93 Electric Utility Industry Restructuring and DG

The fate of distributed generation is tied to how the provisions of EUIR legislation are written and implemented in restructured states and specifically whether the distribution utility rules in any state, restructured or not, are opened to allow market access by new technologies.

By way of background, the intense EUIR debate began soon after the passage of EPAct. The early tier of EUIR states, such as California and New England, had high electric rates. These were followed by many other states* that saw opportunities to initiate EUIR through a grand deal. Simply stated, the grand deal typically will trade away traditional electric regulation in the long term for legislatively mandated lower rates (sometimes financed by divestiture of utility generating assets) in the short term. Accompanying state EUIR initiatives were high-profile Congressional proposals suggesting that a date-certain deadline be established to avoid a patchwork of separate state EUIR laws. Over half of the U.S. population now lives in states where customer choice is available.

Even in states that have opened supply to customer choice, EUIR change does not necessarily open markets for DG. Nonetheless, the move to customer choice offers the promise of new market choice and, in that way, joins at least four major groups in support of restructuring. Would-be DG vendors comprise one of those groups, even though they do not receive open access to the distribution system under any of the restructuring regimes in place so far.

The first group that sees opportunity consists of new competitive electrical supply entrants who hope to compete for customers under new wholesale supply arrangements, but using the same distribution wires as the utility they replace. The second group is comprised of the DG developers who hope to enter what has been a relatively closed electric business. The Distributed Power Coalition of America**! says, "electric restructuring will help the concept of distributed power because the buyers and sellers of electricity will have to be more responsive to market forces. Making sure that stranded costs do not impede distributed power is one of the Coalition's goals." As the argument goes, DG will finally become more feasible in an open market where prices are unbundled and transparent. One requirement of free markets (an informed buyer) will place an economic value on electric reliability, quality, and delivery at time of day.

The third group that sees opportunity consists of investor-owned utilities that were initially ambivalent about EUIR but now have their long-sought prize in sight: pricing freedom. This new-found freedom will mean that their investment strategies will be governed more by the market, less by regulators.

* See the National Conference of State Legislatures for state-by-state accounting of EUIR

** The Distributed Power Coalition of America advocates for distributed generation, primarily at the national level (www.dcpa.com).

Whether this freedom causes investments in DG is a key question that will be explored in this chapter. The fourth group that sees opportunity consists of large-load customers (who started the EUIR movement) who look forward to deeper discounts than what they could achieve under a regulated structure, lower rates, or the freedom to self-generate and sell excess capacity to the grid.

Although the new entrants and investor-owned utilities have a common enthusiasm for EUIR, they have not created a common vision on how all of this is going to play out. This could be a classic case of fight them or join them, and the fighting or joining may well have its day in a PUC hearing room. The industrial and large commercial customers are almost universally favorable to EUIR because they see opportunity with either deeper utility discounts, less expensive self-generation, or utility investment in DG.

The EUIR change poses potential problems for inelastic customers left to the tender mercies of the market once the guaranteed rate reductions in the grand deal expire after a few years. These perils are particularly acute in states with one or more of the following characteristics: low rates, large rural areas, higher numbers of low income populations, or severe transmission constraints that make effective competition far more difficult. Given the magnitude of the rate and social equity issues at stake, EUIR skeptics may consider an analysis of the impact of EUIR on DG to be an academic exercise at best. Innovation, it is argued, can flourish under EUIR. The majority view sees the benefit of utility investment shifting away from generation and transmission, so Discos can concentrate on their core business, where DG resides.

What else might EUIR do for DG? Everyone would like to think that the future belongs to the efficient, and with utilities required to de-integrate and prices becoming transparent, customers will have a new-found opportunity to make choices that match their specific needs. Most optimistic is the view that EUIR will cause utilities to embrace DG as a smart business proposition. If Discos (who, at present, have few workable ideas on how to operationally cope with the complexities associated with thousands of distributed generators in their system) can find the financial incentives and answers to the safety, interconnection, and dispatch problems of DG, then change is possible. If the answers are there, then the underlying concern that the vast majority of residential and commercial customers have — they do not want to own, operate, maintain, and indemnify their own on-site generators — goes away.

The less popular view, perhaps considered contrarian by DG proponents, sees the ramifications of EUIR leading in a very different direction. If the supposed benefit of EUIR, lower rates, is achieved, then DG, which is already price-challenged, will have a difficult time competing with even lower-cost grid-supplied power. A more likely problem is the following: under traditional regulation, utilities frequently provide discounts to industrial and large commercial customers. However, under open markets, utilities are free, and will be even more inclined to offer discounted rates to retain these large loads. This would have the result of placing upward pressure on the inelastic residential and commercial customers. This may not necessarily work to the detriment of DG, but will be a factor considered by regulators. Of greater concern to distributed resource developers is that the more often the utilities provide discounts to large loads, the more they will erode the competitive position of the DG developers who want to make inroads in those markets.

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