2. Background

A. Market for LEVs

The market for pure electric vehicles (EV) is quite small. While nearly all EVs are in California,² there are only 2,300 battery EVs on California's roads.³ A report SCE and PG&E submitted to the Commission states that "according to vehicle manufacturers, expected California light-duty⁴ EV [2002] sales are currently estimated at about 400 vehicles."⁵ There are currently no plug-in hybrid vehicles - vehicles with both an electric motor and an internal combustion engine that are cable of operating completely with the electric motor and a battery system charged from the electric grid - available on the market in the U.S.⁶ Full-scale commercialization of fuel cell technology is not anticipated until at least 2010 due to "significant engineering and technology challenges [that] lie ahead."⁷

On the natural gas side, the picture is slightly better. There are approximately 100,000 natural gas vehicles (NGVs) in the United States, 20% of which are in California. There are approximately 200 liquid natural gas vehicles operating in California.⁸

Most of the increases in LEV production (except the production of internal combustion engine/electric hybrid vehicles that do not require electric charging) have been driven by regulatory requirements. However, the extent of the regulatory requirements is something of a moving target, and it is difficult to determine where those requirements will settle. The federal Energy Policy Act (EPAct)⁹ requires alternative fuel providers to use alternative fuel vehicles for at least 90 percent of their newly-acquired light duty vehicles for model year 2000, but a Federal Judge has found that the federal government is not meeting these requirements.¹⁰ The California Air Resources Board (CARB) requires that automakers produce electric vehicles in California, but its requirements are on hold due to automaker lawsuits. In addition, CARB recently relaxed its rules to expand the types of vehicles that satisfy its requirements. Regional air quality management districts have their own, often changing, requirements.

B. History of IOU LEV Funding

We approved IOU ratepayer funding for LEVs in 1993 in Decision (D.) 93-07-054, after the Legislature enacted Pub. Util. Code § 740.3 et seq. The statute provides that the Commission should work with other state agencies, air quality management districts, the motor vehicle industry and the IOUs to facilitate the use of electric power and natural gas to fuel LEVs. The statute prohibits the Commission from passing funding for such programs through to ratepayers unless they are in the ratepayers' interest. In 1999, the Legislature amended Pub. Util. Code § 740.8 to provide that "interests of ratepayers, short- or long-term, mean direct benefits that are specific to ratepayers in the form of safer, more reliable, or less costly gas or electrical service."¹¹

We decided D.93-07-054 prior to the enactment of the foregoing definition, and therefore developed our own guidelines to determine whether ratepayers should pay for LEV programs. Those guidelines provided for ratepayer LEV funding "if the utilities can demonstrate that" the programs promote 1) reliable and efficient utility service, 2) safe service, 3) environmentally and socially responsible utility service or 4) reasonable rates.¹² Thus, the IOUs bear the burden of proof in these proceedings.

We imposed four additional requirements in D.93-07-054: compliance with statutory guidelines related to research and development and demand side management; consultation with the rest of the industry; consistency with other agencies; and preservation and accommodation of competition.

First, we required that ratepayer-funded LEV programs comply with statutory and Commission guidelines related to Research, Development and Demonstration (R&D or RD&D) and Demand Side Management. Second, the IOUs had to demonstrate that they had reviewed programs of the motor vehicle industry, state, regional and local agencies, other utilities and state and national electric and natural gas LEV research groups to ensure their programs did not unnecessarily duplicate and were complementary with the programs of these entities. This condition is germane to our discussion later in this decision. Third, we required the utilities to demonstrate that their programs are generally consistent with goals, policies and objectives of state and federal legislation and state and local agency action. Finally, utilities' programs could not unfairly compete with nonutility enterprises or interfere with the development of a competitive market. This requirement is also important to our discussion later in this decision.

We did not decide on funding for any particular LEV activities in D.93-07-054, but instead directed the IOUs to file 6-year program applications. In 1995, we issued D.95-11-035, our decision acting on those applications. We found that some of the IOUs' proposed programs satisfied the guidelines, but that others were not in the ratepayers' long-term interest. Among other things, we prohibited ratepayer funding to develop products for commercial use and to market LEVs. These limitations are highly relevant to our discussion below.

