BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Transcription

1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Pacific Gas and Electric Company for Approval of Energy Efficiency Programs and Budget (U39M). Application And Related Matters. Application Application Application SOUTHERN CALIFORNIA EDISON COMPANY S (U 338-E) OPENING BRIEF JANET S. COMBS JANE LEE COLE Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: (626) Facsimile: (626) Jane.Lee.Cole@sce.com Dated: May 22, 2015 LIMS

2 SOUTHERN CALIFORNIA EDISON COMPANY'S OPENING BRIEF TABLE OF CONTENTS Section Page I. INTRODUCTION...1 II. PROCEDURAL BACKGROUND...5 III. DISCUSSION...6 A. The Commission Should Revisit the Purpose of the Cost Reporting Requirements...6 B. The Commission Should Support the Continued Use of Fixed-Price Performance-Based Contracts and Align the Reporting Requirements with Its Direction...8 C. SCE s Use of a Pre-Determined Cost Allocation Method for Reporting Administrative, Marketing, and Direct Implementation Costs is a Reasonable Way to Meet the Commission s 10 Percent Cost Target for Third-Party Contractors...10 D. The Potential Negative Consequences of Not Requiring the Precise Tracking of Costs Can Be Mitigated Without an Audit...12 E. Requiring Utilities to Track the Third-Party Contractors Actual Cost Would Negate the Benefits of Fixed-Price Performance-Based Contracts...14 F. UAFCB s Recommendation that Utilities Audit at Least 20 Percent of the Costs Charged by its Contractors Annually is Meritless...17 G. SCE Should Recover the Shareholder Incentive Amounts Withheld for 2011 and 2012 Related to this Fixed-Price Contract Issue...18 IV. CONCLUSION i-

3 SOUTHERN CALIFORNIA EDISON COMPANY'S OPENING BRIEF TABLE OF AUTHORITIES Authority Page(s) CPUC Decisions D , 11, 12 D , 9, 10 CPUC Resolutions Resolution E , 18, 19 CPUC Rulings R , Administrative Law Judge s Ruling on Reporting Requirements, dated February 21, , 6, 7 Other Authorities R , Staff White Paper, Energy Efficiency Rolling Portfolio Cycle Implementation, issued May 4, UAFCB s Energy Efficiency Financial Compliance Examination Report of SCE for the period January through December 31, 2011, dated September 27, ii-

4 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Pacific Gas and Electric Company for Approval of Energy Efficiency Programs and Budget (U39M). Application And Related Matters. Application Application Application SOUTHERN CALIFORNIA EDISON COMPANY S (U 338-E) OPENING BRIEF I. INTRODUCTION Pursuant to Rule of the Rules of Practice and Procedure of the California Public Utilities Commission (Commission or CPUC), and Administrative Law Judge (ALJ) Edmister s Ruling Setting Post-Hearing Procedural Dates Re SCE/UAFCB Audit Dispute issued on April 23, 2015, Southern California Edison Company (SCE) timely files this Opening Brief in the above-captioned consolidated proceedings. As stated in SCE s Motion for Clarification Pursuant to Ordering Paragraph No. 49 of D , filed on May 19, 2014 (SCE s Motion for Clarification), fixed-price performancebased contracts are a valuable energy efficiency (EE) resource and the Commission should either exempt them from the Commission s cost reporting requirements, or provide clear approval for the utilities to continue to use the cost allocation practices for reporting a third party s costs. In deciding this case, SCE asks that the Commission first revisit the intended purpose of the cost reporting requirements adopted nearly a decade ago and consider whether or not the reporting -1-

5 requirements still serve the intended purpose today. At the time these cost reporting requirements were created, the Commission may not have anticipated the utilities increased use of third-party fixed-price performance-based EE contracts today over traditional time and materials contracts. Thus, ALJ Gottstein s Ruling in 2006 left open the idea that there could be further discussions among program administrators, implementers, and interested parties and staff to further refine the cost categories and improve the reporting requirements. 1 While the Commission recognized in 2012 that fixed-price performance-based contracts are an effective way to pursue third-party program implementation which mitigate risks to the ratepayers, and encouraged the investor-owned utilities (IOUs) to increase the use of such contracts, 2 the Commission did not update or align the cost reporting requirements with this directive. As described below, and in testimony by SCE and Pacific Gas and Electric Company (PG&E), there are reasons for the Commission to revisit whether or not cost reporting requirements should be applied to third-party fixed-price performance-based contracts today, particularly when the costs that the third- party contractors are paid in accordance with the contract and not based on the costs they incur. The actual costs that third-party contractors incur will never match the fixed price invoices that SCE receives. 3 Further, it is highly unusual for a contractor to share its cost data with a contract owner under a fixed-price arrangement. Typically, when an owner seeks to monitor and manage contractor costs to achieve a contract objective, it will use an alternative contracting approach, such as a cost-reimbursable contract. 4 Strict adherence to the cost reporting requirements may put the utilities back in the position of reverting to more time and materials contracts as the reporting requirement defeats the purpose of the flat fee nature of the fixed-price contract arrangement and increases administrative 1 R , Administrative Law Judge s Ruling on Reporting Requirements, dated February 21, 2006, p D , p SCE, Wood, Tr. 117/19-26; SCE, Wallenrod, Tr. 118/ Exhibit PG&E-1 at 10:

