Non Cost-Effective Programs

Pacific is required or encouraged to participate in certain mandated conservation programs, including residential retrofit for low-income customers. In general, these programs have not been cost-effective. URP argues that these low-income programs should be included in the incentive plan. These program categories are intentionally excluded from the DSM incentive/penalty proposal for a number of reasons. First, the level of expected savings is sufficiently uncertain that a penalty should not apply. Second, the company should not be penalized for lack of cost-effectiveness, when it is required to implement the program. Third, the company and the Commission staff are reviewing cost-effectiveness of these programs in a separate process which provides an opportunity to address the cost-effectiveness problems when they arise. Finally, the proposed mechanism does provide an incentive to improve the cost-effectiveness of mandated programs. If the company is successful in reducing mandated program costs to the point that they become cost-effective, the company can earn an incentive on those programs. In addition, reduced program costs, whether for mandated or any other program, lower the overall impact that DSM has on company prices.

7. Threshold Level of Net Benefits

Under the incentive plan, for applicable programs in the first year, the company will receive as a reward or penalty 30 percent of the difference between the net benefit resulting from the first year estimate of energy savings and the net benefit that would have resulted from acquisition of the DSM target. The DSM target is a percentage (65 percent) of the planned level of DSM stated in Pacific’s RAMPP-2 report. URP argues that this 65 percent threshold is not sufficiently stringent, recommending that the threshold level for receiving a reward or being assessed a penalty should be 100 percent of net benefits, or alternatively that DSM benefits should not be included in rate base.

The Commission has previously determined that rate base treatment alone was not sufficient to overcome disincentives to acquire DSM. Order No. 89-1700 authorized utilities to capitalize and amortize DSM costs. In July 1991, the Commission staff issued a report, Investigation Into Electric Utility Incentives for Acquisition of Conservation Resources, which addressed remaining disincentives for DSM acquisition. The report led to the initiation of Docket UM 409 and the issuance of Order No. 92-1673. The order concluded, inter alia, that (1) current regulatory policy does not remove disincentives to acquire DSM, (2) the key to removing disincentives is to provide equal regulatory treatment for DSM and supply-side resources, and (3) utilities need positive incentives to acquire demand-side resources. URP's challenge to the basis of Pacific's proposal does not address the existence of these Commission policies, but argues for a different approach which it prefers.

Pacific’s proposal reasonably addresses the disincentives for acquiring DSM identified in Order No. 92-1673. The plan provides positive rewards to the utility for acquiring DSM. The rewards are provided on a basis equivalent to the treatment for acquiring supply side resources. By deferring the rewards, the company gains the benefits of its conservation efforts between rate cases.

Furthermore, the ratepayers are protected. There is a penalty for failure to achieve the minimum 65 percent threshold target. The share the savings provisions limits ratepayer exposure to excessive earnings should the company acquire more cost-effective conservation than the 100 percent target. Finally, Pacific does not achieve its full authorized return on DSM until the target has been achieved.

URP claims the Pacific proposal is overly generous. URP would not allow Pacific to retain any benefits until Pacific acquired 100 percent of all cost-effective conservation identified in the Plan. Once the 100 percent level was achieved, URP would allow Pacific to retain 30 percent of the savings.

Such a program is all stick and no carrot. URP’s proposal would provide no incentives to the company until the maximum amount of cost effective conservation is acquired. Assuming the level of cost effective conservation is estimated accurately, there would be little opportunity for the company to benefit from acquiring DSM. On the other hand, if Pacific made a good faith effort to acquire conservation, but fell short of the 100 percent target, it would suffer a penalty. URP’s proposal does not satisfy the Commission’s objective of eliminating disincentives to acquiring cost effective conservation.

The Commission concludes that Pacific’s proposal is reasonable. The proposal addresses the disincentives to acquiring DSM specified in Order No. 92-1673 and provides adequate protections for the ratepayers.

8. Loss of DSM Benefits

URP points out that, with the potential for competition in the retail electricity market, some DSM benefits may be provided to commercial or industrial customers who later decide to purchase power from sources other than Pacific.

Pacific responds that this concern would only arise in limited circumstances. With regard to lost revenue, true-up is already provided for. To the extent that lost revenue is less, the mechanism is adjusted downward. With respect to incentive payments, Pacific argues that the incentive mechanism is built upon best estimates at the time of DSM incentives, according to Commission guidelines, and that it would be inconsistent to penalize the company for unforeseen migration loss of customers. Finally, Pacific views the problem as short term, since, in subsequent rate cases, the loss of any customers would be accounted for in the revenue requirement determination.

Staff also takes issue with URP’s position, observing that Pacific is revising its ESc tariffs to provide that, as a condition of termination, costs must be fully recovered for a customer who has received DSM benefits. Staff also argues that lost revenues could cease when new general rates go into effect.

The Commission concludes that the plan adequately addresses the issue of lost customers for the reasons set forth by staff and the company.

