The great standby rate debate: analysis of a key barrier to the influx of needed new alternative energy sources.

• Author: Hurd, John V.

1. INTRODUCTION

   The standby rate structure that a state adopts will have a significant impact on the development of new distributed generation. (6) Distributed generation refers to alternative consumer-owned power sources--such as wind turbines or solar power--that a consumer uses to satisfy his energy demand instead of relying on a utility company. (7) If standby rates are too high, then new distributed generation projects will prove uneconomical. (8) If utility companies do not hold distributed generation owners accountable for costs incurred, however, then these costs will be passed on to non-distributed generation ratepayers. (9)

   Standby customers cannot be charged according to the volumetric rate schedule, through which customers pay according to usage, of non-standby customers because of their irregular load shapes. (10) Distributed generation customers often do not consume any electricity and would have no monthly charge under the volumetric schedule, though they still impose costs on the utility companies. (11) Without a separate standby rate, distributed generation customers would unfairly impose costs on the utilities that will invariably be passed on to non-distributed generation customers. (12)

   The parties to the standby rate debate include distributed generation owners and developers and the regulated utilities who speak on behalf of the non-distributed generation ratepayers. (13) Some distributed generation advocates argue that standby customers should be charged under the traditional volumetric rate structure. (14) Yet most parties agree that there should be a standby rate structure based on cost causation principles, meaning the rate should allow the utilities to recover all costs that the distributed generation customers impose on the system but nothing more. (15) There is considerable disagreement, however, as to what costs and benefits the distributed generation project actually imposes on the distribution system. (16) Also, the parties dispute how and to what extent such costs and benefits should be incorporated into the standby rate structure. (17)

   This Note will examine the costs and benefits that a distributed generation back-up customer imposes on the distribution system. (18) Also, it will outline the arguments for and against including such costs and benefits in the standby rate structure. (19) Thereafter, this Note will discuss the early development of standby rates. (20) It will briefly state the federal requirements for standby rate structure and discuss a case following the enactment of such requirements. (21) Further, this Note will explore the development and structure of standby rate policy in the leading state, California. (22) Lastly, this Note will analyze the components of each policy and determine the most effective policy in accordance with cost causation. (23)

2. HISTORY

   1. An Overview of the Standby Rate Debate

      There are numerous factors that a state must consider in order to develop a standby rate structure that accurately recovers costs imposed on the distribution system by distributed generation while also accounting for benefits to the distribution system and society as a whole. (24) Utility providers and distributed generation advocates vastly disagree over the factors that should be included in the standby rates. (25) Each state's public utility commission must look at the costs and benefits and determine which factors should be included to create a rate that conforms with cost causation. (26)

      The fixed costs that utilities incur to keep a customer connected to the distribution system are the first factor to consider. (27) Electric utilities spend billions of dollars on line maintenance and transistor and substation improvements, recovering these costs through the volumetric rate charged to customers. (28) The unique load patterns of distributed generation customers, however, can lead to under-recovery of a utility's fixed costs. (29) Distributed generation advocates argue that the utilities should still charge them at the regular volumetric rate and to do otherwise would discriminate against standby customers. (30) The utilities believe, however, that doing so would effectively cause the other ratepayers to subsidize the distributed generation customers. (31) The utilities argue that they should recover fixed costs through a fixed monthly "customer charge." (32)

      Another factor to consider in the standby rate debate is the recovery of stranded costs. (33) When utilities make large-scale capital investments, such as constructing new power plants, they recover the capital over time through the volumetric rate. (34) As with fixed costs, when a distributed generation customer switches to standby power, the utility no longer recovers stranded costs from the customer, thereby resulting in increased burden on ratepayers. (35) Some distributed generation advocates refute the existence of stranded costs, while others maintain that they are simply part of the cost of doing business and that the utilities should not be able to recover these costs through the standby rates. (36) The utilities, however, contend that the standby customers should pay their "share" of the investment costs through the standby rate. (37)

      Capacity charges, which represent the bulk of the standby rate charge, present another major issue. (38) Most utilities operate at the distribute level, and, in order to maintain system stability, must buy enough capacity to meet the expected need. (39) The utilities argue that they must maintain full backup capacity for standby customers to ensure that there is adequate power in the event that all distributed generation units are down simultaneously. (40) Distributed generation advocates reject this argument and maintain that utilities should calculate the probability that the distributed generation units will need power from the distribution system and plan their capacity accordingly. (41) This would lead to decreased capacity costs for utilities and would thus decrease the standby rate. (42)

      Another factor that is closely intertwined with capacity costs is system diversity. (43) That is, if there are numerous types of distributed generation on the distribution system, it is less likely that the units will be incapacitated simultaneously. (44) The distributed generation advocates argue that utilities should factor system diversity into their capacity planning and decrease backup capacity accordingly. (45) The utilities do not directly reject this argument but contend that there is simply not enough distributed generation on any individual circuit to create any measurable benefit at this time. (46) Therefore, until adequate distributed generation is present, the utilities must maintain full backup capacity. (47)

      In addition, standby customers argue that capacity charges should account for individual unit reliability. (48) Some units are very reliable and rarely demand electricity, while others are less reliable and often consume electricity. (49) Thus, by charging reliable unit customers for the full capacity costs, the utilities are effectively subsidizing other less reliable unit owners. (50) The utilities firmly attest, however, that they must maintain full power capacity for all customers to ensure system stability and, as such, a distributed generation unit's reliability is of no consequence to the standby charge. (51)

      Distributed generation advocates also argue that standby rates should reflect transmission and distribution investment deferral. (52) Across the country, there are widespread power shortages that lead to blackouts and demand for electricity is projected to increase in the future. (53) To alleviate this, utilities will have to invest in system upgrades that can support the increased demand. (54) Distributed generation owners argue that increased distributed generation alleviates the congestion problems and defers the need for large scale investments. (55) Utility companies, however, contend that to create any actual system benefit requires strategic placement of units, and any deferral of investment would be short-lived. (56)

      Finally, distributed generation owners argue that society as a whole benefits from increased distributed generation due to decreased emissions. (57) Standby customers further assert that the rates should be decreased because of such benefits. (58) The utilities counter by stating that while some "clean" forms of distributed generation do in fact emit fewer noxious gasses than traditional energy sources, others emit more and the rates thus should not be discounted. (59) It is important to reiterate that any reduction in the standby rate would shift costs to the other ratepayers causing them to pay for a societal benefit--fewer emissions--for which they did not contract. (60) Other commentators advocate that distributed generation owners should be compensated for environmental benefits, but through state funded incentives rather than reductions in the standby charge. (61)

   2. Early Case Law: State ex rel. Federal Reserve Bank of Kansas City v. Public Service Commission (62)

      The standby rate debate dates back as far as the 1940s, when utility customers began to generate on-site power to satisfy part or all of their energy needs. (63) In Federal Reserve Bank of Kansas, the plaintiff bank installed all necessary equipment to generate sufficient energy to meet its demand. (64) It sought, however, to contract for a standby rate in order to remain connected to the utility distribution system in the event that its system failed to provide adequate energy to meet the bank's demand. (65) When the parties failed to agree on such a rate, the bank filed suit to have the Missouri Public Service Commission fix a fair rate. (66)

      Many of the parties' arguments closely resemble those put forth in modern standby rate debates, including discrimination against standby customers, the system diversity effect, and utility fixed costs...