Research and Development

The definition of public interest R&D is important as it delineates the types of projects that will qualify as public interest gas R&D.

CEC and UC recommend adoption of the definition of public interest R&D contained in the 1996 "Working Group Report on Public Interest RD&D activities"36 which is: "Public Interest RD&D activities are directed towards developing science or technology, 1) the benefits of which [sic] accrue to California citizens, and 2) are not adequately addressed by competitive or regulated entities." SCGC also supports this definition if it is interpreted to remove certain existing R&D programs from rates. We address SCGC's request separately in our discussion of R&D funding.

PG&E believes that the definition used in the Working Group Report is too general, and that there is no "bright line boundary" between public interest R&D and regulated and competitive R&D.37 As an alternative, PG&E believes that the

definition of public interest R&D should evolve through an oversight committee representing key stakeholders. PG&E offers that the oversight committee should evaluate R&D projects individually based on four criteria:

1. R&D projects that are not funded through the competitive market, and consistent with the gas objectives of Section 740 would be considered as public interest R&D.

2. R&D projects that are consistent with the gas objectives of Section 740 and should not be funded by the competitive market would also be considered as public interest R&D.

3. The type of research conducted. R&D that is fundamental, higher risk, long-term, basic research, and oriented towards public policy would be considered public interest R&D.

4. Ownership of the R&D product. Whether the results of particular R&D projects are be owned by the public, by the utility for the benefit of the utility and its ratepayers, or by a competitive entity for potential licensing and profit, would be another factor in determining if the R&D is public interest.

We agree with UC and CEC that the definition contained in the 1996 Working Group Report on Public Interest RD&D activities is appropriate to define gas public interest R&D. This definition is relatively simple, although applying the definition to particular projects may be more difficult. Thus, our adopted definition is:


Public interest gas R&D activities are directed towards developing science or technology, 1) the benefits of which [sic] accrue to California citizens and 2) are not adequately addressed by competitive or regulated entities.

We appreciate PG&E's concern that a bright line may not always be apparent between competitive and public interest projects, and that an oversight committee should be appointed to help evolve the definition. In consideration of this concern, our adopted R&D program will include Commission oversight through our Energy Division. This oversight will ensure that all R&D projects funded through the gas surcharge meet the definition of public interest, and additional criteria adopted herein.

The June 3, 2003 ALJ ruling requested parties to provide criteria useful to identifying and choosing gas public interest R&D projects.38 PG&E recommends that any project meet the requirements of Sections 740.1 and 890(a), and supplemental objectives established by the Commission.39 Sempra also offers Section 740.1 as a guide, as well as the following criteria for project selection:

A. More than 50% of potential benefits target the general public.

B. The project/technology provides one or more of the following public benefits:

1) Improvements to environmental quality

2) Enhanced transmission and distribution system reliability or integrity

3) Increased overall energy efficiency, and

4) Improved safety.

C. Other R&D funding sources would not otherwise provide adequate funding for the proposed project due to the fact that:

1) The project is too long in duration (5 years or greater)

2) The project is very risky from a technical perspective

3) Technology and/or product is projected to be too costly, and

4) Technology is either at too early a stage or is considered a radical breakthrough.

UC and CEC do not state specific criteria, but provide a list of potential areas for study including energy efficiency, load management, insulation, indoor air quality, heating ducts, building commissioning, distillation, development of biomass and landfill gas, and technologies to reduce environmental impacts of gas use. CEC adds that projects should be prioritized through development of an R&D action plan that reflects energy policy, detailed R&D plans, use of R&D subject areas to develop specific projects and a merit review process with peer experts. CEC recommends that the administrator make decisions for funding.

