BILL ANALYSIS                                                                                                                                                                                                    Ó          1





                SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                                 ALEX PADILLA, CHAIR
          

          SB 48 -  Hill                                     Hearing Date:   
          April 30, 2013             S
          As Amended:         April 8, 2013            FISCAL       B
                                                                        
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                                      DESCRIPTION
           
           Current law  permits the California Public Utilities Commission  
          (CPUC) to allow recovery of expenses for research and  
          development within rates to be charged by electrical, gas, heat,  
          or telephone corporations. Furthermore, guidelines are  
          established for evaluating research, development, and  
          demonstration programs proposed by electrical and gas  
          corporations. (Public Utilities Code 740-740.1)
           
          This bill  will require the CPUC to consolidate all applications  
          for research, development, or demonstration programs under a  
          single proceeding every two years. 

           This bill  would also require the CPUC to administer a peer  
          review of utility research and development plans seeking cost  
          recovery of $1.5 million per year or greater if those projects  
          had not been selected through an open solicitation. 

           This bill  requires reporting of results from ratepayer funded  
          research programs including citations of published papers,  
          public presentations, and patents filed to the Legislature. 

           This bill  provides certain exemptions from the consolidated  
          proceeding and the peer-review requirements for specific  
          proceedings, the California Solar Initiative (CSI), and programs  
          administered by the California Energy Commission (CEC).

                                      BACKGROUND
           
          In order to meet the state's energy needs, the CPUC has  
          prioritized investment in energy efficiency and demand response  
          programs, followed by renewable resource generation, and lastly  











          conventional generation.<1> Research programs are essential to  
          developing new and more efficient methods of achieving these  
          goals.

          PIER - The CEC is experienced with granting funds through an  
          open project solicitation process. The Public Interest Energy  
          Research (PIER) program is a research, development, and  
          demonstration program intended to advance science and technology  
          in the fields of energy efficiency, renewable energy, advanced  
          electricity technologies, energy-related environmental  
          protection, transmission and distribution, and transportation  
          technologies. The open project solicitation for this program was  
          established in statute PRC §25620.1. The program has invested  
          more than $700 million over the past decade. The PIER program  
          will not fund any new projects after remaining funds have been  
          encumbered, and contracts for the last batch of projects will be  
          awarded by June 2013. The CEC will continue to manage projects  
          through 2015.

          EPIC - The Electric Program Investment Charge (EPIC) was  
          established in 2012<2> and is administered by four primary  
          entities: the CEC, PG&E, SDG&E, and SCE. The CPUC approved $162  
          million in funding per year for the program. The CEC administers  
          funding for applied research and development, technology  
          demonstration and deployment, and market facilitation for clean  
          energy technologies and approaches for the benefit of  
          ratepayers. Research investment plans for the EPIC program are  
          considered at the CPUC every three years. 

          The CEC is responsible for administering energy research  
          programs within the state, including the PIER and EPIC programs.  
          However, investor-owned utilities (IOUs) also conduct and  
          administer research of their own. These private research  
          programs are often included in rate cases (e.g., general rate  
          case, energy efficiency proceeding, demand response proceeding)  
          at the CPUC in order to obtain cost recovery. In several cases,  
          the CPUC has determined that such research programs are in the  
          public interest and approved ratepayer reimbursement of the  
          research expenses. 

          Lawrence Livermore National Lab - In 2012, the CPUC authorized  
          the IOUs (PG&E, SCE, SDG&E) to enter into a five-year research  
          ---------------------------
          <1> Energy Action Plan 2008 Update, CEC and CPUC, February 2008
          <2> D.12-05-037, CPUC









          and development agreement with Lawrence Livermore National Lab  
          (LLNL).<3> The CPUC authorized ratepayer funding of the 21st  
          Century Energy Systems (CES-21) program at costs of $30 million  
          per year to be collected by the IOUs and transferred to LLNL.  
          The Utility Reform Network (TURN) and the Division of Ratepayer  
          Advocates (DRA) both opposed the decision. 

          The CPUC identified that LLNL has expertise in supercomputing  
          facilities and analysis, which will be central to conducting the  
          research. In response to an inquiry from DRA, the utilities  
          stated that even though they were aware of other supercomputing  
          facilities within California, they had not contacted or  
          evaluated those facilities to determine if they would be  
          appropriate or cost-effective for the CES-21 program. However,  
          they also stated that such an evaluation would be made for  
          specific proposals to be funded by CES-21 by the CES-21 Board of  
          Directors.<4>

          The CPUC developed a set of criteria that each funded project  
          must adhere to, called the Cooperative Research and Development  
          Agreement. While the criteria do not include "peer review" of  
          proposals explicitly, it is required that each proposal has the  
          support of a majority of the Board of Directors. The Board of  
          Directors consists of 6 members: 3 from academia or research  
          institutions and 3 from the utilities.  

