1. Public Interest Energy Research –Natural Gas Program Status Presentation to Air Emissions Advisory Committee May 12, 2005 Philip Misemer California Energy Commission Energy Research and Development Division

2. 1 Natural Gas in California n The CEC’s IEPR provides background and information on natural gas usage, patterns and issues in California. n California’s total demand for natural gas is increasing: –Core demand (including residential, commercial, and smaller industrial customers) will increase at a rate of 0.9 percent per year –Non-core demand (large industrial customers) will increase at a rate of only 0.4 percent n Electric generation demand will increase at a rate of 1.5 percent per year. n Currently, pipelines from sources outside the State supply 85 percent of natural gas consumed in California. n Some of the primary natural gas issues in California are consumer gas costs, adequacy and security of supply, use of LNG, and gas distribution and storage infrastructure.

3. 2 Natural Gas R&D n Natural gas R&D in California has historically been conducted by the State’s natural gas utilities, both regulated and public purpose research. Regulated gas R&D has been the primary focus of the utilities’ efforts. n The trend in government, not-for-profit, and private-sector investment (including GRI/GTI) in gas-related R&D has been downward over the past decade.

4. 3 Natural Gas Research Legislative and Regulatory Background n Assembly Bill 1002 granted the California Public Utilities Commission (CPUC) authority and discretion to determine appropriate natural gas funding levels for low-income, energy efficiency and public interest R&D activities. n Public Utilities Code Sections direct the CPUC to establish a natural gas surcharge for public policy programs and annually determine the amounts “required” to administer and fund these programs. n The CPUC issued Order Instituting Rulemaking (R.) 02-10-001 on October 3, 2002, to determine broad policy issues and adopt a long-term framework to implement AB 1002. n During August of 2004, the CPUC, in Decision 04-08-010 designated the California Energy Commission as Administrator of the Natural Gas Public Interest Research and Development Program. n 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. n In addition, the CPUC expects approved R&D projects to meet the following criteria: –Focus on energy efficiency, renewable technologies, conservation and environmental issues –Support State energy policy –Offer a reasonable probability of providing benefits to the general public –Consider opportunities for collaboration and co ‑ funding opportunities

5. 4 Natural Gas Program Administration and Budget CEC will manage daily activities and R&D projects, including planning, project procurement, project accounting and program evaluation CPUC will review and approve the annual program plans for R&D projects to be funded The CPUC adopted a 2005 (calendar year) Gas R&D Program cap of $12 million The CPUC also adopted the principle of zero-based budgeting for the R&D Program The budget 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. After this period, the CPUC will assess the reasonableness of the funding level, and the overall R&D program.

6. 5 2005 Program Plan CEC submitted a 2005 program plan to the CPUC on 10/31/04 The plan was prepared in about two months and involved an abbreviated planning process: Working with the utilities on their transition plans PG&E had no projects for continuation SEMPRA had several projects for continuation Collaborating with CPUC staff on what level of detail was required and process issues Working with other CEC Divisions and the R&D Committee Input and review from the PIER team leads Meetings with stakeholder groups (Governor’s office, GTI, EPRI, LBNL, PG&E and SEMPRA) The Abstract process - received about 170 concepts (by 9/30/04) that were ranked per CPUC requirements The core element of the research plan was selection of the four research areas for PINGR The Plan was approved by the CPUC on 12/16/04

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8. 7 Thus far projects have been identified that could expend over 80 percent of the $10.5 million available for research to be initiated 2005. Staffing and program technical assistance should be fully in place for the 2006 program.

9. 8 On-Going CPUC Requirements n Produce annual program report on R&D activities and spending – March 31st of each year n Show CPUC’s Energy Division that projects are performed in a timely manner, within a budget and at reasonable cost and justify program R&D expenditures n Close coordination with IEPR/ER n Stakeholder (public) input to program n Inform Energy Division if and when any commercial benefits result from the gas R&D projects funded through the gas surcharge n Suggested projects should be provided to the CEC and the Energy Division by July 31 of each year for adopting the next annual gas R&D program. n By August 31 of each year, the CEC is to provide a prioritized list of projects that meet the CPUC’s adopted project criteria to the Energy Division. n Up to $15 million R&D Plan for 2006 due by August 31, 2005

10. 9 On-going Issues n Contract Terms and Conditions n Contracting/procurement processes n July project submittals n August 31 Program Plan deadline