7. Need for a Distribution-Only Tariff

In Tennessee Power Company, 90 FERC ¶ 62,238 (March 15, 2000), the Federal Energy Regulatory Commission (FERC) clarified that generators have a right to interconnect to a utility distribution facility under open access tariffs on file with FERC. When a generator connected at distribution wishes to sell its output at wholesale, Order 888 provides guidance. "A public utility's facilities used to deliver electric energy to a wholesale purchase, whether labeled `transmission', `distribution,' or `local distribution' are subject to [FERC's] exclusive jurisdiction ...." Order 888, FERC Stats. & Regs. ¶ 31,036, at pp. 31,969, 31,980 (Appendix G). There is no dispute that when a distributed generator sells its output in the wholesale market or at retail to a customer on a different distribution circuit that the transaction is FERC-jurisdictional. At issue in this proceeding is whether a generator connected at distribution who makes a retail sale to a customer on the same distribution circuit (1) utilizes the transmission system, (2) should be eligible for a distribution-only tariff, and (3) is subject to state or federal jurisdiction.

7.1 Does a Retail Sale within a Distribution Circuit
Utilize the Transmission System?

PG&E, SDG&E, SCE, and Edison Electric Institute (EEI) argue that, from an engineering perspective, distribution-only transactions are infeasible. For example, SDG&E describes the dependence of the distribution system upon services originating from the transmission grid as follows:

"From a technical viewpoint, the distribution system and the customers on the distribution system depend upon the products and services delivered by the transmission system. By separating the two systems, the products and services from the transmission system would cease to flow to distribution customers, and the distribution system would cease to function (de-energize). . . . In certain instances, a distribution customer's energy requirements may be served by DG, however, the ancillary services that an end-use customer pays are supplied by the transmission system because these products cannot be provided by DG or the distribution system apart from transmission." (SDG&E, Ex. 62, p. 16.)

SDG&E further notes that:

"The transmission system and the ISO grid are influenced by energy imbalances associated with distributed generation. If distributed generation is forced out of service, or its output varies in an unscheduled manner, the resulting energy schedule imbalance will be evident on the transmission system and the ISO grid." (SDG&E, Ex. 54, pp. 17-18.)

In testimony, some parties argue that transactions that utilize only distribution facilities can occur.⁹ Parties arguing that distribution-only transactions can occur provided no engineering support for their position. In fact, under cross-examination, witnesses for these parties acknowledged that, in virtually all circumstances, distribution wheeling involves the use of the transmission system and the ISO. For example, Witness Townley for New Energy stated that rather than making no use of the transmission system, distribution wheeling did not involve the "full services" of the California ISO. (Townley, New Energy, RT 732.)

Parties generally agreed that the ISO has the responsibility to balance load and generation within its control area and to provide reserves for load located in the control area. Parties also agreed that utilities do not have the ability or resources to provide load balancing or reserves for load connected with the distribution system and, if a distributed generation either ceases to operate or operates at a lower level, the load is automatically served by the interconnected grid.¹⁰

The ISO explains that since ancillary services and reserves originate from transmission-connected generation sources (i.e., generators and imports) and loads are connected primarily at the distribution level, the ISO relies on the interconnected transmission and distribution grid to deliver imbalance energy from capacity reserves, when required. Hence, the ISO concludes that provision of ancillary services and delivery of imbalance energy to maintain system balance requires the use of both transmission and distribution facilities. Likewise, the ISO argues that "almost every transaction" on a utility distribution system affects ISO operations and thereby imposes costs on the transmission grid. (ISO, Ex. 150, p. 8.)

The ISO acknowledges that, under certain unique circumstances, a transaction can occur that does not affect ISO operations. If a sale occurs "on a Distribution System that is electrically isolated from the ISO Controlled Grid...." it would not rely on the transmission system. (Ibid., p. 9.) If "the energy transmitted from a distribution-connected Generator to a distribution-connected Load does not alter in any way the energy flowing on the ISO Controlled Grid and the Demand of the Load is subject to an automatic curtailment scheme that would disconnect or curtail the Load simultaneously with the disconnection or curtailment of the Generator" then the ISO agrees that use of transmission would be limited. (Ibid.) Under both scenarios, the ISO indicates it would neither arrange for Ancillary Services for the Load nor provide Imbalance Energy. Under the second scenario, the ISO states that its operations would "still be affected inasmuch as the ISO would have to: (1) account for the amount of Demand that is connected to the system but that is controlled by an automated curtailment scheme. . . ; and (2) be able to monitor the status of the automated curtailment scheme. . ." (Ibid.) Therefore, despite its proclamation that ISO operations would not be affected, the ISO nevertheless asserts that it "should be involved" in these situations in order to track the availability/operable status of any load curtailment scheme. (ISO, Phase 1 Opening Brief. p. 21.)

7.2 Should We Establish a Distribution-Only Tariff for Distributed Generators that Sell within a Single Distribution Circuit?

