MP1/KLM/hl2 8/6/2004

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking Regarding Policies, Procedures and Incentives for Distributed Generation and Distributed Energy Resources.

Rulemaking 04-03-017 (Filed March 16, 2004)

ASSIGNED COMMISSIONER AND ADMINISTRATIVE

LAW JUDGE'S RULING AND SCOPING MEMO

This Scoping Memo sets forth the scope, process, and schedule for this proceeding. This Scoping Memo and Ruling follows a prehearing conference before Administrative Law Judge (ALJ) Malcolm held on June 28, 2004, at which the parties discussed the schedule in this proceeding and the potential need for hearings.

I. Proceeding Issues

The assigned ALJ described several general issue areas for the Commission's consideration in this proceeding:

A. Self-Generation Incentive Program (SGIP)

The SGIP, originally authorized by Assembly Bill (AB) 970, provides incentives for the installation of certain types of distributed generation (DG) that meets all or a portion of a customer's energy needs. AB 1685 extends the incentive program through the end of 2007 and adopts air emissions and efficiency standards for projects to be eligible for rebates. The eligibility standards take effect January 1, 2005. Since the prehearing conference on June 28, the assigned ALJ issued a ruling seeking comments on an attached report drafted by the Commission's Energy Division.¹ The report recommends several changes to the SGIP, consistent with AB 1685 and in response to a previous evaluation of the program in Rulemaking (R.) 98-07-037. The report also addresses the issues raised in a motion filed in this proceeding on March 26, 2004 by the California Solar Energy Industries Association. The Commission intends to issue an order resolving the issues raised by the Energy Division's report before the end of 2004.

B. Rule 21 Interconnection Standards.

As described in the order opening this investigation, the California Energy Commission (CEC) and the Rule 21 Working Group plan to provide policy guidance in the area of interconnection issues. On April 21, 2004, the CEC opened its own investigation which will inform our collaborative effort to explore revisions to the current interconnection rules and develop policy guidance to address outstanding technical issues. Consistent with CEC staff recommendations, this rulemaking will consider interconnection costs, meter ownership, the dispute resolution process, net metering for hybrid system, and recommendations for addressing interconnection rules for network systems. The CEC staff advises that the CEC expects to issue a scoping memo in the CEC's investigation (04-DISTGEN-1 and 03-IEP-1) by the second week of August 2004.

To ensure that parties in this proceeding are fully informed of issues relevant to the CEC's proceeding, the CEC will use the same service list for public communication. Similarly, parties should serve the parties in this proceeding and the CEC's related docket.

C. Cost-Benefit Methodologies.

A critical issue in this proceeding, and one required for the Commission's consideration by Public Utilities Code Section 353.9, is that of developing a cost-benefit methodology. The purposes of this analytical tool are to compare resource options as part of utility resource planning, to determine how to choose among candidate DG technologies and projects for incentives and other funding, to assess project alternatives as part of utility power procurement, and to assist in measuring and evaluating the effectiveness of DG incentive programs. There may be other uses for a rigorous cost-benefit test in the future.

1. Relationship to R.04-04-025

The Commission is considering the matter of avoided costs, typically used to calculate the benefits in cost-benefit tests, in a more general sense in a separate docket, R.04-04-025. In that rulemaking, the Commission intends to adopt avoided costs that are consistent, to the extent appropriate, across technologies, programs, and policies. For example, they may be applied to energy efficiency programs, demand response programs, utility resource planning and procurement, energy supply contracts with qualifying facilities, and DG.
R.04-03-017 stated the Commission would not await the outcome of a final order in R.04-04-025 before examining the more specific cost-benefit issues in this proceeding. Indeed, that more general effort underway in R.04-04-025 may require a more precise identification of avoided cost specifications by issue area. For that reason, work in this proceeding may resolve cost-benefit issues that relate specifically to DG, and utilize the more generic avoided costs adopted in R.04-04-025.²

The likely manner in which work can proceed in both proceedings in parallel is as follows. In R.04-04-025 the Commission is considering how to determine input values for various avoided cost components. In this proceeding, we will consider the methodology for evaluating DG cost effectiveness, as well as the factors that will be used in such a methodology. R.04-04-025 should help provide us with the values to plug into equations developed in this proceeding. There may be some overlap and interplay between these activities, and we will coordinate closely to minimize duplication of effort or relitigation of issues in each proceeding.

