A few years into deregulation in California, when people were getting stranded in elevators and produce rotted in coolers during blackouts, distributed energy seemed once again to be the wave of the future. The push toward small and local began when the state partially deregulated the electricity markets in 1996; it continued on through 2000, when the Public Utilities Commission established uniform statewide standards for distributed systems to connect up to the grid.

Yet for all the technologies that have sprung up around that effort, from microturbines to photovoltaics poured into shingles, California's major investor-owned utilities have not exactly encouraged their customers to invest in their own small generators. Indeed, as former state Energy Commissioner John Geesman put it two years ago, "There's an ongoing schizophrenia in state energy policy between what we say we want to do and what we actually allow to happen." Eloquent state reports hail the advantages of distributed energy, but the state regulates utility profits in such a way that customer-owned generation shrinks utilities' earnings. The current rules make a $700 million steam-generator replacement at a nuclear power plant, or a $2 billion transmission line, appear to be sound investments, because the utility can bill customers for their cost and upkeep.

 "Large utility-owned power plants, transmission and distribution lines, electric and gas meters all contribute to the revenue stream (of investor-owned utilities)," says Bill Powers, an electrical engineer and energy consultant in San Diego, Calif. The more a utility owns, the more it earns." The profit is not trivial: The California Energy Circuit reports that Pacific Gas & Electric chief executive Peter Darbee earned $8.7 million last year, 5 percent more than the year before, despite a reported $79 billion in average annual losses due to blackouts.

Most of Powers' research, which can be found in a document called San Diego Smart Energy 2020, has been focused on obviating the need for the Sunrise Powerlink, a 500-kilovolt transmission corridor slated to cut through pristine areas of San Diego County to bring solar and geothermal energy from remote locales to the city. San Diego Gas & Electric, a subsidiary of Sempra Energy, has promised its investors that the utility will earn a $1.3 billion profit on the $1.9 billion line. "When I looked at the numbers," Powers says, "I thought, 'I may even consider building a transmission line myself.' "

Damon Franz, a regulatory analyst with the California Public Utilities Commission, agrees that none of the investor-owned utilities that dominate the state have a direct monetary incentive to encourage distributed generation. But he notes that some utilities pursue some distributed energy anyway, simply because it's good public relations. Southern California Edison has conducted workshops to support customers wanting to take advantage of the California Solar Initiative, a program that pays cash incentives for photovoltaic systems. PG&E helps people connect new systems to the grid in record time. "The people that work within that program get 90 percent of their applications processed within a month," Franz says. He attributes such responsiveness to a service territory full of "eco-minded and progressive" customers.

PG&E has also been worried about losing those eco-minded and progressive customers. In 2007, just as a coalition of San Francisco environmentalists and consumer groups, including the local Sierra Club and the Democratic Party, unveiled plans to break free of the utility, PG&E launched a $10 million marketing effort called "Let's Green This City." The San Francisco County Board of Supervisors responded by approving the activists' plan, allowing the city to take advantage of a 2002 law that permits cities and groups of cities to shop among independent producers for power. "Clean Power San Francisco" has now set a goal of securing 51 percent of its power from renewable sources, including digester gas-powered fuel cells and microturbines, by 2017. "Distributed generation is a core part of the city's goals," says Michael Campbell, the program's director.

Other communities in other utilities' territories may follow San Francisco's example. In April, Southern California Edison angered residents of Palm Desert, Calif., when it lobbied against legislation meant to subsidize rooftop solar. The bill would have required utilities to establish a "feed-in tariff" to compensate owners of photovoltaic installations per kilowatt-hour at a premium rate.

The state assemblyman who authored the bill, Brian Nestande, withdrew it shortly after Southern California Edison executive Catherine Hackney sent a letter to legislators asking them to vote against the bill. The state already allows customers with small renewable systems to choose between selling as much electricity back to the utility as they use (known as "net metering") or selling all the electricity they generate -- including any surplus -- for a modest feed-in tariff. As the tariff on average pays less than California's 12-cent-per-kilowatt-hour retail electricity rate, it benefits almost no one.

Assemblyman Jared Huffman of Marin County received similar input on a bill to allow small wind and solar producers to sell surplus power back to the grid, a measure he believes would encourage more consumers who install their own systems to conserve electricity. Huffman's legislative analyst, Lawrence Cooper, compares the current system to filling your car's tank but having to turn in your surplus gas should you not burn through it after a certain period of time. "These people paid to put their systems on their homes," he says, "they're providing power for the grid. They should get paid for them."

Huffman says the bill actually benefits the utilities because they get credit toward their renewable energy requirements, which in California will rise from 20 percent in 2010 to 33 percent in 2020. Still, Pacific Gas & Electric has not dropped its opposition, even though the bill has been re-written and re-introduced, and no longer allows homeowners to intentionally install more power than they need.

Two decades after the french went nuclear, Amory Lovins and a group of co-authors published the book Small is Profitable: The Hidden Economic Benefits of Making Electrical Resources the Right Size. In it, they argued that the free market has already begun to favor distributed energy over centralized energy, as deregulation and restructuring "exposed the previously sheltered power-plant builders to brutal market discipline," and shifted the economics toward local power. "Central thermal power plants stopped getting more efficient in the 1960s, bigger in the '70s, cheaper in the '80s and bought in the '90s," they write. "At the same time, new kinds of 'micropower' generators thousands or tens of thousands of times smaller -- microturbines, solar cells, fuel cells, wind turbines -- started to become serious competitors."

Speaking by cell phone as he waits for a plane in Denver, airport alert bells and PA system announcements blaring behind him, Lovins has some advice for beleaguered utilities. "If you're AT&T and somebody invents this new thing called a 'cell phone,' do you hunker down and just hope cell phones go away, or do you get into the wireless business?

"Utilities should be treating distributed generation as a source of profit and competitive advantage rather than as a competitive threat," Lovins says. "It's hard to get their heads around a lot of little things instead of a few big things, which is what they're really good at. But if they want to provide low-cost reliable power for the least amount of risk, distributed generation can do it for them. The barriers to smaller systems are really cultural, not technical and economic."

There are some signs that utilities, investor-owned and municipal, understand what it means to adapt, even if they haven't embraced the change. Lovins notes that Idaho Power, an investor-owned utility in a state with no renewable energy goals, used to install, lease and maintain photovoltaic systems for its off-grid rural customers. The utility ended that program in 1997, a move its renewable energy specialist, Scott Gates, still laments. "I liked it," he says. "It provided a real service, (and) it made financial sense, because we didn't have to construct distribution lines at $20,000 a mile." The program no longer fit with the utility's post-deregulation business model, so it left the market to other solar providers. But Gates still writes checks at the end of the year to people who generate surplus power on their rooftops.

Southern California Edison is negotiating with state regulators to install 250 megawatts of distributed solar on rooftops leased from ratepayers, adding to nearly 450 megawatts of currently interconnected photovoltaics. Sempra Energy is using nine of Sopogy's solar collectors to air condition a 45,000 square-foot office building in Downey, Calif. And while San Diego Gas & Electric's plans for 52 megawatts of tracking photovoltaic panels were recently thwarted by regulators who deemed them overpriced (at $7 per watt), the utility has been busily installing "smart" meters in its customers' homes and offices. The meters are one step toward a grid with advanced two-way communications to help utilities manage intermittent renewable power. It may also help integrate those plug-in hybrid cars that the new chairman of the Federal Energy Regulatory Commission, Jon Wellinghoff, envisions shoring up the grid over the next decade.