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Pricing Reform for the Local Disco: Setting Rates That Will Support Distributed Generation

The Proposed Distribution Tariff
Fortnightly Magazine - July 1 2000

efficiency, reflects the potential diffusion of DG, and implements other important objectives. The pricing structure reflects the risk and the fixed nature of distribution costs-fixed in the sense that distribution costs vary little with throughput. The tariff provides for the recovery of sunk and variable costs, plus a risk-commensurate return.


Local Distribution: A Code of Conduct

Eleven suggested principles for operation and regulation.

1. Open Access. The UDC must provide non-discriminatory access and service to all retail sellers and DG owners.

2. Grid Expansion. The UDC should expand the system to meet growth through means including new technologies that can enhance throughput or otherwise improve efficiency.

3. Congestion Protocols. The UDC must establish congestion protocols where appropriate.

4. Access Rates. The UDC must measure its de-averaged costs and set appropriate rates for access and throughput.

5. Power Quality. The UDC should provide, directly or through bids and contracts, system stability, power quality, and other services. That might include arranging for required resources to ensure reliability (day-to-day) and security (minute-to-minute). *

6. Ancillary Service. The UDC may have to set rates, especially under price-cap regulation.

7. Rules for Marketers. The UDC should establish rules for bilateral transactions and the responsibilities of retail sellers. It also will have to develop enforcement and penalty actions for violations.

8. DG Promotion. As a matter of public policy, regulators may encourage the UDC to promote DG and other public interest programs. PCR can be designed to induce such outcomes using "bolt-on" incentives or by excluding expenditures from the price cap that are related to public policy.

9. Unregulated Business. Regulators may want to allow the UDC to pursue unregulated ventures.

10. Grid Independence. The UDC should own no wholesale or bulk power generation, and be independent of generators, wholesale providers, retail marketers, and other market participants.

11. Distribution Augmentation. While the UDC, in principle, should own no bulk generation, it seems crucial that regulators allow it to invest or otherwise control distribution augmentation (DA) assets that can bolster system performance. # -S.A.

* Clearly markets can be developed for some of the services related to system stability, such as load balancing. Regulators may require the UDC to perform these services as provider of last resort until or unless markets evolve. In any event, the cost of special quality levels and other services should be recovered only from customers that actually want them. (Over time, technology may reduce certain costs to the point where it no longer makes sense to try to apportion them. In the case of telephony, consumer advocates two decades ago argued that residential consumers wanted "plain old telephone service," and hence should not pay for newer technologies-including, at the time, electronic switches. Eventually the cost of providing some of these once "specialized" services dropped dramatically, thereby helping all customers.)

All of this is made somewhat more complicated by the fact that some of the services (e.g., system security) have a "public good" aspect, and hence cannot be priced efficiently using market mechanisms. PCR and PBR regimes will induce the UDC to provide these