We agree criteria should be established for the selection of projects, and to provide guidance to the administrator. However, we also want to provide flexibility to the administrator, so that worthwhile projects will not be excluded, including those that may involve collaboration with other entities. Section 740.1 provides guidance; however this section is intended for R&D proposed by electric and gas utilities, and includes certain criteria pertaining to corporate operations. Therefore, in addition to meeting the adopted definition of public interest R&D, we expect that approved gas R&D projects will meet the following criteria:

1) Focus on energy efficiency, renewable technologies, conservation and environmental issues

2) Support State Energy policy

3) Offer a reasonable probability of providing benefits to the general public, and

4) Consider opportunities for collaboration and co-funding opportunities with other entities.

Our adoption of an annual gas R&D program, proposed by the administrator, and approved through the Commission, does not mean we are excluding the input of other parties to the list of potential gas R&D projects. Both the utilities, and other parties, have unique knowledge regarding particular energy problems that may help define worthwhile R&D projects. Therefore, we request that the utilities, and other parties, provide potential gas R&D projects to the administrator and the Commission for consideration and inclusion in annual gas R&D programs. In order to minimize potential delay in adopting annual gas R&D programs, we request that any potential projects be provided to the administrator and the Energy Division by July 31 of the year preceding the year for adopting the next annual gas R&D program.40 Submitted gas R&D projects should explain how the project meets our adopted criteria, including the definition of public interest gas R&D, and include expected project costs and benefits. We expect that the administrator in coordination with the Commission will consider these projects in developing annual gas R&D programs. Annual gas R&D programs will be approved by the Commission.

The administrator of public interest R&D has the responsibility to offer public interest projects for approval, and provide oversight so that projects are performed in a timely manner, within a budget, and at a reasonable cost.

Sempra recommends that the utilities administer the gas program, or in the alternative, Sempra through SoCalGas should be selected as a statewide administrator. If utilities elect not to mange their own R&D programs, Sempra states that its experience, resources, and relations with R&D organizations qualify SoCalGas to act as administrator. Sempra provides a detailed proposal for administering the R&D program including Commission jurisdiction, program funding, and the role of the California Utility Research Council (CURC)41 as an advisory body.

PG&E recommends that an oversight committee of interested and qualified stakeholders should serve as administrator. PG&E believes that the oversight committee should include both utilities and other interested parties, including state agencies. Although PG&E would serve on an oversight committee, PG&E does not want to act as sole administrator.

UC sets out criteria for choosing an administrator, and explains why UC best meets these criteria. UC submits that an administrator must have a public interest focus, coordinate an R&D program with other energy goals and research programs in the state, and manage the R&D program efficiently and cost-effectively. UC argues that the public interest focus should be administered by an entity devoted to the public interest, and not by an entity with conflicting interests, such as the utilities. UC believes the administrator should not be involved in the actual research, but should focus on management of the R&D program. UC asserts that a single statewide administrator provides a single point of contact and thus the most efficient coordination. UC further contends that efficient administration requires an existing research management structure.

UC applies its recommended criteria to the utilities, and concludes that the utilities are unsuitable to serve as an administrator. UC argues the utilities represent multiple entities, do not respect the boundary between public interest R&D and competitive R&D, and do not have a public interest focus. Furthermore, UC points out that utilities focus on their service territories, and except for Sempra, show little interest in acting as a statewide administrator. UC also notes that CURC is not a current functioning organization, and its structure appears to prohibit inclusion of UC or CEC, although in reply, Sempra states that UC and CEC could be included in CURC.

CEC believes there is substantial agreement between the parties regarding the appropriate criteria for administration. Agreed upon criteria include administration on a statewide basis, a single administrator, a program that supports state energy policies, Commission review and approval of the overall R&D program and budget, appointment of a capable and experienced administrator, efficient and publicly accountable, avoidance of conflict of interest, and ability to coordinate with other energy programs. CEC argues that application of these criteria lead to the conclusion that CEC should be the administrator. CEC asserts it already administers an electric research program,42 and develops and enforces statewide energy policies. CEC states it has extensive, ongoing experience in research management, and would be the most efficient administrator. CEC points out that internal Public Interest Energy Research (PIER) oversight and administration is already housed in the CEC, and as a result, overhead costs of administering the gas R&D program would be minimal.43 CEC believes it has the highest degree of public accountability as it is subject to the Bagley-Keene Open Meeting Act and the Public Records Act.44 CEC contends that unlike the utilities that conduct competitive R&D, and UC that conducts publicly-funded energy R&D, CEC is without any similar conflicts of interest. Finally, CEC argues that it is best qualified to coordinate public interest R&D due to its current administration of the PIER program, and its participation and knowledge of R&D in state and federal organizations.

