California's program to restructure electric utilities and introduce retail competition has set a standard for boldness. It is no exaggeration to say that "the whole world is watching." We believe, however, that a key piece is missing. We are writing to ask that the Commission address an overlooked aspect of electricity restructuring: the bundling or unbundling of energy and ancillary services injected into the distribution system, and the role of utility distribution companies (UDCs) in planning, owning, leasing, dispatching, interconnecting or facilitating the optimal utilization of distributed generation (DG). DG is generation, generation-like and storage devices that are connected to the distribution level of the T&D grid on either the system side or the customer side of the meter.
Determining the role of UDCs with regard to distributed energy is integral to electricity restructuring. Until now, the emphasis in unbundling generation and ancillary services from the wires has been at the transmission level because generation and ancillary services have been historically intertwined with the wholesale transmission system, and not the distribution system, however, the Commission could have also considered unbundling generation and ancillary services from the wires at the distribution level.
The question of bundling or unbundling generation and ancillary services from distribution surfaces now as an electricity restructuring issue because distributed generation products such as small gas turbines, microturbines, fuel cells and photovoltaics 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 lest cost of DG, distribution expansion, line losses, and local ancillary services. An OIR is needed to determine whether bundling distribution generation services within utility distribution service comports with the Commission's restructuring goals and with its vision of the role of UDC in competitive retail electricity markets.
Some parties believe that an OIR is needed because failure to resolve this question would create a policy vacuum that could be filled by the UDCs in ways that conflict with the Commission's restructuring policies. These parties believe that if UDCs plan or site DG instead of expanding transmission or distribution, there would be a conflict with the Commission's stated policies that generation and ancillary services be functionally and financially separated from the wires, and that the wires be a common carrier, even if UDCs are seeking the vertically integrated least-cost solution. Other parties believe that failure to resolve this question could prolong a policy vacuum that may unnecessarily hinder DG market entry.
Still other parties believe that the substitutability of distributed generation for T&D means that any further unbundling of generation and ancillary services from the wires is fundamentally an artificial one. These parties 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 by UDCs or by others. These parties believe that UDCs could incent the siting of DG to minimize T&D investment, and could dispatch DG to manage ancillary services at the distribution level such as voltage support, power quality and reliability. In that case, such ancillary services would be distribution function, but would not necessarily be bundled in distribution rates. Yet other parties have a keen interest in the vertically integrated least cost planning of DG and T&D expansion. These parties see an ongoing ownership or leasing role for UDCs in the planning, siting and/or dispatch of DG. These parties also see a role for UDCs in targeting DSM to relieve T&D congestion. Other parties note, however, that the Commission has already dealt extensively with the role of UDCs in DSM, and do not wish to revisit the issue.
An OIR is also needed now because DG is beginning to affect the shape of the electric services industry. Prices of DG are dropping rapidly, efficiencies are rising and market penetration is accelerating. New distribution cost allocation methodologies are making it possible to price distribution services by marginal cost an by distribution planning area, or even by specific distribution circuit. Just as technological change has driven telecommunications restructuring, so does DG promise to usher in technological change that could transform how electricity is delivered. Many expect DG to increase in the future some believe quite extensively, pushed by the interests of ESPs, distribution companies, makers of DG hardware, and end-use customers.
Some believe that the pending mass implementation of DG raises a concern that electric restructuring is falling behind the technology curve, creating thorny regulatory issues that nee to be addressed by the Commission. These parties believe that an OIR is needed to deal with potential anticompetitive impacts of utility planning, ownership or dispatch of DG. Other parties, however, are concerned that the success of DG is very much in doubt due to barriers to energy such as distribution pricing policies, interconnection difficulties and lack of sharing by the distribution company of possible benefits of DG at the T&D level. These parties believe that an OIR is needed to address barriers that DG face under the existing market structure that may unnecessarily hinder implementation. For example, the role that distribution carriers and distribution rate regulation play in facilitating DG can greatly influence the incentives that ESPs and electricity customers face regarding the implementation of DG. Currently, generators are slated to receive congestion cost signals from the ISO that will encourage them to install DG in a manner that would optimize use of existing local distribution. Such price signals or incentives could accelerate the implementation of DG. A comprehensive approach to interconnection requirements could also help accelerate DG implementation. Without clear direction from the Commission, however, some parties are concerned that the growth of the DG market could be unnecessarily hindered.
