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Fortnightly Magazine - March 1 1999

have advanced to the point that UDCs are exploring their use, or are beginning to utilize them as a component of distribution service.

"Just as utilities have historically sited central station generation within the transmission system to achieve the vertically integrated least cost of generation and transmission, so now may UDCs seek the vertically integrated least cost of DG, distribution expansion, line losses and local ancillary services."

These scenarios threaten the PUC's vision of UDCs divorced from the generation sector. Jay Morse explained why, in a letter sent in April 1997 to Eric Wong, chairman of the California Distributed Energy Resources Collaborative at the California Energy Commission, on behalf of the ORA:

"Where a distribution bottleneck is developing, the distribution carrier [could] avoid upgrading distribution by installing generation or grid support on the customer's side of the bottleneck. We are concerned that ¼ generation is being reintegrated with distribution." Morse noted that such reintegration would be inconsistent with the unbundling of generation and ancillary services, including those that relieve bottlenecks, from T&D. He added in a letter to CADER in August 1997 that it is not "in the interest of retail competition for the distribution carrier to replace T&D upgrades with its own generation."

Cavanagh admits possible market manipulation. "Under the circumstances," he told me, "it's hardly surprising that utilities are not rushing to embrace DG technologies. ¼ And it's entirely predictable that many are applying their ingenuity to suppress rather than promote such technologies."

As I learned from Morse and others, Pacific Gas & Electric has leased certain distributed generating assets in the San Jose area and classified them not as production plants, but as "wires plants," claiming they're used for grid support. Shames confirmed that strategy and what it could mean:

"Just about any form of DG could be classified as a 'wires asset,'" Shames explained. "And UDC deployment of DG - a rooftop PV installation, for example - would create competitive problems.

"For example, if the utility can use DG to reduce distribution maintenance, they can afford to sell PV at cost. Their profit would be the unquantifiable distribution function benefits that inure only to the UDC, and not to any competitors in the DG market.

"If I were thinking about selling DG in a UDC territory where the UDC was a competitor, I'd abandon any thoughts I'd have of competing very quickly."

"TRY IT AT A COCKTAIL PARTY," suggests Nettie Hoge, executive director of TURN, The Utility Reform Network, talking about restructuring policy and DG theory. "It doesn't work." Hoge questions whether state lawmakers will ever draw a bead on what it all means.

"We all agree," she insists, "that the [DG] proceeding ought to be used in some way to make sure the utility doesn't get a big advantage in technology, but that will prove difficult because all the ducks are in a row for that.

"Some of the ratemaking issues that are going to come up are a little mind boggling. Standby rates will have huge implications on how technology develops. Backup rates may be so