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HomeMy WebLinkAboutAgenda Bill 3.I 05/16/2011X8.5,5 DATE: May 1.6, 2011 TO: Honorable M, ayor and Members of the City Council FROM: John C. Brown, City Manager, SUBJECT: Resolution,Approving Letter of Support for Public Interest Energy Research (PIER) Program RECOMMENDATION It is recommended that the City Council adopt the attached Resolution Approving Letter of Support for Public Interest Energy Research (PIER) Program BACKGROUND In 1996, California moved 'toward a deregulated, electricity market through the passage of the Electric Utility Industry Restructuring Act (AB 1890). State policy makers wanted to ensure the continuation of electricity research that was in the public interest, 'including research that resulted in system -wide improvements,ihatwould`benefit ratepayers across the state. A provision was included in AB 1890 which authorized the collection of .a surcharge, commonly referred to as a "public goods charge ", on+ investor owned utilities (IOUs) in order to .fund among other things, a Public Interest Ener Research , ro am�� (P Th gy p gr ( ) e California.Energy Commission was given I. the authority under PIER to ,provide grants forresearch to develop, and help bring to market, energy technologies that benefited'the environment, provided- greater system reliability, lowered system costs and p rovided other tangible benefits to ; California electric utility customers. In January 2012, the authonty`to, collect the "public goods' charge" to fund the PIER program will automatically expire unless extended through legislative action. DISCUSSION The State';s Legislative Analyst's Office (LAO) reviewed the; PIER. program_, and identified some key problems with the° current program, namely the lack of focus and a weak strategic tie to the state's current.energy goals: The LAO also identified several options'for the Legislature to consider,(see attached letter dated January 18, 2;01 f), and feels that it continues to make sense for the state to have a continued role in facilitating public interest energy'research. Agenda Review: City Attorney Finance Director l City Manager �/ d FINANCIAL IMPACTS The funding for PIER, as mandated in AB 1890, stipulates that PIER receive no less than $62.5 million annually from tithe public goods charge levied on IOU ratepayers. It is unknown if the Legislature will increase the surcharge amount. ATTACHMENTS 1. Draft Letter 2. Resolution 3. January ISM 2011 letter from Staie''s Legislative Analyst Office (LAO) provided to the State Senate Energy Committee , FINANCIAL IMPACTS The funding for PIER, as mandated in AB 1890, stipulates that PIER receive no less than $62.5 million annually from tithe public goods charge levied on IOU ratepayers. It is unknown if the Legislature will increase the surcharge amount. ATTACHMENTS 1. Draft Letter 2. Resolution 3. January ISM 2011 letter from Staie''s Legislative Analyst Office (LAO) provided to the State Senate Energy Committee DRAFT May 16, 2011 Senator Alex Padilla, Chair; and Members of the Senate Energy Utilities and Communication Committee State Capitol, Room 403`8 Sacramento, CA 95814 RE: Support for Public Int'ere'st Energy Research ( PIIER) program Dear Senators, ATTACHMENT 1 The City of Peialuma, strongly.supports the reauthorization of the `Public Interest:Energy Research (PIER) program and for reauthorization of the electric Public Goods, Charge (PGC) for a minimum often years at current investment levels. A January 18, 2011 Legislative Analyst Office (LAO) review of the PIER program provided to the State Senate Energy Committee; stated that "there is °a role for4he "state to continue to support public i energy b ;the 2012 ; sunset date °,,..to assist the state in meeting its �� h. eyond gy g eseare n oels. e r e o g p g n the LAO report, we ener goals." Of the�thre ptions'.for continuri the.PIER� ro ram liste d i support ° O tion One Continue P�IER.Program Under CEC With a Tighter Focus:" This option p • «, fulfills the historical public intere stain fundin g R &D' fo r which there is an increasing need. p y g' y p g der the•P'IER program. Long-term, m nd depeentr sustained and thoughtful public interest esearch, development and demonstration efforts are necessary to develop; scale -up, and deployclean and affordable energy solutions that tackle California's acute, pollution problems and long -term GHG emissions reduction goals in the most cost = effective manner. The PIER program enhances long -term energy security and independence, rate stability, and long -term rate lowering and cost- effective GHG emissions reduction. PIER's Renewable Energy Secure Communities (RESCO) program is an excellent example of a strategic use of PIER funds. Sonoma County is proud to be implementing a three- year RESCO program in partnership with the California,.Energy, Commission. RESCO has been especially helpful in responding to public .interest in l "ocal ,en_ergy and economic security. We believe that RESCO is critical to meeting this community's aggressive GHG reducti'on;goal. Given the exceedingly difficult budgetary realities that the state is .grappling with, the Legislature