California Public Utilities Commission Approves Plan to Exceed Energy Efficiency Goals

September 24, 2007

On September 20, the California Public Utilities Commission (PUC) approved a new framework for achieving and exceeding the state's energy efficiency goals. The PUC says the new plan is critical to California's efforts to fight global warming.

The plan establishes a system of incentives and penalties to motivate investor-owned utilities to perform above and beyond the state's aggressive energy savings goals. The PUC says the incentives will cause utility investors and managers to view energy efficiency as a core part of their operations that can generate "meaningful earnings" for their shareholders. At the same time, the new framework protects consumers' financial investment, verifies program savings, and imposes penalties for substandard performance.

Earnings to shareholders will accrue only when a utility produces positive net benefits (savings minus costs) for ratepayers. Earnings begin to accrue at a 9 percent sharing rate if the utility meets 85 percent of the PUC savings goals. If performance achieves 100 percent of the goals, the earnings rate increases from 9 percent to 12 percent.

Each earnings rate is a "shared-savings" percentage. For example, if the combined utilities achieve 100 percent of the 2006-2008 savings goals and the verified net benefits (resource savings minus total portfolio costs) at that level of performance is $2.7 billion, then $2.4 billion (88 percent) of those net benefits goes to ratepayers and $323 million (12 percent) goes to utility shareholders.

The reward incentives are balanced by the risk of financial penalties for substandard performance in achieving the PUC per-kilowatt, per-kilowatt-hour, and per-therm savings goals. If utility portfolio performance falls to 65 percent of the savings goals or lower, then financial penalties begin to accrue.

The plan is expected to reduce global warming by an estimated 3.4 million tons of carbon dioxide by 2008, which is equivalent to taking about 650,000 cars off the road. The measure builds upon California's policies to advance clean air and energy, such as the Global Warming Solutions Act (Assembly Bill 32), the Low Carbon Fuel Standard (Executive Order S-01-07) and Emissions Performance Standard (Senate Bill 1368), and follows the direction of the state's Energy Action Plan.

PUC President Michael R. Peevey said, "The culture of a business is often, if not always, defined by how that business makes money. As a result, in the utility world, energy efficiency has traditionally played second fiddle to the generation and transmission side of the business. Today's decision changes that view. It's my hope that California's innovation serves as a template for other states around the nation."

For more information, read the September 20 PUC press release and the text of the decision .

To read more about renewable energy and energy efficiency projects in California, see: