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The California Public Utilities Commission ("PUC") recently issued an order designed to encourage distributed generation. See "Order Instituting Rulemaking into Distributed Generation," Rulemaking No. 99-10-025, Decision No. 03-02-068 (Cal. PUC, February 27, 2003) (the "Order"). The PUC found that distributed generation has the potential to provide at least two benefits. First, it may "reduce system peak demand by serving onsite load" and releasing "existing generating capacity to meet peak demand requirements of other customers." Second, distributed generation may "defer distribution system upgrades," although the PUC found that this benefit is likely of limited duration and system upgrades would eventually become necessary. In light of these benefits, the PUC ordered California’s electric utilities to include consideration of distributed generation in their distribution planning process as an alternative to distribution system upgrades. The utilities are required to file a compliance filing describing the methodology that will be used in evaluating distributed generation as a distribution alternative. The PUC described, with approval, certain criteria proposed by one utility for determining whether distributed generation would allow the utility to defer capacity additions and avoid future cost: The distributed generation must be located where the utility’s planning studies identify substations and feeder circuits where capacity needs will not be met by existing facilities, given the forecasted load growth. The unit must be installed and operational in time for the utility to avoid or delay expansion or modification. Distributed generation must provide sufficient capacity to accommodate [the utility’s] planning needs. Finally, distributed generation must provide appropriate physical assurance to ensure a real load reduction on the facilities where expansion is deferred. The last criterion, that the "distributed generation must provide appropriate physical assurance to ensure a real load reduction on the facilities where expansion is deferred," is of particular importance. The PUC acknowledged that utilities have an obligation to ensure safe and reliable distribution service. The PUC rejected arguments that any distributed generation must be owned by the affected utility for the utility to meet this obligation, but the PUC agreed that the utility must control any distributed generation relied upon in lieu of distribution system upgrades. The PUC found that contractual assurances and associated economic penalties are not enough to provide the requisite control, and that "physical assurances" are necessary. The PUC adopted the following definition of "physical assurance": ["Physical assurance" means the] application of devices and equipment that interrupts a distributed generation customer’s normal load when distributed generation does not perform as contracted. An equal amount of customer load to the distributed generation capacity would be interrupted to prevent adverse consequences to the distribution system and to other customers. Presumably any contract between a utility and third parties for distributed generation would require the installation of the necessary "devices and equipment" and give the utility the right to interrupt the distributed generation customer’s load as required to provide the necessary "physical assurance." With respect to the compensation to be paid to non-utility providers of distributed generation, the PUC requires that such compensation be "no higher than the utility’s short-term carrying cost of capital multiplied by the cost of the planned distribution addition and the number of years of deferral." Thus, the permitted compensation reflects the PUC’s belief that distributed generation may temporarily delay distribution system upgrades but will not render such upgrades permanently unnecessary, and the value of distributed generation to the utility is therefore the time-value of the funds that will eventually be expended to implement the required upgrades. All such compensation is to be paid out of the utility’s distribution budget. The PUC has ordered the California electric utilities to develop model contracts for distributed generation to serve as a starting point for negotiation.
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