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<title>April 2003: California PUC Order Encourges Distribution Generation</title>
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">Robert A. Olson is a partner in the law firm of
Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law,
public utility law and related commercial transactions.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
<a href="mailto:[email protected]"></a></font></small></p>
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</center><p align="left"><b><u><br>
April 2003<br>
</u></b><font size="6"><b>California PUC Order Encourages Distributed Generation<br>
</b></font><strong>by Robert Olson -- Brown, Olson and Wilson, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
200</em>3/06/14)</font></p>
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<p ALIGN="JUSTIFY">The California Public Utilities Commission ("PUC") recently issued an order
designed to encourage distributed generation. See "Order Instituting
Rulemaking into Distributed Generation," Rulemaking No. 99-10-025, Decision
No. 03-02-068 (Cal. PUC, February 27, 2003) (the "Order"). </p>
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<p ALIGN="JUSTIFY">The PUC found that distributed generation has the
potential to provide at least two benefits. First, it may "reduce system
peak demand by serving onsite load" and releasing "existing generating
capacity to meet peak demand requirements of other customers." Second,
distributed generation may "defer distribution system upgrades," although
the PUC found that this benefit is likely of limited duration and system
upgrades would eventually become necessary. </p>
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<p ALIGN="JUSTIFY">In light of these benefits, the PUC ordered California’s
electric utilities to include consideration of distributed generation in
their distribution planning process as an alternative to distribution system
upgrades. The utilities are required to file a compliance filing describing
the methodology that will be used in evaluating distributed generation as a
distribution alternative. The PUC described, with approval, certain criteria
proposed by one utility for determining whether distributed generation would
allow the utility to defer capacity additions and avoid future cost:</p>
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<p ALIGN="JUSTIFY">The distributed generation must be located where the
utility’s planning studies identify substations and feeder circuits
where capacity needs will not be met by existing facilities, given the
forecasted load growth. The unit must be installed and operational in
time for the utility to avoid or delay expansion or modification.
Distributed generation must provide sufficient capacity to accommodate
[the utility’s] planning needs. Finally, distributed generation must
provide appropriate physical assurance to ensure a real load reduction
on the facilities where expansion is deferred.</p>
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<p ALIGN="JUSTIFY">The last criterion, that the "distributed generation must
provide appropriate physical assurance to ensure a real load reduction on
the facilities where expansion is deferred," is of particular importance.
The PUC acknowledged that utilities have an obligation to ensure safe and
reliable distribution service. The PUC rejected arguments that any
distributed generation must be owned by the affected utility for the utility
to meet this obligation, but the PUC agreed that the utility must control
any distributed generation relied upon in lieu of distribution system
upgrades. The PUC found that contractual assurances and associated economic
penalties are not enough to provide the requisite control, and that
"physical assurances" are necessary. The PUC adopted the following
definition of "physical assurance":</p>
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<p ALIGN="JUSTIFY">["Physical assurance" means the] application of
devices and equipment that interrupts a distributed generation
customer’s normal load when distributed generation does not perform as
contracted. An equal amount of customer load to the distributed
generation capacity would be interrupted to prevent adverse consequences
to the distribution system and to other customers.</p>
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<p ALIGN="JUSTIFY">Presumably any contract between a utility and third
parties for distributed generation would require the installation of the
necessary "devices and equipment" and give the utility the right to
interrupt the distributed generation customer’s load as required to provide
the necessary "physical assurance."</p>
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<p ALIGN="JUSTIFY">With respect to the compensation to be paid to
non-utility providers of distributed generation, the PUC requires that such
compensation be "no higher than the utility’s short-term carrying cost of
capital multiplied by the cost of the planned distribution addition and the
number of years of deferral." Thus, the permitted compensation reflects the
PUC’s belief that distributed generation may temporarily delay distribution
system upgrades but will not render such upgrades permanently unnecessary,
and the value of distributed generation to the utility is therefore the
time-value of the funds that will eventually be expended to implement the
required upgrades. All such compensation is to be paid out of the utility’s
distribution budget.</p>
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<p ALIGN="JUSTIFY">The PUC has ordered the California electric utilities to
develop model contracts for distributed generation to serve as a starting
point for negotiation. </p>
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<p align="left"><font face="Arial">
<small>Robert A. Olson is a partner in the law firm of Brown, Olson &
Gould P.C.
which maintains a nationwide practice in energy law, public utility law and related
commercial transactions. He can be reached at:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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