6. Ownership of Distributed Generation

In the prior section we have established that with sufficient utility control, or physical assurance, over distributed generation installed in lieu of a distribution system upgrade, utility ownership of distributed generation is not required. When distributed generation serves a customer's onsite load, parties do not dispute that utility ownership or control is not necessary. In this section we decide, whether as a matter of policy, we should limit ownership of distributed generation installed either to serve onsite load or to defer distribution upgrades. For ownership purposes, when a distributed generation serves onsite load but also sells excess energy into the market, we will consider such unit as if it were supplying onsite load, unless it has participated in the utility system planning process.

In setting policy regarding the ownership of distributed generation, including the role of the utilities in the distributed generation marketplace, most parties recommend that policies be tailored to whether distributed generation will be used to supply customer needs or to support the distribution system. In testimony, briefs, and workshop report comments, parties focused on how different ownership and control rules could affect the market. From the input received from parties throughout this proceeding, it is apparent that there are a number of real concerns about who should be allowed to own distributed generation units.

6.1 Positions of Parties

One of the main concerns of consumer representatives was that utilities should not be allowed to own grid side distributed generation because they would be able to cross subsidize their distributed generation operations with earnings from rates on services provided through their regulated monopoly. The Office of Ratepayer Advocates (ORA) and TURN are concerned that without careful limitations on utility's activity in the distributed generation marketplace, the utilities may be able to use their position as monopoly providers of distribution services to gain an unfair advantage. Particularly, these consumer advocates are concerned about utilities having incentives to behave anti-competitively if they own and operate distributed generation units.

TURN notes that it believes utility and utility-affiliates should be prohibited from owning distributed generation on either side of the meter because it would present "undue competitive advantage" in the distributed generation market to the utility and utility-affiliate. ORA focused its comments on the utility, and noted that utilities should be barred from owning distributed generation on customer locations, and should utilities be able to own grid-side distributed generation, a utility would have the incentive to act in an anti-competitive manner.

TURN and ORA are worried about a utility's ability to cross-subsidize its distributed generation operations with its protected monopoly distribution services. In the case of grid-side distributed generation, the consumer advocate groups warn against possible attempts by the utilities to roll their distributed generation operation expenses into their distribution rates.

Parties agree that any prohibition on utility ownership and operation of distributed generation should be exempted in cases where an emergency exists and temporary deployment of distributed generation on a limited basis could restore reliability and ensure safe operation of the distribution grid. In addition, ORA and TURN suggest that in locations where distribution upgrades may be necessary, the utility solicit distributed generation installations by third parties. TURN and ORA warn of possible conflict of interest if the utility is put in a position of deciding between a third party bid and a utility or utility affiliate proposal.

Utilities focus on their responsibility to maintain system safety and reliability, although PG&E, SDG&E, and SCE had different positions regarding the question of ownership of distributed generation. All agree that because of their responsibility to maintain and operate the grid, the utility needs some form of control over all types of distributed generation, with the greatest level of control for distributed generation units installed in lieu of a wires upgrade. Utilities note that their main requirement is that they be given sufficient control over the distributed generation resources, regardless of what side of the meter they are installed on to ensure the system's safe and reliable operation.

SDG&E does not share the other utilities views that the utilities should be allowed to own and operate distributed generation. SDG&E supports utility ownership of distributed generation in only limited emergency circumstances. The other utilities, most notably SCE, argue that utility ownership would provide the most efficient means of bringing the benefits of distributed generation to electric customers.

The ISO focused on the control needed to ensure reliability of the transmission system. The ISO states that it needs to have information regarding the amount of distributed generation that is online and supplying power to either side of the meter, to ensure it understands what causes fluctuations in load detected in the ISO control room.

NRDC, the only environmental advocacy group to provide testimony on Phase I issues, notes that utility ownership is not necessary for benefits to occur when distributed generation substitutes for distribution upgrades.

