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Calif. PUC considers rewarding utilities for buying distributed energy from customers

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Calif. PUC considers rewarding utilities for buying distributed energy from customers

The CaliforniaPublic Utilities Commission is seeking comments on a proposal to make fundamentalchanges to the rules governing how energy utilities are compensated in order toencourage distributed generation.

CommissionerMichel Florio issued the proposalApril 4 to provide utilities an opportunity to make profits by procuring energyfrom rooftop solar customers and other third-party distributed generators.

The commentswill be filed in a proceeding "to create a consistent regulatory frameworkfor guidance, planning and evaluation of integrated distributed energy resources"for which Florio is the assigned commissioner (Rulemaking 14-10-003).

Florioproposed to allow California's investor-owned utilities earnings opportunities whenthey advance the state's transition to clean, distributed energy, the PUC said inan email. Parties are invited to comment by May 2 on the proposal and respond toseveral questions Florio asked. Reply comments are due May 16.

UnderCalifornia's current regulatory framework, utilities earn a rate of return on theirinvestments in infrastructure. However, if utilities displace or defer rate baseinvestments by instead procuring distributed energy from customers or other thirdparties, they earn no return, Florio said. Customer-sited generation conflicts witha utility's fundamental financial objectives to make money by expanding its infrastructure.

"Toaddress this conflict, Commissioner Florio proposed a regulatory incentive structuredesigned to harmonize the utility's financial objectives with California's desireto foster the cost-effective deployment of clean, distributed energy resources,without increasing the cost of electric service to consumers," the PUC said.Following the comment period and a possible workshop, an administrative law judgein collaboration with Florio will issue a proposed decision for the full commission'sconsideration.

"Thisruling begins formal consideration of these issues with the intent to begin limiteddeployment of solutions starting as soon as practical," Florio wrote in hisproposal.

The commissionersaid the ruling is a first step in which to test the effect of incentives on utilitysourcing of distributed resources. "Consistent with our 'walk,jog, run' approach to these complex issues, I do not intend for this phase to consideror adopt an entirely new regulatory framework or business model for the Californiaelectric utilities," Florio said. "Rather, I hope to develop a pilot programthat can test a revised framework that may assist us in our efforts to promote thecost-effective deployment of DERs [distributed energy resources] in California."

If thecommission desires to provide incentives for utilities to displace some traditionalinvestment by procuring distributed resources, it should offer utility shareholdersthe opportunity to achieve equal or greater value to do so, the commissioner said.Florio suggested utilities might invest in distributed resources if they could achieveshareholder returns equal to 3.5% when they choose distributed generation over moretraditional rate base investments.

Floriosaid his immediate goal is not to determine the precise value of the incentivesbut rather to determine whether the concept is correct and how an interim pilotprogram could be developed to encourage utilities in this direction. If the PUCadopts the concept, the commission would then establish methods to determine theappropriate incentive rate, he said.

The commissionerdismissed the idea that utilities could simply be ordered to use distributed resourcesbecause the complexity of distribution systems prohibits the PUC from being ableto determine specifically when and where distributed resource opportunities existin order to impose command-and-control regulation. Instead, the utilitieswill seek opportunities to deploy distributed generation if pursuit of this resourceis in the shareholders' interests, Florio said.

Offeringshareholder incentives should not come at the expense of ratepayers as long as theamounts paid to distributed resource providers and to utilities total less thanthe cost of the avoided or deferred utility capital investment, he continued.

In additionto avoided cost of capital expenditures, distributed resources may lead to avoidanceof higher operation and maintenance expenses for utility infrastructure, Floriosaid. "Ratepayers should always be better off paying the incentivethan if the utility had just gone ahead with the planned investment," the commissionerexplained.

Floriorecalled the controversies the PUC has dealt with concerning shareholder incentivesfor energy efficiency because those incentives took the form of "split-the-savings"structures between ratepayers and shareholders.

He saidhe does not want the PUC to create an incentive award system where award amountswould lead to extensive litigation. Contested awards might discourage utilitiesfrom pursuing distributed resources because of the relative certainty of earninga return on traditional capital investments, he concluded.

subsidiary , subsidiary , andSempra Energy subsidiariesSan Diego Gas & Electric Co.and Southern California Gas Co.are participating in the proceeding as are a number of solar and independent energyproducers and their representing organizations. Environmental groups and communitychoice aggregators are also heavily represented.

The proceedingalso has attracted utility worker and energy consumer associations, ratepayer groups,business associations and technology interests.

Openedwith a commission rulemaking Oct. 2, 2014, as a demand-side resource programs proceeding,Florio and Administrative Law Judge Kelly Hymes changed the name of the rulemakingon Feb. 26 after concluding the issues were related to a separate for utilities to develop distributedresources plans and other proceedings.