Distributed Generation (DG) is at a crossroads in California. The State has long professed to support DG, but has been slow in providing much needed regulatory and rate certainty to those who are ready and willing to invest in DG. The California Clean DG Coalition (CCDC) sees the DG Rulemaking currently taking place before the California Public Utilities Commission (CPUC) as an extremely important means toward the goal of assuring DG a meaningful position in the State's resource mix. CCDC's efforts in the case have focused on (i) developing a framework that accurately captures and values the benefits of DG, and (ii) moving toward long-term DG tariffs, thereby establishing California's DG market as an example for the rest of the nation. Specifically, CCDC has argued that:

(1)   The cost effectiveness of DG should be measured using the methodology currently applicable to energy efficiency programs (with slight modifications);

(2)   The environmental benefits of DG should be counted in the DG cost-effectiveness methodology;

(3)   Grid-side physical assurance requirements that do not penalize DG owners and customers should be adopted; and

(4)   A process for resolving important standby rate issues, including carrying out the Legislature's intent to include a long-term standby charge exemption in DG tariffs, should be established.

The administrative law judge assigned to the case issued a draft decision on September 6. The draft decision adopts CCDC's first two recommendations above, but declines to offer any flexibility with respect to physical assurance. In addition, the draft opinion fails to state how the CPUC proposes to comply with the statutory requirement to implement long-term DG tariffs. Finally, the draft decision proposes to deviate from longstanding precedent in the energy efficiency arena and evaluate the cost effectiveness of DG projects from the ratepayer and DG customer perspectives, in addition to the traditional societal perspective.

The most disturbing aspect of the draft decision is the overall shift in the CPUC's tone - the word “subsidies” is used liberally throughout the draft decision to describe DG incentives and a brighter line is drawn between gas-fired combined heat and power DG and renewable DG. CCDC suspects the substantial amounts of ratepayer dollars allocated to the Self-Generation Incentive Program (SGJP) - currently $875 million-may be behind the more tempered approach to DG incentives proposed in the draft decision. CCDC believes such an investment will produce valuable returns for the State and, therefore, should not be viewed solely as a cost.

Background

Over the past several years, the State of California has taken a number of actions intended to encourage DG installations. Policy and decision makers recognize that DG offers solutions to today's pressing energy needs: it can reduce stress on the State's energy grid, particularly during periods of peak demand, reduce dependence on large central-station plants, increase power quality and grid reliability and contribute to improved air quality.

About a year-and-a-half ago, the CPUC initiated a rulemaking to implement SBX1-28, important 2001 legislation promoting installation of DG. Most important, SBXl -28 called for an interim exemption from standby charges for small (under 5 megawatts), clean, efficient DG, pending development of long-term DG tariffs. Those tariffs are, to the extent practicable, to continue the standby charge exemption. The CPUC is to make sure that the net costs and benefits of DG are accounted for proportionally by customer class in such rates. The pending proceeding is intended to establish a cost-benefit methodology.

Not unexpectedly, the investor-owned utilities trotted out a parade of horribles in support of their assertions that the costs of DG far outweigh its benefits. The DG industry, on the other hand, presented compelling evidence of the benefits of DG, based on — unlike the utilities — real world examples of operating DG projects. As discussed above, the draft decision takes a middle road: While it proposes a DG cost-benefit methodology that reasonably and accurately accounts for the costs and benefits of DG, it also reins in CPUC support for DG and indicates it likely will be significantly more difficult to justify broad DG incentives. The narrowed support, combined with the lack of direction with respect to long-term DG tariffs— including a long-term standby charge exemption —will continue to thwart development of a robust DG market.

Chilling Effect

It is well past time for DG to move from the sidelines to the mainstream of California's electric system. For combined heat and power (CHP) DG, up to 2,000 megawatts is viable (Assessment of California Combined Heat and Power Market and Policy Options for Increased Penetration, California Energy Commission, April 2005).

CHP projects can be built much more quickly than central-station power plants, helping to meet needed base-load capacity requirements. Under lower natural gas-price scenarios, CHP could contribute several thousand megawatts more.

The long-term DG tariffs and related standby charge policy called for in SBX1-28 were to have been implemented by January 1, 2003. The California Legislature understood the potentially discriminatory nature of standby charges when it adopted SBX1 -28: It expressly directed the utilities to establish new rates that treat customers with similar load profiles the same, regardless of their use of DG.

Even though the CPUC extended the interim standby exemption until the required long-term tariffs are in place, the lack of tariffs and a related standby policy have resulted in enough uncertainty that DG has not assumed the meaningful role the State envisions. Faulty tariffs or imposition of standby charges likely would ensure that never would happen.

Recent events in Los Angeles Department of Water and Power's (LADWP) service area bear out this prediction. LADWP has imposed standby charges on DG, with the absurd results that customers are choosing not to install DG or are not miming already installed DG units because they cannot afford to do so. Clearly, such behavior is contrary to the State's goals for DG.

Developers and customers alike will not pursue DG until rate certainty occurs. If California's policy makers and regulators are serious about increasing DG's role in order to realize its many benefits, they have to unravel the utilities' unfounded, anti-competitive arguments regarding the costs of DG. Fair DG tariffs and a long-term standby charge exemption will allow realization of the State's goals.