must look closely at investments made on behalf of Californians.. Strategic public investments that produce long -term benefits for all Californians such as the PIER program deserve to continue. Sincerely, David Glass Mayor cc: Senate Energy Utilities and Communication Committees (Sen.,Jean Chair), Sen. Tom.Berrvhill Sen. Ellen Corbett, Sen..Kevin.de Lek, Sen:'Mark D`eSau_lnier, Sen -Fran Pavley, Sen. Michael Rubio, Sen. Joe Simitian, Sen. Tony Strickland, Sen. Roderick Wright) Senator'NoreenEvans, State Capitol, Room 4034, Sacramento, CA 9.5814 Senator`Mark Leno, State; Capital, Room;5.100,'Sacramento, CA 9,5414 Robert B. Weisenmille , Ph.D:, Chair, California Energy Commission, 1516 Ninth Street, MS-3- Sacramento, CA`95814 Laurie ten.Hope, Deputy Director, Energy Research and Development Division, PIER Program, California Energy C on riission, 151,6, 9t" ST. MS 51, Sacramento, CA'9 "5814 =5512 ATTACHMENT 2 RE'SOL:UTION APPROVING LETTER Off' SUPPORT FOR PUBLIC INTEREST ENERGY RESEARCH (PIER) PROGRAM WHEREAS, in 1996, the California State Legislature.passed Assembly Bill 1890, the Electric Utility Industry Restructuring;Act; and WHEREAS, a provision of-.AB1890 allowed the collection of a "public goods charge" on investor owned utilities in order to fund the Public Interest Energy Research program (PIER); and WHEREAS', the PIER program,:,under the auspices .of the California Energy Commission, provides:grants! for:re'search to develop,,energy technologies that benefit the environment, lower system costs and `proyide.other benefits to California electric utility customers and WHEREAS, in January: 201- 2,.the authority "to collect the "public',goods charge" to fund the�PIER program will automatically p g g ve action. 11 ex ire ^unless extended.�throu h le � islati . NOW, THEREFORE BE IT RESOLVED THAT 'the "Petaluma ,City Council supports the reauthorization of the Public Inter est:Energy Research program:and strongly encourages the State Legislature to continue funding -for the program by reauthorizing the electric Public Goods Charge for a minimum of ten years at`currenf investment levels. h i Hon. Alex Padilla Senator, 20 District Room 4038, State Capitol Sacramento, California 95814 Dear Senator-Padilla: n ATTACHMENT 3 In Janua 2012 authonity-t6 so- called "public goods charge" to fund the electricity p ort ion of the Public. l,iiter Research wi P_ IER ro rani at the State Energy Resources Conservation and Develo ment Commission C E ' p � "� � ( C) � omatically expire or "sunset" unless P g legislative . rcumstancgs, d in an, August 12 , 11 2010 etter l and m.subse uer action. Given these, r co n du ct an independent t co ny q to q ersauons:with your s - you re, through ues p gr rn�to, dete p n uccessf ill , i 11 our review of the PIER ro a rmme if ; it is; o. erati g y, he program should be ill reauthorized and , if so L ions,are warranted: As,part of our evaluation of the program, if rnodificat we address °tlir;eemain questions-, ® Is there a,;cont hued" state role for a public interest,energy research program in the state' today ?' If so' are p the g current statutory parameters guiding the eligible use of PIER funds- and 11 o. , thus the ro rams foc s still a p -ro p priate? If'not, what should the program's focus be? g program continuation is the current rees for allocating funds via the • Assumin ro am con p CEC the one that:is besf'suil" IQ achieve statuto ob ectives ofthe PIER program, including the creation of tangible electricity'ratepayer- benefits? . rovide a brief back ound of th In our analysis that follows, e w„ p gr e development of the PIER program discuss current public and privat energy . , g IER; ' ener research efforts .includin those P describe a fundamentall problem in the current structure of the program; and, finally, propose three 1 options for the "Legislature to consider in order to improve California's approach to publicly directed energy research, :Our Bottom Line.'Our su orts three major findin s: First in evaluatiri the current pp ° J g � g . pr we -find that has not de'moristrated.tfiat there has been a substantial payoff to ; the ��CEC date from the state's investment, of more than $700 million in-ratepayer We find that. the CEC has generally funded projects.in_line With the broad categories of eligible investments that are set out in statute (such as promoting "energy efficiency" and "demand response" strategies). However, state law - establishes several goals for the -PIER program;, including the creation of tangible. ratepayer benefits. While some particular PIER - sport "gored research projects have served r u January 18, 2.011 � i Hon: Alex Padilla 2 January, 18, 2011 these goals, CEC has not:demonstrated that the majority, of the projects. allocated 'PIER funding by CEC has produced similarbenefits. Second, we find that the legislative and several new a energy landscape that differs greatly from energypolicy objectives has,created am en the that existed in 1'996 when the PIER program was created. In order to helpaddress .technological barriers which may prevent attainment of these state,goals, we,find'that there is a role for the state to continue to support public