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Appendix H Prioritization and Decision Making In Technology Development at the Gas Research Institute This appendix summarizes information obtained by committee members Michael Menke and Edwin Zebroski during a September 4-5, 1997, visit to the Gas Research Institute in Chicago, Illinois. The following description comes from interviews with GRT managers and from GRT publications; possible analogies to OST are sketched in Tables H. l, H.2, and H.3. After a brief introduction to GRT, this appendix describes the major too! the Project Appraisal Methodology (PAM - used to assess technology development projects that are candidates for GRI funds. The PAM rankings (using a ROI measure) of technology development proposals are used by groups of senior GRI managers and advisory bodies to allocate funds. Further sections describe the management and advisory body structure, the establishment of quantitative goals for each business unit (BU), the top- down process of setting target budget figures, and the bottom-up process of proposing PAM-ranked projects to include in the budget. OVERVIEW OF GRI MISSION AND MEMBERSHIP GRI is a not-for-profit corporation, consisting of natural gas utility companies, pipelines, and producers, as members, engaging in RD&D activities of benefit to the domestic natural gas community (including the gas industry and consumers). The technology development work is done under regulatory approval and in nonproprietary venues. This is changing in some instances, and proprietary RD&D management is now one of GRI's offerings to its stakeholders. GRI's mission is to "deliver high-value technology, information, and technical services to gas and related energy markets through cooperative research, development, and commercialization (RD&C)" (GRI, 1998; see also http://www.gri.org). GRI's RD&D program, as a result of an early 1998 settlement conference (http://ferc.fed.us/newsI/pressreleases/gn.htrn), is now divided into two parts: (I) a core gas consumer benefits RD&D segment designed to produce broadly dispersed benefits across all customer classes, and (2) a noncore- mutual benefits RD&D program designed to produce benefits for gas consumers and the gas industry. By the year 2001, GRI's entire RD&D program will be in the core area. GRI also is pursuing funding not approved by the Federal Energy Regulatory Committee for (~) consortium and proprietary RD&D from investors (including but not limited to the gas industry) and (2) public goods RD&D funding from federal and state RD&D agency sources and public utility commission and city-approved gas customer funds. The benefits to GRI membership for a natural gas company are leveraged RD&D dollars, participation in the GR! advisory structure, and easier access to the technology development projects that emerge from RD&D efforts. Most major natural gas companies are members of GRI, with the exception of Exxon, perhaps because Exxon's internal R&D is so large that the leveraging benefit is not significant enough to be worthwhile or because of an Exxon policy against consortium R&D funding. 176

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Appendix H GRI TABLE H. 1 Analogies in External Oversight and Advisory Bodies GRI - External Regulator: Federal Energy Regulatory Council (FERC) External Advisory Groupsa Three levelsj: Highest Level Board of Directors (CEOs from member companies) Intermediate Level PAGs for each BU Lowest Level TAGs for each BU OST Congress and all regulatory bodies (EPA, states, etc.) EM-l's TAC (formerly Dr. Frank's Board of Directors) (Top-level DOE site managers, Assistant Secretary for EM and DASs from EM-30, 40, 50, and 60 Unofficially, includes input from all other external auditors such as congressional staffers, EMAB, GAO, NRC committees, SLC and others Programmatic reviews of each Focus Area and Crosscutting Program Technical evaluation by Independent Review Teams set up by each Focus Area and Crosscutting Program Members of these bodies are external to personnel staff of the technology development program office 177 TABLE H.2 Analogies in Program and Management Structure Within the Technology Development Organization GR] OST