2. Background

This rulemaking was opened to develop specific policies and rules to facilitate the deployment of distributed generation in California. The Commission recognized that distributed generation will provide end-users with additional choices to supply their electricity needs. We recognized that distributed generation is likely to increase competition in the electric generation market, and may assist in improving and maintaining distribution system reliability.

The Commission identified several issues to be covered in two phases. The first phase addressed interconnection standards, the ownership and control of distributed generation, distribution wheeling, distribution system planning, valuation and net metering, educational efforts and outreach to governmental agencies. The second phase addressed rate design, stranded costs, and streamlining of the California Environmental Quality Act.

The objective of Phase 2 of the rulemaking is to determine general policy guidelines for rate design associated with distributed generation. Specific rate design proposals for each of the utility distribution companies were not presented but are to be the subject of future utility-specific rate design applications, such as each utility's General Rate Case or Performance Based Ratemaking proceeding. This decision provides general policy guidelines and guidance associated with standby rate design only. While we initially intended to deal with all rate design issues simultaneously in the final Phase 2 decision, recent events have led us to reevaluate that approach.

Dramatic developments in California's generation market have occurred since this rulemaking was initiated. The state is in the midst of a generation shortage, and new generation, large and small, provides substantial value in addressing that shortage. Because the scope of this proceeding was determined before the electricity crisis began, this case has not focused on the role distributed generation may have in mitigating the state's electricity crisis, or on how new distributed generation units might impact the generation marketplace.

Indeed, in other dockets, the Commission is looking at the appropriate level of incentives for renewable or super clean distributed resources. On September 30, 2000, Governor Davis approved Assembly Bill (AB) 970 (Chapter 329, Statutes of 2000) to amend Section 399.15 of the Public Utilities Code. Section 399.15 directs the Commission to adopt "differential incentives for renewable or super clean distributed generation resources." On October 17, 2000, Commissioners Lynch and Neeper issued an Assigned Commissioners' Ruling on Implementation of Public Utilities Code Section 399.15(b) in R.98-07-037. A draft decision in that proceeding was issued on March 2, 2001.

In recognition of the current electricity crisis, and the potential for distributed generation to assist in mitigating the price and reliability problems associated with that crisis, we today adopt an interim decision addressing one of the issues that promises to provide immediate benefit to California customers. The significant potential for outages has raised to the forefront the need to review and revise the policies and standby rate design associated with distributed generation to provide additional options for consumers.

As we continue to consider issues separately, we need to remain cognizant of the cumulative nature of our decisions. We recognize that, in some cases, the Commission's ultimate decision on some of the general policy issues in Phase 1 or 2 may necessitate adjustment(s) to the rate design policies we adopt in this decision, therefore, we are adopting this decision on an interim basis.