interest energy research beyond the 20`12 'sunset date. Third, if the Legislature decides that there should be a continuing, state role in this area of research, we find that improvements could be made to the implementation of this role, including by tightening funding eligibility parameters and changing the process by which research funding is allocated. Methodology. In.craftitig our response; we discussed these °matters in detail with a number of entities throughout the energy researclix, frimunity including, the CEC„ California Public Utilities Commission (CPUC), California Independent System, Operator (CAISO.) and other regulatory bodies and policy,makers. We also.contacted'investor owned utilities (IOUs); publicly owned utilities (P.OUs),.and other experts in the energy sector, including national research institutes and agencies in otherstates. ;In addition, we consulted PIER reports,, past program analyses, and studies which looked at the state of energy research today. BACKGROUND Electricity Research Prior to Deregulation. Prior to deregulation, of the state's electricity riiarkets in, 1996, most electricity research was driven by utilities themselves. and coordinated through the Electric Power: Research Institute (EPRI). The EPFJ is a national research institute . founded in 1973. following'U.S. Senate hearings which brought attention to the lack of funding for research and development in the electricity industry. 'Through EPRI, utilities around the country were able to pool research-.resources in order to advance technological development and understanding in the area of electricity generation, delivery, and use. During this time, California's IOUs were allowed to recover costs associated with this research activity through the rate-making; process at.the CPUC'. AB 1890 Established Public Goods Charge on. IOU Ratepayers to Fund PIER:jn 1.996 California moved toward.a deregulated electricity market through the passage of the Electric Utility Industry Restructuring Act'(Chapter 854, Statutes of 1.996 [AB 1890, Brultej), widely referred to as AB 1890. At the time, it was widely believed that, under a newly deregulated system, IOUs would have an incentive to cut costs as much as possible, and would thus limit spending on research. State policy makers, however, wanted to ensure the continuation of electricity research that was in the "public interest"= including�research that results in system- wide improvements that would` benefit ratepayers across the state. In order to address this concern policy`makers included in AB; 1890 a provision which authorized the .collection of a surcharge on IOU electricity bills in order to fund, among other purposes; a public interest ene.rgy,research, development, and deployment program. This surcharge. is commonly referred to as a public goods charge. The CEC was given the 1 11 Hon. Alex Padilla January 18, 2011 market�ener .technologies�that b for�:research to develop, and help bring to gy, r PIER to provide grants + i. 1 admmt e a rtty unde enefit the erivironmer t, provide greater system reliability, lower system costs,, and.prov de; other tangible benefi ts to California electric utility customers. , , been allowed "to recover research costs through h the CPelthe enactie n nt of AB 1890 IOUs had' g_ UC's, rate`- makin'g'proce After "the la�?v wa&,enacted, the GPUC decid &d budgets. s. Thisnact on was' based on CPUC's concern that ;ailow.in r IOUs. t h and. ur and pecover such nt of IO g g n newly deregulated market. The act tok n en by the CPUC do not re` pventIO five advantage ti a costs in the rates char ed to elect y - g actions taken Us from conducting their own public interest energy, research utsde of PI , so long as those costs are paid by an IOUs shareholders;rather than from ratepayer-g gl Alt ' Alt hough funding for PIER is POUs Fund'Their Own,Research�Pro rams Outstde - o ,:PIER derived 'solely from the public goods charge levied on California's IOU ratepayers, POUs are nonetheless required statute to levy a.publ c-goods charge on their ratepayers in order to fund. similarprograms. The charge _levied on POU ratepayers is "required by statute to be commensurate with the;amount paid by IOU ratepayers. Funding Level for PIER Established in. Statute. Assembly Bill 1890 mandated that PIER receive no less than $62.5 million annually from the public goods charge levied on IOU ratepayers. In addition, Chapter 932,. Statutes of 2000 (AB 1002, R. Wright), established an additional surcharge natural gas ratepayers in order °to fund,natural.ga& public' interest research_ at an annual level of S24 million -In total; PIER.now receives $86.5 rnilliori.annually. The electricity portion of the. public, goods .charge is - scheduled to sunset, in January 2012. The natural gas charge would continue indefinitely. Focus of PIER Program Established in Statute. Statute provides various funding criteria to guide CEC's allocation of PIER , funds and °to focus the program's activities. For example, Chapter 512, Statutes rof.2006• (SB 1250., `Perata), requires that the program ;focus. on five major areas: (1) advanced. electricity .generation (such innovations as systems that