Analysis of Standby Electric Rates for Distributed Generation

The Situation

Businesses that install their own electricity generating equipment typically need standby service to continue full operation when the generator is out of service. Boston Edison Company, Cambridge Electric Light Company and Commonwealth Electric Company filed a request with the Massachusetts Department of Telecommunications and Energy (DTE) for special rates for providing delivery service to these customers. Under Massachusetts' retail competition rules, electricity consumers are free to choose an energy supplier, but all consumers take delivery service from the local utility.

NERA's Role

A NERA witness testified in support of the utilities' proposal to offer a standby rate for large and medium-sized commercial and industrial customers with distributed generation (DG) facilities. The proposed rate was based on the delivery rates for customers without generators, but adapted to reflect the fact that the intermittent nature of standby use requires a different rate structure to recover the cost of distribution facilities "standing by" to provide this service. A contract demand charge is the appropriate way to recover distribution costs that are incurred no matter how much standby energy a DG facility uses. The NERA expert emphasized in her testimony that, although some DG projects provide societal benefits, using standby rates that do not reflect the full cost of providing standby service is an inefficient tool for encouraging desirable DG development.

The Result

On 23 July 2004 the DTE approved a settlement on standby rates negotiated by the utilities, the Division of Energy Resources, Associated Industries of Massachusetts, Conservation Law Foundation, a group of DG supporters and the Solar Energy Business Association of New England. In approving the settlement, the DTE cited NERA’s testimony, which explained that without the contract demand charge, costs incurred to "stand by" for DG customers would be shifted to other consumers.

For more information, please review Dr. Parmesano's rebuttal testimony before the Massachusetts Department of Telecommunications and Energy.