Top-level EMC (CEO and Senior Management) BU (General Manager and additional staff) Sources of information on market use: staff who make contacts with vendors Senior HQ OST managers (DAS and close advisors) Focus Area, Crosscutting Program (Manager and additional staff) STCGs and needs assessment activities GRI's competition (and its potential partners and strongest supporters) is the internal RD&D shops of member companies, which do shorter-term demonstration or technology support projects than are funded through GRI. Other competition comes from service companies developing proprietary tools, RD&D firms, and other consortium RD&D organizations. Of course, these organizations are also GRI's major partners, in many cases. Technology development at GRI is available to all members (the emerging proprietary program excepted). THE GRI DECISION-MAKING TOOL: PAM The GR! PAM tool subjects each technology development project to an assessment according to four quantitative measures:

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Who is the external customers (of technology development activities9? Member utilities and commercial vendors Who is the ultimate, far-end customer? Consumers of natural gas products ~ 78 Decision Making in the DOE-OST TABLE H.3 Additional Parallels GRI Who is the internal customer (of technology activities) ? TAGs and PAGs OST DOE work force of RD&D personnel, primarily in national labs Users of products at DOE sites, especially DOE site managers and contractor employees Congress plus all external auditors with global interest in cleanup at low cost (including the U.S. taxpayer) aSince these external customers operate independently of each over, coordinated R&D makes sense. . cost savings to the gas industry resulting from implementation of the technology product (reported as a O&M cost reduction or gas price savings); 2. cost savings to the gas consumer resulting from use of the technology or product (a consumer savings in terms of capital, O&M, or operating costs; or added productivity value); 3. energy savings (British Thermal Units [BTUs]~; that is, the amount of energy resource (domestic or imported natural gas or an alternative energy source) conserved due to the use of that more efficient technology or product (these calculations compare the new proposed product to the baseline [present- day] technology for a projected year of use); and 4. new and retained load; that is, for GRI's mutual benefits (noncore) program, consumer options enhanced, or increased gas use or retained gas use in comparison to other fuels. This criterion is not used for the core (gas consumer benefits) program. A fifth and qualitative measure is provided by a score sheet that addresses such issues as environmental impacts, regulatory issues, and safety-related and operational improvements that cannot be readily quantified in dollar or Btu terms. Calculating Projected Benefits Each proposed project is subjected to calculations that assign a dollar or Btu value to its benefits in each of these four major areas (and quantitative values in the finch area). Business units collect market data to gauge the market (to form the estimate of market penetration for a proposed new technology). This approach uses a reference database that is maintained and used providing a "[eve! playing field" for fuel prices, market potential, and economic parameters (e.g., discount rates) by the BUs that compete for funds within GRI (GRI, 1996b). The benefit calculation accounts for technical and market uncertainties with multiplicative factors, and uses a simple discount rate to deduce a net present value of future benefits. The five calculated benefits (estimated against the aforementioned five PAM measures) are combined statistically (GRI, 1996b) with weighing factors to produce a single quantitative value that represents the total weighted benefit of the technology development project. t Since industrial efficiency is, in principle, not of concern to the regulator, this measure is translated into one of relevance to the consumer, by passing along such efficiencies as a lower surcharge for gas services, a measure that in the market would make gas energy displace other energy sources.