          HECA - The Hydrogen Energy California (HECA) project received  
          federal funding from the Department of Energy's Office of Fossil  
          Energy. Southern California Edison also received CPUC approval  
          for $30 million in ratepayer funding for studies associated with  
          the project. The facility will be located in Kern County and use  
          a gasification technology to convert coal and petroleum coke  
          into hydrogen and CO2 gas. The hydrogen can be used to generate  
          electricity, and the CO2 will be sequestered in a nearby oil  
          field. 

                                       COMMENTS
           
              1.   Author's Purpose  . The author is concerned that there is  
               currently no mechanism for a proper evaluation of the  
               scientific and technical merits of the research that the  
             --------------------------
          <3> CPUC D12-12-031, December 20, 2012
          <4>  
          LawrenceLivermoreNationalLaboratoryPartnership_DR_DRA_004-Q29









               CPUC approves. The author argues that the CPUC does not  
               hold the necessary expertise to judge the scientific and  
               technical qualities of proposed research and as a result  
               has no way of knowing if a program is worthwhile.  

              2.   Intended Entities  . Some language in the bill is  
               ambiguous regarding the entities that are subject to the  
               bill. For instance, the bill states "the commission shall  
               consolidate all review and approval of research and  
               development projects . . ." This could be interpreted to  
               include projects administered by the CPUC itself, including  
               research reports and studies. The author's intent is to not  
               include the research administered by the CPUC directly. The  
               bill language should be clarified to establish that  
               research administered by utilities is the focus of the  
               bill.  
           
               The primary objective of the CPUC and the utilities is to  
               provide reliable and safe service, whether the commodity is  
               electricity, water, telecommunications service, etc. These  
               entities are not necessarily equipped to perform the same  
               kind of rigorous review of fundamental research as an  
               academic or research funding institution. 
                
             3.   Research Delays  . Under this bill, research would be  
               approved every two years at most frequent, and it often  
               takes the CPUC a year or longer to conduct a proceeding.  
               Currently, utilities can include research funding with  
               other requests related to rates. The repercussions of this  
               are that utilities will have to plan research programs in  
               two-year or longer intervals, and research ideas that are  
               generated between application periods will be postponed.  
               The trade-off that is proposed by this bill is increased  
               oversight and planning of research for decreased ability to  
               respond to new technologies and rapidly changing markets  
               (e.g., the widespread adoption of plug-in electric  
               vehicles). The intent behind the bill is to provide further  
               oversight of approved research, but the proposed mechanism  
               leads to stalled research that would hinder the utilities'  
               ability to respond to new technologies and opportunities. 

               Research or studies that are required to respond to a  
               unique or emergency situation (e.g., downed transmission  
               lines from natural disasters, SONGs outage) would be  










               delayed until the next available application period.  
               Utilities currently have the authority to establish a  
               Catastrophic Event Memorandum Account (Public Utilities  
               Code 454.9) in order to record costs of restoring services  
               and repairing or replacing damaged facilities. It is not  
               clear if costs associated with any study necessary to  
               restore service could be included under this account or if  
               they need to be included in the proposed consolidated  
               proceeding. The author's intent is that research could be  
               approved through a memorandum, if necessary to respond to  
               an emergency situation. 

              4.   Exceptions . The exceptions provided in the bill are for  
               specific proceedings that were opened prior to January  
               2013. The language indicates an awkward implementation of  
               the author's intent. The specific exempted proceedings  
               provide a loophole where CPUC could reopen or keep open  
               those proceedings indefinitely and include future research  
               proposals within them instead of within the proposed  
               consolidated research proceeding. 

               The bill does not specifically address whether projects  
               proposed in proceedings that were opened during 2013 would  
               be included or excluded from the consolidated proceeding.  
               Without excluding those specifically, the projects in  
               proceedings opened this year would be denied funding. This  
               is the author's intent.

               The bill provides an exception for funding through the  
               California Solar Initiative and the CEC. The CSI program  
               already performs an open solicitation for proposals that  
               then undergo a technical review before approval.<5> This  
               already meets the criterion provided by the author that  
               proposals for large programs be solicited in an open  
               manner. It is not clear why the program needs to be further  
               separated from the proposed consolidated proceeding. 

