Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Distributed Generation: Implications for Restructuring the Electric Power Industry

Fortnightly Magazine - June 15 1995

transparent least cost planning and determining inherently volatile locational avoided costs. Allowing direct access might temporarily reduce the onslaught of self-generation investments, but this will pave the way for retail wheeling of distributed generation and storage power. On the other hand, discouraging retail wheeling will promote self-generation unless the utility is willing and able to absorb most projects as inside-the-fence investments. Either way, the regulatory and utility business infrastructures will be severely tested.

Scenario 2: Utilities break up into separate and independently operated units along the traditional functional divisions of generation, transmission, and distribution. Initially, a single, regulated distribution company (DisCo) will probably serve the entire territory of the original franchise. Assuming the DisCo

is barred from owning generating facilities, the distribution planning process can satisfy the principles of transparency and least cost planning. The regulatory burden will not increase, and may even diminish in an absolute sense.

The continued proliferation of distributed generation could lead to two developments. First, vertical disaggregation undermines the assumptions behind the Public Utility Holding Company Act. Exemptions from the Act's requirements are extended to the retail market, creating a new industry player: the exempt retail generator (ERG).

Second, project planning and permitting becomes localized, forcing the horizontal restructuring of the original DisCo into autonomous or even independent DisCos, defined along city or county limits. Communities, cities, and counties demand a greater say in what is happening in their neighborhoods. Local governments become keenly interested in the economic and environmental impacts of future distributed generation investments in their jurisdictions. The ultimate result is decentralized regulatory oversight in the areas of ratemaking, environmental planning, and resource acquisition. Localizing generation redefines the debate on externalities.

Regulation's Future

Skeptics will argue that the proliferation of distributed generation will not affect restructuring. They will argue that: 1) the cost advantages of bulk generation will serve as market barriers to large-scale implementation of modular investments, and

2) environmental constraints will limit competitive options to low penetration rates.

The skeptics ignore a few important facts.

First, the regulatory infrastructure is already in trouble. In regions where resources are scarce, the industry is already in a state of chaotic command-and-control micromanagement. Consider, for example, the Biennial Resource Planning Update (BRPU) experience in California. Even if the BRPU is somehow reformed to the satisfaction of the Federal Energy Regulatory Commission (FERC), a single distributed generation project can bring a new cycle of competitive resource solicitation to a halt. Proliferation does not necessarily mean high penetration rates.

Second, if policymakers are intent on genuine reform, the extent of their planning horizon should easily encompass the technological advances that could resolve some of the environmental and cost constraints of distributed generation.

Third, local generators can bring benefits above and beyond the traditional energy and capacity worth of new investments. These added values will transform marginal projects into resources that can compete with the best bulk-power suppliers. Several leading investor-owned utilities have already embraced proactive strategies in that direction.

Remarkably, the FERC and California debates have so far failed to seriously consider the implications of technological change for