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Appendix H GRI I79 RD&D cost calculations are also done for each technology development project. These consider only the costs borne by GRT; hence, leveraging dollars with other organizations is accounted for quantitatively, by reducing GRI costs (GRI, 1996b). With both benefits and costs calculated, a benefit-cost calculation, representing the ROI for each project (GRI, 1996b) per dollar of RD&D investment, is made for each technology development project. Proposals are then ranked according to their benefit-cost ratio. The cutoff between funded and nonfunded projects is determined essentially by the budget for technology development, with some allowance for advisory bodies to select based on the worthiness of projects that are near the funding cutoff line. Four categories of monetary returns (benefits or costs) are noted by GR} managers. Retums can be achieved as: 1. enhanced revenues through increases in gas use (noncore only), 2. 3. 4. a cut in capital costs (one-time savings), a cut in O&M costs, or reduced costs to the consumer for each proposed RD&D project. The PAM estimating methodology (and the database of information kept) makes record keeping easy for retrospective analyses (e.g., to explore in hindsight why some projects were thought worthy or unworthy, or simply to explore the basis for a particular decision that was made at some point in the past). Further details on this methodology can be found in GRI literature (see GRI, 1996b, 1997b). GRI ORGANIZATION AND MANAGEMENT External Regulation: FERC In a regulatory process established in the mid-1970s, the overall budget of GRI is established in conjunction with the external regulator, FERC. By regulatory mandate, a one-year program and five-year R&D plans are filed and approved. An approved plan provides a mechanism to collect an approved amount of RD&D funds for the filed year from surcharges to customers of natural gas pipelines (a "pass- through" mechanism), enabling these funds to be collected with essentially no risk to the member companies. Advisory Structure and the GR} Employee Counterparts A body of top-level managers and executives of member utilities constitutes GRI's Board of Directors, which has the opportunity to solicit input from several subordinate advisory bodies (see Figure H.~. The Board of Directors advises the senior GR} management group called the Executive Management Committee (EMC), consisting of the president, two senior vice presidents to whom the five BUs report, and a few other senior executive officers. The advisory bodies immediately below the Board of Directors are three Program Executive Committees (PECs), which set budgetary guidance, and three others: the Advisory Council, the Research Coordination Council, and the Municipal Gas System Advisory Committee. The PECs represent each of the major industry sectors: LDCs, pipelines, and producers. A separate, more tactical-level Project Advisor Group (PAG) advises each of the six GRI BUs: Supply, Transmission, Distribution, End Use Efficiency, Market Analysis and Information, and

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Appendix H GRI 181 Environment and Safety. Within each PAG, several Technical Advisor Groups (TAGs) are formed around technical topics (e.g., the PAG for the Transmission BU has TAGs for corrosion issues, nondestructive evaluation, measurement, and compressors). The PAG thus has the job of ranking projects and advising the allocation of funds among projects from various TAGs, according to guidance from the PEC. The business units manage a portfolio of RD&D projects, grouped into project areas. R&D OBJECTIVES In this multitiered organization, different objectives are established for different levels. At the corporate level, objectives are qualitative statements that define the direction of the RD&D efforts (GRI, 1997a). Objectives are written at three levels: overall, program, and project (GRI, 1997b). Business units and senior management work together to derive quantitative goals from the objectives and use the goals to track and measure progress (GRI, 1997b). Meeting these goals then becomes a main part of each BU's strategy. These goals are of the form of targeted improvements over the next 5 to 10 years, for example, to achieve a certain cost savings or a certain load reduction (in gas consumption per useful Btu output) or, for the mutual benefit program, increased or retained load. These quantified goals are met by delivering products, processes, and techniques to the marketplace in a certain timeframe. These goals define the impacts of technology development projects that are considered relevant for GRI funding. As an example, the Supply BU has an objective to increase the quantity of natural gas available from emerging resources at competitive prices. Technology development projects would be funded (and their commercialization success tracked) to meet this goal. This BU is funded at $25 to $35 million per year, and employs 10 to 15 professional staff. ANNUAL PLANNING CYCLE GRI's practice is in principle simple to find the technology development projects with the highest ROT, as calculated by the PAM tool. This is done each year with a top-down process of tentatively dividing the total budget among BUs, followed by a bottom-up process of generating and defending PAM-scored projects. Each year, new project ideas compete with existing projects according to PAM calculations, to determine the suite of GRI's R&D activities. Top-Down Funding Allocation to Business Units The top-level Board of Directors meets at regular intervals to provide guidance that senior