You asked for a summary of the Department of Public Utility Control's (DPUC) recent decision regarding the distributed generation program.

SUMMARY

PA 05-1, June Special Session, establishes incentives for distributed generation, i. e. , small generating facilities located on a customer's premises. These incentives include capital and operating subsidies for such facilities. In September 2007 DPUC issued a draft decision suspending capital subsidies for emergency generators under the program, finding that they were not cost effective. The decision does not affect (1) capital subsidies already approved for such generators, (2) operating subsidies for approved emergency generators and for such generators in the future, and (3) incentives for other types of generating facilities. The decision also made several other changes to the distributed generation program, including limiting new capital subsidies to the amount of generation equal to the customer's load.

BACKGROUND

PA 05-1, June Special Session, establishes capital and operating subsidies for electric company customers who install new generating capacity at their facilities. Such new capacity can reduce federally-mandated charges arising from congestion on the transmission system, which is particularly severe in the southwestern third of the state. The maximum size of distributed generation under the program is 65 megawatts (MW); a typical power plant has a capacity of 500 MW.

Under the act, the capital subsidy can range from $ 200 to $ 500 per kilowatt (kw) of generating capacity. A customer can only receive the subsidy if its project reduces the congestion charges more than the amount of the subsidy. The act provides for long-term financing of these projects.

The act also provides operating subsidies for the projects. It requires electric companies to rebate a participating customer's gas delivery charge if it uses natural gas to generate power. The act exempts the customer from electric company backup charges if the project's generating capacity is less than the customer's peak load and is available to the system during peak periods.

PA 07-242 extends the incentives to certain generation developed before January 1, 2007 whose capacity is increased after this date. It also makes customers of municipal electric utilities eligible for the incentives.

PA 05-1, June Special Session, required DPUC to establish additional standards for the amount of the subsidies and criteria and procedures for awarding subsidies and their size. In docket no. 05-07-17, DPUC established a capital subsidy of $ 450 per kw for baseload generation units and $ 200 per kw for emergency generators. Each generating facility could also receive an additional capital subsidy of $ 50 per kw if located in the southwest third of the state and operating before June 1, 2008.

RECENT DPUC ACTIONS

Hearing and Investigation

On March 13, 2007, DPUC reopened the 2006 docket to address issues relating to eligibility for grants, among other things. DPUC held a hearing on July 11, 2007. During the hearing, additional issues were raised as to the program's costs and benefits. In its 2006 decision, DPUC estimated that new emergency generators in the state would provide a benefit to state customers due to lower wholesale energy prices and increased forward reserve capacity. These benefits were needed to justify the minimum incentive under the legislation of $ 200 per kw.

During the hearing DPUC cross-examined witnesses about the energy and reserve benefits associated with emergency generators. Testimony by United Illuminating (UI), in particular, raised serious concerns whether the grants to emergency generators are cost effective. UI testified that no energy benefits are derived from emergency generators since they only operate a few hours in a year. These projects also do not qualify for the forward reserve market. In addition, UI testified that the organization that administers the regional wholesale market had established a limit of 600 MW for emergency generators in the regional capacity market.

On July 13, 2007, the Office of Consumer Counsel filed an emergency motion to stay approvals for capital subsidies for emergency generators. On July 25, 2007, DPUC temporarily suspended the emergency generation grant award program to determine whether the projected reduction in congestion charges attributed to projects was greater than the amount of the projected subsidies.

DPUC formed a working group on August 1, 2007 to re-examine these issues, particularly with regard to emergency generators. The group consisted of representatives of the electric and gas companies, large customers, and several firms that develop distributed generation projects. The group met five times and also engaged in significant e-mail correspondence. The group did not address the costs and benefits of emergency generators but instead concentrated on the 600 MW limit issue. The working group addressed several other issues, including the subsidy level for baseload facilities.

The group submitted its report to DPUC on August 13, 2007. It recommended that DPUC:

1. wait until after the February 2008 auction of forward capacity before determining the future of the emergency generation capital grant program;

2. reconvene the working group after the auction to conduct a new cost-benefit analysis based on how many emergency generation units are selected in the auction and the results of the auction; and

3. in the meantime, either stay the acceptance of new emergency generation applications or notify applicants of the current situation.

The group also recommended that DPUC continue to award the emergency generation grants, based on the present award rules and amounts, for completed applications that had already been accepted by DPUC. The group did not recommend any changes with regard to the capital subsidy level for baseload facilities, but did recommend that DPUC modify when these facilities must be available in order to qualify for the subsidy.

Decision

On September 7, 2007, DPUC issued a draft decision (docket no. 05-07-17RE01) on these matters. In this decision, DPUC noted that no party disputed UI's testimony regarding the benefits of providing a capital subsidy for emergency generators. DPUC agreed with UI that there are insufficient benefits or reductions of congestion charges to justify the minimum grant for emergency generators of $ 200 per kw. DPUC terminated the emergency generation subsidies as of July 25, 2007 and will accept no new applications for emergency generation grants. But, DPUC will review and process pending emergency generator grant applications that were filed before July 26, 2007. Moreover, the baseload capital grants will continue at the current levels. DPUC stated that it will periodically review the cost effectiveness of the capital grant programs. It noted that it may be possible to open the program in the future for emergency generation projects that are eligible for the forward reserve market or if other benefits and costs change significantly.

The decision also addressed several other issues raised in the hearing. DPUC decided to limit new capital subsidies to the amount of capacity needed to meet the customer's load (DPUC had previously approved two applications where the capacity of the distributed generation exceeded the customer's load). It also modified when baseload needs to be available to be eligible for capital subsidies. DPUC made several other minor revisions to the overall program.

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