Regardless of whether DG's success is assured or in doubt, all parties signing this letter believe that California will benefit from the Commission taking a comprehensive look at the challenges and opportunities associated with the growing use of DG. An OIR would give the Commission the opportunity to chart a course for successful commercialization of DG in the context of retail electric competition. Such a comprehensive approach would be far superior to a piecemeal approach in which the Commission looks at individual DG issues as they arise, without a guiding strategic sense of where DG fits into the Commission's vision of restructured electricity serve markets. To gain this strategic vision, the Commission needs to explore and understand:
We understand that opening a new rulemaking under the electric restructuring entails a commitment of staff resources that may seem difficult at this time. However, if a comprehensive approach to determining the UDC role in DG is not taken, the burden on the Commission's precious staff resources could be greater still. If, as some believe, the mass implementation of DG is imminent, then lack of a cohesive regulatory framework may result in the Commission being blindsided by regulatory issues it did not anticipate. Ongoing proceedings would be disrupted with a correspondingly greater burden on the staff. Further, an ad-hoc approach may deprive the Commission of the regulatory efficiencies that may accrue from scaling the learning curve and dealing with regulatory issues one time only. Without a pro-active and comprehensive approach to determining the UDC role in DG, DG policy would emerge case-by-case, with no policy coordination, and little examination of the implication of emerging policies on the evolution of electric competition. A proactive rulemaking proceeding can forestall these consequences while helping to assure the efficient use of Commission staff.
Some parties are also concerned that without proactive rulemaking, UDCs may proceed to plan and dispatch DG as a UDC function. These parties are concerned that as a result, staff could be called upon to deal with market power issues "after facts have been established on the ground." The result could be an inefficient use of Commission resources. For example, these parties are concerned that failure to proactively deal with market power issues could lead to avoidable proceedings on the divestiture or CTC treatment of DG that is planned, leased or owned by UDCs. Another example of possible failure to anticipate and avoid complication is the BRPU. A proactive rulemaking can avoid such scenarios developing.
A precedent for this OIR exists in the Commission's revenue cycle unbundling and direct access decisions, which were critical to opening new markets for metering, telemetry and ancillary equipment. Decision 97-05-039 did not set a limit for unbundling. Rather, in focusing on the unbundling of revenue cycle services, the Decision generally initiated the unbundling of electric utilities and set the stage for future UDC restructuring. Moreover, the Commission's Gas OIR clearly implies that the Commission is going to pursue electric and gas restructuring beyond the initial phase of revenue cycle unbundling. A similar proceeding is absolutely critical for DG. It presents the perfect opportunity for the Commission to promote implementation of DG by separating competitive service markets from monopoly functions that remain with the UDC. Precedents for a DG OIR also exist in the Commission's decisions on generation divestiture, and the OIR into the role of affiliates.
These decisions sought to foster new industries by separating services that could be provide competitively from bottleneck or common carrier services dedicated to a public interest. The Commission's OIRs into telecommunications open network architecture is also dedicated to the same end.
To ensure that DG is commercialized in harmony with the Commission’s vision of restructured electricity markets, the Commission needs to determine:
The undersigned parties strongly urge the Commission to at a minimum open an OIR into the role of UDCs in DG. We have attached a proposed list of questions that the Commission could ask participants in an OIR. The questions are designed to elicit information about the issues raised in this letter so that the Commission can determine a role for UDCs in facilitating and breaking down barriers to DRs that would comport with the Commission's restructuring goals. We have also attached a list of definitions to assist the Commission.
In developing our submittal, we realize that these issues are interlinked with other issues that are being dealt with elsewhere in electric restructuring, such as the jurisdiction of the ISO over must-run generation, and the UDC role in energy efficiency, procurement, and default sales. It is the intention of some parties that the OIR be narrowly focused on the UDC role in DG in order to avoid overlaps or conflicts with other aspects of the Restructuring OIR. These parties believe that a narrow proceeding can help the Commission to broadly determine the appropriate role of the UDC in electricity markets in the context of the Commission's market power concerns. Other parties prefer that the Commission's investigation comprehensively address the appropriate role of the UDC in electricity markets, and that an investigation into the UDC role in DG would be a key component of that. Still others believe that natural gas ratemaking and industry structure issues also need to be addressed. These parties believe that DG represents a convergence of electricity and natural gas industries, and that the structure of both markets therefore needs to be considered.
To accommodate these views of what the OIR should be, we have proposed two sets of questions, a set of "core" questions that would focus the investigation narrowly, and a set of supplemental questions suggested by some of the parties to this letter, which the Commission should use to conduct a broad investigation into the scope of the UDC. We acknowledge that the ultimate scoping of an OIR is the purview of the PUC, but we would like to see, at a minimum, the set of "core" questions proposed below discussed.
To our knowledge, no regulatory commission in the world has initiated a rulemaking in the role of UDCs in DG at the dawn of retail competition. If the Commission agrees to open an OIR into the UDC role in DG, California can once again lead the way.
JXM/KTT/RC/MS/ERW/KD/jxm