The record makes clear that in all but limited circumstances, a retail sale within a distribution circuit will utilize transmission facilities. If a sale of excess energy occurs on a distribution system that is electrically isolated from the ISO controlled grid it clearly does not rely on the transmission system and imposes no cost on the transmission system. ORA identifies Mountain Utilities and Santa Catalina Island as two examples of islanded distribution systems. (See ORA Phase 1 Opening Brief, p. 34.) However, rates for SCE customers in Santa Catalina include a transmission component.¹¹

Mountain Utilities is not connected to the transmission system and does not have a transmission component to its rates, as it has no transmission costs.¹² Thus, Mountain Utilities already has a distribution only tariff. If an electrically isolated distribution system is located within one state, no interstate commerce occurs, and no FERC jurisdiction attaches. (See generally, Federal Power Act, §201(b)(1), 16 USC §824(b)(1).) When a distribution system is electrically isolated from the transmission grid, it makes sense to consider development of a distribution only tariff, and such tariff would be subject to exclusive Commission jurisdiction.

The ISO cautions that the proliferation of islanded distribution systems would conflict with current regulatory policies to consolidate control areas by exacerbating "seams" at the boundaries of interconnected systems, ultimately leading to increased transaction costs. As a policy matter, we agree that electrically isolated distribution systems should not be encouraged. Stand-alone distribution systems could lead to reduced reliability, establishment of new utilities and the attendant regulatory costs. However, from a cost causation standpoint, if a distribution system is not interconnected to the grid and therefore imposes no costs on the transmission system, customers on that system should not be required to pay transmission charges.

To the extent that the distribution system is not electrically isolated from the grid, as a general rule, the ISO must provide ancillary services and imbalance energy for retail transactions, even if such transactions occur within a single distribution circuit. The ISO's services rely on the transmission system, and therefore a retail transaction within a distribution circuit utilizes the transmission system. Transmission services are required for that transaction to be completed; therefore, compensation for those services should be provided and a distribution-only tariff is not appropriate. Establishment of a distribution-only tariff would "unjustly permit a customer to avoid responsibility for its share of the costs associated with the construction, maintenance, and operation of the [Cal] ISO Control Grid without which the transactions in question would not be possible." PG&E, 88 FERC ¶ 63,007 at page 65,073 (1999). As PG&E points out, "(t)hese transmission and grid management costs will not go away; instead, they will be unfairly shifted to other utility ratepayers." (PG&E Phase 1 Opening Brief, p. 13.)

TURN also voices strong concern over cost shifting impacts associated with adoption of a distribution-only tariff. TURN observes that "[a]t its core, this proposal seeks to allow some customers to pay marginal transmission costs while requiring all others to share the remaining embedded costs of ISO operations." (TURN, Phase 1 Opening Brief, p. 57.) According to TURN, implementation of distribution-only tariffs would "encourage large customers to avail themselves of opportunities to decrease their purchases of transmission services while likely doing little to reduce the overall costs incurred by the ISO. In fact, the practice of distribution wheeling could potentially increase ISO costs by forcing more costly monitoring of smaller DG units and more precise balancing of loads in particular control areas." (Ibid.) TURN then indicates that the amount of ISO fixed costs to be collected from customers continuing to receive bundled service "is almost certain to increase despite the fact that these customers would not be altering their behavior at all." (Ibid.) With respect to adverse impacts on particular customer classes, TURN adds that "[s]ince it is clear that residential customers are extremely unlikely to take advantage of unbundled distribution wheeling service, the consequences for this class are all but certain." (TURN, Ex. 10, p. 15.) TURN strongly recommends the Commission reject proposals for distribution-only tariffs.

In general, we concur with TURN's analysis. However, the ISO has identified at least one situation in which it would not provide ancillary services or deliver imbalance energy. In that situation, the full services of the ISO- controlled grid are not utilized and it would be appropriate to remove certain ISO related costs (i.e., costs associated with ancillary services and imbalance energy) from transmission charges when transactions meet the criteria laid out by the ISO. We agree with the ISO that the transmission system is still implicated even under these transactions because of monitoring requirements. Because rate design should be consistent with cost causation principles, we concur that if the full services of the ISO controlled grid are not utilized, a customer should not pay for those services. We do not agree with parties who argue that we should adopt a distribution-only tariff because any remaining costs are de minimus.

FERC, not this Commission, sets transmission rates for customers purchasing energy from third parties. In Order 888, FERC addressed "what facilities are jurisdictional to [FERC] in a situation involving the unbundled delivery in interstate commerce by a public utility of electric energy from a third-party supplier to an end user." Order 888 at p. 31,780. FERC concluded, and the Court of Appeals upheld, that it has jurisdiction over the transmission component of an unbundled interstate retail wheeling transaction, including the rates, terms, and conditions for the use of transmission facilities. See Transmission Access Policy Study Group v. FERC, 2000 U.S. App. Lexis 15362 (D.C. Cir. June 30, 2000). The decision of whether and how to establish a tariff for the limited circumstance described by the ISO is within FERC's jurisdiction.

