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Net Metering and the Cost-Shift Debate: Ignoring the Noise to Parse the Net Issues at the Heart of the Debate

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The debate over net metering is a hot topic before many state legislatures and public utility commissions. The Western U.S. is no exception.   Arizona, Nevada, Utah, Colorado and California are among the states grappling with the idea of how to properly incent distributed generation (DG) and whether net metering needs to be part of that formula.

At its core, net metering essentially provides a credit to owners of distributed generation (particularly photovoltaic rooftop solar facilities) for the energy that is produced from their systems. This credit is typically the equivalent of the full retail rate for electricity. That is, if one pays a set price per kilowatt hour for electricity from the utility, that customer will receive a credit equal to the same rate for (1) any energy the customer uses from the DG system; and (2) any excess energy that flows back on the utility’s distribution grid. Consequently, customers avoid paying the “energy charge” or the per-kilowatt-hour rate for electric service. This charge, however, includes a significant portion of the fixed costs of the transmission and distribution facilities necessary for a customer to turn the lights on whenever that customer has a demand for electricity. Because net metering allows a customer to largely avoid paying energy charges they otherwise would pay, the utilities argue that this results in lost fixed cost revenues that can then not be recovered, absent some mechanism to address the loss. In Arizona, several of the larger electric utilities have a partial decoupling adjustor mechanism that allows them to recover some of the lost fixed costs associated with DG system installations. As a result, net metering is allowing more fixed costs to be shifted to customers without DG systems, who are bearing the brunt of paying for the fixed costs of providing electric service to DG system customers.

The Arizona Corporation Commission, which is Arizona’s state public utility commission, recently acknowledged the cost shift problem when it approved a $0.70 per kW charge by Arizona Public Service Company to DG system customers through APS’s lost-fixed cost recovery adjustor mechanism (LFCR). The Commission found that that “the proliferation of DG installations results in a cost shift from APS’s DG customers to APS’s non DG residential customers absent significant changes to APS’s rate design.” Decision No. 74202 (December 3, 2013) at ¶ 49, 50 (located at Since major rate design changes are done in full general rate cases, some utilities have proposed to change their net metering tariffs so that excess energy is credited at a lower rate, such as the avoided cost rate or the cost of energy from a utility scale solar facility, in order to partially address the cost-shift problem more timely. Other utilities such as APS are currently seeking to raise the per-kW charge through its LFCR to better alleviate the cost shift. Groups representing the larger solar-leasing companies object to these proposals. Chief among their arguments is that the utilities are ignoring the long-term benefits distributed-solar generation provide to non-DG system customers and to the utility. It remains to be seen whether the Commission will tackle these proposals separately or require that they be addressed within a full general rate case.

Other states besides Arizona are currently dealing with the issues of net metering and the resulting cost shift. For instance, the Public Service Commission of Utah, in its Report and Order dated August 29, 2014 in Docket No.13-035-184, rejected a $4.65 net metering facilities charge for residential customers proposed by Rocky Mountain Power as part of its rate case, citing the need for more information regarding program costs and benefits. The order is available at In Nevada, where there is currently a 3% cap on net-systems to be reached in Summer 2015, Senate Bill 374 was passed to allow the state utility commission to consider allowing net metering systems up to 235 MW, and to consider charges to avoid, reduce or eliminate an unreasonable shifting of costs. See In California, AB 327 requires large electrical corporations to provide net metering to additional eligible DG system customers through July 1, 2017 (or until the current 5% cap based on aggregate peak demand is reached) while also requiring development of new successor contract or tariff that may include net metering for similar eligible customers after that time. See Colorado is also currently evaluating net metering and the associated costs and benefits of distributed generation policies. See Colorado Public Utilities Commission Proceeding No. 14M-0235E available at

Both sides recognize that the net metering issue is intertwined with the question of how to evaluate distributed generation when determining just and reasonable rates. Ultimately, rates for DG system customers may need to be redesigned to include a per-kilowatt “demand charge” to better ensure embedded costs for facilities are recovered. DG system customers may ultimately be considered true “partial requirements services” customers and treated as such. Further, the solar industry will have to justify why long-term benefits (including environmental and economic benefits) should be factored into establishing rates based on embedded costs and cost-of-service principles. In the meantime, some commissions (including Arizona) are grappling with whether and how to address the cost-shift dilemma pending a full general rate case. One thing appears certain: the net metering issue will remain a hot topic for state utility commissions for the foreseeable future.