1 Some utilities may question this concept. San Diego Gas & Electric argued in California's DG investigation that distributed generation does not always lead to a reduction in distribution plant investment, and that any investment savings is not kilowatt for kilowatt. And the Federal Energy Regulatory Commission has taken a more extreme position, allowing a utility to charge a fee for distributed generators delivering electricity into the distribution grid.

2 This article discusses pricing competitive distribution services in a manner that would allow distributed generation to interact with the central market for electricity on a dynamic basis. Much of the language of the article presumes that the distribution services are being provided by an integrated utility. However, Texas has "dis-integrated" its utilities, prohibiting the distribution wires company from buying any electricity for its customers. Under these conditions, the pricing concepts presented in this article should be viewed as transfer prices between the distributed generator and any entity that has the residual obligations of a utility, such as providing power to consumers and buying electricity from qualifying facilities. The transfer prices then can be separated between the distribution wires company and the "utility." Such separation process is outside the scope of this article.

3 One possible derivation of the generation and transmission portion of the distribution price is the price paid for deviations from the scheduled dispatch, as geographically adjusted for transmission issues. This also can be accomplished by setting the transmission level price using a continuous auction of electricity imbalances, as is discussed in "Daily Cashouts of Gas Imbalances Using A Formulary Auction," , Fall/Winter 1999.

4 Public Utility Regulatory Policies Act of 1978.

5 Total electrical losses increase with the square of the power flow, as do the revenues associated with such losses. In other words, tripling the flow on the network will cause electrical losses to be nine times as large. Tripling network flow will also triple the price differential across the network and triple the associated revenue, because this tripled price differential is charged against three times the flow.