In choosing an administrator for public purpose gas R&D programs, we have considered the arguments, qualifications, and experience of Sempra, UC and CEC. As a starting point, we look to D.95-12-063 addressing electric restructuring,45 in which we stated "We do not intend for the surcharge to collect funds to pursue research that the competitive market will provide on its own. After a transition period, perhaps by January 1, 1998, the funds collected through a surcharge for public goods research should be administered by an independent, non-utility entity." The application of this language to gas R&D leads us to conclude that the administrator should be a non-utility entity.

Eliminating the utilities means that either UC or CEC could act as administrator. Both UC and CEC have a public interest focus, could implement an R&D program on a statewide basis, and have R&D program experience. However, between these two entities, CEC currently manages the PIER program, and central to its mission is the development of public energy policy. In addition, CEC is subject to the Bagley-Keene Open Meeting Act and the Public Records Act requirements that help ensure public accountability. Consequently we believe CEC is best suited to act as administrator for the gas R&D program. In the event that CEC chooses not to act as administrator, we believe that UC could serve as an alternate administrator. Consistent with our conclusion that the administrator should be a non-utility entity, the administrator should not sub-contract with investor-owned utilities for the administration of any R&D programs.

We agree with the parties that there is a need for an oversight role by this Commission. We are responsible for adopting the R&D program, and for setting the surcharge to fund the R&D program; therefore, we must necessarily approve and resolve administration, funding, project approval, or other matters, and make a final decision. In this instance, the Energy Division, serving as the Commission's advisor, will assist us in this role. Any request for approval or changes in the adopted R&D program should be by letter, directed to the administrator, with a copy to the Commission's Energy Division. Proposed program changes should include an explanation of the reasons for the proposed changes. Changes proposed by the administrator should be brought to the Energy Division for approval. The annual proposed R&D program should be provided by the administrator to the Energy Division by August 31.46

At this time we will not establish any additional committees, boards or other entities to oversee the administrator. We are concerned that an oversight committee will add an unnecessary layer of administration, and may delay projects. We agree with CEC that the administrator should manage daily activities and R&D projects, including planning, project procurement, project accounting and program evaluation. The Commission will review and approve the annual plans for R&D projects to be funded.

There is wide variation in the parties' recommended funding levels. Sempra recommends that R&D spending remain at the current annual level of approximately $4.5 million. PG&E recommends a similar level of initial spending, although PG&E would allow this amount to increase to approximately $11 million, if worthwhile R&D projects can be identified. UC recommends spending at least $15 million annually, while CEC recommends funding be at least $24 million. Sempra argues that the intent of the Legislature in adopting AB 1002 was to limit R&D spending to the current level of about $4.5 million.47

Sempra derives this figure from an assessment reflecting 20 years of experience, and asserts that no party demonstrated that $4.5 million is an unreasonable funding level. Sempra contends that CEC's funding recommendation, based on parity with electric public interest R&D, is not appropriate as the electric R&D funding level was established under separate legislation without an analysis of needs. PG&E supports Sempra's contention that the legislature intended to limit R&D spending to current levels. Alternatively, PG&E recommends that any increase in R&D spending above $4.5 million should be justified by a zero-based budgeting approach.48

UC argues that a zero-based budgeting approach should not be used to determine additional R&D spending. UC contends zero-based budgeting would unnecessarily delay research work, and may result in rejecting worthwhile R&D projects that are not as cost effective as other projects. UC also rejects limiting R&D spending to current levels. UC argues that current gas R&D funding is insufficient to make a significant contribution to overall energy change. Thus, UC recommends an annual funding amount of at least $15 million, based on UC's professional judgment.49

