IV. Developing Cost-Benefit Models According to Perspective
The costs and benefits of any energy project may vary significantly depending on whose perspective a model reflects. For example, a model that reflects ratepayer concerns will focus primarily on the cost of a project relative to other energy resource options available for purchase by the utility. A model that reflects societal concerns will likely to incorporate environmental impacts and equity concerns. A model that reflects the concerns of the DG owner will emphasize project profitability. The Standard Practices Manual presents three perspectives comparable to these and identifies them as follows:
(1) The participant test, which measures the costs and benefits to the customer participating in a program, such as a DG developer receiving a subsidy;
(2) The non-participant test or "ratepayer impact measure," which measures how customer bills change as a result of the program; and
(3) Societal or "total resource cost" test, which measures the net costs of the program based on the impacts to participants and non-participants.
Applying all three models would measure how costs and benefits are distributed among various groups or individuals.
The parties generally do not dispute the purpose of each of these models. They do, however, dispute their relative importance, how they should be applied and what the tests should measure. Each is discussed below.
A. The Non-Participant Test or Ratepayer Impact Measure (RIM)
The non-participant test measures the relative costs and benefits of a DG project or program from the standpoint of utility ratepayers. The main difference between this cost-benefit model and the "societal" model discussed below is that the non-participant test measures transfers of wealth between ratepayers and DG facilities are included in this test. Thus, it measures economic benefits as well as the allocation of costs between DG developers and utility ratepayers.
The utilities advocate for the application of the non-participant test in order to evaluate the impact of DG projects on utility customers from cross-subsidies such as exemptions from standby charges and nonbypassable charges. SCE observes that the non-participant test is the only test that quantifies the fairness of the allocation of costs and benefits between customers who install DG and those who do not. SCE observes that this test would measure the cost to ratepayers of such subsidies as exemptions from standby charges and nonbypassable charges, reduced transmission and distribution costs, and SGIP incentives. SCE also states this information is necessary in order for the Commission to comply with Section 353.9, which requires that net costs associated with tariff modifications provided to DG customers be recovered only from the class of the DG customer receiving the tariff modification.
Some DG proponents oppose the use of such a test, viewing it as too narrow to capture the total benefits of DG projects. CCDC does not believe a non-participant test is necessary to evaluate DG, arguing that the Commission need only apply a modified version of the societal test already in use for energy efficiency projects and programs.
Discussion:
Ratepayers (or "non-participants" in this context) support DG programs as part of our policy to promote the development of a more diverse and environmentally sound energy network in California. Among the DG subsidies they support are discounted rates, net metering, exemptions from standby charges, and the cost responsibility surcharge (CRS), and direct financial incentives offered by the SGIP. The cost-benefit test that measures whether ratepayers as a group realize a net benefit from DG development recognizes the subsidies that are offered by ratepayers to DG developers. It differs conceptually from a more traditional cost-benefit test, which does not recognize transfers of wealth between various affected groups. It asks only whether an activity or program provides net benefits to society at large.
Our first concern with regard to whether our DG incentives are worthwhile is whether they provide net benefits to the state at large. If they do, continued funding makes sense from an economic standpoint. This would be true even if DG development would occur without the incentives.
Even if DG subsidies are economically efficient from a societal standpoint, however, the Commission would not be doing its job if it did not at least consider the net cost of the program to those who pay for it. In addition to its duty to promote the interests of the general public and the economy at large, the Commission is charged with the protection of utility ratepayers. For that reason, we intend to specify a non-participant cost-benefit model and to use it to measure ratepayer liabilities. While we may not in every instance use it to disqualify a DG facility from program participation or to modify existing subsidies, we must at least manage ratepayer funds with our eyes open.
We therefore state our intent to measure the costs and benefits of DG facilities and programs from the standpoint of ratepayers. We use the RIM test, as defined in the SPM, as presented in the Itron report, and as modified herein. The RIM test measures ratepayer costs and benefits over 20 years, consistent with how we measure energy efficiency resources. In subsequent sections of this order, we discuss the variables that the non-participant test should include. Where modifications to the Itron approach are not explicitly addressed and adopted, the specifications in the Itron approach are implicitly adopted.
B. Societal Test or Total Resource Cost (TRC) Test
The so-called "societal" test measures the relative costs and benefits of a DG project or program to all Californians. The societal model is the purest form of cost-benefit analysis from an economic standpoint because it is indifferent as to who pays the costs or reaps the benefits of DG. The model merely inquires as to the net benefits accruing to the subject economy or group. The "TRC-Societal Version" (TRC) test is a variation of the societal model that is currently included in the SPM applied to the Commission's energy efficiency programs.