6 and/or compliance costs for the programs with questionable benefit to the ratepayers. Should the Commission decide in this case that the cost reporting requirements should be applied to third-party fixed-price performance-based contracts, the Commission should rule that SCE s cost allocation factor method is an acceptable practice for complying with the Commission s cost reporting requirement. Because of the issues associated with tracking precise costs in a fixed-price performance-based contract, using cost allocation factors is a standard, widely accepted accounting practice that achieves cost-effective EE for ratepayers. 5 As described below and in SCE s testimony, the cost allocation factors are based on SCE s informed decision after taking into consideration the nature of the contract, the work to be performed by the third-party contractors, and the third-party s expectation as to expenses in the three Commission-mandated reporting categories over the course of the contract. 6 Also, SCE regularly trains and educates its third-party contractors on Commission cost categories, and follows a reasonable process (including its review of allocation factors and invoices for reasonableness) in developing and reporting the cost allocation factors. 7 The Commission s Utility Audit, Finance, and Compliance Branch (UAFCB) recommend that SCE audit the costs charged by 20 percent of the third-party contractors annually. The purpose of this recommendation seems to be premised for the utilities to have more oversight of these contracts and to prevent the utilities from shifting administrative and marketing costs onto third-party contractors. 8 However, UAFCB was unable to provide any evidence of SCE or any other utility inappropriately shifting its costs onto third-party contractors in this case. 9 Further, UAFCB even admitted during the hearing that, even if such cost shifting occurred, ratepayers would not be affected as a result. 10 Importantly, it is unclear what 5 Exhibit SCE-1, pp Exhibit SCE-1 at 3:5 4:2. 7 SCE, Wood, Tr. 99/ UAFCB, Kajopaiye, Tr UAFCB, Kajopaiye, Tr. 42/ UAFCB, Kajopaiye, Tr. 32/

7 purpose such an audit will serve as the invoices generated by the third-party contractors do not necessarily correspond to the actual costs incurred by the contractor during that invoicing period and is not equivalent to what SCE pays the contractor. 11 Moreover, as described in detail below, the potential negative consequences raised by UAFCB of not requiring the precise tracking of costs by third-party contractors can be mitigated without an audit. To the extent the Commission still has some concerns about the possibility of utilities shifting costs onto third-party contractors, SCE offered through its testimony and upon crossexamination at hearing, potential enhancements to improve the documentation standard for which cost allocation factor standards can be supported or justified by third-party implementers. These improvements can be developed jointly by the IOUs, the Energy Division, UAFCB, and the third-party implementers in lieu of auditing individual invoices for fixed-price performancebased contracts. Finally, SCE respectfully requests that the Commission s decision in this case be applied prospectively and not retroactively to SCE s accounting practices prior to the decision. Because SCE s accounting practices for its fixed-price performance-based contracts are not out of compliance with Commission directives nor did these practices violate any standard accounting practices, SCE should recover $5,005,528 of shareholder incentives withheld from SCE s 2011 shareholder incentive awards, and $1,239,986 of 2012 shareholder incentives withheld from SCE s 2012 EE shareholder incentive awards, pending resolution on this fixed-price contract issue SCE, Wallenrod, Tr. 116/25 117/8; SCE, Wood, Tr. 117/ Resolution E-4700, OP 2, and p

8 II. PROCEDURAL BACKGROUND On May 19, 2014, SCE filed a Motion for Clarification Pursuant to Ordering Paragraph #49 of D In its motion, SCE sought clarification regarding how costs associated with third-party fixed-price performance-based EE contracts should be reported for Commissiondirected accounting purposes. In particular, SCE sought a Commission ruling stating that either fixed-price performance-based EE contracts are not required to track costs in detail as UAFCB recommends or, in the alternative, the cost allocation method currently used by SCE is an acceptable practice for complying with the Commission s cost reporting requirements. 13 In this regard, SCE also sought to resolve the pending issues surrounding SCE s 2011 EE incentive awards that were withheld based on UAFCB s finding that SCE s cost allocation for fixed-price performance-based contracts were considered a potential reporting discrepancy. 14 On June 3, 2014, PG&E, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCal Gas) (collectively, IOUs) filed responses to SCE s motion, generally supporting the motion, but diverging on the remedy they would have the Commission select. A prehearing conference was held on August 5, 2014, and an Amended Scoping Memo was issued on October 29, 2014, to update the original August 2012 Scoping Memo 15 to place in scope the proper accounting treatment in 2011 for SCE s third-party contracts, and also how to account for third-party fixed-price performance-based contracts from 2015 onward for all IOUs SCE Motion for Clarification, p UAFCB s Energy Efficiency Financial Compliance Examination Report of SCE for the period January through December 31, 2011, dated September 27, 2013 (2011 Audit Report). 15 See A , et al., Scoping Memo and Ruling of Assigned Commissioner and Administrative Law Judge, issued August 27, A , et al., Corrected Amended Scoping Memo and Ruling of Assigned Commissioner and Administrative Law Judge Re Southern California Edison Company s Motion for Clarification Pursuant to Ordering Paragraph Number 49 of D , issued October 29, 2014, p

9 An evidentiary hearing was held on this matter on March 30, At the hearing, parties had the opportunity to cross-examine the witnesses who submitted written testimony in this matter, and such written testimony was entered into the record. On April 23, 2015, ALJ Edmister issued an Ruling Setting Post-Hearing Procedural Dates Re SCE/UAFCB Audit Dispute, setting dates for closing briefs, transcript corrections, and submittal of the matter. III. DISCUSSION A. The Commission Should Revisit the Purpose of the Cost Reporting Requirements The Commission should focus on the underlying purpose of the cost reporting requirements and consider whether those requirements should be applied to fixed-price performance-based contracts which many utilities are using today in order to meet the ever growing EE demands in California. When the Commission updated the cost reporting requirements in 2006 to track EE activity costs in the three categories of administration, marketing, and direct implementation, 17 the Commission stated its expectation that the content and format of these reporting requirements will need to be modified over time as key stakeholders assess their information needs as well as the progress of IOU portfolio plans. 18 The Commission went on to state that the reporting requirements adopted at this juncture should be viewed as the first generation of reporting requirements for post-2005 energy efficiency activities, and not the final word. 19 The Commission concluded by stating that [n]othing in today s ruling precludes further discussion among program administrators, implementers, 17 R , Administrative Law Judge s Ruling on Reporting Requirements, dated February 21, 2006, p Id. at p Id. at pp