CEC argues that gas R&D funding levels have declined dramatically over the past 10 years, despite the availability of many public interest cost-effective projects with benefit-to-cost ratios between 2/1 and 9/1. CEC states that this significant decline in R&D funding occurred during a period when the consumption of gas continued to substantially increase. CEC estimates its recommended funding level of $24 million using an average of three methodologies, "social investment," "historic gap," and "parity." The social investment methodology estimates R&D funding as equal to 1% of the gross operating gas revenues in California, or $30 million. The gap methodology uses CEC's estimate of public interest R&D funding by utilities in the early 1990s to estimate current R&D needs of $22 million. The parity methodology estimates gas R&D based on establishing funding equivalent to electric funding in the PIER program, resulting in an estimate of $20 million. The average of these three methodologies is $24 million, CEC's recommended funding level. CEC further contends that funding at the much lower level proposed by Sempra would continue the inequity of "free-ridership" and "unfair competition" between the electricity funded PIER program and gas R&D funding.

SCGC's testimony focuses on one issue. SCGC advocates removal of Low Emission Vehicle (LEV) program costs from gas rates, and funding this program through the PPP surcharge. In D.03-10-08650 adopted October 30, 2003, we denied the same request by SCGC. We find no reason to change this policy, and therefore will not adopt SCGC's request.

The R&D funding level must provide adequate R&D funding for worthwhile public interest programs and the opportunity for reasonable program growth. Gas is a vital resource in the economic future of California, and nationwide. Clearly, as a matter of important public policy, we must adopt the means to maximize the effectiveness and efficiency of our gas resources. Therefore, we reject Sempra's recommendation to limit future R&D funding to current levels, as well as Sempra's contention that the Commission has no authority to set the R&D budget. We cannot conclude that the Legislature, in enacting AB 1002, intended that R&D spending would not increase above current levels. As CEC notes, in determining legislative intent the courts require statutes to be read as a whole, harmonizing the various elements by considering each clause and section in the context of the overall statutory framework.51 AB 1002, which grants the Commission authority and discretion to determine appropriate natural gas funding levels for low-income, energy efficiency and public interest R&D activities, is consistent and in harmony with Public Utilities Code Sections 890(a) and 890(d), because these statutes direct the Commission to establish a natural gas surcharge for certain specified public policy programs and annually determine the amounts "required" to administer and fund these programs for each utility. If we accepted Sempra's interpretation, the Commission would be restricted from determining the gas surcharge to fund these programs, including the R&D program. Thus, an interpretation of Legislative intent that freezes these amounts cannot be harmonized with these statutory provisions. This restrictive interpretation would make the Commission's determination of annual funding meaningless surplusage, a conclusion we reject.

Furthermore, it is unreasonable to conclude that the Legislature intended to ignore the factors that cause PPP costs to increase. These factors include significant increases in the cost of gas, general inflation, and the number of customers that qualify for these programs. If we accepted Sempra's restrictive interpretation, the value of these programs would diminish as the costs of the programs increased and the funding level remained unchanged.52 No party, including the utilities, has asserted that this outcome is reasonable.

Although we assert our authority to set a reasonable gas R&D budget, we will not adopt a specific level of R&D funding. We are beginning a new R&D program, under a new administrator, along with Commission oversight. In order to allow the R&D program to develop, we will adopt a zero-based budget subject to approval by the Commission. We shall request that the administrator provide a prioritized list of projects that meet our adopted project criteria,53 to the Commission by August 31 of each year,54 prior to the January 1 R&D program effective date. The projects will be reviewed and approved by the Commission. We also agree with PG&E that, at least initially, there should be a cap on first year R&D program costs. In consideration of the parties recommended funding levels, we will adopt a first year cap of $12 million beginning January 1, 2005.55 We will further provide that this initial cap can be increased by up to $3 million annually pending identification and approval of additional R&D projects, to a maximum cap of $24 million after four years; these amounts shall include all necessary R&D administrative costs. After four years, we will assess the reasonableness of the funding level, and the overall R&D program.

