Why – in a state that professes to embrace it – has deployment of distributed generation failed to take off? California needs more generation and distribution upgrades, but not at the expense of the environment. Small, clean, on-site generation is particularly well-suited to fill these needs, in combination with demand response and energy efficiency programs, and limited larger infrastructure projects. Unfortunately, ongoing regulatory uncertainty and investor-owned utility reluctance serves to keep DG out of the picture. This article focuses on issues relating to the standby charge exemption mandated by California Senate Bill (SB) X1-28, and the threat to the DG industry posed by the erratic approach to its implementation.

California Claims to Embrace DG

The State of California has long purported to support deployment of DG, recognizing its many benefits. The Legislature has enacted a number of important bills intended to encourage installation of DG as part of the long-term solution to California’s energy requirements. A little over two years ago, the California Energy Commission (CEC) proposed a framework for developing strategies designed to facilitate the development of DG. Most recently, the California Public Utilities Commission (CPUC), CEC, and the California Power Authority adopted an Energy Action Plan for the State. Second in the Energy Action Plan’s “Loading order” of energy resources, only behind increased conservation and energy efficiency, is the goal of meeting the need for new generation through renewable energy resources and distributed energy resources, including DG. The Energy Action Plan could not state more clearly the State’s determination that DG comprise a vital part of California’s energy landscape:

Distributed generation is an important local resource that can enhance reliability and provide higher quality power, without compromising environmental quality. The state is promoting and encouraging clean and renewable customer and utility owned distributed generation as a key component of its energy system. Clean distributed generation should enhance the state’s environmental goals. This determined and aggressive commitment to efficient, clean and renewable energy resources will provide vision and leadership to others seeking to enhance environmental quality and moderate energy sector impacts on climate change. Such resources, by their characteristics, are virtually guaranteed to serve California load. With proper inducements distributed generation will become economic.

It’s hard to imagine DG developers could complain of regulatory or other impediments in the face of such strong policy endorsements. Nonetheless, significant uncertainty regarding a variety of issues, including pending Self-Generation Incentive Program modifications, seemingly never-ending “refinement” of interconnection standards and, most standby charge exemptions under SB X1-28, is wreaking havoc on the financial end.

Standby Charges: The Regulatory Framework

Right now, it is not clear how the CPUC intends to implement the provisions of SB X1-28 dealing with long-term DG tariff issues. SB X1-28 was adopted during the State’s energy crisis to encourage generation, and provides in part that combined heat and power DG applications under five MW that commence operation by a certain date are to be served under rates identical to those of customers with similar load profiles that do not install DG for a specified period of time. The CPUC has interpreted these provisions of SB X1-28 as mandating an interim exemption from standby charges (the “interim” standby exemption).

SB X1-28 intended that eligibility for the described interim standby charge exemption would extend at least until the utilities developed long-term tariffs for DG. Such long-term tariffs are to provide that “customers with similar load profiles within a customer class will, to the extent practicable, be subject to the same utility rates, regardless of their use of distributed energy resources . . .” In other words, SB X1-28’s clear preference, all other things being equal, is for standby charge exemptions to continue in long-term DG tariffs. Notably, the size and technology limits applicable to the interim exemption (i.e., CHP applications under five MW) do not apply under the long-term tariff provision of SB X1-28

When it became clear that the required long-term tariffs would not be adopted before the eligibility period expired for the interim standby exemption, the CPUC extended for one year (until December 31, 2004) the interim exemption eligibility period for CHP projects sized five MW or smaller. The CPUC determined the interim exemption should also apply to “ultra-clean” resources automatically for six-month periods until the required long-term DG tariffs are adopted.

Significant Confusion Exists as to How the CPUC
Proposes to Establish the Required Long-Term DG Tariffs

The CPUC is presently considering issues relevant to the development of long-term DG tariffs in a variety of proceedings, making it expensive and time consuming for the DG community to keep up.
SB X1-28 mandates that the CPUC consider the actual costs and benefits of DG in establishing long-term DG tariffs. In March of this year, the CPUC opened a rulemaking to, among other things, develop a methodology for quantifying the costs and benefits of DG (the DG OIR). Predictably, PG&E and SCE argue the costs of DG projects typically outweigh their benefits. California’s Clean DG Coalition, on the other hand, is confident the CPUC will ultimately adopt a reliable cost-benefit methodology establishing that DG provides net benefits.

