When utilities and solar advocates faced off in May at the California Public Utilities Commission (CPUC) over capping solar’s net energy metering (NEM) incentive, stakeholders knew the issue was significant. Few realized it would set off a re-evaluation of utility rates.

NEM returns the retail per-kilowatt-hour rate to solar system owners for the electricity their systems produce, often reducing their bills to zero and exempting them from their utility’s co-charge for grid infrastructure maintenance.

California’s big three investor-owned utilities (IOUs), including San Diego Gas and Electric (SDG&E), believe the exemption inequitably shifts the burden for grid maintenance costs to non-system owners. The IOUs asked the CPUC to redefine the NEM cap downward to more quickly end the incentive.

The CPUC sustained the existing cap, pending closer scrutiny of NEM’s costs and benefits.

But the commissioners saw in the confrontation a bigger issue, according to SDG&E Rates & Analysis Manager Chris Yunker. “They came out with a residential rate OIR [Order Instituting Rulemaking]. They are going back to the drawing board to examine whether our current rate structure actually supports California policy,” Yunker said.

The NEM debate highlighted “our current rate design and subsidies buried in it,” he explained. In California’s “low carbon future, people can adopt all sorts of different technologies. When technology unbundles the services the utilities provide, the pricing needs to follow or there are adverse consequences.”

The June 21, 2012 CPUC OIR called for the examination of whether “the current tiered rate structure continues to support the underlying statewide-energy goals, facilitates the development of technologies that enable customers to better manage their usage and bills, and whether the rates result in inequitable treatment across customers and customer classes.”

The state’s mandate for utilities to move to 33 percent renewable sources by 2020, the California Solar Initiative, NEM, Governor Brown’s call for 12,000 megawatts of distributed generation by 2020, and AB 32’s required greenhouse gas emissions reductions, the OIR said, “have an impact on utility operations, utility costs, how the utility recovers those costs, and, ultimately, the rate itself. As the state moves to a cleaner resource mix, rates must be established that allow the utility to recover the costs related to these programs in an equitable manner.”

SDG&E wants, Yunker said, “a transition of the rate design so that we can charge for the service we provide and so people can get what they pay for and pay for what they get.” The cost of grid operations avoided by solar system owners and shifted to other ratepayers through NEM, he said, is just one of many services in “bundled” rates that SDG&E would like to see “unbundled.”

Solar advocates say this would erode NEM as a solar incentive, to the detriment of the state’s renewables and emissions reduction goals.  

Yunker disagrees. “That’s the way we can grow solar sustainably so that anybody who adopts it can get the benefits it provides and credit for the costs avoided by the utility while, at the same time, other customers are not stuck paying costs of services that solar customers use but aren’t covering under the current regime.”

NEM is, Yunker said, “a starting point for the discussion. In reality, the issue is one of rate design. It’s whether we can provide accurate price signals.”

Utilities’ rates recover costs for four general categories of services, Yunker said: Customer Costs for connecting ratepayers, Distribution Demand Costs for delivering energy, System Capacity and Transmission Costs for matching the system to peak demand, and the Commodity Costs of energy.

“All those things are in the bundled rate,” explained SDG&E Senior Communications Manager Stephanie Donovan. “If you do not have to pay for the costs of those things, and under the current net energy metering structure you don’t, those costs are still incurred and they are shifted to customers who don’t have solar.”

When the separate services that a utility provides are identified, Donovan added, “people who want to have solar rooftops or distributed wind have an accurate price signal.”

Rooftop solar remains a challenge for California’s utilities. The CPUC’s OIR is due to the fact that, Yunker observed, “we are trying to catch up to technology.”

Solar advocates like Mainstream Energy Director of Government Affairs Ben Higgins argue that the state’s IOUs are uncomfortable with the variability of solar and other renewables. Yunker said the CPUC determined that role for them. “The commission has long supported independent markets,” Yunker said, “and supported the utilities as a check to the market and to provide reliability.”

Austin Energy (AE), a small, progressive municipally owned utility, may have the innovation that reaches beyond NEM.

Its studies determined rooftop solar’s benefit to the utility to be 12.8 cents per kilowatt-hour. Beginning in October, AE’s solar owners will be billed the same as all its other electricity consumers, including rates between 1.8 cents and 11.4 cents per kilowatt-hour and a $10 monthly Customer Charge. But solar owners will also be credited with 12.8 cents for every kilowatt-hour they send to AE.

Theoretically, there should be no revenue loss to utilities or undue burden to other ratepayers because AE will only be paying for value it receives and will be charging for costs incurred.

“Solar system owners are no longer a special class of customer,” explained AE’s Leslie Libby. “So far, it makes sense to everybody.”