10 interested parties and staff for the purpose of refining common definitions of cost categories over time in order to further clarify and improve consistency in reporting. 20 The Commission s insight and guidance into the purpose of these cost reporting requirements can also be found in Decision D In that decision, the Commission stated: We are obligated to keep overall ratepayer costs at reasonable levels, allow the utility to recover only reasonable administrative costs, and ensure that the maximum amount of funds go directly to valuable programs. Indeed, if we allow utility administrative costs to go unchecked, then we leave open the possibility that savings that do not appear to be cost-effective would be costeffective if the utilities administrative costs were controlled. We would thus fail to carry out our legal obligations to ensure that rates are just and reasonable and that the utilities first obtain all cost-effective energy efficiency. 21 In order to provide cost-effective EE programs and to meet the ever growing EE demands of the state, the IOUs have increased the use of third-party fixed-price performance-based contracts. As described below, tracking the third-party contractors costs under fixed-price performance-based contracts are not only difficult but the actual costs incurred by the third-party contractors do not match the amount utilities pay them because the contractors are paid in accordance with the contract. 22 As detailed in SCE s testimony and in this Opening Brief, tracking of precise time and material costs would negate the benefits of having fixed-price performance-based contracts, would likely increase cost to the ratepayers to implement, yield questionable benefit to the ratepayers, and may force SCE to revert back to using time and materials contracts. Thus, the Commission should revisit whether the cost reporting requirements adopted almost a decade ago should be applied to third-party fixed-price performance-based contracts today. 20 Id. at p D , p. 55 (emphasis added). 22 SCE, Wood, Tr. 117/19-26; SCE, Wallenrod, Tr. 118/

11 Furthermore, the Commission should consider whether its policy goals of reducing administrative costs and providing maximum benefits to the ratepayers can be achieved through standard accounting principles. As SCE s witness Mr. Loughlin described at the hearing, the Commission s three cost categories of marketing, administration, and direct implementation, are not found in Generally Accepted Accounting Principles (GAAP) or Federal Energy Regulatory Commission (FERC) Accounting, nor is there a direct mapping of FERC subaccounts to the three cost categories. 23 Recently, the Commission Staff noted in its Staff White Paper on Energy Efficiency Rolling Portfolio Cycle Implementation, that [t]he Commission has imposed a variety of non-standard accounting requirements on PAs over the years, in pursuit of various policy objectives (e.g., an administrative cost cap and accounting categories adopted in D ). All of these requirements should be up for reconsideration PAs should use generally [accepted] accounting principles (GAAP) wherever possible. If we can achieve a policy goal (e.g., reduced administrative costs) within a commercial off-the-shelf accounting framework, then that is preferable to our creating unique accounting rules. 24 B. The Commission Should Support the Continued Use of Fixed-Price Performance- Based Contracts and Align the Reporting Requirements with Its Direction SCE explained in its testimony that the majority of SCE s third-party contracts are fixed price, meaning they are based on a cents-per-kwh saved format or a fixed-price-per-ee measureinstalled format. In these contracts, third parties bundle their costs and negotiate a total price that SCE will pay for performance. 25 From , SCE had 55 fixed-price contracts, 16 hybrid 23 SCE, Loughlin, Tr. 95/19-27, and 98/ ALJ Edmister also recognized at the hearing that the three cost reporting categories are not found in Generally Accepted Accounting Principles or FERC, but something that the Commission created in the EE proceeding only. See ALJ Edmister, Tr. 95/19-96/6. 24 R , Staff White Paper, Energy Efficiency Rolling Portfolio Cycle Implementation, issued May 4, 2015, p. 19 (emphasis added). 25 Exhibit SCE-1 at 3:

12 contracts, and 6 time and material contracts. 26 Similarly, PG&E uses fixed-price contracts for certain energy efficiency programs because it considers them to be a good value for ratepayers as these types of contracts require payment only for verified energy savings delivered by the contractors. 27 Indeed, the Commission has clearly recognized the benefit of using third-party [fixedprice] performance-based contracts and supported the IOUs expanded use of such contracts: We find two principle reasons to rely more heavily on third-party program implementation. First, to a large extent, third-party implementation can occur pursuant to performance-based contracts. Under such agreements, executed between the IOU and the third-party, the third-party implementer accepts the risk for program non-performance: if verified energy savings do not result from the program, the third-party service provider receives reduced compensation. With effective IOU oversight, performance-based contracts can effectively mitigate risk that ratepayer contributions do not produce commensurate value. 28 As SCE s witness, Mr. Wallenrod, explained at the evidentiary hearing, the risk is shifted mostly on, if not all, on the contractors. They have an obligation to perform or they don t get paid. It mitigates the risk for our customers, and we can watch that. 29 Because these thirdparty fixed-price performance-based contracts are beneficial to ratepayers, the Commission encouraged the IOUs to increase the use of such contracts, stating: While we recognize that all of California s objectives for energy efficiency cannot be achieved through performance based contracts alone, we conclude that their use should be increased by the IOUs going forward. 30 SCE agrees with the Commission s guidance in D , but respectfully requests that the Commission align its cost reporting requirements with that guidance. The current reporting requirement, as it is applied today by UAFCB, amounts to a direct conflict with the direction SCE has received from the Commission in D ; that is, the UAFCB would 26 SCE confirms that the numbers stated in SCE s Motion for Clarification are accurate. 27 Exhibit PG&E-1 at 7: D at SCE, Wallenrod, Tr. 127/ D at 154 (emphasis added). -9-