              5.   Peer Review  . The author has proposed that applications  
               for funding of $1.5 million per year or more should be  
               selected through an open solicitation by the utility or  
               that the CPUC administer an independent peer review of the  
               proposals. The threshold amount of $1.5 million is set  
             --------------------------
          <5> California Solar Initiative solicitation available at  
           http://calsolarresearch.ca.gov/Current-Solicitations/  









               arbitrarily, but is intended to highlight large programs.  
                
               The author argues that the incorporation of a peer review  
               process for large projects will increase the quality of the  
               scientific and technical results of the research, and lend  
               additional credibility to the research. The competitive  
               process incorporating peer review of proposals is the  
               standard among other granting institutions. Major federal  
               agencies that incorporate peer review for grant funding  
               include the Department of Agriculture, the National Science  
               Foundation, the National Institutes of Health, the  
               Environmental Protection Agency, the National Institute of  
               Standards and Technology, the National Oceanic and  
               Atmospheric Administration, and the National Aeronautics  
               and Space Administration.<6>  

               The CPUC argues that the open proceeding process is  
               equivalent to a peer review by inviting input from  
               stakeholders in the case. However, input from stakeholders  
               does not necessarily evaluate the scientific and technical  
               merits of the proposal, nor are general stakeholders  
               necessarily qualified to perform such an evaluation. The  
               open proceeding process determines whether research should  
               be done, and is not an evaluation of the quality of the  
               proposed research plan.

               Perhaps most significantly, the inclusion of a peer review  
               approval process for projects over $1.5 million annually  
               will serve as a disincentive for utilities to propose large  
               research projects. This mechanism was included by the  
               author in order to highlight research proposals that  
               potentially lack scientific and technical merit. The bill  
               would not prohibit funding these projects, but it would  
               subject them to further review before approval. 

              6.   Ratepayer Impact  . Funding for research is already  
               approved in a piecemeal manner. Approving research through  
               one consolidated proceeding does not necessarily lead to a  
               change in rates. 

              7.   Proposed Amendments  . The committee may wish to consider  
             --------------------------
          <6> US General Accounting Office, "Federal Research: Peer Review  
          Practices at Federal Science Agencies Vary."  GAO/RCED-99-99.   
          March, 1999.









               amending the bill to alleviate unintended consequences. The  
               proposed amendments strike the requirement for a  
               consolidated proceeding and exceptions to that proceeding  
               in order to prevent the most grievous objection that the  
               bill causes inordinate delays to approval of research  
               funding. 

               In order to address the author's primary concern that  
               scientific and technical merits of proposals are currently  
               not evaluated rigorously, the amendments refocus the bill  
               on the peer review of funding applications. The current  
               wording of the bill implies some confusion by directing the  
               CPUC to place preference on some projects over others.  
               These amendments strike the previous language and replace  
               it with clearer language that implements the author's  
               intent. The amended wording requires the CPUC to administer  
               a peer review using independent, qualified individuals to  
               evaluate the merits of the research and reasonableness of  
               the requested funding. The amendments also allow the CPUC  
               to waive the peer review requirement if the proposal has  
               already undergone a peer review by a state or federal  
               entity. In this way, the bill would allow for timely  
               approval of funding for projects that have matching funds  
               from other entities such as the National Science Foundation  
               that already conduct peer review of applications. The  
               reporting requirements are revised to include a defined  
               date of compliance and frequency of reports. The amendments  
               also strike portions of this bill that were redundant and  
               the source of some confusion. 

               The proposed amendments strike portions of the bill and  
               replace them with the following: 

                 (b) When reviewing any request from a public utility for  
                 authorization of expenses for research and development  
                 projects where the expenses are to be recovered from  
                 ratepayers and the expenses are in excess of $1.5 million  
                 per year, the commission shall administer a peer review  
                 of the proposed projects before awarding ratepayer  
                 recovery of the expenses. The peer review shall consider  
                 all of the following:

                 (1) The overall scientific or technical merits of the  
                 proposed research.











                 (c) The commission may waive the peer review requirement  
                 in paragraph (b) for research and development projects  
                 that have been selected through an open solicitation of  
                 proposals or contingent upon a peer review by a public  
                 state or federal entity.

               Amendments also require a report to be submitted to the  
               Legislature covering research from the previous three years  
               due no later than December 31, 2014 and recurring every  
               three years thereafter. 


                                       POSITIONS
           
           Sponsor:
           
          Author

           Support:
           
          Division of Ratepayer Advocates
          San Diego Gas & Electric Company, if amended
          Sierra Club California
          Southern California Gas Company, if amended
          The Utility Reform Network

           Oppose:
           
          California Public Utilities Commission


          

































          Kyle Hiner
          SB 48 Analysis
          Hearing Date:  April 30, 2013