recycle heat from power systems toproduce electricity), (2) climate change and the environment, (3') energy n redu e ust m a for ener renewable energy, and (5), ehani snis that serve to y P g ( g of power g; ion, 'Chapte 01 Statutes of 20 ), ( Budget ap_.d FiscadReyiew on ,. Earlier le islat r � 05 SB " 76, ew Committee), had,already expanded' the scope of the PIER program to include;, a sixth category= for transportation-related research. `CEC ensure that PIER fungi' g i ' g . loadin order a t n gY P ions align with the state's ener Statute requires that the gyf g; " erm used to define all state eener gy nonties. The loadillowider.. gy P - n or q he state s ener cy and demand re ponse strategies, 2 development of renewable order: requires, t n ener demands in the , fo and strbuted gener t on resources, and 3 generation of clean f ssil -fuel P viable O g r ( g ed electricity. r, R Hon. Alex Padilla 4 January 18, 2011 THE CEC' IMPLEMENTATION OF PIER R AISES ISSUES WhatHas the Siate Received From Its In"vestmentin PIER? Since the program's inception, PIER has funded nearly $700 million in public interest, research and development. While the amount invested bythe state in these activities is easy to track, it-is by no means clear that the investment has resulted in a payoff to the'state's electricity ratepayers who provided these resources.• While the 'CEC has estimated-that the has resulted in billions of dollars in savings to ratepayers, we believe that'there.are serious problems with the - way'the CEC has calculated these benefits. In its calculations, CEC attributes to the PIER program the entirety of the substantial ratepayer savings, that have resultedafrom the state's adoption of energy- related building and appliance standards. While -it is true'that some of the research used to develop these standards has been fostered by PIER, our, analysis indicates that it is not reasonable to directly attribute all resulting cost'savings to PIER:IFor example, CEC.'is: implicitly counting as.a'benefit from PIER savin tighter building and appliance standards adopted.as early as the 1970s, long before PIER ever existed. It 'is, fair to attribute some credit to the PIER program,'in that some changes were made to`these standards as the result of PIER-supported �. research. In addition CEC has Ibee_ n , able to document how the P,- IER,program: has helped to bring to market such innovations as floor cooling technology and cool roofing. But CEC's calculations of benefits to ratepayers ers often overstate the impaa:of these changes, in our view. This does'nof y lead to the conclusion that continued state investment" in public necessanl interest energy research is ater in this analysis, we find that there is unwarranted As we discuss 1' a need for a continued „state role in this research area to assist the state m meetin its energy goal's. We also find that Ili ere isothe�potent lal fora much.`largerpay off fr omthe program if it were - refocused and various other;program improvements adopted.. PIER Has Funded a Bro,'ad Spectrum,;gf.Besearch` Perhaps Too Broad. A broad array of research has been funded,over. time under PIER within each of the six''allowable,investment categories discussed earlier. The PIER funded research.projects we have reviewed,generally fit within these allowable cafegories. However; some projects appear to' have only a tenuous connection-to;'the subject of''energy. For,exampleJust within th climate change and environment area, PIER has funded,research on such topics as deforestation in California groundwater the potential impact of climate change, on bird distribution, and salmon ” habitat restoration.., Our. analysis raises questions° as to whether the range of research is so. broa& nd unfocused that itis hindering the potential benefit of the PIER program: Fragmenting the research into so many directions reduces the likelihood, in our view, that this research-J.5 being translated into changes in the ,'electricity marketplace that are benefiting consumers or the public:d large. All Statutory Goals of PIER Not Being Met, The, statute that created PIER establishes various goals for the program which were intended to guide'the allocation of PIER funds. Specifically, statute provides' that the general goal of the program is: "to develop, and help bring to market, energy technologies -that provide increased.environmeintal benefits, greater system reliability, and lower system costs, and (emphasis added) that provide tangible benefits to 0 Hon. Alex Padilla 5 January 18, 2011 electric utility customers." In. nearly all cases, it is clear that the projects selected for funding are in line with some of.these goals. However, based on our review, it appears that not all of these goals are being:met by each particular. project that:has been allocated funding, as the law creating PIER requires. This. particularly appears to be the case for the climate change /environmental category. For example, while researching the potential impact of climate change on the distribution of birds may have scientific, merit, it is doubtful that it will lead to tangible electricity ratepayer`benefits as required under the PIER