13 require precise tracking of time and material of third-party contractors costs in fixed-price performance-based contracts. 31 This is fundamentally at odds with the nature of such contracts and the current requirements make it impracticable for SCE to continue its use of such contracts. C. SCE s Use of a Pre-Determined Cost Allocation Method for Reporting Administrative, Marketing, and Direct Implementation Costs is a Reasonable Way to Meet the Commission s 10 Percent Cost Target for Third-Party Contractors Under fixed-price performance-based contracts, should the contractor s costs turn out to be higher than the agreed fixed price, the resulting loss is the responsibility of the contractor. 32 However, unlike time and materials contracts, these fixed-price performance-based contracts do not require precise tracking of the contractor s time and materials because the contractor is paid a fixed price according to the established payment mechanism in the contract irrespective of the costs incurred by the contractor in executing the work, 33 and the client s focus is on the contractor s obligation to perform or they don t get paid. 34 Under performance-based fixedprice contracts terms, it is not common industry practice for a contractor to share its actual cost data with the contractor owner 35 and producing such financial information may disclose proprietary information, such as how much profit the vendor is making on the contract. 36 In Decision D , the Commission correctly recognized the difficulty in tracking third-party contractors costs and ruled that: However, imposing a 10% administrative cost cap for each program within these categories would be excessively burdensome for utilities, third party contractors and government partners. Therefore, we direct the utilities to seek to achieve a 10% administrative cost target for third party and local government partnership direct costs (i.e., separate from utility costs to administer these 31 UAFCB, Kajopaiye, Tr. 16/25-17/7. 32 Exhibit PG&E-1 at 7: Id. at 7: SCE, Wallenrod, Tr. 127/8. 35 Exhibit PG&E-1 at 1: SCE, Wallenrod, Tr. 116/

14 programs). As combined total program categories, third party and local government program administrative costs should strive toward the 10% total administrative cost target. 37 To meet this 10% administrative cost target for its third-party contractors under fixedprice performance-based contracts, SCE uses pre-determined cost allocation factors negotiated in the contracts for reporting expenses in the three cost categories of administration, marketing, and direct implementation. 38 However, as explained in detail in SCE s testimony and further explained in Section D below, the use of pre-determined cost allocation factors is not arbitrary and provides SCE and the Commission reasonable visibility into the third-party contractors cost breakdowns. 39 The cost allocation factors are also based on SCE s informed decision after taking into consideration the nature of the contract, the work to be performed by the third-party contractors, and the third-party s expectation as to expenses in the three Commission-mandated reporting categories over the course of the contract. 40 SCE s witness, Ms. Wood, also explained in detail SCE s process of training and education of the third-party contractors on Commission cost categories, and the process that SCE follows (including its review of allocation factors and invoices for reasonableness), in developing and reporting the cost allocation factors. 41 Because of the issues associated with tracking precise costs in a fixed-price performance-based contract, using cost allocation factors is a standard, widely accepted accounting practice to achieve costeffective EE for ratepayers. 37 D , p. 63 (emphasis added). 38 Exhibit SCE-1 at 1:24 2:8. 39 See Exhibit SCE-1 at 3:14 4:2. 40 Id. See also SCE, Wood, Tr. 99/27-106/ SCE, Wood, Tr. 99/

15 D. The Potential Negative Consequences of Not Requiring the Precise Tracking of Costs Can Be Mitigated Without an Audit In its testimony, UAFCB explains that there will be potential consequences to the Commission s cost containment policies if the IOUs are not required to allocate among cost buckets for third-party contracts. 42 Primarily, UAFCB seems to be concerned that, without verifiable cost data compiled and reported in the three cost categories, the IOUs may be able to circumvent their 10% cap on IOU administrative costs and targets/caps on marketing costs by unduly shifting such duties onto local government partnerships and third-party implementers. 43 However, at the evidentiary hearing, UAFCB witness Mr. Kajopaiye stated that so far he had seen no evidence of utilities unduly shifting costs onto third-party contractors, but that he believed the potential for such cost shifting still exists. 44 Specifically, Mr. Kajopaiye stated: [e]ven though we have not found any shifting occurring, but we usually have in the back of our minds that they could potentially do it if they [sic] find it difficult to keep their costs on that 10 percent. 45 Thus, UAFCB s concern that IOU administrative costs could potentially be shifted to third-party contractors in an effort to circumvent the 10% cap on total IOU administrative costs 46 seems to be based on its general distrust of the utilities and not on any factual basis. More importantly, Mr. Kajopaiye admitted that, even if such cost shifting occurred, ratepayers would not be affected as a result. 47 To the extent the Commission still has concerns about the possibility of utilities shifting their administrative or marketing costs onto third-party contractors, even though that has not proven to be the case, SCE notes that it has oversight over administration, marketing, and direct 42 Exhibit UAFCB-1-2 at 4:29 5: Exhibit UAFCB-1-2 at 4:32 5:5. See also UAFCB, Kajopaiye, Tr. 43/3 44/ UAFCB, Kajopaiye, Tr. 42/ UAFCB, Kajopaiye, Tr. 59/26-60/3. 46 The 10% cap on total IOU administrative costs was imposed by D , Ordering Paragraph (OP) #13(a). 47 UAFCB, Kajopaiye, Tr. 32/

16 implementation activities in third-party fixed-price performance-based contracts at the time SCE negotiates the contract. 48 SCE reviews the budget and other financial information received from the contractor to evaluate whether the price and the budget breakdown of the contract as a whole are just and reasonable. 49 Although this approach does not allow all components of the cost allocations to be verified to source data for each invoice provided by the contractor, it is not arbitrary and does provide SCE and the Commission significant and reasonably accurate visibility into cost breakdowns. 50 During the term of the fixed-price performance-based contract, the contractor submits invoices to SCE at regular intervals and provides narratives on the contractor s activities in the administrative, marketing, and direct implementation categories, and allocates the costs of each invoice into the Commission s three cost categories. 51 SCE also monitors the achievement of savings in the field, along with customer feedback, and compares those results with the vendor s invoices to allow for adequate control and measurement in the oversight of the contract. 52 In addition, if there are significant changes to the scope of work or the third-party s business cost structure, budgets and cost allocations are reviewed and updated 53 and would be reflected in an update to the contract. 54 In fact, under a fixed-price performance-based contract, contractors have a strong incentive not to allow the utilities to push additional administrative tasks onto them, and would likely push-back if the utility were to try to divert any of its own administrative tasks onto the contractor because such tasks would not be represented in the contract and, thus, the contractor would not get paid for such additional tasks SCE, Wood, Tr. 103/ SCE, Wood, Tr. 103/ SCE Motion for Clarification, p SCE, Wood, Tr. 103/24 104/ SCE, Wallenrod, Tr. 105/ Id. 54 SCE, Wallenrod, Tr. 125/13-18; UAFCB, Kajopaiye, Tr. 42/ SCE, Wood, Tr. 128/