CCDC and ASPv propose the Commission recognize the similarities between DG and energy efficiency projects by adopting the TRC model. They believe this model is appropriate because of the comparability between energy efficiency and DG. CCDC and ASPv recognize that the TRC model should be tailored according to air pollutant emissions of DG projects and suggests the utilities assess the incremental cost of reduced transmission system vulnerability as part of the avoided cost. It would have the Commission use the TRC-Societal Version test to adjust standby rates in utilities' general rate cases.
The TRC-Societal Version measures costs associated with installation, operation and maintenance, fuel costs, removal less salvage value, and administration costs. Among the benefits measured by the TRC test are two external "adders," one for air emissions associated with electricity usage and one for gas usage. It also permits the inclusion of adders to reflect reduced water use and waste generation. In evaluating DG facilities, CCDC believes the Commission should use the standard variables that are applied to energy efficiency programs, such as discount rates, estimates of the effects of "free riders"2 and useful life. It would apply the six avoided costs included in the TRC-Societal Version, three for electricity savings and three for gas savings. CCDC and ASPv would modify these avoided cost calculations according to the recommendations made in the E3 report issued in January 2004.
ASPv explains its preference for the TRC model in the SPM in part by arguing that the Itron approach fails to include a number of DG benefits because they are considered too general or too difficult to quantify. In light of the state's support for renewable DG, ASPv explicitly advocates for erring on the side of including too many benefits rather than too few even if some of those benefits are quantified at zero for now.
Although SCE does not explicitly object to the application of E3 avoided cost estimates or the TRC test, SCE observes that the E3 report does not present a complete cost-effectiveness methodology, but only addresses avoided costs, which are one element of a cost-benefit test. SCE observes that the variables included in Itron's approach to the Societal Test can be modified to incorporate "market effects," that is, the transformation of the market as DG technologies become more affordable and available to the public.
Discussion:
No party disputes the application of the societal model and we state our intent here to apply it. DG proponents propose to use the TRC model and the E3 findings to measure the cost-effectiveness of DG. SDG&E/SCG and SCE propose using the variables specified in the Itron report. The difference between the societal cost-benefit approach recommended in the Itron report and the SPM TRC test currently applied to energy efficiency programs is mainly that they include different variables. The TRC test in the SPM includes variables that are not quantified by the Itron model, such as certain environmental adders.
While both DG and energy efficiency programs relieve the utilities of serving some load, in some significant ways they are not alike. The purpose of our inquiry here is to develop a model for DG facilities that best reflects the value of DG to society and ratepayers. Subsequent sections of this order address each variable that presented controversy between the parties. Attachment A lists all of the variables we adopt for each model and the data source for each. While the variables may not measure costs and benefits perfectly, they are reasonable for our purposes and may be modified as better information becomes available.
The participant test measures the economic viability of a DG facility to the developer or customer installing the facility. While those who install DG will naturally have their own calculation of whether an investment is worthwhile, the Commission might want to conduct its own participant test to determine the level of incentive needed to promote investment and to help prevent the provision of incentive payments by "free riders." As PG&E observes, it also appears that Section 2827(n) requires the Commission to complete a report on the costs and benefits of net metering from the perspective of "customer-generators." No party opposed the use of a participant test and we state our intent to adopt a participant cost-benefit model here and to use it to evaluate the efficacy of and need for incentives at various levels.
The Itron report identifies as benefits the customer's reduction in electricity bills, the value of displaced fuel with the use of waste heat, tax credits and other government incentives.
We herein state our intent to develop specifications for a participant test and to use that test where appropriate. In subsequent sections, we discuss the variables for that test that were a source of controversy in this proceeding. Attachment A lists all of the variables for the test and the source of data for each variable.
We also state our intent to use the test to eliminate "free-riders." Our purpose is not to penalize a facility for its cost-effective operation but to maximize the use of a limited pool of funds for the development of DG resources. Every dollar spent on a project that would be built without subsidies is a dollar that is not available for a project that might be viable with a subsidy. We will consider changes to the SGIP program and other subsidies consistent with this objective. In future proceedings, we will also consider whether other subsidy programs should be offered only to those facilities requiring them as a way to motivate investment and operation.
2 "Free riders" are beneficiaries of a subsidy designed to motivate certain actions who would have taken that action without the subsidy.
