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Appendix G Prioritization and Decision Making In Technology Development at the Electric Power Research Institute This appendix summarizes information learned by a committee member (Edwin Zebroski) in interviews with EPRI managers) at the Electric Power Research Institute in Palo Alto, California, on September ~ ~ and October 2, 1997. Following a brief explanation of similarities between OST, EPRI, and the Gas Research Institute, the EPR! decision-making process is discussed in more detail. ANALOGIES BETWEEN OST, EPRI, AND GRI The EPRI and GRI support research for their respective industries, electricity and natural gas, in market sectors such as production, distribution, environmental impacts, and new commercial uses.2 Within each institution, the same decision-making processes for project selection and evaluation were applied to the R&D activities across all sectors, making these processes ones that could be applied generally to R&D work of many kinds (i.e., not restricted to R&D activities in any one sector, such as environmental impacts). The committee devoted special attention to EPRI and GR} because of similarities between these institutions and OST. All three organizations formulate and manage R&D that is executed by contractors, partly on a sole-source basis and partly on an REP and open bid basis. Other similarities exist in their respective research portfolios, organizational structures, and context. Research Portfolios Several features of the R&D activities of EPRT and GR} are analogous to those of OST. Both EPRT and GRI develop process improvements that lessen environmental impacts and facilitate compliance with environmental regulations. Both EPRI and GRI have programs on environmental monitonug and remediation technologies. Both manage R&D in several technical areas, with projects at various stages of technical maturity (i.e., from basic research to applied engineering and demonstration). 'The managers interviewed were Robert Brockson (Environment), Gene Eckhart (Customer Service Group), Michael Evans (EPRI CSG Co., a profit-making subsidiary), Mark Samoyj (Power Electronics and Power Systems), and Steve Gehl (Strategic Planning). Ethic might he `?n~en~le~rer1 through the increased availability of an affordable energy source. 169

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170 Decision Making in the DOE-OST Organizational Structure As described in further detail in this appendix and the next, both EPRI and GR} have several tiers of program structure, each managed by staff and advised by an oversight body. These institutions serve a customer base that is a collection of quasi-independent member utilities that support a centrally coordinated R&D program based on their perceived benefits (to each member utility as well as to the industry at large). Context Other similarities are those of context arid include the broad range of interests that these institutions must serve and the changes in recent years due to the changing interests and needs of their respective clients. Like OST, both EPRI and GRI have experienced declining and more tightly defined, controlled, and scrutinized budgets. Both EPRT and GRI have experienced greater pressures to be responsive to the short-term needs of their clients. Features of EPR] and GR] Decision-Making Processes Both EPRI and GRI have highly structured decision processes for goal setting, project definition, and project selection. Although the decision organization structures differ, they are functionally equivalent in providing decision processes that connect the setting of general goals and missions with the formulation and selection of specific projects. Both EPRI and GR] have made the transition from decision processes that were largely "top-down" (in defining goals, missions, and content of their R&D programs) to more "bottom-up" processes, which develop a program content that is closely coupled to the current needs of their clients. Both organizations have good track records of the yield on R&D in terms of benefit-cost ratios for individual projects that are selected and eventually applied in the field. They also have relatively good track records in terms of the cumulative benefit-cost ratios of their entire programs for their client communities. Furler remarks on EPRI's evolving decision-making process appear below. Appendix H discusses GRI's methodology and provides tables suggestive of analogies to OST within DOE-EM. ORIGIN AND PAST PRACTICES OF EPRI, 1972-1990 EPRI was set up by the electric utility industry in 1972-1973 as a response to a congressional proposal to establish a federal organization apart from the federal Energy Research and Development Agency (now DOE) that would develop improvements in electricity supply, delivery, and use. The federal agency was to be supported by a tax on electricity bills. The counterproposal by the industry was to form a nonprofit research organization managed by the industry and supported by dues from the electric utilities and by pass-through charges levied on the regulated earnings. This proposal was accepted by the U.S. Congress. Most of the divisions of the new EPRI organization inherited some legacy R&D programs that had been supported by the Edison Electric Institute (EEI), a trade organization. These projects had been initiated by EEI and managed by advisory committees that met several times a year. As the size and complexity of these programs grew and as the projected 10-year expenditures rose to several billion dollars the need for ongoing professional management and subject matter technical expertise became widely recognized in the utility industry. This recognized need coincided with pressure from the U.S. Congress for an energy research institution' which resulted in the formation of EPRI.