statute. Other. Issues. Other issues have been brought to our attention concerning the current framework and implementation of the PIER program. First; the public nature of the program (and thus the need to ensure transparency throughout the appl'ication review period) has resulted in what is inherently a lengthy °application process. We have been ,advised that this has discouraged potential researchers from participating in the program. A second issue concerns 'who owns the-rights to the results of research that has been funded with both public and privatefunds; as is typically the case for.PIER- funded projects. This issue is currently resolved through:.negotiations on a case -by -case basis between the public and private funders and, ultimately isa decision, left to the administrative discretion of the CEC. The question of proprietary rights appears to be disc ouraging some parties from participating in the program. A third issue concerns the efficiency of having multiple' public interest energy research programs in the state—one operated by CEC under PIER, as well as the additional internal research . programs operated, byeach POU.:It?is likely that this arrangement results in unnecessary and additional administrative costs for the administration of these programs. Also, this situation could result in a lack of of this research, and increases the risk of duplicative research efforts. IS T HERE A CONTINUED STATE ROLE FOR ENERGY RESEARCH? Meeting State Energy Goals. Will.Require Research Breakthroughs., Since the PIER program was created, many aspects of 'the California energy sector have changed. The 2000 -01 energy crisis in California, new state policies to require increased generation of electricity from renewable energy sources and other policy changes have created a new energy landscape that looks much different than the, one in existence in 1996. 'State legislation is driving the. need for technological change.and research torachieve breakthroughs in the energy area. For example, Chapter 469 Statutes of 2010 (AB 2514, Skinner), authorized the CPUG to determine targets for IOUs to develop storage capacity for electricity. While some forms of energy storage, such as ,hydroelectricity, have been in existence for decades other forms of storage will still require technological breakthroughs in order to make their' integration into the grid cost- effective. The goal of increasing California's access to renewable sources of energy —one of the state's primary energy priorities =is also driving the need for technological change and research. Due tc the intermittent nature and relative unpredictability of wind and solar resources, there are numerous engineering "challengesto integrating these renewable energy sources into the electrical grid in a cost- effective way without jeopardizing the reliability of energy delivery L� Hon. Alex Padilla 6 January 18, 2011 systems.. Technological breakthroughs wiltbe needed, for example, to improve the ability of electrical system operators to accurately forecast the availability of "renewable.resources in order to better.'integrate them into the= "grid. Other areas of legislative interest are so- called "sthaKgrid" technologies and demand response systems which are, intended to reduce consumers' energy demand. While demand response is,equalto energy efficiency assthe state's first °priority in the loading order, energy engineers indicate that"more research is needed in order'to;advance these technologies beyond prototypes,, IOUs Now Have Much ,Greater Incentive to Invest in Public. Interest Energy Research. Changed circumstances since the passage of AB 1890 have opened the doorTor the Legislature to considernew approaches to 'fund'ing ;public interest energy - research. Because of the state's various energy.- related mandates, the IOUs now have,a.much greater incentive to invest in research in order to meet the state's energy" goals. The. IOUs" face significant fiscal penalties if they do not meet various: energy mandates and targets. A Continued State Role in,Energy Research Makes Sense: Given the circumstances discussed above; we believe that meeting the state's energy goals. will require continued investment by both the public "sector (including'the state.).as well as the private sector. We are.not in a position to determine how much state funding_ should appropriatelybe committed to these purposes. This is an important policy decision for the Legislature to should it decide to continue. the sfate's role in -a.publicly�directed : energy research program. However, should the Legislature choose to reauthorize the PIER program in some form, we recommend that improvements be made to the proc "ess :for allocating funds: for such , a program. In the section that follows, we ,discuss; three potential approaches; for reforming the: state's role, in energy research. Each approach is designed to make the,state's investment.rol'e more strategic. Regardless of the particular approach taken, we recommend that any legislation to reauthorize a state- supported research:piogram sunset the, after a determined period of time — perhaps five years —and provide for, a °periodic evaluation