4. Issues before the Commission

The issues before the Commission in this proceeding are largely determined by statute, Commission precedent, and the Scoping Ruling.

4.1. Is the Proposed Revenue Requirement to Support the Requested Ratepayer Funding of Phase I of the CAES Project Just and Reasonable?

A critical issue before the Commission in a utility's request for authorization to recover costs in rates is whether the costs are just and reasonable. The reasonableness of any project is most clearly determined when the benefits and costs are compared with as much quantification as possible.

PG&E argues that it is both just and reasonable for it to recover the Phase 1 costs. PG&E asserts that the CAES Project will expand the deployment of advanced technologies enhancing the availability of renewable energy resources, especially wind. In support of its contentions, PG&E has provided a copy of the grant application submitted to DOE and the data responses sent to DRA during discovery.

PG&E states in its application that this CAES Project is a unique, innovative project and, therefore, not duplicative of first generation compressed air energy storage projects. First, PG&E contends the CAES Project is unique because it utilizes saline rock formations as the underground storage reservoir unlike two existing compressed air energy storage projects. Second, unlike first generation compressed air energy storage projects, this project will include the addition of an adiabatic (no fuel) compressed air energy storage testing capability which, PG&E contends, will further advance the next generation of fossil fuel-free compressed air energy storage capability. Third, the CAES Project will utilize off the shelf components unlike previous compressed air storage projects, which used specially designed and therefore more expensive components.

PG&E asserts the CAES Project will be beneficial to ratepayers and California because it will reduce greenhouse gas emissions by enabling large-scale deployment of intermittent renewable resources and peak load management capabilities using only 35% of the natural gas that a simple-cycle combustion turbine currently uses. Next, PG&E states it will improve grid reliability, flexibility, security and interoperability with available and reliable bulk storage capabilities to integrate renewable resources and to respond to smart grid signals from the CAISO for spinning/non-spinning reserve, VAR/voltage support, and self-healing grid commands. Finally, PG&E contends it will lower electric power system costs and enhance cost effectiveness by charging the CAES plant during lower-priced off-peak periods, reducing the use of expensive gas turbine "peaking" plants during on-peak periods, and increasing overall grid asset utilization.24

PG&E estimates that, in addition to bringing Recovery Act funds into California, the CAES Project will directly create approximately 500 jobs. PG&E states that the project is also expected to indirectly create additional jobs supporting the jobs directly created by the project. PG&E asserts that many of these jobs will be local jobs in Kern County, which has a 14.75% unemployment rate as of June 2009.25

PG&E contends that the costs for Phase 1 of the CAES Project are reasonable. First, PG&E was awarded $24.9 million in federal grant money to pay for half of the cost for Phase 1 so ratepayer funding is only required for 50% of the cost of Phase 1. PG&E has sought $1.3 million in research funding from the CEC and, if awarded, PG&E would reduce the amount of funding recoverable from ratepayers accordingly. Additionally, PG&E has assembled a team whose prior experience allows it to utilize experience and knowledge gained from the Alabama compressed air energy storage project, a first generation project, to reduce the cost and timetable of research, development, and construction.26

PG&E has provided a detailed budget as part of its DOE grant application showing how Phase 1 costs are allocated within each phase and by project year.27 PG&E states that the budget was determined with substantial support from
Dr. Robert Schainker, who has over 20 years experience with similar designs and projects using bids received by PG&E for similar equipment. PG&E contends that Phase 1 conducts the analysis necessary to more accurately estimate the costs of developing the underground storage field. Such analysis, PG&E asserts, is crucial to determine if the storage field is economic or if the project ultimately lacks feasibility.28 PG&E contends it will ensure that the project is completed in the most cost effective way by utilizing California's competitive Request for Offer (RFO) Process.29 PG&E will issue an RFO to evaluate bids and select the winning prime construction contractor, who will prepare the site for construction and prepare the bubble development in the selected rock formation.30

PG&E requests authority to establish a memorandum account to track the costs incurred on this project and a process to recover the revenue requirements booked to that account. PG&E states that, once it receives approval from DOE and the Commission, the balance in that account would be transferred to the Distribution Revenue Adjustment Mechanism annually through the Annual Electric True-up advice letter filing.31 PG&E notes that because of the anticipated schedule of this proceeding and the structure of the proposed memorandum account, customer rates are not expected to be changed until January 1, 2011.

