AUC Reaffirms Option M and the Policy of Paying Generators the Transmission Savings from Distributed Generation

Distributed Generation (DG) refers to smaller-sized generation projects (generally less than 20MW) that are directly connected to the lower voltage local electricity distribution systems that service consumers. DG is distinguishable from much larger-sized generation projects that are directly connected to higher voltage transmission lines that first transmit the power longer distances, and deliver it to the local distribution systems which, in turn, deliver that power to consumers.

DG results in a larger number of smaller generation facilities being embedded near consumers.  DG therefore displaces the power that would otherwise have to be imported by the owner of the distribution system (DFO) from the transmission system for the DFO to provide electricity to consumers. DG therefore reduces transmission system investment, lowers congestion and line losses, and enhances consumer reliability. That does not mean that DG does not have its challenges, some of which has written about here.

Fairness suggests that if DG provides transmission savings then the generators of the DG, and not electricity consumers, should benefit from those transmission savings. That was the issue before the Alberta Utilities Commission (AUC) in an application made recently by EQUS REA Ltd. (“EQUS”).   EQUS is a rural electrification association in Alberta that distributes power to its members. The EQUS distribution system is not directly connected to the transmission system because it is connected to the Fortis distribution system downstream from the transmission system.  Think of the EQUS distribution system as being bolted on to the Fortis distribution system, which is the one bolted on to the transmission system.

EQUS requested in its application that the AUC require Fortis to help EQUS make the DG credit that Fortis currently provides to DG connected to the Fortis distribution system available to the DG connected to the distribution system owned by EQUS.  The AUC agreed with EQUS, and in a decision issued last month (AUC Decision 22293-D01-2017) reiterated its policy that the transmission cost savings that a DFO receives (mainly lower Demand Transmission Service charges) because DG is connected to its distribution system should be paid by that DFO to the generator of the DG.  This policy, first enunciated by the AUC’s predecessor back in 2000, is an acknowledgement by the AUC that DG should be incented (Fortis called it a subsidy from consumers) by paying generators of DG the transmission savings that occur because of their DG.

To be fair to Fortis, it was not disputing the AUC policy that DG credits should be paid to generators.  Further, as a regulated utility, any DG credits that Fortis pays to generators are passed on to its customers. Fortis was not trying to make more money off the backs of DG generators connected to the EQUS distribution system. In fact, Fortis has since 2001 been providing a DG credit, called Option M in its tariff, to generators of DG connected to the Fortis distribution system.  That Option M credit is essentially the monthly difference between the actual transmission system charges paid by Fortis, and the transmission system charges that would have been paid by Fortis if the DG had not been generating on its distribution system. In essence, Fortis’ Option M credits are a flow through of funds from its consumers to the DG generator to compensate the generator for the savings that arise because the transmission system is used less to deliver power to the consumers served by Fortis.

This AUC decision is significant because it reaffirms an Alberta policy of providing generators of DG in this province with a very important source of revenue.  It also puts the distribution system of EQUS on the same footing as the distribution system of Fortis when it comes to hosting DG. Do not be surprised if we hear more about DG credits in the coming months as the AUC finalizes the report on DG that it is required to prepare and file with the Minister of Energy by the end of the year.  DG developers have been pushing for the AUC to standardize, simplify and regulate the DG credits that all DFOs provide so that they are the same, whether the DFO is investor- (like Fortis), municipally- (like ENMAX or EPCOR), or member- (like EQUS) owned. Further, DG developers would like to see DG credits be calculated in a manner that results in less volatility, so that the DG credits can be more easily used to secure the long-term financing needed to build a DG project. will continue to follow the DG credit issue and advise you if any changes arise in this very important source of revenue for generators of DG in Alberta.

Kent D. Howie and Alan L. Ross

Kent and Alan both practice in the Electricity Markets Group at the Calgary, Alberta office of the national law firm Borden Ladner Gervais LLP. 


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