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Two state utility regulators' decisions highlight the growing controversy generated by increasing power production from distributed generation - particularly rooftop solar panels - and challenges in rate designs for U.S. utilities, Fitch Ratings says.

While distributed generation currently represents a very small fraction of total power generation in the U.S., Fitch expects it to grow substantially due to continuing improved efficiency, lower cost, and federal and state energy policies. The financial ratings firm says the trend will lead it to garner an increasing share of total system power sources.

Net metering allows customers to buy and sell supply to and from the utility. Fitch says this can create pricing incentives to benefit one utility customer class over the majority of the customer base. As a result, integrating renewable and energy efficiency policies into an equitable customer rate design remains among the largest challenges facing the U.S. utility industry.

Fitch draws on two recent events to inform its analysis: Idaho Power's proposal to raise service charges for residential and business net metering customers to more fully reflect their use of the company's distribution system was rejected by the Idaho Public Utilities Commission last week. Last month, the Louisiana Public Service Commission voted against a similar proposal by Entergy.

According to Fitch, the Idaho decision recognized the potential "overbuild" of systems that net metering incentives could create and provided credits for any excess generation rather than cash payments to net metering customers under a feed-in tariff. The ratings firm considers credits for excess supply and caps on total net metering production with higher fixed demand charges as essential components of rate design as net metering programs grow.

Fitch believes a similar net metering scheme that led to the destabilization of the power markets in Spain in late 2008 is a cautionary tale. It was directly tied to incentives given to owners of small solar generation systems under feed-in tariffs that were introduced in 2004, the ratings firm concludes.



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