17 In its testimony, SCE offered some possible enhancements that could be made to improve the documentation standards for which cost allocation factors are to be supported or justified by different third-party implementers. 56 During the hearing, SCE witness, Mr. Wallenrod, also offered some improvements that can be made as an alternative to utility auditing of vendors real-time costs under these fixed-price performance-based contracts. Mr. Wallenrod stated that, although an audit of vendor real-time cost data would be infeasible under a fixed-price performance-based contract (for the reasons set forth in Section III.E., below), it is possible at some future time such as the end of the contract, or even on an annual basis to perform an update of the budget in an effort to true-up the allocation of costs into the three Commissionrequired categories. 57 This could be done by asking the vendor to support the allocation determined under the contract based on a review of the past and anticipation of the future to determine whether the original allocation is still appropriate. 58 Should the Commission find these enhancements to be a practical alternative to an audit, they can be developed jointly by the IOUs, the Energy Division, UAFCB, and the third-party implementers. E. Requiring Utilities to Track the Third-Party Contractors Actual Cost Would Negate the Benefits of Fixed-Price Performance-Based Contracts UAFCB expects the third-party contractors under fixed-price performance-based contracts to track and report their costs in three categories of administration, marketing and direct implementation. 59 UAFCB witness, Mr. Kajopaiye further testified that the actual costs of the third-party contractor and what the utilities pay the contractor under the contract should be the same and that [t]here should not be any difference. 60 This is incorrect, and it reflects UAFCB s misunderstanding of the flat fee nature of fixed-price arrangements, which do not 56 Exhibit SCE-1 at 10: SCE, Wallenrod, Tr. 118/ SCE, Wallenrod, Tr. 121/ Exhibit UAFCB-1-2 at 4:6-7 & 5:19-22; see also UAFCB, Kajopaiye, Tr. 12/18-13/ UAFCB, Kajopaiye, Tr. 20/

18 require precise tracking of the third-party contractors costs. As explained by SCE witnesses, under a fixed-price performance-based contract, SCE pays a set price established with the third-party upfront; although the contractor submits invoices to SCE at regular intervals (e.g., monthly), these invoices do not necessarily correspond to the actual real-time costs incurred by the contractor during that invoicing period. 61 SCE witnesses correctly summarized the problem of tracking fixed price contracts: The costs that the vendor incurs are not equivalent to what we pay the vendor. We pay the vendor in accordance with the contract, which is a fixed price per delivered energy or delivered installation of a measure. And whatever it costs the vendor to deliver those results, we don t pay that. We pay what s in the contract. 62 Thus, contrary to UAFCB s testimony, the actual costs of third-party contractors will never match the fixed-price bills that we receive 63 Additionally, while SCE may have a right to audit its contractors and request financial information, contractors would likely be unwilling or unable to produce financial information that matches the Commission s three cost categories. 64 This is because under performancebased fixed-price contract terms, it is not common industry practice for a contractor to share its actual cost data with the contractor owner 65 and producing such financial information may disclose proprietary information, such as how much profit the vendor is making on the contract. 66 Thus, [i]t is highly unusual for a contractor to share its cost data with a contract owner under a fixed-price arrangement. Typically, when an owner seeks to monitor and manage contractor costs to achieve a contract objective, it will use an alternative contracting approach, such as a cost-reimbursable contract SCE, Wallenrod, Tr. 116/25 117/8; SCE, Wood, Tr. 117/ SCE, Wood, Tr. 117/ SCE, Wallenrod, Tr. 118/ SCE, Wallenrod, Tr. 115/22 116/ Exhibit PG&E-1 at 1: SCE, Wallenrod, Tr. 116/ Exhibit PG&E-1 at 10:

19 Moreover, requiring the third-party contractors to produce actual cost information may result in the contractors providing data on costs not incurred under the contract. 68 As explained above, not only is there a gap of time between when costs are incurred by the contractors versus when they actually submit the bill, but [o]nce the contract value is accepted, the costs incurred by the successful contractor or vendor are not relevant to the delivery of the final cost objective. 69 Finally, UAFCB mistakenly believes the third-party contractors costs would not increase if they are required to track and report the cost according to the Commission s three cost categories because these contractors are dealing with regulated utilities and would have rules that they must follow and because these contractors are not mom-and-pop shop vendors. 70 But this is hardly the case. First, the third-party contractors who enter into fixed-price performance-based contracts are not expected to track their costs in detail. 71 Thus, even if these contractors are not mom-and pop shop vendors, it would place additional administrative burden on the contractors to establish and manage its own cost accounting system in accordance with the IOU s specific cost definitions and reporting requirements. 72 Second, while SCE did not obtain the exact dollar amount from each of its third-party contractors, 73 logically, any time contractors are asked to do more than what the contract requires, or in this case, change their record keeping practices, it would cost more. A few contractors told SCE that it would cost several hundred thousand dollars to implement a system in addition to labor charges for creating the reports and actually doing the tracking. 74 Finally, not only would this requirement increase the cost to the ratepayers but the benefit is questionable. Admittedly, UAFCB [doesn t] look at 68 SCE, Wallenrod, Tr. 116/23-25; SCE, Wood, Tr. 117/ Exhibit PG&E-1 at 11: UAFCB, Kajopaiye, Tr. 36/11-37/ Exhibit SCE-1 at 7:12-16 & 8: Exhibit PG&E-1 at 11: If the Commission desires precise costs to the third-party contractors or the IOUs as a result of this cost tracking and reporting requirement, SCE would be willing to provide that information. 74 SCE, Wood, Tr. 84/