9. Energy Policy Act of 1992

URP argued in its briefs that the Commission was required by the Energy Policy Act of 1992 to consider the competitive impact on small business in adopting the incentive system under consideration here.

The National Energy Policy Act of 1992 requires the Commission to consider adoption of federal standards concerning: (1) integrated resource planning, (2) cost-recovery procedures for DSM that will make these activities at least as profitable as traditional supply-side investments, and (3) incentives for investments in cost-effective improvements in the energy-efficiency of power generation, transmission, and distribution. In addition, if a commission implements either integrated resource planning or cost recovery procedures under the Act, it must also consider the impact that the standard would have on small business. The Commission opened Docket UM 712 in response to the Act’s requirements. URP was a participant in that docket. On June 23, 1995, a final order was issued, Order No. 95-627, in which the Commission declined to adopt the federal standards on integrated resource planning. The Commission found that Oregon’s existing standards and procedures were adequate and declined to adopt the standards in the federal legislation. The order further noted that, since the federal standards were not adopted, the small business impact review was not needed. Order No. 95-627 at 6. The

UM 712 order disposes of the Energy Policy Act issue raised by URP.

10. Incentive Mechanism Policy Goals of Order No. 92-1673

Pacific’s incentive mechanism satisfies the five policy criteria for incentive mechanisms set out in Order No. 92-1673.

Symmetrical Rewards and Penalties. Symmetrical rewards and penalties are provided for in the plan, based on 30 percent of the difference between Pacific’s achieved DSM savings and the target level of net benefits.

Specific Benchmarks. For each program category, the mechanism uses a single figure benchmark tied to Pacific’s least-cost plan targets, rather than a range, to ensure that the company receives either a reward or a penalty.

Proportionality. The amount of the reward or penalty is a fixed percentage of and, therefore, directly proportionate to, the difference between the achieved level of net benefits and the target level.

Significant not Excessive Incentives. The mechanism provides Pacific an opportunity to significantly improve its earnings, but the potential rewards do not outweigh the benefits associated with the acquisition of demand-side resources. The incentive mechanism gives Pacific the opportunity to earn its authorized rate of return on its demand-side investment to the extent it meets or exceeds the targets for resource acquisition, when combined with the lost revenue mechanism. Incentives are subject to an upper limit of 30 percent of the total net benefit from conservation.

Best Estimates of Savings. The deemed savings adopted for Phase I of the company’s plan are reasonable estimates, based on consultation and empirical studies of similar conservation measures.

CONCLUSION

Except with respect to the Energy Policy Act, URP does not assert that the Pacific plan violates statutory or other legal requirements. In general, URP argues that certain factual bases of the plan are erroneous or unreasonable, and that policy elements of the plan are misguided. Neither argument is persuasive. The overall set of mechanisms put forward by Pacific is consistent with the guidelines established in docket UM 409. The plan contains some important components which reduce ratepayer risk. With the exception of Phase I (first year) of

the incentive mechanism, both the cost recovery and incentive plans are subject to verification and true-up based on verification of savings. Phase I of the incentive plan is "derated," basing the incentive payments on only a portion of the deemed savings (e.g. 70 percent of deemed residential savings). The company plan includes an evaluation that will enable the Commission staff and other interested persons to determine the effectiveness of the mechanisms.

Estimated savings and other components of the plan are reasonably based upon credible studies and other information available regarding the effectiveness of conservation measures. The fact that some studies may differ from those relied on by Pacific does not render the company’s approach unreasonable. Nor is the Commission required to adopt URP’s policy perspective with respect to DSM programs, simply because it might be more conservative than that of Pacific or staff. On balance, URP recommends a far more restrictive approach than Pacific on each component of the plan. It is not at all clear that adoption of this approach would achieve the Commission’s goals set out in UM 409 to remove disincentives for utilities to invest in demand-side resources. The Commission has the discretion to choose among alternate methods of achieving a regulatory purpose. American Can Co. v. Davis, 28 Or App 207, review denied 278 Or 393 (1977). It is not obligated to employ any single formula or combination of formulae to determine what are, in each case, "just and reasonable" rates. Pacific NW Bell v. Sabin, 21 Or App 200 (1975). In this case, the Commission concludes that Pacific has met its burden of showing that the cost recovery and savings mechanisms comply with Commission requirements and the guidelines of Order No. 92-1673 and that the resulting rates will be just and reasonable.

ORDER

IT IS ORDERED that:

The Cost Recovery and Incentive Mechanisms contained in PacifiCorp Schedules 191 and 192, having been found just and reasonable and in compliance with Order No. 92-1673, are approved and may remain in effect as provided in Order No. 94-320.

 

The claims set forth in the ORS 757.210 complaint of the Utility Reform Project are denied.

 

Made, entered, and effective ________________________. 

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of service of this order. The request must comply with the requirements in OAR 860-14-095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-13-070(2)(a). A party may appeal this order to a court pursuant to ORS 756.580.