2. Proposed DG Costs and Benefits.

Staff from the Energy Division and the CEC conducted a workshop on May 5, 2004 which focused on identifying costs, benefits, and potential methodologies to quantify them. The workshop looked at several CEC-funded research projects aimed at developing ways to quantify these values from the perspective of various interests. Parties filed comments in response to the workshop and to the DG Order Instituting Rulemaking (OIR) recommending a number of DG cost and benefit factors for possible inclusion in a cost-benefit methodology. Although the parties do not agree on the appropriate cost and benefits elements for DG, the following lists those the parties have identified.

Costs:

1. Costs to mitigate distribution system impacts (e.g., interconnection study costs, upgrade costs)

2. Utility revenue loss due to displaced usage of transmission and distribution facilities.

3. Utility/DWR revenue loss due to avoided commodity purchase - energy, capacity, bonds

4. Costs for enhanced reliability

5. Improved stability and power quality

6. Ancillary services/VAR support

7. Utility loss of revenue due to displaced thermal load, cost of ratepayer incentives for CHP generators

8. Increased responsiveness to load growth

9. Environmental controls

a. NOx emissions

b. CO2 emissions

c. Water pollution

d. Soil pollution

e. Power plant siting

f. Environmental equity

g. Noise abatement

10. Lower market prices for power, payments for installed capacity.

11. Increased employment and taxes

12. Costs for increased national security

13. Conservation of natural gas

14. Building code or local permitting requirements

15. Loss of utility plant investment revenue

16. Administrative, maintenance, installation costs

17. Emissions offsets

18. Special metering

19. Cost of tax and other incentives

Benefits:

1. Reduction or deferral in distribution and transmission capital investment

2. Reduced T&D line losses

3. Avoided commodity costs - energy & capacity

4. Enhanced reliability

5. Improved stability and power quality

6. Provision of Ancillary Services/VAR support

7. Environmental Impacts

a. Avoided NOx emissions

b. Avoided CO2 emissions

c. Avoided water pollution

d. Avoided soil pollution

e. Reduced power plant siting impacts compared to large central station power plants

f. Promotion of environmental equity compared to large central station power plants

8. Thermal load provided in Combined Heat & Power applications

9. Increased responsiveness to load growth - due to its modularity and scale, DG is well suited to increase capacity in a manner that closely matches load growth.

10. Lower market prices for power - "[DG] may convey positive externalities or benefits to all end users that go beyond what the customer- and distributed-generators realize in reduced bills or power sales. The Commission should evaluate the monetary value of these benefits and potentially devise a program of payments for installed capacity."³

11. Increased employment in California and tax revenue

12. National security benefits/reduced security risk to grid

13. Conservation of natural gas

14. Avoided utility cost of capital/finance costs

15. Avoided utility administrative, maintenance, insurance, and installation costs

16. Tax and other incentives

Some costs and benefits will be easier to quantify than others. Parties comment that DG costs and benefits vary based on technology, fuel input, application, size, location, and frequency and duration of the facility's use. Additionally, the value of DG depends on the perspective of the viewer, i.e., a customer who is deciding whether to install DG, a utility deciding from among energy resource options, a utility ratepayer, or the DG merchant. There is also a societal perspective, one the Commission has historically considered in weighing the benefits of energy efficiency programs. In Decision (D.) 03-02-068, the Commission found that DG can serve different purposes, such as onsite generation or as a distribution system alternative. The value of a DG project may depend on how the power is used, technology, fuel and application. For this reason, it may be appropriate to develop different methodologies that reflect various perspectives and types of DG.

