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Distribution Utilities: Forgotten Orphans of Electric Restructuring

Fortnightly Magazine - March 1 1999

will not want to burden other ratepayers with the costs of expanding distribution capacity to benefit the manufacturer, but will have to work within the parameters of existing cost-allocation and rate design rules. Lastly, environmental regulators may not like some capacity-increasing alternatives such as distributed generation because of the local environmental impacts, even though utility regulators may wish to promote those same alternatives in order to defer the need for new poles and wires. The result is four interest groups with four potentially conflicting goals.

For the disco to meet its obligation to connect efficiently and equitably, two difficult questions must be answered:

1. What is the optimal amount of local distribution capacity or its equivalent for the disco to satisfy its obligation to connect?

2. How should the resulting stream of current and future costs be allocated among different customers, including (possibly) retail electric suppliers?

The first question requires the disco to meet uncertain future local area capacity demand. This will be all the more difficult because, unlike the existing system where the disco and the electric supplier are one and the same, the disco will probably not know the specific terms of the sales transaction between the retail supplier and the manufacturer. Although it may be possible to offer interruptible power contracts to the manufacturer to reduce peak capacity and delay or obviate the need for new distribution system investments, such arrangements will also have a cost, and may not coincide with what the retail energy supplier wishes to offer. The disco will need a method for determining which investments in area capacity it should make, if any, and regulators will need to approve of such methods.

The second question, while less technical, will be more contentious. In the past, distribution expansion costs have rarely been allocated to specific customers because of the public good nature of the distribution system. Instead, those costs have traditionally been allocated among all customer groups, based on standard cost-allocation methodologies for integrated utilities. That probably will have to change.

Doing so will raise several issues. How will customer groups be defined, by local area or across different areas? Will individual customers be required to pay the full costs of major distribution system upgrades, even if the benefits accrue more widely? What will happen if forecast demand for that capacity does not materialize? How will regulators ultimately define "prudent" disco investments in area capacity when future demand is uncertain?

What is "Least-Cost" Distribution?

When a disco invests in new local area capacity, its regulators and customers will want those investments to be efficient to keep distribution costs low. Overbuilding distribution circuits or investing in overly expensive distributed generation and DSM in anticipation of local demand that never materializes will result in other customers paying more than they might otherwise. Conversely, under-building may require expensive "emergency" investments or, in some cases, an inability for customers to obtain the electricity they want. Thus, knowing when to invest and in what to invest will be an important component of disco life in a restructured environment.

A few regulators