IX. Preliminary Scoping Memo: Scope of the Proceeding

This new Rulemaking divides the present task into five issue areas:

Cost-Benefit Analyses for Customer and IOU Installations: As noted above, this is the highest-priority task for this proceeding, both in meeting our legislative obligations and in developing the conceptual underpinnings for our new approach to Distributed Energy Resources. Issues of particular interest include the definition of Distributed Generation, positive and negative impacts of DG exporting power to the grid, whether deliberately or inadvertently, environmental and economic impacts of net metering, and the degree to which DG additions that affect utility reserve requirements are reflected in project economics.

The value of a potential DG installation depends on the viewer's perspective: for instance that of the IOU, the developer, the ratepayer, or the owner/installer. At times these multiple interests will intersect, and in these cases the state's goals for DG expansion should be most vigorously pursued¹⁰. At other times the IOU's interest in customer stability may conflict with the desire of a potential DG installer for premium power. In all instances we must guard against unjustified cost-shifting that may result from broad DG deployment, within and across customer classes. We will be in a better position to evaluate these and other issues with the analytic tools and planning guidelines to be developed in this proceeding, beginning with the cost-benefit analysis called for by the Legislature.

To that end we must decide whether to develop a cost-benefit analysis methodology that is rigorously quantitative, deriving explicit dollar values for every aspect of a DG project, or rely instead on a qualitative method, judging project characteristics against a list of attributes ranked by desirability. We note that the responsibility on the part of this Commission to develop a cost-benefit test originates in Pub.Util.Code Section 353.9, enacted in SB 28x of 2001, as follows:

"The commission shall create a firewall that segregates distribution cost recovery so that any net costs, taking into account the actual costs and benefits of distributed energy resources, proportional to each customer class, as determined by the commission, resulting from the tariff modifications granted to members of each customer class may be recovered only from that class."¹¹

Similarly, Pub. Utilities Code Section 2827(n) Public Utilities Code § 2827(n) directs the Commission to "assess the environmental costs and benefits of net metering to customer-generators, ratepayers, and utilities, including any beneficial and adverse effects on public benefit programs and special purpose surcharges."

A qualitative cost-benefit test would be appropriate were the question merely whether to approve or deny a DG proposal. A general determination, for example, that a DG facility postpones the need for a costly distribution system upgrade, and will result in a negligible increase in emissions, would allow the Commission to approve a DG project as in the ratepayer's interest and satisfactory from the cost-benefit standpoint. This, however, is not the test proposed by the Legislature; actual costs and benefits are to be determined, netted and tracked to guard against cost-shifting, and to accomplish this the Commission must develop dollar values for each characteristic of a DG project. We ask for party input on the characteristics that must be monetized in this way, such as the deferral of distribution upgrades, the provision of voltage support or peak-shaving energy, changes to the emissions profile of the state's generating stock, and any other relevant issues.

An important contribution to this effort may come from the avoided cost study mandated by AB 970, presently under consideration in the Commission's energy efficiency docket (R.01-08-028). This study, the product of multiple Commission workshops and ongoing stakeholder processes, will establish avoided cost estimates attributable to efficiency investments in the areas of: transmission & distribution investments forestalled; reduction in the cost of on-peak energy; avoidance of environmental damage associated with electricity generation; and grid reliability improvements. A number of these characteristics may also be applicable to DG on the benefit side of the cost-benefit ledger.

When the report and its underlying methodologies are complete they will be presented for consideration by the Commission, and, assuming they are formally adopted and available in a timely manner, will be incorporated into this new Rulemaking as a reference document. Parties will have an opportunity to consider the applicability of these avoided cost methodologies, and any necessary changes to them, to our present task of cost-benefit analysis for DG projects. Alternatively, should this methodology prove inappropriate to DG, we will develop the necessary methodologies independently of those established in our efficiency proceeding, utilizing all the resources available to the Commission, including the ongoing work in the PIER program.

We also note that the Legislature expresses its concern over cost-shifting in terms of customer classes - DG installations shall not burden customers in another class. We are equally concerned, however, that DG customers not unjustifiably shift costs to those within their class that remain under IOU service. Parties are asked to comment on whether the Commission should establish a new customer class entirely comprised of DG customers, and to contain all DG-related costs within that class, or whether the Commission should consider some other method of ensuring that costs are appropriately shared as DG usage expands.

Finally, to enable fully informed resource planning and procurement decisions based on complete cost and benefit information, we hope to develop a comprehensive record comparing the emissions profiles of DG technologies to those of modern central-station facilities.

We anticipate that the cost-benefit analysis issue will occupy the majority of this new Rulemaking's effort in its early phases, and invite comments on the full range of implicated issues, not simply those raised here.

DG as a Utility Procurement Resource: In Decision 02-12-071 this Commission directed the utilities to consider DG as a resource in their long-term planning and procurement processes. This new DG rulemaking can assist in this area by expanding our understanding, via the cost-benefit test, of the positive and negative effects of DG installation on the IOU side of the meter, of DG's potential contribution to utility reserve requirements, and of the role of DG in ensuring overall resource adequacy. To the extent that technological advancement has improved the ability of DG to forestall distribution upgrades, we will reconsider the question here, incorporating the ongoing research on DG grid effects being conducted by the CEC's PIER program. It is in this area of the proceeding that we will consider any necessary changes to the state's Net Metering program for DG.

