1. The Need for Compensatory Standby Rates
Mass Restructuring Roundtable
March 28, 2003
Peter Zschokke
Vice President
Regulatory Strategy & Research
National Grid USA Service Company

2. California PUC Findings of Fact 2/27/03
“The key to ensuring safe and reliable distribution services is not utility ownership of distributed generation, but the ability of the utility to control the distributed generation unit.”
“The value of a distributed generation alternative is the value of deferral of a planned distribution upgrade for the time period of the deferral.”
“Physical assurance is required if distributed generation is to be considered as an alternative to distribution system upgrade.”

3. California PUC Conclusions of Law 2/27/03
“The utilities are responsible for the safety, reliability, and operation of the distribution system and therefore must have control over the planning and operation of the distribution system.”
“Third party ownership of distributed generation designed to defer distribution system upgrades should be allowed, subject to appropriate physical assurances and participation in the utility distribution planning process.”

4. Meaning of Order for Standby Rates
DG benefits require physical assurance
No physical assurance  no planning benefit
No planning benefit  utility maintains obligation serve
Obligation to serve potential load requires investment
Investment requires fair, compensatory recovery

5. What Should be Recovered in Standby Rates
Generation should not be recovered at this time
Customer diversity
Competitive marketplace
Transmission: Maybe
Distribution: Yes
Lack of local diversity
Lack of physical guarantee
Planning requirement for reliability

6. MECO Average Distribution Rates
Cents/kWh
Residential (excluding low income)
C&I (< 10,000 kWh/month)
Medium C&I (> 10,000 kWh/month/< 200 kW)
Low load factor (200 hours use)
High load factor (600 hours use)
C&I (> 200 kW) average
Low load factor (200 hours use)
High load factor (600 hours use)

7. Benefits of Diversity Provided in Retail Rate Design
Feeders & substations designed to meet system peak
Cost of service recovered from maximum demands and energy use of individual customers
By definition: system peak load is less than sum of individual customer demands or energy use

8. What is value of Grid Interconnection to customer
Customer Service Reliability
Additional source for reliable service to customer
Ability to size generation for efficient use with supplemental service
Back-up for unplanned or planned outages

9. What is Value of Grid Interconnection to Customer II
Sell to market
Sell to affiliate
Sell to neighbor
Arbitrage electric prices vs. fuel cost
6 MW of customer generation shut down today
Trade ancillary services

10. How should Standby Service for DG customers be valued?
Depends on level of service
On-demand service: Immediate reliability
Manual: Service connection within a specified response time
Requested service at previously agreed times
No interconnection requested: isolation
Depends on length of service agreement
Depends on amount of back-up requested

11. Pricing Standby Service
Recognize: Value provision for DG changes obligation to serve
Immediate reliability = traditional obligation
Other options reflect a reduced obligation to serve
Customer accepts risk of less reliable service in exchange for lower price
Increased risk to company and its customers if customer returns to full service
Efficient choices are made when service is priced at full value and subsidies are not created