20 the savings, 75 have not found any fund shifting occurring, 76 and even if there was fund shifting, UAFCB admitted the ratepayers would not be affected. 77 F. UAFCB s Recommendation that Utilities Audit at Least 20 Percent of the Costs Charged by its Contractors Annually is Meritless UAFCB recommends that even if the Commission determines that fixed-price contracting reporting with pre-determined allocation factors is appropriate on a going forward basis, then the Commission should require the utilities to verify at least 20% of the costs charged by the contractors annually to ascertain if the fixed allocation percentages are accurate. 78 Mr. Kajopaiye clarified that UAFCB s recommendation is that after five years, 100 percent of the third-party contractors under fixed-price performance-based contracts would be audited. 79 This essentially means 100 percent of the third-party contractors would need to track their costs regardless of whether the Commission approves the IOUs to continue to use the cost allocation method for reporting purposes. This simply does not make sense as it would defeat the purpose of the cost allocation method as a reasonable practice for complying with the Commission s cost reporting requirements, because it would still force the third-party contractors to track their costs in detail. UAFCB witness Mr. Kajopaiye admitted during the hearing, this 20 percent audit requirement is not a Commission-mandated requirement, but a recommendation that UAFCB determined, on its own judgment, to make sure that there is some level of oversight of these contracts. 80 However, requiring the utilities to conduct detailed audits of all of its third-party contractors costs is not necessary for the utilities to have oversight of these contracts. Further, 75 UAFCB, Kajopaiye, Tr. 68/ UAFCB, Kajopaiye, Tr. 59/ UAFCB, Kajopaiye, Tr. 32/ Exhibit UAFCB-1-2 at 4: UAFCB, Kajopaiye, Tr. 33/27-34/1. 80 UAFCB, Kajopaiye, Tr. 33/

21 the audit requirement is an extreme solution which would render these contracts meaningless because the audit requirement would not only result in additional administrative burden on contractors to establish and manage their own accounting systems as discussed above, but would place additional administrative burdens on the utilities for conducting the audit. More importantly, it is unclear to SCE how ratepayers benefit from these audits. The Commission should consider ratepayers benefit first in rendering a decision on whether or not a third-party contractor should be required to precisely track its costs in a fixed-price performance-based contracts as UAFCB recommends. G. SCE Should Recover the Shareholder Incentive Amounts Withheld for 2011 and 2012 Related to this Fixed-Price Contract Issue In Resolution E-4700, the Commission rejected SCE s request for payment of a $5,005,528 holdback on 2011 shareholder incentives, and also held back $1,239,986 of 2012 shareholder incentives pending the resolution of SCE s Motion for Clarification in A Resolution E-4700 states: The deliberations occurring in A are related to the proper accounting treatment for SCE s third party contracts and are expected to determine whether SCE s accounting practices in 2011 and 2012 resulted in the accurate reporting of third party contract expenditures. It would be premature to award SCE shareholder incentives on a portion of expenditures that may not have been accurately accounted and reported. Consequently, we will determine whether to award the $6.2MM holdback after the Motion for Clarification is resolved. 82 For the reasons discussed herein, SCE respectfully requests the Commission find that SCE s accounting practices, as they relate to third-party fixed-price performance-based contracts, are not out of compliance with any current Commission directives regarding the administration of such contracts or reporting of the associated costs, nor does SCE s use of pre-determined cost 81 Resolution E-4700, OP Resolution E-4700, p

22 allocation factors to estimate third parties costs into the Commission s cost categories violate any standard accounting practices. In addition, if the Commission adopts process improvements for the reporting of third-party fixed-price contracts into the Commission s cost categories, such as those described by Mr. Wallenrod regarding the review of contract terms that would eliminate the need for real-time cost tracking and audits, 83 the improvements should be applied on a prospective basis only. Because SCE was directed to request recovery of these holdbacks in its annual incentive award request advice letter, 84 these findings are necessary for SCE to properly claim the associated shareholder incentives. IV. CONCLUSION Based on the foregoing, SCE respectfully requests that the Commission issue a decision: (i) finding the fixed-price performance-based contracts are either exempted from the Commission s cost reporting requirements, or that SCE s practice of using a pre-determined cost allocation method for reporting administrative, marketing, and direct implementation costs of these fixed-price performance-based contracts, based on the estimated budget, is reasonable, without the need for utilities to audit any of the third-party contractor s actual costs; (ii) denying UAFCB s proposal to require IOUs to audit the third-party contracts actual costs under fixedprice performance-based contracts; and (iii) authorizing SCE to recover the shareholder incentive amounts withheld for 2011 and 2012 related to this fixed-price performance-based contracts issue. 83 SCE, Wallenrod, Tr.124/ Resolution E-4700, OP

23 Respectfully submitted, JANET S. COMBS JANE LEE COLE /s/ Jane Lee Cole By: Jane Lee Cole Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: (626) Facsimile: (626) May 22,

24 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Pacific Gas and Electric Company for Approval of Energy Efficiency Programs and Budget (U 39 M). And Related Matters. Application Application Application Application CERTIFICATE OF SERVICE I hereby certify that, pursuant to the Commission s Rules of Practice and Procedure, I have this day served a true copy of SOUTHERN CALIFORNIA EDISON COMPANY S (U 338-E) OPENING BRIEF on all parties identified on the attached service lists A et al. Service was effected by one or more means indicated below: Transmitting the copies via to all parties who have provided an address. Placing the copies in sealed envelopes and causing such envelopes to be delivered by hand or by overnight courier to the offices of the Commissioner(s) or other addressee(s). ALJ Todd O. Edmister CPUC 505 Van Ness Avenue San Francisco, CA Placing copies in properly addressed sealed envelopes and depositing such copies in the United States mail with first-class postage prepaid to all parties for those listed on the attached non- list. Executed May 22, 2015, at Rosemead, California. /s/ Olivia Gutierrez Olivia Gutierrez Legal Assistant SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California 91770