In this subject area we will also examine the manner in which direction provided in D.03-02-068, the Energy Action Plan, and legislation can best be employed in the planning and procurement process of the IOUs. As noted above, we call upon the IOUs to provide an update on the implementation of D.03-02-068 within two weeks of the issuance of this order, and reiterate the finding in D.04-01-050 that more detail is required in the IOU long-term plans regarding the role of DG.

Some contend that a more extensive reliance on DG would have mitigated the impacts of the August 14^th East Coast blackout. We invite parties to comment on the validity of these claims, the extent to which this potential role for DG should influence IOU resource planning and procurement, and the manner in which this consideration should be reflected in the cost-benefit test we will develop in this Rulemaking. Information developed in this area of the Rulemaking will be made available for use by the Commission and parties in R.01-10-024, the General Rate Cases, and with R.03-03-015, which is currently investigating whether added rates of return should be afforded to certain types of DG, for use in long-term planning, procurement and evaluation.

Future Incentives for Customer-Side DG: The third priority issue is the question of public subsidies for DG development. California presently provides incentives to encourage the installation of customer-side DG through programs administered by this Commission and by the CEC. This Commission's program, the Self-Generation Incentive Program (SGIP), is open to larger-scale DG systems, and has the goal of reducing peak system demand. The Emerging Technologies Account in the CEC's Renewable Energy Program supports smaller DG systems, with the goal of market transformation to promote these technologies' eventual cost-competitiveness. The Commission is presently evaluating the SGIP, including how to implement AB 1685, in the efficiency, low-income assistance, and renewable R&D docket (R.98-07-037). In establishing this rulemaking we will consolidate SGIP issues for consideration here, closing docket R.98-07-037, and coordinate their resolution with the CEC's ongoing program evaluation and our own Procurement rulemaking.

We are interested in exploring improvements to the SGIP. An ALJ Ruling issued December 10, 2003 requested comments on program evaluation reports prepared and submitted by Itron Consulting Group.¹² The ruling also solicited proposals regarding AB 1685 implementation.¹³ Recommendations included a flat "dollar per watt" incentive structure without percentage caps, sequenced incentive reductions per unit of installed capacity as funds are depleted, and an exit strategy linking incentive levels to what we anticipate would be declining market prices as DG technologies mature.

We must also ensure that our eligibility requirements reflect the emissions standards under development at the ARB, to be implemented in 2007. Consideration will be paid to the encouraging or discouraging of the use of natural gas as a fuel for DG facilities. It may also be beneficial to examine the interplay of the two stated goals of the Commission and CEC programs, the extent to which they reinforce each other, and whether any redundancies or inconsistencies can be removed to make the subsidy efforts more targeted and efficient. Parties are asked to comment on the full range of these issues.

Outstanding Interconnection and Related Technical Issues: Many issues have been successfully addressed in the Commission-authorized tariff Rule 21 Interconnection Working Group process. Our colleagues at the CEC, as detailed in Appendix A, inform us that a number of issues regarding standby charges, interconnection processes and net metering remain unaddressed. Some of these issues necessarily appear in the other categories scoped here, but we raise them in the Rule 21 context to determine which, if any, need to be specifically addressed as Rule 21 issues. Answers to these questions will be important to other aspects of this proceeding, in particular the cost-benefit analysis, and will influence the guidance this rulemaking provides to other proceedings, including Procurement. As noted above, we hope to hear from parties regarding the recent FERC NOPR on small generation interconnection and the extent to which it is compatible with California's CPUC authorized tariff Rule 21 procedures. We are particularly interested in hearing from parties regarding the present system of dispute resolution and suggestions for any necessary improvements.

DG Issues for the Future: DG technologies and the industries that support them are evolving and offer a range of possibilities for the energy future, as well as a potential source of economic development for the state. The CEC's programmatic emphasis on market transformation, and the DG work undertaken as part of its PIER program - upwards of $80 million in ratepayer funds to date - should be more directly incorporated into this Commission's resource planning and procurement process to take advantage of this potential. In this area of the Rulemaking the Commission will expand its understanding of the potential for advanced DG systems in areas such as fuel cells, hydrogen production, microgrids, storage, and modular systems that provide energy for stationary and mobile uses.

Our ongoing collaboration with the CEC will help us to understand and incorporate these technologies when and if they become viable, and we invite the participation of groups such as the California Fuel Cell Collaborative to contribute to our understanding of these emerging technologies. We hope to elicit the participation of local governments in resource-constrained areas where DG technologies, both established and experimental, may help to meet load. Evaluation of the potential for DG aggregation will also be undertaken in this subject area. Many advanced DG technologies are speculative at present, but we have reason to believe that the participation of the investor-owned utilities will be crucial in any eventual success that may result. The transition to a sustainable energy future may require an impetus from the regulatory process, before market forces can effectively engage disruptive technologies and deliver on their substantial promise.