The wires business goes up for grabs as California opens its landmark case on distributed generation.
Jay Morse has studied distributed generation for the past seven years. Today, as an engineer and policy analyst on regulatory transition and market development issues for the California PUC's Office of Ratepayer Advocates, he sits in the eye of the storm. Technology is busting out all over, says Morse, who calls himself the "godfather" of DG in California's electric restructuring.
"A lot of microturbine products are going to hit the market in the next few quarters," he told me in early February. "The future isn't the future any more."
In California, the future is March 17, the deadline for filing the first round of comments in Rulemaking 98-12-015, launched late last year by the PUC to solicit proposals on DG and competition in the electric utility distribution sector.
Why would the PUC revisit electric restructuring so soon after winning brickbats for its retail choice plan? And then there's the "Green Book," the PUC's gambit to restructure the natural gas industry. Lawmakers shot that down last summer, in Senate Bill 1602, when they left the PUC free to "discuss" gas industry reform, but told regulators not to do anything major until year 2000.
Michael Shames, executive director of UCAN, the Utility Consumers Action Network, sees tough sledding in Sacramento: "They don't want to deal with this issue, but if the PUC acts, they'll feel they have to.
"The new heads of the legislative oversight committees are active, ambitious and worried that California deregulation is not working as promised. I don't bet on the horses, but I'd bet on some new round of legislation on energy this session."
CONTRARY TO WHAT MANY THINK, distributed generation is much more than customers making their own electricity, bypassing the grid. Yes, that can happen, but it's integration - not bypass - that makes DG so interesting. Should utilities integrate their own DG with distribution functions they already perform? Could utility-owned DG distort energy retailing, if utilities serve as default providers of bundled sales and wires services?
Attorney Ralph Cavanagh, at the Natural Resources Defense Council, sees some integration as desirable: "The technologies are grid enhancements, not grid replacements. [But] that does not imply that utilities should hold title to the technologies themselves. The role I envision is integration."
In short, DG opens to scrutiny the full spectrum of operations conducted by the utility distribution company, or UDC. That is evident from the Magna Carta of DG, the so-called "Statement of the Signatories," a letter sent to California PUC President Richard Bilas on June 5 urging the PUC to study DG. That letter was drafted in large part by Morse. It was signed by the ORA, UCAN, TURN, NRDC and other renewable energy advocates, plus potential DG manufacturers and energy marketers, such as Allied Signal, Enron and New Energy Ventures. It sets out clearly why DG policy may need to address network integration as much as grid bypass:
"Distributed generation products such as small gas turbines, microturbines, fuel cells and photovoltaics [PV] have advanced to the point that UDCs are exploring their use, or are beginning to utilize them as a component of distribution service.
"Just as utilities have historically sited central station generation within the transmission system to achieve the vertically integrated least cost of generation and transmission, so now may UDCs seek the vertically integrated least cost of DG, distribution expansion, line losses and local ancillary services."
These scenarios threaten the PUC's vision of UDCs divorced from the generation sector. Jay Morse explained why, in a letter sent in April 1997 to Eric Wong, chairman of the California Distributed Energy Resources Collaborative at the California Energy Commission, on behalf of the ORA:
"Where a distribution bottleneck is developing, the distribution carrier [could] avoid upgrading distribution by installing generation or grid support on the customer's side of the bottleneck. We are concerned that ¼ generation is being reintegrated with distribution." Morse noted that such reintegration would be inconsistent with the unbundling of generation and ancillary services, including those that relieve bottlenecks, from T&D. He added in a letter to CADER in August 1997 that it is not "in the interest of retail competition for the distribution carrier to replace T&D upgrades with its own generation."
Cavanagh admits possible market manipulation. "Under the circumstances," he told me, "it's hardly surprising that utilities are not rushing to embrace DG technologies. ¼ And it's entirely predictable that many are applying their ingenuity to suppress rather than promote such technologies."
As I learned from Morse and others, Pacific Gas & Electric has leased certain distributed generating assets in the San Jose area and classified them not as production plants, but as "wires plants," claiming they're used for grid support. Shames confirmed that strategy and what it could mean:
"Just about any form of DG could be classified as a 'wires asset,'" Shames explained. "And UDC deployment of DG - a rooftop PV installation, for example - would create competitive problems.
"For example, if the utility can use DG to reduce distribution maintenance, they can afford to sell PV at cost. Their profit would be the unquantifiable distribution function benefits that inure only to the UDC, and not to any competitors in the DG market.
"If I were thinking about selling DG in a UDC territory where the UDC was a competitor, I'd abandon any thoughts I'd have of competing very quickly."
"TRY IT AT A COCKTAIL PARTY," suggests Nettie Hoge, executive director of TURN, The Utility Reform Network, talking about restructuring policy and DG theory. "It doesn't work." Hoge questions whether state lawmakers will ever draw a bead on what it all means.
"We all agree," she insists, "that the [DG] proceeding ought to be used in some way to make sure the utility doesn't get a big advantage in technology, but that will prove difficult because all the ducks are in a row for that.
"Some of the ratemaking issues that are going to come up are a little mind boggling. Standby rates will have huge implications on how technology develops. Backup rates may be so high that they discourage new technology.
"Also, not enough people are looking at the interrelationship of natural gas with the electric distribution system." I asked why, given how there's supposedly so much excess pipeline capacity for bringing gas to California. Was the problem a lack of fuel diversity?
"Yes," said Hoge, "fuel diversity could be a problem, but not so much with the big pipes, but with the small pipes, the local gas distribution lines."
What will happen at the PUC? Morse marked out some positions in the June 5 letter:
"Some parties believe that ¼ failure to resolve this question would create a policy vacuum that could be filled by the UDCs in ways that conflict with the PUC's restructuring policies.
"Still other parties believe that the substitutability of DG for transmission and distribution means that any further unbundling of generation and ancillary services from the wires is fundamentally an artificial one. [They] believe that further unbundling is not the important next step, but rather the task is to determine rules that value the siting and dispatch of distributed resources."
The June 5 letter invites the PUC to consider an ISO operator for the distribution sector - an "IDO" to create price signals for DG and distribution system investment, just as ISOs enforce locational marginal pricing and transmission congestion contracts to regulate regional grid networks.
Meanwhile, DG prices are dropping rapidly. Market penetration is accelerating, not only in DG, but also in other forms of distribution competition, as Morse recounts: "About three weeks ago [mid-January], an irrigation district condemned PG&E's wires at book value. If that continues to happen, it will open the flood gates."
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