2. Background

The purpose of this rulemaking is to develop policies and rules to facilitate deployment of distributed generation in California. Customers utilizing onsite generators must comply with interconnection requirements set forth in Rule 21 of utility tariffs. To remove unnecessary barriers to distributed generation deployment, the Commission adopted simplified and standardized interconnection requirements and associated fees governing interconnection of distributed generation facilities. Decision (D.) 00-12-037 adopted a uniform rate for an initial and supplemental review of an interconnection application and authorized the Interconnection Working Group to develop further refinements to the standards. There was general agreement that for distributed generation installations under 10 kilowatts (kW) in size, there would be a limited need for detailed interconnection studies or distribution system upgrades to accommodate very small generating systems.

Pub. Util. Code § 2827 provides another rate option for customers utilizing small renewable generators. Section 2827 was adopted in 1995 and established a net energy metering program whose purpose was to "encourage private investment in renewable energy resources, stimulate in-state economic growth, enhance the continued diversification of California's energy resource mix, and reduce utility interconnection and administrative costs." (Stats. 1995, Ch. 369.) Net energy metering allows the eligible customer-generator to net its electricity usage drawn from the utility grid against its own electricity generation at retail rates. Eligible customer-generators were limited to residential customers installing wind or solar generators under 10 kW whose purpose was to supply their own load. The Assembly Floor Analysis developed at that time indicated that the statute required utilities to purchase surplus energy from eligible customer-generators without the customer having to be certified as a qualifying facility (QF). Section 2827 was amended in 1998, 2000, and 2001.

In 1998, § 2827 was amended to expand the definition of an eligible customer-generator to include small commercial customers installing wind or solar generators, among other changes. The 1998 changes also set forth the following new requirement:

"(d) Each net energy metering contract or tariff shall be identical, with respect to rate structure, all retail rate components, and any monthly charges, to the contract or tariff to which the same customer would be assigned if such customer was not an eligible customer-generator.... Any new or additional demand charge, standby charge, customer charge, minimum monthly charge, interconnection charge, or other charge that would increase an eligible customer-generator's costs beyond those of other customers in the rate class to which the eligible customer-generator would otherwise be assigned are contrary to the intent of this legislation, and shall not form a part of net energy metering contracts or tariffs." (Stats. 1998, Ch. 855.)

On April 11, 2001, Governor Davis approved Assembly Bill (AB) X1 29, (Stats. 2001, Ch. 8) which specified certain changes to California's net energy metering program. Previously, program participation was limited to residential and small commercial customers with wind or solar generating facilities of 10 kW or less. ABX1 29 adds temporary provisions to expand eligible customer classes to include all commercial, industrial and agricultural customers and increases the allowable facility size to 1 megawatt (MW). Section 2827(d) is unchanged from the 1998 amendments.

The Interconnection Working Group has held discussions regarding the impact of ABX1 29 on the utilities' interconnection rules and practices, including recovery of costs associated with interconnecting net energy metered facilities above 10 kW. The utilities assert that projects over 10 kW will likely require additional studies to determine potential impacts of facilities on the distribution system. If significant system impacts are identified, interconnection facilities or distribution system modifications could be required to mitigate these impacts. The utilities assert that net energy metered customers over 10 kW that require additional studies or modifications should bear the associated costs to provide these services and equipment. Other parties assert that § 2827(d) exempts eligible customer-generators from any interconnection costs.

There are five general cost categories associated with generation units and their interconnection:

1. Generating facility costs;

2. Interconnection facility costs;

3. Distribution system improvement costs;

4. Interconnection study costs; and

5. Interconnection application review fees.

All parties agree that generating facilities that interconnect to the electricity grid, whether eligible for net energy metering under § 2827 or not, are responsible for the first cost category. Interconnection facilities include metering and protective devices needed to achieve safe interconnection. Protective devices may need to be placed on either the customer or utility side of the revenue meter. Defining a physical boundary between interconnection facilities and distribution system improvements is not always possible; rather a functional boundary between protection and distribution system upgrades is considered here. Parties generally agree that interconnection facilities on the customer side of the meter must be paid for by the generator. Who pays for interconnection facilities on the utility side of the meter is in dispute for generators eligible for net energy metering. As set forth in Rule 21, customers who install generation are responsible for all interconnection facility costs and the next three cost categories as well. (See D.00-12-037, Attachment A, pp. 9-10, Section 5.2.) This allocation of cost responsibility is not in dispute for distributed generators that do not meet the requirements of § 2827.

Although it is not explicitly stated in Rule 21, parties generally believe that facilities less than 10 kW in size are unlikely to require significant distribution system improvements or detailed interconnection studies. (See the October 30, 2001, Comments of PG&E, p. 13 and Comments of SCE, p. 7.) Thus, most generators under 10 kW, although responsible for all cost categories under Rule 21, would only incur application review fees. Rule 21 implemented a waiver of application review fees for generators eligible for net energy metering, indicating that this was pursuant to § 2827 (see D.00-12-037, Attachment A, p. 3), prior to the expansion of § 2827 to facilities up to 1 MW.²