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Appendix G- EPRI 171 Funding and Membership Initially, EPRI was funded by dues that were based on a fixed formula paid by participating utilities. The formula took into account the number of customers, the overall size of power generation, and the overall revenues of each company, and covered bow stockholder-owned utilities and cooperatives. This fee provided the utility with membership in the organization, access to all R&D results, and opportunities to serve on several levels of oversight and technical committees and the Board of Directors. Member utilities included power cooperatives and municipal and federal power authorities such as the Tennessee Valley Authority. In the last few years, about 20 percent of the companies that are non-utility generators have become members. At its peak, total membership represented about 90 percent of the electric- generating capacity of the United States. Organizational Structure EPRT was run by a Board of Directors, which established the formulas for utility dues and the total size of the EPR} budget. Under the board were technical staff in divisions and Sepal laments. Each of these management levels had an advisory group. Parallel to the Board of Directors, a Research Advisory Committee (RAC) was established Mat included top-level technical people Tom member utilities. The members were composed of directors of research, vice presidents of engineering departments, and senior project managers of utilities. Each EPR] division and department had its own technical advisory committee, with utility representation by specialists in the respective technical areas involved. Top-Down Definition of Organization R&D Goals The overall mission and goals of the organization was defined in general terms by the organization documents and further defined on a continuing basis by the Board of Directors. Allocation of Budgets to Divisions The Board of Directors and the RAC held quarterly meetings reviewing the work of EPRI. A special annual meeting of the two was held together. The outcome of this annual meeting was the determination of the overall budget level and the division of this budget into major topic categories such as Generation (spanning both fossil and nuclear), Transmission and Distribution, and Environment. The divisional and departmental committees, together with EPR! staff, provided the RAC and the Board of Directors a list of proposed new and ongoing projects that defined the proposed goals and budget of each division. These projects were generally approved as proposed. Exceptions occurred when Me board and RAC differed in their proposed division budgets. In such cases, the divisions facing a tentative budget reduction would have their lists of projects ranked in priority as judged by the staff. The {owes/-priority projects would be dropped to meet the allocated budget. Project Definition and Selection Projects were defined by the technical staffs of the divisions and departments to contribute toward each division's or deparUnent's general goals and scopes. EPRI experienced growing budgets for most of its first two decades. This resulted in a significant fraction~ypically 15 to 30 percent-of projects as

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172 Decision Making in the DOE-OST new starts each year. Foam processes for contractor qualification and bid selection were established and used. A generic matrix of selection criteria was used, including the contractor's expertise, technical track record, financial track record, and in many cases, and ability to provide cofunding from another source. Measurement and Control of Projects The contracts for projects included schedules for major milestones and deliverables, as well as expenditure forecasts. The project engineer for EPRI would meet regularly with the PI for progress reviews to supplement the information received in written progress reports. Contract provisions permitted short-term cancellations or modification of contracts for reasons such as a failure to meet milestones, a lapse in budget controls, or a change in information on technical feasibility and/or expected benefits. Changing Regulatory Environment and Deregulation in the 1990s The current partial deregulation of the electric power industry has the effect of separating the suppliers of power generation, electric transmission, and local electricity distribution into three distinct entities with different interests, technical needs, and competitive pressures. Utility companies no longer have assured monopoly of supply and transmission in their territories. Thus, each utility is in competition with other utilities and with nonutility generating companies. The former common interest in improving the technologies and solving common problems is largely gone, since a particular improvement may be of greater value to a competitor. As an indication of these trends, an overall assessment of dues started to show declining participation, resulting in a reduction of EPRI's budgets for R&D and staff. EPRI responded to this challenge by adopting a "bottom-up" decision process with more direct involvement of the most interested potential users in formulating R&D projects and goals. CURRENT PROJECT SELECTION PROCESS The practice of EPRI in the 1990s is to formulate its R&D program in a way that supports only the project work that member companies choose to fund with their membership dues. A Reorganization That Enables Members to Select Projects EPRI has been reorganized into "business units," which replaced the former divisional structure. Determination of the overall EPRI budget and allocation of budgets among the business units are longer primarily done at the board level. In the current "cafeteria style" of operation, a "menu" of proposed projects is submitted to the Board of Directors with the endorsement of the senior technical advisory committee. This committee obtains inputs from the advisory committees of the business units (formerly divisions), which in turn get advice and project endorsements from the technical committees at the target level (programs or projects are now called "targets"~. The board's approval of the list of targets is an endorsement only in principle, because

