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A Blueprint for DG

Presenting a fair and simple distributed generation plan for utilities and policy-makers.
Fortnightly Magazine - January 1 2003

customer would be eligible for a zonal credit only if the customer installed DG in a distributed generation zone. A utility would be required to install DG only in distributed generation zones in accordance with its least-cost plan.

Conceptual Dichotomies That Prove Useful in Pricing DG

In assessing any pricing system for distributed generation, two conceptual dichotomies prove useful. First, profound differences arise depending on whether the DG resides on the customer side of the meter or the utility side. On the customer side of the meter, DG competes with the distribution "natural monopoly" and, under currently prevalent cost-of-service rate regimes, threatens utility revenues. Moreover, when the customer owns the DG facility, the lion's share of the benefits accrue to the customer rather than to the utility. As a consequence, in the absence of regulatory intervention, utilities will, in their own rational self-interest, erect barriers to the entry of DG. The types of barriers primarily include complex and costly interconnection procedures and requirements and high "standby" rates.

By contrast, on the utility side of the meter, in a properly designed regulatory regime, the utility can substitute DG for higher-cost distribution facilities, sell the output of the facility, and enjoy the ensuing financial benefits.

Currently, however, prevalent forms of rate design and restrictions placed on utilities in competitive markets frequently eliminate the utility's ability to profitably employ DG facilities. As a consequence, the utility's use of socially beneficial distributed generation is relatively rare today.

The second useful conceptual dichotomy relates to industry structure. A utility that has been unbundled into generation, transmission and distribution components in a jurisdiction with retail competition operates under a profoundly different, more complex regulatory regime than does a vertically integrated utility in a traditional, non-competitive environment. Unbundled utilities frequently face ownership and operation restrictions on the relations between their distribution and generation arms that preclude the distribution arm from owning DG facilities.

Distributed generation incorporates attributes of both distribution and generation. If the utility is forbidden to combine them, DG is not an option for the utility no matter how economic the facility may be. By contrast, a vertically integrated utility can view the economics of DG facilities in their totality, comparing the cost of prospective facilities with the combined costs of the generation, transmission and distribution facilities that the DG would replace.

This article enunciates the basic principle that the regulatory system should be neutral as to the ownership of the DG facility. However, DG facilities today are more commonly owned by end users than by utilities. We now address distributed generation facilities that are owned by utilities and installed on the utility side of the meter, either within a distribution substation or near to a customer's load.

Regulated utilities have an obligation to serve new distribution customers and meet increased loads in their franchise service areas. If the regulator provides comparable regulatory treatment to DG facilities owned by a utility and the utility's traditional distribution facilities, then the utility can make an efficient economic choice between the two options. The challenge for policy-makers is to level