As recommended by both CEC and UC, we will order the utilities to continue their public interest research, although we will direct them to provide updated R&D plans to the Commission within 60 days of the effective date of this decision. These updated plans should detail how the utilities will end current public interest R&D projects or transfer these projects to the administrator by December 31, 2004. Utilities shall report any unspent R&D funds to the Energy Division as of December 31, 2004. Any unspent R&D funds shall be used for future R&D programs.

R&D costs shall be allocated among utilities on the basis of throughput gas volumes as discussed in Allocation of Commission and BOE administrative costs. The Energy Division will then notify each utility of its R&D costs so that utility specific R&D costs may be included in the October 31 surcharge ALs.

We will also direct utilities to identify R&D amounts in quarterly remittances to BOE. Utilities shall send copies of the quarterly remittances to the Energy Division and the R&D administrator that show the dollar amount of the remittance representing R&D funding following filing with BOE.56 Returns are to be held on a confidential basis.

In addition to a definition of public interest R&D, determining an administrator, and funding levels, parties make other recommendations for implementing an R&D program. Sempra recommends that the Commission require annual reports concerning program administration. PG&E recommends that the R&D program costs be remitted quarterly to the BOE, with reimbursement within 30 days of the date a claim is submitted. PG&E also agrees with CEC's proposal that R&D funds be deposited into a separate fund to assume timely payments to contractors. Furthermore, PG&E recommends that the annual authorized amount for R&D funding, including administrative overhead, would be added to other surcharge costs, collected quarterly, and retained in a BOE fund for distribution to the R&D project administrator to cover R&D project costs. PG&E advocates allocation of R&D revenue and costs through a separate rate component to non-exempt customer classes based on equal-percent-of-marginal-cost. CEC recommends that following initiation of the R&D program, funding should be implemented on a five-year funding cycle beginning in January 2005.

We direct the Energy Division to work with appropriate state agencies to establish a separate R&D account in the Fund, if feasible. Additionally, the utilities should amend their balancing accounts via an AL, if necessary, to reflect the collection of revenues for public interest R&D through the PPP surcharge, remittances to BOE and disbursements from the Fund to a non-utility administrator. The utilities shall also report to BOE the amounts collected from the surcharge for R&D with their quarterly remittances and furnish a copy to the Energy Division. The utilities should maintain existing authorized R&D cost allocation procedures. Proposed allocation of R&D costs to customers using equal-percent-of-marginal-cost is an issue for BCAP or other ratemaking proceedings.57 However, we note initiating an R&D program, collecting R&D surcharge revenues, and establishing accounting procedures, may cause some initial problems in paying contractors while the fund is being established. We expect the administrator to address any R&D funding, project financing, or payment problems that may evolve as a result of the difference between quarterly deposits by utilities to the Fund, remittances from the Fund, and payments to contractors. Disbursements from the Fund to the R&D administrator shall not exceed the adopted zero-based R&D budget. Energy Division will issue instructions for Fund disbursements to CEC.

We also will adopt Sempra's recommendation for annual reports by the administrator. We expect that the annual reports will provide information on costs, balances of approved project budgets and expenses, benefits and progress of R&D projects. The reports should be filed annually with the Energy Division by March 31.

In embarking on a public interest R&D program, parties have noted the potential for commercial benefits from R&D projects. Clearly, if any commercial benefits result, we expect that these benefits would accrue to the ratepayers who are funding the program through the gas surcharge. Accordingly, we expect the administrator to inform the Energy Division if and when any commercial benefits result from the gas R&D projects funded through the gas surcharge. Commercial benefits may be used to offset future R&D costs, reduce the gas surcharge, or be returned to ratepayers, upon determination of the Commission.