Many parties described methodological perspectives that are used in the California Standard Practice Manual: Economic Analysis of Demand-Side Programs and Projects. As some parties suggest, this manual is a useful starting point for developing cost-benefit methodologies for DG. Similarly, the framework described for avoided cost calculations in the E3 Report could be applied to cost-benefit methodologies for DG.

Parties should use these reference documents when preparing specific cost-benefit methodology proposals for testimony.⁴ In developing testimony, the parties should identify the relevant perspectives for purposes of cost-benefit testing and identify the appropriate costs and benefits applicable to each perspective. Additionally, parties should propose methods to quantify the applicable cost and benefit factors, identify specific sources of data that can be used as inputs, and propose equations/calculations defining the test. Parties are encouraged to present illustrative examples showing the steps involved in their proposed cost-benefit test methodology(ies).

In D.03-02-068, the Commission adopted a set of criteria DG must meet to provide distribution system benefits and allow the utility to defer upgrades or additions to distribution facilities. The DG unit must be installed and operational in the right place, at the right time, and must provide the capacity size required to meet the utility's needs. Finally, the unit must provide physical assurance to ensure a real load reduction. This proceeding will not consider modifications to these criteria at this time, but parties should include DG used for this purpose when developing a cost methodology(ies).

3. Data Needed to Quantify Costs and Benefits.

In order to assess and monitor the viability or cost-effectiveness of a project or program element (ie, financial or rate incentives), parties will need utility and DG project data to calculate costs and benefits. The utilities control data and analysis related to system planning, line losses, interconnection, and net metering. Public access to this information may compromise confidentiality. On the other hand, without the information, the development of quantitative methodologies is impossible.

This ruling directs San Diego Gas and Electric, Southern California Edison, and Pacific Gas and Electric Company to prepare specific proposals to make all relevant information and data available to those parties in order to assess the costs and benefits of a particular DG project or program element. If the utilities consider certain data or information confidential, they should propose ways to mitigate these concerns. The utilities should address these issues in testimony.

Although some parties indicate that provision of DG operational data should not be a condition of participating in a cost-benefit test or DG program, parties should address how to accommodate a probable need for some level of data disclosure, which may be necessary to evaluate program or project success.

4. Program Monitoring, Measurement and Evaluation.

As some parties observe, the cost-benefit methodologies the Commission initially adopts may require fine-tuning as the market evolves and parties gain a better understanding of project costs and benefits. Similarly, some parties suggest the Commission order routine evaluations of the effectiveness of the DG program and the cost-benefit methods adopted, which could serve as a foundation to consider ways to modify program goals or program elements. This may be a logical component of the evolving DG program and one with which the Commission has considerable experience in its implementation of energy efficiency. The Commission will need to determine in this proceeding how to assess DG benefits after the fact and whether a project complements utility procurement and provides a basis for participation in DG incentives and other funding. Parties' testimony should include proposals for achieving these objectives.

D. DG Reporting Requirements.

In comments to the OIR and at the prehearing conference, parties questioned whether this proceeding might streamline or consolidate the multiple utility reports filed with the Commission each year, such as those providing data on interconnections, net metering installations, cost responsibility surcharge exemptions, and the SGIP. To minimize the number of reports and assure their usefulness, Commission staff will conduct a short workshop on this issue in September.

E. Other Resource-Related Issues.

The OIR issued in this proceeding identifies several issues related to resource planning, such as how DG might be incorporated into utility procurement portfolios, net metering, resource reliability, and distribution system planning. The Commission will consider how to address these broader issues after the hearings on cost-benefit methods and may modify this scoping memo accordingly.

¹ Comments were filed by 17 parties on July 23, 2004.

² A July 19, 2003 ALJ Ruling in R.04-04-025 seeks comment from parties on any changes needed to apply the E3 avoided cost methodology to DG, among other resource categories. Comments and reply comments are due July 30th and August 13th, respectively.

³ Comments by City and County of San Francisco, May 17, 2004, p.9.

⁴ Attachment B provides additional resources in the form of a list of policy, research, and decision documents that may assist parties in developing a cost-benefit test.