of.the results of the research program. The; latter will,help the- Legislature ensure that ifs policy direction; for the program is being followed and its goals: for the program are being met as cost = effectively as possible., INVESTMENTS' IN RESEARCH SHOULD BE° MORE STRATEGIC `The, Legislature Has_ 0 Maximize. Publicly Directed Energy Research Investments.. Earlier we identified;some.key problems; with, the current PIER.program— namely, the . program's- lack of focus and its weak,strateg'ic tie to, the, state's current energy goals - We have also 'identified some options for the Legislature to address these problems. Each of these options has policy tradeoffs; which we discuss below. An'important policy issue for Legislature to consider_;is�how much flexibility and.control to give to the IOUs to. make research investment decisions and what-level of governmental involvement in the process is;.deemed appropriate. The options we present below are not mutually exclusive. Rather, a hybrid approach could be taken that includes- elements from different options,, depending upon the Legislature's desired policy goals. Hon. Alex Padilla 7 ' January 18, 2011 Option One— Continue,PIER Program Under GEC With a Tighter Focus As we discussed: previously,, research projects which received funding through PIER may not always meet all of the original statutory criteria for the program. To address: this concern, the Legislature may wish to consider re;guinng a more strategic focus for „the:program based on its current priorities, emphasizing research that will specifically ad_ dress the current technological barriers to achieving the state's current energy goals. As noted earlier, the climate change /environmental category particular, appears to.have been very"broadly interpreted by CEC in its research investment decisions. The Legislature thus might consider providing greater policy direction regarding wlia"Uype of research is eligible, for funding under this category. Alternatively, the Legislature might-even consider eliminating-the climate e"change category in recognition of the fact that most of the state's current energy policy has been developed with an eye toward climate change mitigation and reducing, greenhouse gas emissions. Such an action would recognize that investments that serve to meet the state's energy goal's. directly also move the state closer "to meeting its .climate change goals as well.. As part of this. option, the Legislature may'wish to consider transferring public goods charge revenues collected by POUs for research purposes to the PIER fund. Thin approach would respond to concerns .;about the inefficiency and' lack of coordination from creating multiple separate, public interest energy research programs across the state. This would maintain the institutional knowledge that has been built at CEC for the operation of such a research program.. It would also maintain ,the existing opportunities the. Legislature has for oversightthrough.budgetary and policy review of CEC activities. However, there is a tradeoff with this option. By continuing to, rely so heavily on the CEC, rather than electricity providers in making research investment decisions, this approach potentially misses an opportunity to focus the program on cost- effective investments that would be more likely to maximize the benefits .to'ratepayers. In our view, cost - effective investments. are more likely to occur under a process that,gives utilities that must be concerned about their "bottom line" more of a voice in such decisions. Option Two —Allow IOU;'.Rate Recovery of Public Interest Research As discussed previously, most utility -:sponsored research was conducted internally or through EPRI. This is no longer the ,case because the CPUC began to generally prohibit IOUs from , incentive toda to mve h and.;development costs through rates. ave "a greater” recoverm they resear st in "research that's a'li " ed with the - public intere t O ursumg the state's P p. s gy g g' pp O authorizing the collection ener oals the Le islature could consider the roach• of 1, not re costs for this eof researchAhro. gh rates. Statute could still p provide p ar a IOUs to recover their of the,public goods ch g fund ublic interest research (2). t ,p ` g parameters for the type of public interestireseafeh T6t which this rate recovery would apply." This option has some advantages. It would provide the IOUs with,flexibility in making research lead.to the state achieving its ener9 , goals more cost- effectively. since Pu... blic , Additionally, e Stments that maY would no longer be involved,, there would no longer be uncertainty Oyer whoa would have the rights to research outcomes. Hon. Alex Padilla 8 January 18, 2011 There is a potential.tradeoff with this option however. In effect, the option makes the CPUC the sole arbiter on behalf of °the state of IOU research investments. The role of the CEC in such research decisions would end, resulting in the loss of its institutional expertise in informing these decisions. While the CPUC would gain significant authority over the.level of investment that could be mandated upon the IOUs, -the Legislature would probably