The evidence demonstrates that, as long as the distribution system is not electrically isolated from the transmission grid, a distribution-only transaction cannot occur and therefore a distribution-only tariff is inappropriate. Therefore, we decline to adopt a distribution-only tariff at this time. However in some very limited circumstances, as defined by the ISO, transactions may not rely on the full menu of transmission services and in those circumstances, a tariff removing ancillary services and imbalance energy costs would be appropriate. Not only would such a tariff be consistent with cost causation principles, but it would also encourage generators and users to develop innovative arrangements designed to maximize efficient and reliable use of the distribution infrastructure. We encourage the utilities, the ISO, and FERC to explore whether existing tariffs properly reflect cost causation for the narrow set of transactions identified by the ISO as not relying on the full menu of transmission services. If distribution systems are electrically isolated from the transmission system, cost causation principles dictate that distribution-only tariffs should be developed under the jurisdiction of this Commission.

7.3 Jurisdiction over Distributed Generation Interconnections when Sales of Excess Energy Occur

When a distributed generator interconnects to the distribution system for backup or standby service in order to serve its own load, the Commission has jurisdiction over the interconnection. In D.00-11-001 and D.00-12-037, we adopted standardized requirements for interconnections where the generator does not sell its excess energy or capacity into the grid. As FERC held in Order 888, "states have authority over the service of delivering electric energy to end-users."(at p. 31,782). Jurisdiction over qualifying facility (QF) interconnection arrangements made for the purpose of selling to the utility was explicitly given to the states. Western Massachusetts Electric Company, 61 FERC ¶ 61,182 at p. 61,662 (1992), aff'd, Western Massachusetts Electric v. FERC, 165 F.3d 922 (D.C. Cir. 1999). Thus, this Commission has had jurisdiction over rates, terms, and conditions of the majority of distributed generation installations to date.

In R.99-10-025, we sought comments on whether the FERC or this Commission will have jurisdiction over the rates, terms, and conditions of interconnection when the interconnecting entity sells energy. We postulated that jurisdiction would depend on whether the sale was at retail or wholesale. PG&E points out that "if generators wish to deliver to the grid, they are seldom going to be in a position to make an exclusive marketing determination at the time of interconnection whether they will be selling at wholesale or retail. They can, in fact, switch back and forth on an hourly basis." (PG&E Phase 1 Opening Brief, p. 21, Ex. 53, p. 1-12.) PG&E argues that when facilities can be used for both state jurisdictional and FERC jurisdictional services, FERC has jurisdiction. FERC and the courts have taken the position that when facilities are of mixed use, in other words, that they might be used for both transmission and distribution, FERC has exclusive jurisdiction to regulate those facilities. Western, 61 FERC at 61,662 n. 20 and Order 888 at p. 31,369 n. 13.

Our objective in exploring this question is to ensure that the significant work parties have undertaken, and continue to undertake, to develop and refine statewide interconnection protocols that address the technical aspects of interconnection is not lost in a debate over jurisdictional responsibilities at the state or federal level. As PG&E points out:

"Most interconnection details by their nature are relatively stable; addressing such issues as what safety equipment is needed, what process will the utility go through in evaluating new interconnection proposals, and who will bear cost responsibility for upgrades. It makes no sense for such rules to change from hour to hour depending on the generator's choice of customer. Accordingly, it is important that either the question of interconnection jurisdiction be clearly resolved in a way that provides stable rules for given situations from one authority, ..., or makes FERC and CPUC rules on interconnection requirements the same." (PG&E Phase 1 Opening Brief, p. 22.)

In accord with our position before the FERC in Docket No. RM02-1-000, it is the Commission's position that California's interconnection rules and guidelines should apply to distributed generation that falls within the definition of a QF.¹³ In cases where the distributed generation unit does not meet the definition of a QF, California's interconnection procedures should apply so long as the distributed generator's sale of or unintentional export of energy into the system is incidental.¹⁴ When power sources operate in parallel with the grid there is no technological difference between the interconnection of a QF or distributed generator. Nor is there a need for different technical interconnection requirements for incidental energy sales versus incidental energy exports because the interconnection does not know whether or not a sale has occurred.

We consider this an analogous situation to the FERC's handling of transmission siting. The FERC has stated numerous times that transmission siting clearly falls within the state's purview, in part because it is a matter of inherent local concern.¹⁵ The FERC has limited its review to the ratemaking that flows from state siting decisions. As with transmission siting, interconnection of generators on the distribution system presents issues of local safety, reliability, and environmental concern where the state has primary jurisdiction. Consequently, because this is a local resource issue and not a ratemaking issue, technical interconnection rules and procedures for distributed generation are state jurisdictional, regardless of whether incidental sales of energy occur.