Energy service providers Enron and NewEnergy are concerned that the utility may engage in preferential treatment of utility owned distributed generation units within their service territory, and suggest that the utility not be allowed to own or operate distributed generation units for that reason.

The marketers of distributed generation technologies feel that development of distributed generation will be maximized if regulated utilities are not allowed to compete, especially on the customer side of the meter. Similar to many other parties, the distributed generation marketers expressed the opinion that the utilities should put grid-side distributed generation out for public bid. The distributed generation marketers that commented on Phase I issues noted many of the same concerns as the consumer advocates, specifically those concerns about utility cross-subsidization of distributed generation activities with revenues from it's protected monopoly activities.

6.2 Criteria for Evaluating Options

The parties have provided several options for ownership of distributed generation resources. In evaluating the possible alternative for ownership of distributed generation assets we kept the following criteria in mind: grid-side distributed generation applications should maintain or enhance grid reliability and safety; regulations promulgated by the Commission should be designed to minimize complexity - thereby minimizing the cost of regulatory burden, in addition to providing clear rules for market participants; this decision should promote the most efficient allocation of resources - in other words, the cost of grid-side distributed generation deployment versus distribution system upgrades should be considered; and the selected policy should protect consumers and minimize the costs borne by ratepayers.

6.2.1 Customer Side

Customers with specific power reliability or quality needs may look to onsite generation to meet all, or a portion of their generation needs. Customer side power is not a new idea; customers that operate critical electrical devices (such as hospitals) have had onsite backup generation available for decades. However, new, lower-priced, more efficient distributed generation technologies, in conjunction with the high energy prices faced by some California consumers, has caused some consumers to consider producing their own energy onsite full time, not only as a means of emergency backup power.

None of the utilities that participated in this proceeding plan to market distributed generation to customers and SDG&E explicitly argues against utility ownership of customer side distributed generation. We agree with SDG&E that utilities are responsible for "the safe and reliable delivery of power at reasonable prices." (See SDG&E, Phase 1 Opening Brief, p. 3.) SCE and PG&E however argue that despite the fact that they do not intend to market distributed generation to customers, they should not be precluded from doing so if they later change their mind.

Customer-side distributed generation represents a new market in California's electric industry. The investor-owned utilities have a franchise, which grants them sole rights to provide electric distribution services within specific service territories in return for being subject to state regulation. Sections 330(e), (f), (g), and (r) all demonstrate that regulated utilities should be focusing on their delivery, safety, and reliability responsibilities. Pub. Util. Code § 377, as effective in 1999 and 2000, directed the Commission to regulate utility owned generation to ensure that utility ownership does not confer undue competitive advantage on the utility.⁸ SCE relied on § 377, as previously adopted, to argue that the Commission has the authority to allow utilities to own customer side distributed generation. TURN argues on brief that the reverse is also true, that the Commission has the authority to limit utility ownership of distributed generation under § 377.

Although we might have considered not allowing the regulated utilities or their affiliates to sell, own, or operate, distributed generation units on the customer's side of the meter based on the record developed in this proceeding, circumstances in the electric industry have changed and we choose not to limit ownership at this time. We note that the utilities and their affiliates do not appear to offer any sort of specialized expertise in the manufacture, sale, or operation of distributed generation on the customer side of the meter, so we do not encourage them to enter this new business line within the regulated utility. However, utilities and affiliates of the utilities, as independent agents, remain free to enter the customer side distributed generation market along with independent third parties. From a ratemaking standpoint, utility owned customer side distributed generation should be treated as a generation asset and revenues associated with utility ownership or operation of customer side distributed generation should offset the utility's costs of ownership or operation.