25 CPUC - Service Lists - A Page 1 of 13 5/22/2015 CPUC Home CALIFORNIA PUBLIC UTILITIES COMMISSION Service Lists PROCEEDING: A PG&E - FOR APPROVAL FILER: PACIFIC GAS AND ELECTRIC COMPANY LIST NAME: LIST LAST CHANGED: MAY 14, 2015 DOWNLOAD THE COMMA-DELIMITED FILE ABOUT COMMA-DELIMITED FILES Back to Service Lists Index Parties CHRIS CONE HOWARD CHOY POLICY MANAGER DIR. - OFFICE OF SUSTAINABILITY EFFICEINCY FIRST CALIFORNIA COUNTY OF LOS ANGELES, CA 00000, CA FOR: CALIFORNIA BUILDING PERFORMANCE FOR: COUNTY OF LOS ANGELES/SOUTHERN CONTRACTORS ASSOCIATION (EFFICIENCY CALIFORNIA REGIONAL ENERGY NETWORK FIRST CALIFORNIA) JEAN MERRIGAN JEANNE MERRILL WOMEN'S ENERGY MATTERS POLICY DIRECTOR CALIF. CLIMATE AND AGRICULTURE NETWORK, CA FOR: WOMEN'S ENERGY MATTERS, CA FOR: CALIFORNIA CLIMATE AND AGRICULTURE NETWORK JENNIFER ROSSER JEREMY WAEN PROGRAM DIR. SR. REGULATORY ANALYST SIERRA BUSINESS COUNCIL MARIN CLEAN ENERGY, CA 00000, CA FOR: SIERRA BUSINESS COUNCIL FOR: MARIN CLEAN ENERGY JODY S. LONDON JODY LONDON CONSULTING LARA ETTENSON NATURAL RESOURCES DEFENSE COUNCIL

26 CPUC - Service Lists - A Page 2 of 13 5/22/2015, CA 00000, CA FOR: THE LOCAL GOVERNMENT SUSTAINABLE FOR: NATURAL RESOURCES DEFENSE COUNCIL ENERGY COALITION MARGIE GARDNER MEGAN KIRKEBY CAL. ENERGY EFFICIENCY INDUSTRY COUNCIL CALIFORNIA HOUSING PARTNERSHIP CORP., CA 00000, CA FOR: CALIFORNIA ENERGY EFFICIENCY FOR: CALIFORNIA HOUSING PARTNERSHIP INDUSTRY COUNCIL CORPORATION (CHPC) NWAMAKA AGBO SACHU CONSTANTINE POLICY ASSOCIATE-GREEN COLLAR JOBS CMPG. CENTER FOR SUSTAINABLE ENERGY ELLA BAKER CENTER FOR HUMAN RIGHTS, CA 00000, CA FOR: CENTER FOR SUSTAINABLE ENERGY FOR: ELLA BAKER CENTER FOR HUMAN RIGHTS SHANDRA (TIGER) ADOLF SAMUEL P. KRASNOW BUILDING PERFORMANCE INSTITUTE, INC. VP-REGULATORY AFFAIRS FIRSTFUEL SOFTWARE, INC., CA BEDFORD ST., STE. 350 FOR: BUILIDING PERFORMANCE INSTITUTE, LEXINGTON, MA INC. FOR: FIRSTFUEL SOFTWARE, INC. DONALD GILLIGAN MICHAEL PETRICONE PRESIDENT SVP - GOV'T AFFAIRS NAT'L. ASSN. OF ENERGY SVC COMPANIES CONSUMER ELECTRONICS ASSOCIATION 1919 SOUTH EADS STREET, DC ARLINGTON, VA FOR: NATIONAL ASSOCIATION OF ENERGY FOR: CONSUMER ELECTRONICS ASSOCIATION SERVICE COMPANIES (NAESCO) JONATHAN MELCHI STEVEN R. SHALLENBERGER HEATING AIR-CONDITIONING & REFRIGERATION PRESIDENT 455 MILL RUN DRIVE, SUITE 820 SYNERGY COMPANIES COLUMBUS, OH S 1000 E FOR: HEATING, AIR-CONDITIONING & OREM, UT REFRIGERATION DISTRIBUTORS INTERNATIONAL FOR: SYNERGY COMPANIES CHAIRMAN / PRESIDENT MARY LUEVANO LAT. BUS. CHAMBER OF GREATER L.A. GLOBAL GREEN USA 634 S. SPRING STREET, STE MAIN STREET, 2ND FLOOR LOS ANGELES, CA SANTA MONICA, CA FOR: LATINO BUSINESS CHAMBER OF GREATER FOR: GLOBAL GREEN USA LOS ANGELES JANE LEE COLE BART C. MIESFELD ATTORNEY CITY OF CHULA VISTA - CITY ATTY'S. OFF. SOUTHERN CALIFORNIA EDISON COMPANY 276 FOURTH AVENUE 2244 WALNUT GROVE AVE. / PO BOX 800 CHULA VISTA, CA ROSEMEAD, CA FOR: CITY OF CHULA VISTA FOR: SOUTHERN CALIFORNIA EDISON COMPANY