end; up: with less control and oversight over such a revised research program. The Legislature could partly address this concern by enacting statutory parameters to guide therate,recovery-process and to ensure that the type of research receiving such.,rate, recovery is consistent with the Legislature's priorities. The Legislature could also cap the amount of research costs that could be recovered through rates to ensure it maintained control over the program. Option Three — Create a Public- Private Partnership for Electricity Research A third option to restructuring public interest energy, research is; a hybrid approach designed to provide more flexibilily,'than is currently available to ther utilities in making research investment decisions while retaining ample public oversight over the ,process. Under this option, the Legislature would reauthorize the collection by IOUs of a public goods charge for public interest research purposes: However, as an alternafive to'the current program structure, funds would remain with the 'Individual utilities'rather than being remitted to the PIER fund at the CEC. Sim:i:lar to the current uti'lity energy efficiency programs that are partially funded from the public !goods charge, use of funds would be subject to each utility developing a multiyear investment plan. Rather than being submitted to the; CPUC, these: .research investment plans would be submitted to a: new ly created coordinating council which would replace the PIER program at the CEC. For example the Legislature could create a coordinating council composed of representatives from the CEC, CPUC, CAISO, and. CPUC's Division of Ratepayer Advocates. It should also include representatives of the POUs and IOUs. Under this concept, the council would deliberate-and agree upon an appropriate research course for the state. Each utility's research focus would subsequently-be subject to approval by the coordinating council. Utilities would then develop their own research plans based on these discussions. The council would approve ,the overall research plans but decisions about funding particular research projects would he left to the utilities. Because this option involves decision- making about the use of public funds, we would recommend that commission meetings be subject to state laws requiring open and public meetings. The creation of'a new administrative entity under state law raises a number.of technical and policy issues for the Legislature to consider. The structure and.rules of the coordinating. council would require attention in order 'to ensure that it'furictioned effectively. In addition to addressing the important - issues of the council's membership and iisxesponsibilities, the Legislature could provide its direction in statute on ,such issues as the requisite, number of council.`:meetings annually, voting rules, and guidelines by which research plans would be designed and; submitted. The main advantage of this option is opportunity for such,a council to coordinate research efforts across the state. This would potentially allow for greater sharing of technological innovation among these utilities and greater coordination across the state in the development of new technologies, such as a smart electrical grid. Providing more - flexibility to the individual Hon. Alex Padilla 9 January 18, 2011 utilities regarding where to invest research dollars would,help. to focus funding more strategically on investments thatare cost- effeetive: Finally, eliminating the currerit. program at the CEC would probably expedite decisiommakir gg about what research would go 'forward, since utilities would now be making such funding decisions One downside is that this option ad&'costs for.the creation of a new administrative bureaucracy, one which now involves multiple state agencies, rather than.just the CEC. However, these new costs would likely'be more .than. offset by savings on administrative costs due to the elimination of the PIER program at CEC: The coordinating: council, unlike the CEC, would not be making decisionsYabout funding of individual projects,, and thus would likely: need far fewer staff than CEC requires for PIER. SUMMARY In summary, we find that while the CEC is unable to- demonstrate a substantial payoff from the state's 'investment in 'the PIER program up to now; 'it -makes sense for the to have a continued role in facilitating public energy research. However in order to achieve a bi er� a. ,off from the gg p y " state "s mye,stment,'improvements are warranted to the process for deciding which research justifies support by the` ratepayers. The current process should be revamped to result in more strategic = investments that am more =likely to serve to address the state's.current:energy goals and legislative - priorities. We offer a number of options for the Legislature; to consider in .structuring :the state''s -public interest ,energy research activity going forward. Roberts Sh ould u have questioris regarding this information, please feel ;free to. _contact Tiffany you or tiffany.roberts @lao.ca.gov, or Mark Newton at 31 9-8323 or mark..newton @lao.ca.gov. Sincerely, Mac Taylor Legislative Analyst yi 1