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© 2002 The Daily Journal Corporation. All rights reserved.
November 13, 2002
COMMISSION TRIES TO BALANCE NEEDS OF POWER USERS, UTILITIES
By David M. Niebauer and William W. Funderburk Jr.
When the government tries to decide how it
should recover $20 billion for past overpayments of electricity costs,
it gets everyone's attention. The state Public Utilities Commission is
engaged in a high-stakes zero-sum game that pits users of electricity,
who range from homeowners and apartment dwellers to commercial buildings
and industrial manufacturers, against utilities to determine who will
pay their "fair share" of the bill.
The commission's decisions in this arena will shake up the state energy
markets again. What remains to be determined is whether these new actions
also will open an economic path for companies and municipalities trying
to control their energy costs with clean on-site electricity generation.
A recent commission decision, proposed Sept. 24 and subject to comment,
establishes a variety of fees (called exit fees) to be imposed on "direct
access" customers as a partial payback of debts from the energy crises.
See "Order Instituting Rulemaking Regarding the Implementation of
the Suspension of Direct Access Pursuant to Assembly Bill 1X and Decision
01-09-060," Cal. Pub. Utilities Comm'n Rulemaking 02-01-011 (Jan.
Direct-access customers obtain electricity from independent electric
service providers, not the electric utility, a business practice sanctioned
by early rounds of energy deregulation. The proposed decision sets exit
fees for direct-access customers at up to 2.7 cents per kilowatt-hour
- or higher under alternative decisions proposed by other commissioners
- a significant hit for many customers who negotiated long-term contracts
in the 5- to 7-cent-per-kilowatt-hour range. Direct access represents
12 percent of the electricity capacity in the state.
This decision is especially significant for large energy users because
it forces them to make some critical decisions on how they buy electricity
and how much they pay for it. In some cases, the imposition of exit fees
will make direct access uneconomical.
It is unclear what effect the decision will have on the enforceability
of existing long-term direct-access contracts. What is clear is that the
stakes are high and that significant motivation exists to find ways out
of uneconomic contractual relationships. By making this decision on direct
access, the commission has decided that a significant part of the $20
billion bill should be borne by direct-access customers.
The commission now turns its attention to the bundled customers (those
receiving service from the grid, including individual and commercial accounts)
and customers who opted or will opt to install on-site power or "distributed
The commission proceedings affecting distributed generation were merged
with the direct-access proceedings under the moniker DA/DL, standing for
direct access/departing load.
Distributed-generation customers (those who generate their power on-site,
either in parallel mode with the electric utility or on a stand-alone
basis) have a separate set of fees in store for them, termed "departing
Hearings to set departing load fees for customers who opted for on-site
generation are under way at the commission, and interested parties expect
a proposed decision sometime before the end of the year. Many stakeholders
have proposed a settlement that would resolve the direct access/departing
load issues. The expectation is that departing-load fees may come in slightly
higher than those for direct-access customers. Some parties, such as the
Center for Energy Efficiency and Renewable Technologies, are pushing for
reduced fees for "ultra clean" distributed generation, such
as solar, wind and fuel cells.
A customer's decision to opt for "clean" or "dirty"
distributed generation most often reflects primarily economic considerations.
The strong perception in the marketplace is that clean energy is more
expensive energy. For the most part, without government support, that
perception is an accurate view of reality. Clean technologies are often
new technologies that face substantial cost hurdles that more established
(usually dirtier) technologies do not encounter.
The dirtier distributed-generation technologies are represented by fossil
fuel-burning engines that emit significant amounts of nitrous oxide and
other carbon pollutants into the environment. When the heat generated
by these less-clean technologies is used, however, projects often offer
rapid paybacks for facility owners, assuming that all other things, like
departing-load fees, are equal.
Many clean-energy interests argue, on the other hand, that if the less-clean
technologies were forced to take into account the damage to the environment
and the costs of future remediation and cleanup occasioned by polluting
technologies, the cost analysis would shift to the side of the clean energy.
Legislation has begun to address this imbalance by providing economic
subsidies for selected clean-energy technologies. Most notably in the
distributed-generation arena, the commission, acting per legislative mandate,
issued Decision D. 01-03-073 (March 27, 2001) (as modified by D. 02-04-044
(April 4, 2002)), to provide a tiered system of financial incentives to
encourage customer self-generation.
The decision gave the following subsidies: the lesser of 50 percent of
total project costs or $4,500 per kilowatt to solar and wind technologies,
as well as fuel cells operating on renewable fuels; the lesser of 40 percent
of total project costs or $2,500 per kilowatt to fuel cells operating
on nonrenewable fuel and utilities; and 30 percent of total project costs
or $1,000 per kilowatt for gas turbines, microturbines and certain internal
combustion engines using sufficient heat recovery and meeting reliability
In an acrimonious prologue to the commission's decision, the bellwether
and highly influential South Coast Air Quality Management District successfully
petitioned to modify the rule to allow for other agency funding of projects
receiving commission self-generation funds.
Attention is now focused on how the commission will implement SB1038,
signed by the governor on Sept. 12 as part of an omnibus renewable-energy
legislative package. SB1038 has added a new section to the Public Utilities
Code that permits the commission to consider energy efficiency and emission
performance when establishing rates and fees for distributed generation.
The rationale for this new code section is encouragement of early compliance
with air quality standards established by the state Air Resources Board.
Technologies that meet high emission-performance standards, termed "ultra-clean,"
and other low-emission distributed-generation technologies can expect
a lessened impact from proposed departing-load fees, perhaps in the 1-cent-per-kilowatt-hour
Ultra-clean distributed generation is defined as those technologies that
meet or exceed the standards set by the state Air Resources Board for
2007, including solar, wind, fuel cell and certain combustion technologies
employing catalysts to reduce emissions.
Sound public-policy reasons dictate treating ultraclean distributed generation
differently. As noted, dirtier, cheaper technologies may not be taking
into account the future costs of deteriorating air quality. Restricting
the ability of clean and efficient distributed-generation technologies
to compete in the marketplace could force the state Air Resources Board
to roll back its emission standards for distributed generation, which
in turn would set back the timetable on the state's clean-air initiatives.
The growing market for trading emissions credits may alleviate some of
the economic imbalance, but legislatively mandated subsidies and other
economic incentives remain potent weapons in the environmentalists' arsenal.
Is clean distributed generation for real? The jury is out. Now is the
time for interested parties to weigh in on the matter. The commission
is under extreme pressure to find ways to pay for upcoming bond issues
necessary to pay for above-market power costs and, in some instances,
historical procurement charges. Commissioners may need to be persuaded
that the state's energy bills can be paid without sacrificing its air
Will departing-load fees be imposed? Most likely, although the extent
of those fees may be tempered by recent legislative action that clearly
encourages clean distributed-generation technologies. Depending on how
the final commission decisions come down, even some direct-access customers
may be looking to distributed generation to supplement their electricity
load - and on an unexpected basis: cost.
As of Nov. 7, the Public Utilities Commission issued a final ruling adopting
the 2.7-cents-per-kilowatt-hour direct-access cap, leaving assessment
of the departing-load surcharge to be determined.
David M. Niebauer is an attorney and consultant specializing in
energy finance. William W. Funderburk Jr. of Stanzler Funderburk
& Castellon specializes in environmental law.