27 CPUC - Service Lists - A Page 3 of 13 5/22/2015 KAYLA RACE CODY HOOVEN ENERGY POLICY ADVOCATE SAN DIEGO UNIFIED PORT DISTRICT ENVIRONMENTAL HEALTH COALITION 3165 PACIFIC HIGHWAY 2727 HOOVER AVE., STE. 200 SAN DIEGO, CA NATIONAL CITY, CA FOR: SAN DIEGO UNIFIED PORT DISTRICT FOR: ENVIRONMENTAL HEALTH COALITION DONALD C. LIDDELL JOY C. YAMAGATA ATTORNEY REGULATORY MANAGER DOUGLASS & LIDDELL SAN DIEGO GAS & ELECTRIC/SOCALGAS ND AVENUE 8330 CENTURY PARK COURT, CP 32 D SAN DIEGO, CA SAN DIEGO, CA FOR: WAL-MART STORES, INC AND SAM WEST, FOR: SAN DIEGO GAS & ELECTRIC COMPANY INC. FAITH BAUTISTA ELIZABETH KLEBANER PRESIDENT / CEO ADAMS BROADWELL JOSEPH & CARDOZO NATIONAL ASIAN AMERICAN COALITION 601 GATEWAY BLVD., STE SOUTHGATE AVE, STE. 200 SOUTH SAN FRANCISCO, CA DALY CITY, CA FOR: CALIFORNIA CONSTRUCTION INDUSTRY FOR: NATIONAL ASIAN AMERICAN COALITION LABOR MANAGEMENT COOPERATIVE TRUST MATTHEW O'KEEFE JEANNE M. SOLE OPOWER CITY AND COUNTY OF SAN FRANCISCO 760 MARKET STREET, 4TH FLOOR CITY HALL, RM 234 SAN FRANCISCO, CA DR. CARLTON B. GOODLET PLACE FOR: OPOWER SAN FRANCISCO, CA FOR: CITY AND COUNTY OF SAN FRANCISCO EDDIE H. AHN HAYLEY GOODSON BRIGHTLINE DEFENSE PROJECT ATTORNEY 1028A HOWARD STREET THE UTILITY REFORM NETWORK SAN FRANCISCO, CA MARKET ST., STE FOR: BRIGHTLINE DEFENSE PROJECT SAN FRANCISCO, CA FOR: TURN SHERIDAN J. PAUKER, ESQ. JACK STODDARD REGULATORY COUNSEL MANATT PHELPS & PHILLIPS, LLP WILSON SONSINI GOODRICH & ROSATI ONE EMBARCADERO CENTER, 30TH FL. ONE MARKET PLAZA, SPEAR TOWER, STE 3300 SANFRANCISCO, CA SAN FRANCISCO, CA FOR: SWITCH LIGHTING COMPANY FOR: RENEWABLE FUNDING, LLC/METRUS ENERGY, INC./ENVIRONMENTAL DEFENSE FUND (EDF) MARY GANDESBERY SARA STECK MYERS ATTORNEY ATTORNEY AT LAW PACIFIC GAS & ELECTRIC COMPANY TH AVENUE PO BOX 7442, MC B30A SAN FRANCISCO, CA SAN FRANCISCO, CA FOR: ENERNOC, INC. FOR: PACIFIC GAS & ELECTRIC COMPANY ROBERT FRIED JERRY LAHR ATKINSON, ANDELSON, LOYA, RUUD & ROMO PROGRAM MANAGER 5075 HOPYARD ROAD, STE. 210 ABAG POWER

28 CPUC - Service Lists - A Page 4 of 13 5/22/2015 PLEASANTON, CA EIGHT STREET FOR: INSTITUTE OF HEATING & AIR OAKLAND, CA CONDITIONING INDUSTRIES, INC. FOR: ASSOCIATION OF BAY AREA GOVERNMENTS/SAN FRANCISCO BAY AREA REGIONAL ENERGY NETWORK (SFBAREN) LEN CANTY BRUCE MAST BLACK ECONOMIC COUNCIL BUILD IT GREEN 484 LAKE PARK AVENUE, SUITE BROADWAY, STE OAKLAND, CA OAKLAND, CA FOR: BLACK ECONOMIC COUNCIL FOR: BUILD IT GREEN JASON B. KEYES KATHERINE DANIEL ATTORNEY PROGRAM MANAGER KEYES FOX & WIEDMAN LLP GREEN FOR ALL TH STREET, STE TELEGRAPH AVE., STE, 600 OAKLAND, CA OAKLAND, CA FOR: SOLARCITY CORPORATION FOR: GREEN FOR ALL SCOTT WENTWORTH TIMOTHY BURROUGHS ENERGY ENGR.-FACITLITIES & ENVIRONMNT CLIMATE ACTION COORDINATOR CITY OF OAKLAND CITY OF BERKELEY 250 FRANK H OGAWA PLAZA, STE MILVIA STREET OAKLAND, CA BERKELEY, CA FOR: CITY OF OAKLAND FOR: CITY OF BERKELEY VIEN TROUNG CRAIG SCHLATTER THE GREEN ASSETS DIRECTOR COMMUNITY DEVELOPMENT MGR. THE GREENLINING INSTITUTE COMMISSION OF MENDOCINO COUNTY 1918 UNIVERSITY AVENUE, 2ND FLOOR 1076 NORTH STATE STREET BERKELEY, CA UKIAH, CA FOR: THE GREENLINING INSTITUTE FOR: COMMUNITY DEVELOPMENT COMMISSION OF MENDOCINO COUNTY JAMES BECKWITH ANTHONY RAHILL PRESIDENT SR. BUSINESS ANALYST FIVE STAR BANK CRHMFA HOMEBUYERS FUND 6810 FIVE STAR BLVD., STE K STREET, STE ROCKLIN, CA SACRAMENTO, CA FOR: FIVE STAR BANK FOR: CRHMFA HOMEBUYERS FUND DEANA CARRILLO EXECUTVIE DIRECTOR CAEATFA 915 CAPITOL MALL, ROOM 457 SACRAMENTO, CA FOR: CALIFORNIA ALTERNATIVE ENERGY AND ADVANCED TRANSPORTATION FINANCING AUTHORITY (CAEATFA) Information Only ALANA VOLSKAYA ALICE STOVER