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Paradigm Buster: Why Distributed Power Will Rewrite Open-Access Rules

Fortnightly Magazine - October 15 1999

acceptable function for a regulated monopoly, especially where utilities have divested central station generation. To what extent will the regulated entity be allowed to compete with unregulated developers of distributed power resources? If the utility itself is barred, what code of conduct should govern participation in the new business by an unregulated affiliate of the utility?

Who Controls Dispatch? Here again, analysis turns in significant part on whether distributed power is viewed as a competitive function only, or one that also is part of the regulated utility function.

Self-generators and unregulated distributed power competitors will be able to make their own decisions about when to operate the new asset, based on power and gas market conditions (and potentially based on real-time price or other signals about available capacity and pricing on the distribution system). These decisions could apply to a single site or across a group of sites operated by a single distributed power company.

Regulated utilities presumably will be able to offer the service of dispatching generators owned by others, taking into account distribution capacity needs as well as generation market prices. The tough question here may be whether any new institutional entity will arise to monitor, facilitate, coordinate or automate the dispatch of potentially thousands of small generators and load management systems. Such new entities might include an "independent distribution organization" (IDO), a local power exchange, or perhaps a local dispatching service of a regional independent system operator or utility. The new IDO conceivably could be a private, for-profit venture, in which case it might be termed a "virtual utility," with responsibility for coordinating operations with the utility grid as well as optimizing the economic value of the distributed power asset. Such an entity largely would be an information integration and management business.

The scope of the changes outlined above likely will require considerable revisions to the regulation of both rates (see sidebar, "No Gen is an Island") and operational terms and conditions. Considerable time and effort will be required to develop and implement these new rules and rates. The principle of "comparability," which has informed so much of the open-access paradigm, will be inadequate to fully guide this development because so many of the changes will raise new issues where there simply isn't any "comparable" utility rate or practice to apply.

The power industry today must come to grips with underlying changes that are truly profound. The industry must develop a business and regulatory model that recognizes these fundamentally altered patterns of production, consumption and distribution. It is a task that lies considerably beyond the scope of the present essay, whose goal is to initiate, not culminate, this debate.

Francis H. Cummings is a principal at XENERGY Inc., where he directs the company's consulting practice in distributed power. He was director of policy at the Massachusetts Division of Energy Resources from 1994 to 1998, where he developed and negotiated the state's approach to voluntary divestiture of generating plants.

Philip M. Marston, counsel to XENERGY Inc., is an attorney and consultant who has written and spoken widely on regulatory issues