Neither TURN nor DRA object to approval of Phase 1 of PG&E's CAES Project, subject to certain conditions and the resolution of certain issues prior to Phase 2 of the project.32 Specifically, DRA argues that PG&E must show the CAES Project is cost effective and efficient in order to receive ratepayer funding.33 DRA contends PG&E may show cost-effectiveness and efficiency in one of two ways:

1. The project produces an economic benefit by showing it moves energy from off-peak to peak hours, taking advantage of the difference between peak and off-peak periods; and/or

2. The project produces quantifiable environmental benefits by alleviating the intermittency and increasing the contribution to system reliability of wind generation.

While DRA recognizes that PG&E's current estimates are preliminary and that the cost calculations (for Phases 2 and 3) need to be further refined by information obtained in Phase I, DRA also contends that ratepayer funds should only be expended for Phases 2 and 3 when PG&E can demonstrate that the project as a whole is conceptually viable under reasonably probable physical and economic conditions.

PG&E will be required to provide detailed reports on the costs and benefits of the project to DOE. PG&E will provide copies of these reports to the Commission. However, in response to the questions raised by DRA, PG&E has stipulated that it will furnish additional information at the completion of Phase 1 as set out in Attachment A.34

The record supports the contention that the CAES Project is a unique project because the CAES Project presents unique technical and design challenges which include the innovative use of a saline rock formation as the storage reservoir, and new compressed air energy storage plant design that is an improvement over first generation designs.

The CAES Project differs from the first generation compressed air energy storage projects in Alabama and Germany because the proposed project 1) uses saline rock as the storage reservoir; 2) uses off-the-shelf equipment instead of custom-made parts and thus, reduces costs; and 3) uses a combustion turbine with heat recovery instead of the single purpose burner to provide an efficiency advantage over existing compressed air energy storage projects.

Only Phase 1 of the CAES Project is at issue in this Application. With respect to the benefits of Phase 1, which includes not only the permitting and transmission interconnection, but also the research and design verification necessary to move from preliminary to final plant design, the benefits are not quantified, but nevertheless substantial. The compressed air energy storage technology holds promise of reducing greenhouse gas emissions; improving grid reliability, flexibility, security and interoperability; and lowering electric power system costs and enhances cost effectiveness.

The CAES Project is anticipated to add jobs not only to the state but specifically to an area that has a high unemployment rate. In addition, the CAES Project has attracted a $24.9 million award from the DOE to the state which will have a multiplier effect on the California economy.35 Phase 1 is a crucial first step to the ultimate determination of whether the compressed air energy storage technology as envisioned by PG&E has merit and whether ratepayers would receive a direct benefit from the construction and operation of the compressed air energy storage plant.

In considering grant applications for Recovery Act funds, DOE stated that it adopted extensive requirements and a thorough review process.36 DOE specified that the merit review process would evaluate the project approach, significance and impact, interoperability and cyber security, and project team.37 As part of that review DOE explained it would examine the validity of the proposed approach, likelihood of success, and innovativeness of the technology, and would weigh the benefits in terms of anticipated performance improvements and cost savings of the proposed application over current practices, as well as other criteria.38 The Commission previously found that the benefits that the DOE seeks to achieve through its Smart Grid grants would also be beneficial to investor-owned utility ratepayers.39 In addition, the Commission found that it is reasonable to conclude that investor-owned utility projects that receive DOE grants will be beneficial to the investor-owned utilities' ratepayers.40

