California has long recognized the many benefits of DG and has strongly encouraged its deployment. SB 28X, 2001 legislation designed to continue supportive state policy, required that long-term DG tariffs reflecting the costs and benefits of such generation be established by January 1, 2003. The distributed generation (DG) community understood that the energy crisis and its aftermath meant that the California Public Utilities Commission (Commission) and the state's investor owned utilities temporarily had to focus on issues other than DG. DG interests appreciated the Commission's willingness to extend the interim DG tariffs — primarily the standby charge waiver — until long-term DG tariffs were in place.

Nonetheless, the DG community looked forward to the development of a meaningful cost-benefit methodology and the certainty long-term tariffs based on that methodology would provide. Everyone had high hopes when the Commission began the DG OJR in March 2004. With respect to cost-benefit issues, parties filed testimony last fall, and hearings were initially scheduled for November 2004. Unexpectedly, the schedule was suspended pending issuance of the “Itron Report.” After a couple of delays, the Itron Report was finally issued on March 29.

In general, the Itron Report appears to be too little, too late. In 2001 (Decision No. 01-03-073), the Commission directed the Energy Division to “hire an independent consultant to develop a cost-effectiveness method that can be used on a common basis to evaluate all pro grams that will remove electric load from the centralized grid, including energy efficiency, load control/demand responsiveness programs and self-generation. ” Four years later, we get the Itron Report.

Not only is the cost-benefit framework in the Itron Report limited to analysis of the Self-Generation Incentive Program (SGIP), it represents a major step backward for evaluation methodology. Specifically, the Itron Report proposes to evaluate SGIP projects using a separate framework for three perspectives — society as a whole, ratepayers and SGIP participants. This approach is wholly at odds with existing Commission program evaluation practices and sets the stage for inefficient and costly relitigation of established policies. For years, the Commission has used the Total Resource Cost Test, Societal Version, for valuing the cost effectiveness of demand side management and energy efficiency programs. The Itron Report provides no basis for the proposal to deviate from longstanding Commission practice, other than to state generally that use of all three cost effectiveness tests is somewhat common with respect to assessment of publicly funded programs. It ignores that the Commission has emphasized that consistency in methodology is important when evaluating the cost effectiveness of all programs that remove electric load from the grid .

There are more specific problems with the Itron Report. It proposes to exclude consideration of transmission and distribution avoided cost under its version of the Total Resource Cost Test, Societal Version, based solely on the fact that SGIP projects are not required to provide physical assurance. Such facile analysis fails to recognize the verifiable diversity benefits of DG and fails to explain why DG should be treated differently than energy efficiency projects, which are given credit for diversity effects. It also disregards the enhanced reliability provided by DG to the transmission system. Further, the Itron Report methodology for evaluating avoided emissions costs significantly underestimates the avoided emissions that result when DG is installed.

All of this is not to say there is nothing of use in the Itron Report. For example, it appropriately includes avoided reliability costs associated with ancillary services as an element of the Total Resource Cost Test, Societal Version.

Parties in the DG OIR and the avoided cost proceeding have provided the Commission with useful tools for developing a meaningful cost-benefit methodology for DG, consistent with established Commission policy for evaluating demand reduction and energy efficiency programs. Hopefully, the Commission will rely on the Itron Report only to the extent it furthers this discussion and will not accept the invitation to deviate or step backward from sound evaluation practices. Rate certainty for the DG community is long overdue; it would be a shame to get distracted now.  

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Ann Trowbridge is a partner with Downey Brand LLP. She represents the California Clean DG Coalition, an ad hoc group formed to promote the ability of DG system developers, manufacturers, distributors, marketers and investors, and electric customers, to deploy Downey Brand's Energy Law Practice Group has expertise in a wide range of energy matters, including oil and gas production, public power, power plant siting and California Public Utilities Commission policy and regulation. Ann can be reached at atrowbridge@DowneyRrand corn.