We also made clear in D.95-11-035 that ratepayer funding of LEV programs would not continue indefinitely:

Where direct benefits to captive ratepayers are insufficient to support ratepayer funding of utility ventures, utilities are strongly encouraged to undertake new market activities of a broader scope, but should do so at shareholder expense. . . . This not only protects captive consumers from subsidizing new business ventures, it also allows utilities to reap the rewards of successes and swallow the penalties of economic losses.¹³

We reiterated this point in our 1998 decision denying rehearing of D.95-11-035: "[T]he Legislature and the Commission intended funding for these essentially experimental programs for a specific six-year period, not an open-ended one."¹⁴

We also stated in D.95-11-035 that the LEV statute does not obligate us to fund any IOU LEV programs. While the law "encourage[s] this Commission to approve utility programs that support the development of a market for [LEVs]  . . . , no ratepayer funds can be expended unless the program will provide direct benefits to ratepayers in the form of safer, more reliable or less costly gas or electric service."¹⁵ Thus, to the extent the IOUs cannot prove that their ratepayer-funded LEV programs provide such direct ratepayer benefits, the Commission must disallow the funding.

We also prohibited the utilities from undertaking ratepayer-funded research to develop new products.¹⁶ We made clear that while utilities could engage in new product evaluation in order adequately to plan and manage the electric vehicle recharging load, ratepayers should not fund the development of new products. This restriction will become relevant when we discuss PG&E's and SoCalGas' use of ratepayer funding in partnership with the Idaho National Engineering and Environmental Laboratory (INEEL), a laboratory operated for the United States Department of Energy (DOE) by Bechtel Corporation.

D.95-11-035 authorized funding for utility LEV programs for six years. The funding expired on December 21, 2001. We extended the funding through December 31, 2002 in Resolution G-3322, and through our final decision on these applications in D.02-12-056. We explained in D.02-12-056 that, "We do not prejudge the utilities' applications for any additional funding or new program activities, or whether continued funding of existing LEV program activities pursuant to our final decision is appropriate."¹⁷

D.95-11-035 provided that the utilities would record their LEV program expenses in "one-way" balancing accounts. The accounts are so labeled because their usage requires the utilities to refund to ratepayers funds reflected in rates but left unspent, but does not allow them to recover from ratepayers any expenditures in excess of the authorized accounts.¹⁸

D.02-12-056 also made clear that we would be considering only "discretionary" LEV program activities, such as customer service, training, research and development and other "non-mandatory" LEV programs, in this proceeding.¹⁹ These discretionary programs are not the subject of statutory clean air requirements, but rather are carried out by the IOUs at their own discretion. This decision acts only on the IOUs' discretionary funding requests.

We explained that we would review "mandatory" LEV program activities in each utility's general rate case (GRC) or cost-of-service proceeding.²⁰ We identified as "mandatory" activities the acquisition of alternative fuel use fleet vehicles pursuant to federal law, operation and maintenance costs associated with use of alternative fuel use fleet vehicles and associated infrastructure, infrastructure (fueling facilities and related equipment) needed to support alternative fuel use fleet vehicles, employee training and instruction necessary for the use of alternative fuel use fleet vehicles, and accounting for the costs of these mandatory activities. These activities are therefore outside the scope of this decision. To the extent the IOUs have included requests for mandatory funding in their applications - even interim funding pending the outcome of their GRCs or cost-of-service proceedings - we do not act on them here. They will have to seek interim funding in those other proceedings.

C. The IOUs' Applications

In this decision, we act on each IOU application consistently, rather than allowing the IOUs different procedural options. For each program, we extend funding for one year, to expire one year from the effective date of this decision, and impose several conditions for continued IOU funding. Due to the concerns we express in this decision, we approve no funding for the period after this one-year period ends. The IOUs shall file quarterly reports as directed elsewhere in this decision.

1. SoCalGas/SDG&E's Applications

SoCalGas and SDG&E filed a joint application seeking $2,924,000 in total discretionary LEV funding. This amount breaks down as follows:

2. PG&E's Application

PG&E seeks $5,026,000 in total discretionary LEV funding. Using PG&E's chart, this amount breaks down as follows:

3. SCE's Application

According to its chart, SCE appears to seek only $182,160 in discretionary funding, although its request is not at all clear.

D. Other Parties' Responses to the Applications

The Commission's Office of Ratepayer Advocates (ORA) protested the IOUs' applications, asking that the Commission discontinue ratepayer funding of LEV activities that are not directly related to utility obligations under various government mandates to purchase, operate and maintain LEVs. Specifically, ORA requests that we discontinue funding for LEV RD&D activities, which it alleges should be covered by existing RD&D funding derived from charges for Public Purpose Programs. It also asks us to discontinue funding for consumer information, education and training activities relating to commercially available LEV products and services.

