Utility Policy Issues Affecting Distributed Generation & CHP Deployment

2. Utility Policy IssuesAffecting Distributed Generation & CHP Deployment Getting the Rules Right CHP in the Pacific Northwest Seattle Hilton Hotel Seattle, Washington October 15, 2002 Presenter: John Nimmons, J.D. John Nimmons & Associates, Inc. Sustainable Energy Strategies Mill Valley, CA 415.381.7310

3. Rank Barriers Explanation Barriers to DG (from DPCA’s 1999 member survey)

4. Barriers to DG (from DPCA’s 1999 member survey) Rank Barriers Explanation 1 Interconnection Inconsistent standards, complex process, high cost 2 Utility tariffs Stranded costs, exit fees, standby, general rate design 3 Interconnect technology Sometimes poorly understood, inadequate or costly 4 Lack of familiarity E.g., with DG technologies, environmental benefits 5 Permitting process Long, cumbersome, costly & often inappropriate 6 Assigning DG value Hard to identify, quantify & allocate among parties 7 Stakeholder confusion Utilities & consumers unfamiliar with DG benefits 8 High first cost Discourages DG adoption, despite life-cycle benefits 9 Electricity restructuring Creates uncertainty, complexity & inconsistency 10 Few DG case studies Little experience, especially w/ grid support, impacts

5. Rank Barriers Explanation 1 Interconnection Inconsistent standards, complex process, high cost 2 Utility tariffs Stranded costs, exit fees, standby, general rate design 3 Interconnect technology Sometimes poorly understood, inadequate or costly 4 Lack of familiarity E.g., with DG technologies, environmental benefits 5 Permitting process Long, cumbersome, costly & often inappropriate 6 Assigning DG value Hard to identify, quantify & allocate among parties 7 Stakeholder confusion Utilities & consumers unfamiliar with DG benefits 8 High first cost Discourages DG adoption, despite life-cycle benefits 9 Electricity restructuring Creates uncertainty, complexity & inconsistency 10 Few DG case studies Little experience, especially w/ grid support, impacts Barriers to DG (from DPCA’s 1999 member survey)

6. Interconnection Barriers • The Problem • DG can strengthen the grid, & vice-versa • utilities responsible for grid safety & reliability … but often have disincentives to connect DG • The Challenge • create appropriate utility incentives • develop objective, uniform technical standards • simplify procedural requirements to connect • reduce costs for small, low-impact resources

7. Interconnection Progress • National efforts • IEEE 1547 - uniform technical standards • FERC - Standardized procedures & agreements • Generator Interconnection • over 20 MW [RM02-1-000, 4/24/02] • Small Generator Interconnection • up to 20 MW [RM02-12-000, 8/16/02] • www.ferc.gov/electric/gen_inter.htm#Stand%20Inter • State efforts • California, New York, Ohio, Texas • NARUC Model DG Interconnection Procedures & Agreement • www.nrri.ohio-state.edu/programs/electric/distributedgeneration

8. Tariff Barriers to DG • Universal tariff issues facing DG • ‘Stranded’ utility costs (bypass charges, exit fees, etc.) • ‘Cogen deferral’ rates (or ‘flexible pricing’) • Standby charges • Fixed vs. usage-based charges • Location- & time-sensitive pricing

9. Tariff Barriers to DG • Stranded costs • Issue: Will DG ‘strand’ utility assets, shifting their costs to utility shareholders or other ratepayers ? Yes,and a death spiral will surely follow. • Utility view: No,and DG’s not responsible for utility investments. • DG view: • Analysis: • Assets dedicated to a single customer and not re-usable shouldbe customer responsibility (whether or not a DG customer) • ‘Stranding’ doesn’t apply where assets remain in ratebase, and utility can continue to use and earn a return on them • Assets may be temporarily underutilized, but used later; distinguish normal revenue fluctuation from ‘stranding’

10. Tariff Barriers to DG • ‘Flexible pricing’ or ‘cogen deferral’ rates • Issue: Should utilities ‘compete’ with DG by undercutting their otherwise applicable tariffs? • Utility view: Yes, keeping DG customer protects others, and some revenues are better than none • DG view: No, invites monopoly abuse, and thwarts DG that could benefit the system and other customers • Analysis: • Reasonable in principle but too often used as a sword, not a shield • Short-term response to a long-term problem • Benefits of encouraging DG innovation and utility collaboration may outweigh short-term benefits of flexible pricing

11. Tariff Barriers to DG • Standby charges • Issues: • Should utilities or their customers decide what level & type of standby services each customer needs, & whether they’re worth buying? • What costs should be included in standby charges?

12. Tariff Barriers to DG • Standby charges • Utility view: DG customer may need its full requirement, and the utility must provide distribution capacity • DG view: DG customer should decide what service it needs, when it needs it, and what it’s willing to pay for it • Analysis: • Most agree that standby charges should be ‘cost-based’ – the question is how to calculate costs • Costs differ as a function of quantity, firmness, location and time, and efficient standby pricing should reflect that • Contractual arrangements can supplant utility obligation to meet full requirements, and empower customers to choose what they need

13. Tariff Barriers to DG • Fixed vs. usage-based charges • Issue: which vary with usage; Which grid costs are fixed; and what rate designs which can DG reduce; ensure fair cost recovery, yet encourage sensible DG? • Utility view: T&D costs are fixed regardless of customer usage, so T&D rates should comprise mainly fixed charges • DG view: T&D costs reflect customer usage over time, so rates should be usage-based and ‘avoidable’ by customer action • Analysis: • DG may not avoid T&D costs in the short-run, but long-run incremental costs drive rates • Those costs are a function of load growth – i.e., customer usage • Usage-based charges better reflect costs, but are more volatile

14. Tariff Barriers to DG • Location- & time-sensitive pricing • Issue: Should T&D rates reflect that costs differ by location and time of use, to signal high-value DG? • Utility view: T&D costs do differ by location and time, but T&D rates must be averaged to ensure universal service • DG view: T&D costs differ by location and time, and rates should signal those differences to influence customer behavior • Analysis: • Averaged rates mute cost signals and undermine economic efficiency • De-averaged location- and time-specific rates are more efficient, but more volatile, harder to administer, and threaten universal service • Other approaches (such as locational credits or riders, or 2-part rates) can achieve similar benefits more simply, and advance sensible DG

15. Conclusions • Interconnection & tariffs are key to DG success • Considerable progress on interconnection • Less attention to rate design so far • Rate design rhetoric often oversimplifies & obscures • Rate issues are rarely black & white, but focusing on specifics instead of generalities will help resolve them • DG is still a small percentage of supply: utilities & regulators can afford to innovate a little, to learn a lot