management (the EMC) caIries out. The board determines the overall annual budget and provides broad- brush, strategic, "policy"-type impressions or directions of critical needs, threats, and opportunities for the gas industry. The EMC translates this guidance into target levels of funding for major strategic initiatives. Each BU is charged with coming up with a suite of high-ROI technology development projects to receive these funds, in a bottom-up process described below. All but one business unit is geared toward producing results for use in the marketplace; that is, the end products are hardware process, software, or information products whose commercial sale and use make natural gas operations cheaper, safer, and'or more efficient. The exception is the Environment and Safety unit, which is geared toward activities of risk and cost avoidance (e.g., providing information to allow industry, regulators, and the general public to make informed decisions on proposed environmental legislation, or engaging in activities to prevent potential public health and safety catastrophes, accidents,

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182 Decision Making in the DOE-OST or threats from occurring). Currently, the amount of funding for this business unit is set as a percentage of the total pie (the Environment and Safety amount is set by guidance as 7 to 9 percent of the total). in the near future, the Environment and Safety unit will compete for its share of the pie in the same way other business units do, by PAM ROI calculations. To do this, the Environment alla Safety group is establishing methodology to quantify measures such as risk (and accident) avoidance, avoided costs, and cleanup liability and to translate these results into dollar figures. Bottom-Up Project Initiation Process The TAGs and PAGs of each BU are some of the places in which new RD&D ideas are generated and championed. PAG members are essentially gas company managers who have their own technical problems to solve (to achieve their own goals), and one way to help their cause is through funding relevant GR! projects. TAG members are knowledgeable about the state-of-the-art in their technical fields and are primed to champion new developments.2 TAG members are individuals at the project manager level or the equivalent in their company; that is, they are engineers with technical problems to solve and have technical expertise as well as the ability to network within their employer organization to obtain data needed for market estimates. PAM calculations require both technical information and market assessments. The responsibility for getting quantitative estimates falls to the GR} BUs that want to champion an idea, which they forward as a PAM-scored proposal to the PAG level. Each PAG and BU forwards to the PEC a collection of proposed projects, showing in effect what RD&D could be done with available and additional funds. The ROT numbers are used to rank the technology development proposals within and across each of the six BUs. Subsequent EMC and PEC reviews of these proposals make funding adjustments, in effect debating over projects that are close to the funding cutoffs between BUs. A project with a lower ROT can be funded over one with a higher ROT only if BU personnel can make a compelling case for funding such a project (presumably the project's worth was poorly captured in the quantitative PAM methodology). The Board of Directors reviews the final budget for approval. R&D PROJECT MANAGEMENT RFPs and Contracts Once the EMC approves funding for a proposed project, by virtue of its ROT-based racing, REP (or sole-source) specifications are written (by technically competent personnel) and the PI of the best-bid proposal receives that RD&D money. All of the above-mentioned R&D planning activity happen prior to issuing an RFP.Contract incentives are used in many cases to provide the contractor with incentives to achieve performance goals and seek a commercial partner. Tracking Projects Funded projects are tracked using the RD&C stage-and-gate process. For PAM calculations, the probability of technical success of a project was determined simply by its stage level, with each stage level assigned a certain probability of technical success (e.g., stage 2 dictates the use of a probability of x Dither sources of RD&D ideas are GRI project managers, the manufacturing and RD&D communities, universities, and many others.

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Appendix H GRI 183 percent; stage 4, y percent, as a uniform practice used by all business units, for all projects at that stage). Gate reviews are done by personnel at the lowest possible management level, so as not to make the process unduly burdensome and unnecessarily formal. A few gate reviews (such as gate 2 Research initiation] and gate 4 [product development initiation] reviews), representing critical decision points, are done by more senior management. One important lesson learned to date by GRI managers is need to get marketing and manufacturing information, not just technical performance data, into gate reviews, especially by gate 4. The RD&C stage-and-gate tracking system was described as a helpful discipline, enabling a few projects that lacked potential to be recognized and terminated in early stages. Member Company Management It was stated that it is easier in general to sell short-term projects to advisory bodies, perhaps because of their near-term focus. Hence, guidance is established to provide program balance between near-term, midterm, and long-term RD&D, to prevent higher-risk, higher-payoff projects from being detrimentally impacted