The Southern California Generation Coalition (SCGC), consisting of the Los Angeles Department of Water and Power, the City of Burbank, the City of Glendale, the City of Pasadena, the Imperial Irrigation District, Williams Energy and Reliant Energy, protested the application of SoCalGas and SDG&E. SCGC recommends that the SoCalGas customer service function be limited to providing safe service to entities that directly fuel NGVs. It also alleges that government agencies or other organizations should provide NGV information to the public, rather than the utility. For NGV RD&D, it claims that ratepayers should not fund these activities because LEV product manufacturers are better suited to do so. Finally, it asserts that utility RD&D activities should be funded through the Natural Gas Public Purpose Program surcharge.

The Western States Petroleum Association (WSPA), a non-profit trade organization representing companies involved in the petroleum industry, protested the application of SoCalGas and SDG&E. WSPA is concerned that the proposed LEV programs exceed the parameters adopted in D.95-11-035 and that additional clarification is needed to fully understand the utilities' customer education and RD&D activities.

Liberty Fuels (Liberty), an equipment developer, opposes the utilities' applications. Liberty claims that the utilities have used ratepayer funds to monopolize the NGV market and that continued funding will provide the utilities with an unfair advantage over the private sector. In support of its allegations, Liberty says that past spending has been inappropriately devoted to lobbying and promotional efforts that are contrary to D. 95-11-035. Additionally, Liberty claims, utility RD&D efforts have been directed toward developing new products that should be undertaken by private companies. As a case in point, Liberty suggests that natural gas compressor manufacturers are better suited to conduct RD&D for such products than the utilities.

The California Energy Commission (CEC), a state agency with an interest in the conservation and/or displacement of petroleum fuels and promotion of fuel diversity, supports the utilities' continued role in expanding the use alternative fuels. Its primary interest is to define the scope and scale of the utilities' LEV programs. In particular, CEC maintains that ratepayer funded RD&D is appropriate to support compliance with the EPAct, although public-private partnerships should be explored.

The California Air Resources Board (CARB), a state agency authorized to adopt regulations intended to meet clean air standards, supports the utilities' applications. CARB claims that the utilities' LEV programs have been and continue to be supportive of the agency's efforts to reduce transportation-related emissions. CARB also states the utilities have provided valuable input into developing guidelines for LEV incentives and promoting the availability of grants. According to CARB, utility training and education activities based on their fleet experience is important in fostering the public's acceptance of zero emission vehicles. Additionally, the utilities' continued participation in CARB's Infrastructure Working Group is important for developing infrastructure standards.

The South Coast Air Quality Management District (SCAQMD), a public agency with air quality regulatory authority over the South Coast Air Basin, supports the utilities' applications. It claims that the proposed utility LEV programs, including public information and RD&D components, are vitally necessary to assist the agency with its expedited implementation of its air quality management plan. SCAQMD also says that utility public information programs help users understand a myriad of governmental certification categories and equipment options. Furthermore, issues related to fuel specifications concerning the agency benefit from utility involvement. Utility participation in SCAQMD's Technology Advancement Office promotes non-duplicative LEV RD&D efforts and certain other enhancements.

CALSTART, an organization that works with industry and government to develop advanced transportation technologies to improve air quality, supports the utilities' applications. CALSTART claims that ratepayer funding is needed for LEV RD&D because manufacturers are unwilling to make investments in this area and there are government spending shortfalls. The group also cites a need for utility involvement in the development of natural gas hybrid electric vehicles.

The Environmental Coalition (Environmental Coalition or Coalition), consisting of the National Resources Defense Council, the Coalition for Clean Air, the Planning and Conservation League, and the American Lung Association of California, supports the utilities' applications. The Coalition disputes the characterization that some elements of the utilities' programs are "discretionary" and claims that all aspects of the IOUs' programs are necessary. According to the Coalition, utility LEV programs benefit ratepayers by playing a key role in improving air quality, sharing LEV related information with customers and promoting safety. In its view, unless these programs are extended, the ratepayers' investment in the utilities' past activities and experience with LEVs would be lost.

E. IOUs' Current Staffs and Fueling Stations

As best we can discern, the IOUs currently have the following staffs handling LEV activities:

· SoCalGas/SDG&E have downsized their staff from 39 to 7 employees.

· PG&E has approximately 10 full time equivalent staff persons (FTEs) performing the customer service function,²¹ 3 FTEs in the RD&D area, and 2-1/2 FTEs in the Technology Application Assessment group.²²

· SCE did not provide relevant information.

The IOUs have the following fueling stations for LEVs:

· SoCalGas has 20 or 21 NGV fueling stations.²³ Fourteen are open to the public. SDG&E has 3 fueling stations.²⁴

· PG&E has 22 NGV fueling stations.²⁵

· SCE has no NGV fueling stations since it is an electricity-only utility.