California — already a leader in intelligent utility regulations — is taking aggressive steps to stay the leader. The California Public Utilities Commission (PUC) made the following remarkable proposal last month:

  • All new residential construction in California will be zero net energy by 2020
  • All new commercial construction in California will be zero net energy by 2030

In addition, the PUC established “a new system of incentives and penalties to drive investor-owned utilities above and beyond California’s aggressive energy savings goals.” Under this framework:

Earnings to shareholders accrue only when a utility produces positive net benefits (savings minus costs) for ratepayers. The shareholder “reward” side of the incentive mechanism is balanced by the risk of financial penalties for substandard performance in achieving the PUC’s per-kilowatt, kilowatt-hour, and therm savings goals.

Kudos to the PUC for its aggressive strategy, which “puts energy efficiency on an equal footing with utility generation,” as Commissioner Timothy Alan Simon put it. “It will align utility corporate culture with California’s environmental values.”

Even though utility regulations seem mundane, they are a core climate strategy, so here are some more details of the PUC’s ground-breaking decision:

Earnings begin to accrue at a 9 percent sharing rate if the utility meets 85 percent of the PUC’s 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. This means, 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 go to ratepayers and $323 million (12 percent) go to utility shareholders. If utility portfolio performance falls to 65 percent of the savings goals or lower, then financial penalties begin to accrue.

You can read more on what the PUC is doing here.

This post was created for ClimateProgress.org, a project of the Center for American Progress Action Fund.