This paper was just published in Utilities Policy, on a timely subject which is of interest to many of you. The authors will have reprints available, and have supplied me with an electronic copy of the (15 page) manuscript, from which I extracted the following excerpts. The complete paper is 10 pages as published.

Contact: Carl Blumstein, 510-642-9588, cjblumstein@lbl.gov

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“Public-Interest Research and Development in the Electric and Gas Utility Industries,”
Utilities Policy: Volume 7, Issue 4, 21 April, 1999, pages 191-199
Carl Blumstein, University of California Energy Institute
Stephen Wiel, Lawrence Berkeley National Laboratory

An unintended consequence of the restructuring of the electricity industry in the U.S. has been a sharp decline in expenditures for R&D by investor-owned utilities. This paper examines how the public interest may be damaged by this decline in R&D expenditures and discusses some of the strategies that could be employed to mitigate the damage.

The restructuring of the electricity industry has been accompanied by a sharp decline in R&D expenditures by investor-owned utilities (IOUs), which have fallen by more than 45% between 1993 and 1996. The trend in the U.S. … is consistent with trends in other countries where the electricity industry has been or is being restructured.

A key driver of this trend is competitive pressures to cut costs. “While cuts are occurring across the board, RD&D departments are particularly vulnerable because in most cases research projects are not considered essential to the operation. In addition, the value of RD&D projects are difficult to quantify and often seen as a long-term investment. These trends are particularly prevalent for IOUs positioning themselves to increase profits for shareholders.” (Schilling and Scheer 1997) While, in retrospect, this trend does not seem surprising, it was certainly not an intended consequence of restructuring. Intentions notwithstanding, policy makers are now confronted with the questions: (1) how will this decline affect the public interest and (2) if some of the effects are adverse to the public interest, what mitigating steps, if any, should be taken?

This paper is intended to stimulate discussion on these questions by examining some of the issues in detail. First, we define public-interest R&D and illustrate the definition with some examples. The examples also give some idea of what may be lost if utility R&D expenditures continue to decline. Then we examine some of the issues that would be raised by efforts to mitigate the decline in utility expenditures for public interest R&D. These issues, which we explore using a series of examples, are funding, governance, and scope. Finally, in a brief conclusion, we discuss our concern that public interest R&D is likely to suffer some serious damage if action is not taken. However, we believe that there are likely to be many workable solutions to the problems we pose.

Technological change is an important contributor to economic growth and R&D is an important contributor to technological change. Any sharp decline in R&D expenditures is, at the least, a cause for concern. On the other hand, restructuring is moving the business of electricity generation decisively toward competition. If history is a guide, this competition will be conducive to innovation. New R&D investments may be forthcoming from the competitors or their suppliers. Thus, concern with the current decline in R&D expenditures should focus on the R&D, if any, that will not be adequately provided by the competitive market. Especially at risk are R&D funds for projects that, from a societal perspective, have measurable public benefits but that private markets will probably be unable to support because these public benefits cannot be appropriated by private firms.

In current discussions about utility industry restructuring this type of R&D has come to be known as public-interest R&D. Among the areas where the benefits of public-interest R&D may be important are health, safety, environment, energy efficiency, and “pre-commercial” technical information. Many R&D projects have both private and public benefits.

Strategic options [to provide] post-restructuring R&D support mechanisms [are discussed], with a description of funding, governance and scope, followed by an analysis of pros and cons. The four options offered are – Direct Industry Control, – Industry Directed Not-For-Profit, – Publicly Directed Not-For-Profit, and – Direct Government Control. These four are not mutually exclusive and do not begin to exhaust the possibilities.

We … conclude … that none of the options described above is sufficient by itself to provide for public-interest R&D after restructuring. In the past, public-interest R&D was sustained by a mixture of public and private, regulated and unregulated, and federal and state institutions and support mechanisms. Today, in the midst of restructuring, it is not surprising that some of these arrangements are being disrupted given the profound institutional upheavals now happening in the energy industry. Public-interest R&D is likely to suffer some serious damage if actions are not taken to deal with these disruptions.

The purpose of this paper is to stimulate discussion concerning what actions to take. The situation is complex, but the problems are by no means insoluble. Indeed, we think there are likely to be many workable solutions. Our hope is that discussion will begin to identify some of the better solutions and will contribute to the evolution of a new mixture of public and private, regulated and unregulated, and state and federal institutions and support mechanisms that will enable public-interest R&D to continue providing benefits after restructuring.