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 4 8 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