The Need for Compensatory Standby Rates

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) 3.332 C&I (< 10,000 kWh/month) 4.427 Medium C&I (> 10,000 kWh/month/< 200 kW) 2.052 Low load factor (200 hours use) 3.200 High load factor (600 hours use) 1.124 C&I (> 200 kW) average 1.297 Low load factor (200 hours use) 2.168 High load factor (600 hours use) 1.037

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