36 Item A by reference, Working Group Report on Public Interest RD&D Activities, September 6, 1996, submitted in R.94-04-031, pp. ES-2 and 2-7. 37 Competitive R&D activities are directed toward developing science or technology, the benefits of which can be appropriated by the private-sector entity making the investment. Regulated R&D activities are directed toward developing science or technology, the benefits of which are related to the regulated functions of the entity making the investment. (Working Group Report, p. ES-2.) 38 ALJ Ruling, Attachment A. 39 See D.90-09-045, Appendix C, 37 CPUC 2d 390, pp. 397-398. 40 In recognition of the effective date of this decision, potential projects should be provided to the administrator and Energy Division by September 30, 2004 for the 2005 R&D program. 41 CURC was established in 1984 to coordinate gas and electric R&D programs in California. (See Sections 9202-03.) 42 The PIER program is codified in Section 399.7. 43 CEC states that administrative overhead for the PIER program ranged from 4% to 12 % annually, while the utilities administrative costs have ranged between 17% to 23% annually, and UC estimates its administrative costs at 15% to 20% annually. 44 Government Code Sections 11120 et seq. and 6250, et seq. 45 D.95-12-063, as modified by D.96-01-009, pp. 112-113. 46 The project list should explain how each project meets our adopted criteria, the estimated cost of each project, the administrator shall also include a list of projects that have been rejected. In recognition of the effective date of this decision, the proposed R&D program for 2005 should be provided by the administrator to the Energy Division by October 31, 2004. 47 The Legislative Counsel's Digest for AB 1002, Section 1, states: "It is the intent of the Legislature to continue public policy programs in an equitable manner that will ensure that all gas consumers will provide a fair share of adequate funding for these programs without increasing the current funding levels for these programs." (Item by Reference B, p. 1.) 48 Under zero-based budgeting, projects that qualify would be identified, including cost and benefit analysis, and then summed. The Commission would determine the total appropriate funding, and include this amount in determining a surcharge. In the event a zero based budget has not been set in time for January 1 surcharge rate updates, the surcharge will be set using the amount of the annual program spending cap. Over or under collections (including balances in excess of project costs) of R&D costs will be adjusted for in the following January 1 surcharge rates. 49 TR 2, p. 135. 50 See D.03-10-086, p. 48, in Application 02-03-047, a SoCalGas and SDG&E application for authority to continue funding of LEV programs. 51 People v. Jenkins, 10 Cal.4th 234, 246; 40 Cal. Rptr. 2nd 903, 910 (1995). 52 See for example D.02-09-021, Attachment 2, which increases the CARE, budgets for SDG&E and SoCalGas by $11.7 million, and $4.5 million, respectively. Under Sempra's interpretation of AB 1002 these increases would be illegal resulting in some combination of restricting the number of CARE customers or reducing the subsidy per customer provided by the CARE program. 53 The project list should explain how each project meets our adopted criteria, and the estimated cost of each project. The administrator shall also include a list of projects that have been rejected. 54 Except for R&D program year 2005, that should be provided by October 31, 2004. 55 We will allow CEC to access up to $1 million in the Fund during 2004 if necessary to begin their administration of the R&D program. We note that PG&E has collected approximately $5.5 million of unspent R&D funds through the surcharge on deposit in the Fund. The start-up funds for CEC will come from these PG&E collections and an adjustment will be made to future surcharge rates so that these costs are apportioned to all the utilities. The start-up funds are to be included in the R&D spending cap for program year 2005. 56 PG&E estimates that it has already collected and remitted about $5.5 million to BOE between 2001-2003. We agree with PG&E that these funds be made available as a part of PG&E's contribution to R&D on behalf of its customers. Future PG&E PPP surcharges should reflect this contribution. 57 Utilities that currently do not have R&D costs and thus do not use an allocation procedure for R&D costs, should allocate R&D costs to customer classes using equal-cents-per-therm.

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