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Distribution Utilities: Forgotten Orphans of Electric Restructuring

Fortnightly Magazine - March 1 1999

but allocate costs across all distribution system customers for others. (The actual payment mechanism, such as alternative distribution tariffs for individual customers or local area-specific tariffs, is another issue, which I do not consider here.)

1. Preserve the Existing System. Under the current system of allocating costs by customer class, investments in new capacity are rolled into the overall class distribution rates for the disco's customers. Disco customers outside the specific area of growth are affected adversely. However, in the new restructured world, the disco will be responsible for meeting customer distribution capacity needs but will have no influence over the terms and conditions for energy sold to customers. That will complicate attempts to apply the existing cost-allocation system. Furthermore, the existing allocation methods are based on traditional definitions of customer classes, but those customer class distinctions may no longer persist in a restructured world. Thus, it isn't clear how efficient and equitable the treatment will be if regulators maintain the status quo in allocating costs for distribution capacity investment.

2. Allocate to Specific Users. An alternative is to allocate distribution capacity investment costs to the individual customers who impose the need for such investments.

In some circumstances, it may be possible to identify specific distribution investments that provide benefits to only a subset of clearly identified customers, usually large industrial or commercial ones. As restructuring takes place and separate discos are formed, there is likely to be greater regulatory pressure for those discos to identify specific customers who are driving the need for new local area capacity investments. Regulators may face political pressure not to impose new distribution costs on customers in general, so as to deliver on promises of lower cost electricity service to all classes of customers. Unfortunately, in many cases, investments will provide joint benefits to a variety of customers in an area.

That pressure may be exacerbated by the structure of distribution rates developed by the regulators. To the extent that fixed distribution costs are allocated on a volumetric (per kilowatt-hour) basis, consumption decisions will be affected more than if these costs are allocated on a fixed, ready-to-serve charge basis. Because many of the distribution costs are fixed and the marginal cost of providing off-peak local area capacity is, for all intents, zero, recovering distribution capacity costs on a volumetric basis will be inefficient. Such inefficiency will exacerbate inequities and complicate the cost-allocation question.

3. A Mixed Method. A third option is for regulators to assign distribution system capacity investment costs directly to certain individual customers, but allocate other costs to groups of customers. This option may be thought of as a subset of existing allocation systems, except replacing groups of multiple customers with groups of individual customers.

This "mixed" option represents a theoretical ideal in terms of equity: Allocate non-joint costs to the customers driving the need for new investments but allocate joint costs more globally. Thus, if there are no other customers in the same area as the industrial facility, then asking that customer to pay the expansion costs is reasonable and appropriate. This solution,