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Distributed Generation: Last Big Battle for State Regulators?

Fortnightly Magazine - October 15 1999

war over the distribution system," replies Shames.

ORA's Morse, however, does not believe that distribution networks will be undermined by DG. Rather, he says, both technologies will work in concert.

The California Manufacturers Association says that since DG helps UDCs avoid additional investments in distribution facilities, there should be no reason to "protect" them from any claimed revenues or stranded investments. Furthermore, PG&E and Edison argue that DG may substitute for more-expensive distribution investment.

In addition, Morse argues against acceleration of stranded cost or a request by PG&E to implement a wires charge for exiting customers in order to recover its lost margin.

UCAN's Shames breaks down the utility costs as they relate to generation and distribution. "In California, the average residential bill is about 10 cents a kilowatt-hour. The cost of generation costs 2 cents and between 4 and 5 cents is distribution; a penny for transmission and about 2 pennies for public goods and surcharges," he says. "[You're] looking at twice [the cost], if not more, than your kilowatt-hour being attributed to distribution functions."

Comments from the attorney representing Enron, Michael B. Day of Goodin, MacBride, Squeri, Ritchie & Day LLP, support the argument against stranded cost.

"Recent experience shows that, in contrast to the generation sector of the industry, the distribution sector is less susceptible to the risk of stranded costs. For example, in each of two recently approved sales of utility distribution facilities, the sales price exceeded the net book value, i.e., there were no stranded costs. Instead, there were benefits. Indeed, if structured properly, distribution competition could well result in greater use of the existing utility distribution system, with a corresponding increase in utility revenues," says Day.

"[Furthermore], certain tariffs represent some of the thickest regulatory underbrush" that the CPUC needs to clear on behalf of consumers, he says. "Specifically, in order to encourage competition in distribution services, the Commission must reform or eliminate certain aspects of the electric standby tariffs, the residual load service tariffs are applied in a way that effectively discourages customers from choosing service from any entity other than the utility."

Day adds, "If these tariffs and charges are salvageable, they need to be reformed to reflect only the utilities' cost of providing required service. The tariffs should not be used as a means to discourage innovation, choice and competition."

Capstone's Almgren also takes a strong stance against stranded cost. "Capstone believes that distributed generators should not be burdened with the cost of stranded assets. Distributed generators were not party to the decision that resulted in these stranded assets and should not be required to fund them," he says.

"Stranded asset charges, including the [competition transition charge], are a major obstacle to the development of a competitive electricity market in California. These charges add significantly to the cost of alternative power and, in many cases, undermine the benefits of the alternative including DG," Almgren says.

"Commercial business takes risk with its investments and wears the consequences, for good or for bad. In all instances, it is not clear what the economic value of