The CPUC is considering avoided costs, the standard frequently used for determining benefits in cost-benefit equations, in another proceeding in the context of energy efficiency and demand response. While the CPUC has noted the potential for overlap between the cost-benefit phase of the DG OIR and the avoided cost proceeding, it is not clear how the two proceedings will be coordinated.

Adding to the confusion is the fact that the rate design phases of PG&E’s and SCE’s general rate cases are underway at the CPUC. Both propose long-term DG tariffs in the form of increased standby rates for DG, contrary to SB X1-28 and longstanding State policy favoring DG. Neither have indicated whether or how they will adjust any standby rates that may be adopted in their general rate cases to reflect compliance with SB X1-28’s requirement to cost-benefit analysis. The CPUC has yet to provide guidance on these issues.

Finally, certain of the utilities have suggested informally at workshops and to potential DG customers they intend not to apply the interim standby exemption to under five MW DG CHP applications after 2004, regardless of whether the long-term DG tariffs required under SB X1-28 are in place. In their view, only ultra-clean DG may qualify for the automatic extensions of the exemption eligibility period after 2004. Even though this interpretation contradicts a clear CPUC decision, it will, at a minimum, increase uncertainty and costs for DG developers and customers if the utilities persist in asserting it in 2005.


It is Time to Provide DG Developers and Customers with Certainty

The fact that different but related DG tariff issues are being considered in myriad proceedings without a clear plan for coordination creates tremendous doubt for DG developers and customers and does nothing to further the goals of the State’s Energy Action Plan. Who will finance a project if it is not possible to reasonably predict how applicable tariffs will be adopted? How do DG developers counter troublesome utility representations regarding the scope of the interim exemption that, whether intended or not, disrupt the DG customer market? How does the State propose to make good on the pledge to treat DG as a top priority so it doesn’t end up on permanent standby?

DG — a generation option the State purports to champion — has borne more than its share of regulatory uncertainty in recent years. The DG community has weathered the energy crisis and a lengthy, expensive proceeding dealing with surcharges that arose out of the crisis. DG developers continue to participate in workshops intended to reduce interconnection-related barriers to market entry. Given clear legislative intent, with respect to DG tariffs and standby charges, there is no reason to cause DG developers and customers to hold off on further deployment of DG now because of confusion regarding implementation of SB X1-28.


Recommendation: The CPUC Could, and Should,
Define a Process for Coordinating DG Tariff Issues

The CPUC could easily resolve current doubt regarding DG tariffs. Specifically, the CPUC could (1) clarify in the DG OIR and the utilities’ rate design cases how the overlapping DG tariff issues will be coordinated, and (2) confirm the scope of eligibility for the interim standby exemption. The CPUC could accomplish these goals as follows:

These actions will provide much needed certainty to DG developers and customers, will continue the state’s strong history of support for DG, consistent with the Energy Action Plan, and will ensure DG is not put on permanent standby.

 

[1] The Commission was to have issued a proposed decision addressing revisions to the Self-Generation Incentive Program in August of this year in the DG OIR (CPUC) Rulemaking No. 04-03-017). As of the date this article was submitted, a proposed decision had not been published.

[2] Under Public Utilities Code sections 353.1 and 353.3(a), eligibility for the interim standby exemption extended until June 1, 2003. Section 353.13(a) requires that the long-term DG tariffs be in place by January 1, 2003.

[3] CPUC Decision No. 03-04-060.

 

Ms. Trowbridge is a partner with Downey Brand LLP in Sacramento, California. The firm's Energy Law Group has expertise in all areas of energy law, from production of oil and gas, to utility ratemaking, to siting large central station power plants. Ms. Trowbridge represents the California Clean DG Coalition..