6.2.2 Grid Side

In the system planning section we concluded that sufficient control and physical assurance is possible for distributed generation units such that utility ownership is not necessary for units that are developed in order to defer distribution upgrades. Only SCE argues that utility ownership is the surest way to provide for physical assurance and therefore we should not allow other ownership for distributed generation designed to defer a distribution upgrade. All other parties agree that if a distributed generation unit is sized, located, and installed consistent with the utility's planning process, and provides physical assurance, ownership by the utility is not required in order to provide distribution system benefits. We agree with TURN who states that:

"While it may be necessary for a non-UDC distributed generation unit to provide some form of physical assurance, it is also clear that any so-called `Distribution DG' unit owned by SCE would also need to provide that same guarantee. Therefore, any SCE-owned distributed generation unit providing reliability services would be required to identify load that can be shed if the unit fails to perform at a time of peak demand. Given that this requirement would apply equally to any distributed generation performing this function, it is not clear that utility ownership would offer any greater guarantees than a non-UDC alternative." (TURN, Phase 1 Opening Brief, p. 30.)

For these reasons, we will not limit ownership of distributed generation on the grid-side to utilities. Third-party ownership should be allowed, subject to appropriate physical assurances and participation in the utility planning process. Because it is unlikely that distributed generation will permanently defer distribution system upgrades, we expect that contracts for third party owned distributed generation would be relatively short term in nature and renewed or dissolved based on the results of the utility distribution system planning process.

The question then becomes, should utilities be allowed to own distributed generation installed for grid support purposes at all. SDG&E recommends that grid-side ownership by utilities be limited to "portable generators used to provide operational support on a temporary and short-term basis, generation used for emergency purposes to support the distribution system on a temporary basis, pending more permanent consideration during the annual planning process, and research development and demonstration." (SDG&E, Phase 1 Opening Brief, p. 2.) The record reflects that these are the only capacities in which utilities have owned or utilized distributed generation in the recent past. TURN supports SDG&E's proposal and would limit temporary use to no longer than one year. Other parties similarly support utility ownership of distributed generation for temporary, emergency, or research applications to support the reliability of the distribution system. There is clearly a public interest in allowing utilities the flexibility to respond to distribution system emergencies and temporary situations through ownership of distributed generation for these limited applications. Utility ownership of distributed generation used for these limited purposes is appropriate and we will allow this continued ownership by utilities.

Should utilities be allowed to own distributed generation that is designed to defer distribution upgrades on a more permanent basis? Because we have found that benefits from installation of distributed generation for distribution support purposes are likely to be time and location limited, regardless of ownership, any distributed generation installed for distribution support purposes will be unlikely to serve that function indefinitely. Distributed generation installed on a permanent basis will soon become simply a power generator, rather than a distribution deferral project. As a general rule, we encourage utilities to limit their ownership of distributed generation to portable generators used to provide operational support on a temporary basis, generation used for emergency purposes to support the distribution system on a temporary basis, pending more permanent consideration in the annual planning process, and research, development and demonstration purposes relating to delivery service operation. This preference is not intended to prejudge any potential utility role in the generation market that may be considered as part of the utilities long-term procurement planning process.

We will not specify how long "temporary" lasts as recommended by TURN, but we expect that utility owned distributed generation will be utilized in truly temporary situations with permanent solutions being implemented through the distribution system planning process that occurs within one year after implementation of a temporary distributed generation solution. For utility-owned distributed generation solutions that are temporary in nature, we will not require the same type of metering associated with permanent generating facilities. We adopt the proposal of SDG&E, which is supported by ORA, to treat output of such facilities as Unaccounted for Energy. We agree with SDG&E that such output should be relatively insignificant in nature and ensures that the utility utilizes its own distributed generation only when it provides distribution value, not based on any perceived value of generation output. (See generally, SDG&E, Ex. 54, p. 3.)

If a grid-side distributed generation solution is identified as part of the utility's annual planning process and the utility distributed generation solution is the least cost investment, the utility should be allowed to make the investment. Like third-party distributed generation providers, the utility should be eligible to receive a credit based on the deferral value of the distributed generation unit. The credit would be paid out of the distribution budget. The distributed generation capital cost and operations and maintenance costs should be treated as a generation cost. Any distribution credit will be treated as an expense and would serve to reduce the capital and O&M costs of the generation asset.