Co-Generation Boom Is Going Bust

To me, it seemed like another gold rush. Throughout California, companies scurried to install small power plants and strike it rich. The gold was there for the taking.

Only this time, the “gold” was “co-generated electricity.”

This modern gold rush was set off in 1978 when Congress passed a law requiring my company, San Diego Gas & Electric, and other utilities to buy electricity from any qualified customer producing it.

The concept was simple enough: Companies using large volumes of process heat and electricity could invest in small power plants and produce their own electricity. By using the same fuel to generate both heat and electricity, they could cut their energy bills by a third.

Even better, they could sell their excess power to us in the utility industry--who would have to buy it.

In 1978, the law seemed a solution to the nation’s troubles. The United States had just suffered two devastating energy disruptions brought on by the Mideast oil cartel and America’s own crazy-quilt price controls on domestic oil and natural gas.

With the 1978 Public Utilities Regulatory Policies Act, Congress sought to provide cash incentives for alternative energy resources like co-generation, conservation and solar, wind and geothermal. These new technologies were to be the weapons in America’s fight for energy independence. The law came at a time when our commercial and industrial customers were desperately seeking alternatives to the state’s high electricity costs.

For more than a decade, the California Public Utilities Commission had been engaged in what we call “social rate-making,” charging commercial and industrial customers higher rates in order to hold down costs for residential customers. After 10 years of this “social rate-making,” our high commercial and industrial rates had many of our customers frantically seeking an alternative to SDG&E.;

When the new law was passed, many of these customers saw it as a godsend. Not only could they save money by bypassing SDG&E;, but they also could actually make money by selling us their excess power.

By 1985, California co-generators were selling 1,300 megawatts of power to the state’s three largest utilities, reaping hundreds of millions of dollars in profits. But there is a price: higher rates for other Californians.

Today, the state’s electric utilities are beginning to question whether their non-co-generating customers are benefiting from co-generation. A colleague of mine from Pacific Gas & Electric, for example, says that, since 1980, PG&E; customers have paid $261 million more for electricity under the Regulatory Policies Act than they would have paid had PG&E; generated the same amount of electricity in its own power plants or purchased it from other utilities.

Here in San Diego, our excess costs from 1984 are about $9 million and growing.

We at SDG&E; are beginning to believe that this law has outlived its usefulness and might be harming the very people it was designed to help. Indeed, SDG&E; is leading an effort to eliminate some of the more onerous provisions of the act and is seeking changes in the PUC’s rate-making policies that have led to excessive customer costs.

For example, the PUC’s current rate policies prevent us from charging co-generators the true cost of supplying them with standby service in case their co-generating equipment should fail or needs to be shut down for maintenance. Instead, the PUC’s policies require us to charge other customers more to provide this “subsidized” standby service.

We don’t think that’s fair. It’s as if you were sharing a taxi with a co-generator. He gets to his destination and tells the driver to stand by because he may need a ride in the near future. He then tells the driver to charge you for that standby time. That’s wrong.

This is bad rate-making, and it’s bad economics. Yet, by asking for changes in PUC’s policies, my company is beset by charges from co-generators and their allies that we’re attempting to harm the public we serve. Before we made our proposals, we knew they would be unpopular in certain quarters. However, we also knew that, if allowed to continue, these incentives would increasingly harm all customers who don’t co-generate.

The problem we and our residential customers face is threefold. Under the Regulatory Policies Act, SDG&E; has to buy co-generated power at what is called the “avoided cost.” This “avoided cost” is the amount the PUC figures would have been the cost for electricity had we built new power plants to supply the power provided by co-generators.

From the start, there was trouble with the regulators’ arithmetic. The PUC based its price projections on the assumption that double-digit inflation would continue and fuel prices would soar. Neither happened. The result is that today the price paid to many co-generators is unreasonably high.

Second, we don’t need the energy. We have enough of our own, at prices cheaper than the calculated avoided cost.

Finally, early PUC action imposed higher rates on everyone else with the result that co-generators reaped a profit from their co-generation systems--systems that all too frequently wouldn’t make economic sense without subsidies and incentives paid by other customers.

While the original law was well-meaning, the fact is it has led to incredible consequences. It has forced us to forgo importation or production of cheaper power in order to take delivery of high-priced co-generation. The current commissioners appear to recognize these problems and are moving toward solutions supported by the utilities.

Our proposal to remove some of these “perverse incentives” will be discussed in hearings here in San Diego this week. From the very start, our proposal caused an uproar.

Faced by what they view as a threat to their co-generated profits, co-generators quickly mounted their own campaign. As soon as our proposal hit the newspapers, co-generators were loudly complaining to all who would listen that the utility is out to “kill co-generation” because it “fears competition.”

They found a ready and willing ear in the news media, which has largely--inaccurately--portrayed the story in David and Goliath terms.

Since the late 1970s, SDG&E; has supported the Regulatory Policies Act’s goal of encouraging new technologies. We had learned the hard way that it was going to be difficult, if not impossible, to build new conventional power plants in California. With a rapidly growing customer base, SDG&E; publicly stated that co-generation could help meet new demand.

Yet, early on, we foresaw increased rates for our other customers as one of the act’s consequences. And we were vocal in our concerns.

The record shows that, since the late 1970s, SDG&E; has been against “bad” co-generation, but supports “good” co-generation. “Bad” co-generation can be defined as co-generation that relies on subsidies from other customers or from shareholders. Also, it is the type of co-generation that must be bought at the expense of other, cheaper power sources.

“Good” co-generation is co-generation that can be justified without customer subsidies and that provides us with reliable power for the future.

We have never taken the position that all co-generation is bad and must be “killed.” The simple truth is, and always has been, we’re in favor of co-generation that helps our customers and opposed to that which harms them. To believe otherwise is to ignore the record.