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Appendix G-EPRI 173 each target approved by the board must then attain sufficient buy-in by member companies to support the proposed work. Each participating company has the option of supporting any target (project) of interest, a group of related targets, or none. Only a few companies (about 10 percent of the client pool) now broadly support all or most of the program across the board. The Board of Directors continues to provide overall policy guidance on goals, missions, and relative emphasis on the different areas of technology needs and opportunities. However, votes are weighted by the degree of participation of the voting company in the topic area involved. The board endorses the overall budget, which-with some exception for strategic research as described below is composed of targets with specific funding commitments from interested utilities. Project Definition and Formulation Each proposed project is subjected to several evaluations. Pre-Project Evaluations Each proposed project (as well as some continuing projects) is formulated or reformulated by the interested business unit. In the design of a research proposal, before a project is presented to the member companies the proposed project is reviewed intensively by the Customer Systems Unit, which evaluates the potential market (i.e., the reasonably assured base of potential users); the benefit-cost expected if the project is fully successful; the probability of success (technical risk) that the technical proposal, if funded, would reach the stated performance goals and deliverables; and the risks of being able to accomplish the expected results within the proposed budget and time schedule. The continuing discipline of requiring funding buy-in by potential users provides a continuing test of the effectiveness of these market estimates and cost-benefit calculations. Technical Advisory Committee Evaluations The project proposal, along with the market evaluation and the technical risk evaluation, is submitted to the advisory committee structure and to all of the potentially interested companies that may not be currently represented on the advisory structure. This process determines which companies will buy into any given project by confiding it, in effect buying a "share" of the project. The cost of each share depends on the number of participants and may be adjusted by the relative sizes of the participating companies. It is possible for a single company to support a project unilaterally. Companies that do not participate in a given target do not have access to the results of the work. Strategic R&D A shortcoming of this cafeter~a-style funding, which is recognized by EPR] managers, is that certain types of projects will not be pursued. These would include projects that have relatively long-term goals or projects that explore a possible opportunity that has substantial risk associated with it.

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174 Decision Making in the DOE-OST This deficiency is addressed by a category called "Strategic Research," formerly known as Exploratory Research. This is an assessment set by board policy of about 12 percent of the overall budget for "Targets of Onnc~rtunitv." These have sometimes been relatively fundamental nieces of engineering economic, or environmental research aimed at overcoming some obstacle in unclerstanolng a particular system. Other goals may be to overcome some limiting factor in a system's efficiency, reliability, or ability to provide a novel function. Half of the Strategic Research budget (6 percent) is allocated to the individual business units. The other half is managed by a Strategic Research unit, dedicated to {ong-term or more speculative targets. The usual pattern is that the work of the Strategic Research unit establishes the feasibility of a novel or improved approach. If it appears to be able to reach field application, the appropriate business unit caITies on further development, provided the target can find member support. This process appears to be working reasonably well to preserve some long-term advanced work, with about 25 percent of the programs lasting over a several-year penod. Other Current Practices and Features of EPR! Operations The practices and features described below contribute to the viability of the EPR] way of supporting R&D. Risk Analysis for Cost-Benefit Ratings Environmental R&D has been especially market driven due to increasing regulatory requirements and air quality standards. Each proposal is subjected to a sophisticated risk analysis for the environmental factor or pollutant involved and the expected environmental benefit if the project is fi~nded and succeeds. Research topics include air quality improvements, watershed management, and fisheries. Avoided costs are included in the cost-benefit assessments. R&D Deliverables at Fixed Price The companies that participate in a target are in effect given a guarantee by EPRI that the deliverable results will be provided for a promised cost and schedule. This provides a strong incentive to the companies to participate since it largely precludes the risk that their investment in supporting the project will be wasted. It also provides a strong incentive for EPR! and contractors to monitor and manage projects closely to avoid missed milestones, cost overruns, or loss of focus. User Buy-in and Cofunded Demonstrations Ensure Applications The pattern of calTying forward only projects that have specific user commitments has largely eliminated a concern noted in the 1980s that only about 10 percent of R&D results in some areas had widespread application in the subsequent three- to five-year period. Demonstration projects are conducted only when a major share of the fielding comes from the host company.

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Appendix G EPRI Cost-Benef~t Re-evaluation and Ranking 175 In addition to the pre-project market and cost-benef~t evaluations, a special staff oversight function is provided to re-evaluate cost-benefit results and rankings periodically. Information Support Services Because of the changing paradigms of suppliers, marketing, and competition, the traditional patterns of customer support, billing, and information flows are also in need of rapid change. Specific examples are the management of real-time pricing of power supply and power quality issues such as reliability, freedom from damaging harmonics, and voltage stability. A number of utilities are also providing specialized telecommunications services. EPR} sees a market for special developments in such topics. It is expected that many such of these will be specific to a given local situation and therefore call for proprietary developments. A for-profit subsidiary has been formed to handle this area.