California statues, including Assembly Bill (AB) 32 (Stats. 2006, Ch. 488), AB (Stats. 2006, Ch. 47-1) 1925, Senate Bill (SB) 1368 (Stats. 2006, Ch. 598), and Executive orders S-7-04 and S-3-05 call for greenhouse gas reduction. The legislature has added to its mandate for reduction of greenhouse gas the importance of developing an infrastructure that will meet the state's needs in the future. In SB 17 (Padilla)(Chapter 327, Statutes of 2009) the legislature stated that:

It is the policy of the state to modernize the state's electrical transmission and distribution system to maintain safe, reliable, efficient, and secure electrical service, with infrastructure that can meet future growth in demand and achieve all of the following, which together characterize a smart grid . . ."41

The legislature specifically included in its mandate the deployment and integration of cost-effective advanced electricity storage and peak-shaving technologies.42

With such a clear indication of legislative and executive direction, it becomes the responsibility of the Commission and California utilities to devise strategies that can achieve these legislative goals, even without easy quantification of benefits. Considering this, the CAES Project, which is an innovative opportunity to advance environmental and energy policies, produces benefits that justify its pursuit. Moreover, when the legislature adopts goals that require new technologies to achieve them, it is not reasonable to demand that the preliminary research and design of the new technology provide the Commission with the same level of detail on costs and benefits that the Commission would expect from the use of a traditional technology. Finally, the prospect of determining whether the technology of the proposed CAES Project is technically and economically feasible through the work of Phase 1, while making progress on legislatively mandated goals of reducing greenhouse gas emissions and improving grid reliability, justifies Phase 1 expenditures.

The determination of whether or not it is reasonable to fund Phase 1 of the CAES Project is inherently challenging because PG&E seeks to develop a new technology and Phase 1 seeks to develop unproven technology and/or expand current practices. In this instance, however, PG&E was awarded a $24.9 million grant by DOE which leverages ratepayer dollars and provides ratepayers the opportunity to develop technology with less expense. Phase 1 will allow PG&E to determine whether or not the project as a whole will prove technically and commercially feasible and whether it is reasonable for PG&E to proceed to subsequent phases of the project. If, however, the Phase 1 analysis indicates that the project lacks feasibility, PG&E will return surplus Phase 1 funds to DOE and ratepayers.43

PG&E will utilize California's competitive RFO process to ensure that the project is completed in the most cost effective manner. The costs for Phase 1 were also reduced by PG&E's use of the knowledge and experience gained through development and construction of the first generation Alabama compressed air energy storage project. The team assembled by PG&E draws on the expertise of Dr. Robert Schainker and others involved in the preliminary design and construction of the Alabama compressed air energy storage plant in its preliminary design for Phase 1.44

Based on the record, the costs for Phase 1 are reasonable. The potential ability to determine whether or not the compressed air energy storage project in the Kern County area can improve grid reliability, flexibility, security and interoperability and lower electric power system costs while reducing greenhouse gas emissions justifies PG&E's Phase 1 expenditures.

24 PG&E Application, Attachment 1 at 10.

25 PG&E Application, Attachment at 21.

26 PG&E Reply to Protests at 10.

27 PG&E Application, Attachment at 11-15.

28 PG&E Reply to Protests at 8. Note also that PG&E states any surplus Phase 1 funding would be returned to DOE and to ratepayers should such a determination be made.

29 PG&E Application, Attachment A at 7, 14 and 50-52.

30 PG&E Application, Attachment A at 52.

31 The amount transferred will be limited by the total expenditure cap of $24.9 million established in this proceeding.

32 We note that most of the concerns raised by DRA and TURN relate to the transition between Phase 1 and subsequent phases of the project. Only Phase 1 is at issue here.

33 Stipulation at Appendix A at 2.

34 Stipulation, Appendix A.

35 PG&E Application, Attachment 1 at 21.

36 DE-FOA-0000036.

37 DE-FOA-0000036 at 41.

38 DE-FOA-0000036 at 41-42.

39 D.09-09-029 at 4.

40 D.09-09-029 at 25.

41 Pub. Util. Code § 8360.

42 Pub. Util. Code § 8360(g).

43 PG&E Reply to Protests at 8.

44 PG&E Reply to Protests at 10.

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