by the near-term focus of some. How to Manage a Business Unit According to one GR} general manager, managing a BU involves the following efforts: I. participation in industry-wide meetings, to discuss and gain perspective of gas industry and consumer issues at several levels; 2. periodically convening GR! workshops or conferences designed to facilitate long-range thinking in the industry and generate associated new RD&D ideas, based on explorations of future major issues and potential technical solutions to them; and 3. visiting member companies and reviewing their use of GRT technologies to identify what GR! products are valued and inform the companies of where GR] is or might be headed in the future. Each of these actions uses the interactive session as a tool to encourage the generation of new ideas within the community served by the BU. Market Use and Commercialization Performance is measured by BU personnel polling vendors in the commercial sector (who are obligated by contract to provide GR} with statistical information) on how many of the new devices are sold and/or used. These data are used in GR} calculations to deduce whether a goal has been met. The performance of each business unit is thus tied to the suite or portfolio of projects, rather to any particular one. Hence, individual technology development projects that are poor performers can be tolerated, especially if they are noted soon enough (at lower gate numbers), prior to heavy funding levels, and a few deliverables to the marketplace that are poor performers can be tolerated as long as enough are successfully commercialized. The measurable against which GRI business units score themselves is not how many specific technology development products are delivered to their customer or member base, but rather the total, ultimate market impact on gas consumers and the gas industry of new developments. On one hand, it can be argued that the technology development shop has little control over market consequences; nevertheless, market impact is the measure adopted that leads BU personnel to audit vendors to obtain data on how often new technology is used.

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184 Decision Making in the DOE-OST To pursue the above example, the Supply BU would develop improved surveying tools and techniques (to probe new reservoirs) and ask users how often such tools were used and how useful they were. The aim is to construct from such information an assessment of value (in dollars) of attaining an extra several feet of survey from the well bore shaft, which can be recast as an avoided cost of drilling unnecessary wells, plus the value of the additional gas reserves brought into play. Environment and Safety Unit This BU has a substantial risk management program to calculate a threat-to-cost ratio, analogous to a benefit-to-cost ratio. Benefits are quantified as future avoided costs, which in practice are harder to sell to advisory groups than nearer-term costs savings or new or retained load. The ranking of project proposals within the Environment and Safety BU is done judgmentally by GRT management staff, with the help of the unit's PAG. The benefit of giving control to advise is that they take ownership of the results as well. Proposals are packaged to appeal to all (or as many as possible) gas industry sectors, each of which would like information on how the proposed work is to be used and how it would save resources (e.g., by reducing insurance costs or reducing manpower requirements). The PAG votes, with votes normalized by business sector (meaning, presumably, that if twice as many Pipeline people come to the meeting as Supply people, the Pipeline people's votes count half as much). One challenge of this Environment and Safety unit is that it crosscuts as the technical areas of the business units, creating a situation in which Environment and Safety unit personnel in effect report to all PAG PECs (i.e., they have many masters), which complicates management. The Environment and Safety unit's proposals are expected to be competitive with those of the applied RD&D BUs for two reasons. The first is that an RD&D program with perceived benefits to many BUs garners many more champions. The second reason, as a manager of one of the other BUs pointed out, is that there is a generally strong awareness that this work must be done to prevent future potential liabilities to the gas industry, which are borne ultimately by the consumer in terms of higher prices for the commodity or service. it is reasonable to think that safety-related improvements would naturally be a basis for collaborative RD&D efforts (since all member companies, the consumers, and the industry as a whole benefit by safer operations). What RD&D Does Not Get Done via PAM? There are some intuitively important RD&D ideas, for which benefits are hard to measure, quantify, and defend, that, hence, may be unfunded by an organization such as GRT (or any similar organization that performs coordinated R&D for a large stakeholder and customer base) that uses PAM-type benefit- cost calculations to govern a corporate way of making RD&D decisions. Should such projects be done by governments, using public funds to complement what the corporate world does not do? The issue for GRT and for its stakeholder and customer base is whether any part of GRI's mission of doing RD&D for the benefit of the natural gas industry and consumers is left unfulfilled under PAM-type selection criteria for new projects. PAM also does not perform portfolio analysis, balancing such things as near-term versus long-term R&D, and supply versus gas use versus operations R&D.