Key DG Rate Issues

The CPUC has an opportunity in the pending DG Rulemaking to (i) adopt a methodology that fairly and accurately accounts for the costs and benefits of DG, and (ii) implement Legislative intent to afford DG a long-term exemption from standby charges.

In early rulings, the CPUC appropriately recognized that DG should be evaluated as a member of the same category of resource options that includes energy efficiency, demand response and electrical storage. All these options may be used to manage onsite electric load and provide system benefits (e.g., peak load reductions and increased grid reliability). For at least the past 20 years, the CPUC has measured the cost effectiveness of energy efficiency programs using a total resource cost methodology, valued from society's perspective. Given the effort the CPUC has devoted to developing the energy efficiency cost-effectiveness methodology (including the receipt of input from the utilities) and the acknowledged similarities between DG and energy efficiency, CCDC has advocated that the commission apply the same cost-effectiveness methodology, with minor modifications, to DG. Such an approach would send the right signals to customers who seek to reduce their dependence on the overextended energy grid and DG developers desiring to accept the State's invitation to deploy DG as part of the solution to California's energy needs. The draft decision also would look at the cost-effectiveness of DG from ratepayers' and DG customers' perspectives. If a project is cost-effective from the customer's perspective, it may not receive SGIP funds — that is, the draft decision purports to do away with “free riders.” It is not entirely clear how the ratepayer test is proposed for use. In CCDC's view, it may be appropriate to use the ratepayer test to allocate SCIP funds; it should not be used to eliminate DG projects from eligibility for funding. The societal test could be used to rank eligible projects in the first instance. Hopefully, a final decision will clarify these issues.

With respect to the values used in the different tests, CCDC proposed, as a modification to the traditional approach, to count the environmental benefits of DG in the cost effectiveness methodology. Because a DG cogeneration project produces electricity and process heat, CCDC proposed that the emissions from the DG proved be compared to the sum of the emissions from a utility generation resource and the emissions from an industrial boiler (which would supply process heat in the absence of the DG cogent project) in order to account for entire package of emissions reductions associated with DG cogeneration units. The draft decision adopts this recommendation.

CCDC opposed extending the physical-assurance requirements applicable to DG projects that participate in the utility distribution planning process (i.e., grid-side DG) to DG installed on the customer side of the meter. [Physical assurance is defined as the application of devices and equipment that allow a utility to interrupt a DG customer's normal load when the customer's DG does not operate.] For customer-side DG, the goal of any physical assurance framework should be not to penalize DG owners and customers that is, physical assurance should only be required during local peak periods or during emergencies in the local distribution area. Further, for purposes of valuing avoided costs, CCDC recommended treating DG consistently with energy efficiency projects by recognizing diversity effects. The draft decision rejects these proposals, adhering instead to the stringent physical assurance requirements adopted in a 2003 decision, which was based on a stale record developed before and during the energy crisis.

Finally, CCDC has urged the CPUC to establish a process for resolving critical standby rate issues. Carrying. out the Legislature's preference for a long-term DG exemption is long overdue; CPUC confirmation of such an exemption will provide much needed certainty to California's ratepayers and the DG industry The draft decision does not directly address this issue and CCDC plans to continue pressing for certainty.

Embracing the Opportunity

Clean, efficient DG can provide immediate, real and valuable benefits to California's electric consumers. It is time to eliminate the uncertainty that has stalled DG and move toward realization of those benefits. DG parties in the DG Rulemaking have supplied the CPUC with ample basis to establish a cost-benefit methodology that reliably and accurately accounts for all the costs and benefits of DG. The real-world examples submitted by CCDC show that, at least in general, the benefits of DG outweigh its costs. The CPUC should move forward expeditiously to (i) adopt a meaningful DG cost-benefit methodology, (ii) develop the required long-term DG tariffs and (iii) implement Legislative intent by confirming a long-term standby charge exemption for small, clean DG. Hopefully, the draft decision and related follow-on CPUC proceedings will favorably resolve these critical issues.

A number of other states, recognizing the many benefits of DG, are also working to integrate DG into their energy mixes. California is poised to -- and should -- lead the way.

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Ann L. Trowbridge is a partner in the law firm, Downey Brand, LLP. Contact: Eric R. Wong with the California Clean DG Coalition at eric.r.wong@cummins.com; office phone: 916-493-3339.

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Endnote

1.   CCDC is an ad hoc group interested in promoting the ability of DG system manufacturers, distributors, marketers and investors, and electric customers, to deploy DG. It is currently comprised of Capstone Turbine Corporation, Caterpillar, Inc., Chevron Energy Solutions Company, Cooperative Community Energy Corporation, Cummins Cal-Pacific, Cummins, Inc., Cummins West, Inc., DE Solutions, Inc., DTE Energy Technologies, Inc., Energy and Power Solutions, Inc., Hawthorne Power Systems, Holt of California, Ingersoll-Rand Energy Systems, Johnson Power Systems, next>edge, Inc., Northern Power Systems, Peterson Power Systems, Quinn Power System, Real Energy, LLC, Simmax Energy, Solar Turbines Incorporated, and Tecogen, Inc.