California regulators ordered the state's big three investor-owned utilities to deploy distributed energy resources in pilot projects to displace or defer the need for traditional distribution infrastructure.

The Public Utilities Commission also established a regulatory incentive mechanism pilot for PG&E Corp. subsidiary Pacific Gas and Electric Co., Sempra Energy subsidiary San Diego Gas & Electric Co., and Edison International subsidiary Southern California Edison Co. to earn a 4% pretax incentive for annual payments they make to distributed energy resource providers in lieu of rate base investment, presiding Commissioner Michel Florio said. Florio's term on the commission expires Jan. 1, 2017. The utilities also were encouraged to select up to three additional projects.

The PUC in its decision also directed its Competitive Solicitation Framework Working Group to develop a technology-neutral pro forma contract for future use, based upon the incentive pilot experience.

Florio said the financial incentive is designed to encourage utilities to use distributed resources rather than building additional distribution infrastructure because otherwise they would be discouraged from using third-party resources that would cut into their rate base investments.

Florio noted that one advantage of distributed resources is saving energy that would otherwise be needed to support voltage along the length of a distribution line. Having distributed resources down the line from a substation helps support voltage that is otherwise lost as the distance from the substation increases, he said.

Commissioner Carla Peterman noted the difficulty of focusing on distributed energy resources without getting into the broader issue of future utility models and she applauded the defined focus of the proceeding.

The competitive solicitation of distributed resources is just one part of a future utility business model that is much too complex to tackle all at once, Florio said, adding that it is in keeping with the PUC's "walk, jog, run" approach.

PUC President Michael Picker said the electric industry is being reshaped by the development and use of new technologies that can be owned and operated by anybody. "We are at a point where third parties can provide services and displace some utility functions in the wired grid," he said. "It doesn't change the need for incumbent utilities, but will reshape their role from the bottom up."

However, appropriate utility incentives are needed to encourage this trend, the commissioners agreed. Solar parties argued that the 4% incentive based on the value of distributed energy resources contracts will be less attractive to utilities than the return they are able to get on traditional grid investments. However, the PUC sided with the Office of Ratepayer Advocates' argument that connecting the incentive to the distributed energy resource contract price provides greater cost certainty than the return on traditional investments, though the PUC did not elaborate.

For utilities to achieve the incentive, the procured distributed energy resources must replace or defer a previously planned and authorized distribution project, the PUC said.

The utilities were authorized to record the value of their incentives in balancing accounts for later recovery and incentives would be recovered for each year they are claimed as long as the distributed energy resources procured were successful in avoiding or deferring an otherwise planned utility expenditure, the PUC said in its decision. (PUC Rulemaking 14-10-003)