A. 96-12-009
COMMISSIONER JESSIE J. KNIGHT, JR. CONCURRING:
I support this decision, but feel compelled to memorialize
thoughts that may aid future commission deliberation in dealing
with new unbundling issues that will surely arise over time.
The decision here provides a fair allocation of costs among the
classic functional areas of transmission, generation and distribution,
as well as an economically efficient means of calculating the
competition transition charge (CTC). Yet, I must express concerns
that the premise driving this stage of unbundling has a basic
flaw. The exercise to divide the electric industry into three
distinct functional components is an idea that no longer fits
the reality of the evolving competitive market for electricity.
Traditionally, the electricity industry has been segmented into
three primary functions -- transmission, distribution and generation.
This decision reflects our own institutional biases
that were cultivated during the several stages of our own initial
procedural and issue development in the electrical restructuring
proceeding, as well as the strictures evident in AB 1890 that
serve as the intellectual and legislative anchors justifying the
attempt to put costs into these three baskets. The study and
debate over the course of this decision has highlighted the unequivocal
fact that there are many costs that did not fit easily into one
basket or the other.
Generally, these costs should be characterized as
"retailing costs". These retailing costs can be categorized
as reflecting the cost of selling electricity to an end-user.
They are not costs associated with the generation of electricity.
Fundamentally, the production of power, the actual generation
of electricity, is a wholesale function rather than a retail function.
These retailing costs are not a true component of the cost of
distribution, because the business function of selling a product
to a customer is inherently not a distribution cost. By definition,
transmission costs are not associated with providing retail service.
The procedural necessity in place currently, that
insists that all costs must be allocated to generation, transmission,
or distribution, has obscured the issues in this proceeding.
There are identifiable costs associated with the provision of
retail electric service, costs that should be unbundled from wholesale
costs, recovered through the provision of retail service and therefore
solely collected from retail customers of the utility.
As a result of this decision, some of these retailing
costs have been allocated to generation and some assigned to distribution.
Of paramount concern is the fear that recovery of retailing costs
in distribution rates will require competitive retail providers
to inadvertently pay the retailing costs of the utilities. Realization
of this envisioned circumstance would create a subsidization of
the utility's retailing function, thus promoting injury to the
development of a competitive retail electric marketplace.
As the Commission proceeds to fashion a robust and
competitive retail market, it must actively seek to further unbundle
these "retailing costs" from distribution and generation
rates. Only this proactive effort can ensure a level playing
field between the utilities and competitive energy service providers.
The Commission's experience in overseeing the natural
gas and the telecommunications industries prepares us for the
inevitable fact that the unbundling that is occurring here will
be the first of many such proceedings, as our thinking and analysis
mature. It is a historic fact that the telecommunications industry
has undergone many rounds of unbundling. First, customer-premise-equipment
was unbundled from telephony. Later, long distance was unbundled
from the local service market, as a result of the disaggregation
of AT&T that resulted from the Modified Final Judgement in
1984. Since then, central office space has been unbundled, as
was the many underlying basic service elements in the 1980's and
early 1990's, as part of the federal open network architecture
policy. Currently, local telephone service is being further unbundled
with links being unbundled from ports. In fact, the entire network
is being unbundled into basic network functions, with each getting
unbundled from each other. Furthermore, in the wholesale provision
of bundled service, the Commission has seen fit to ensure that
wholesale rates are discounted to unbundle retailing costs.
In the natural gas industry, the merchant function,
gas gathering, and interstate transport are all unbundled. In
a Commission decision that is a mere few weeks old, gas storage
was unbundled. Moreover, this Commission is actively engaged
in bringing about even greater unbundling in the intrastate gas
arena as a result of D.97-08-055. Furthermore, it is the
intention of the Commission to ensure that its forthcoming long
term gas strategy also addresses this issue of unbundling retailing
costs from the provision of wholesale services.
In the electricity industry, as we explored the various
aspects of the industry, it became apparent that generation is
made up of many severable components. Electricity has an energy
component, reliability components, and retailing components.
Distribution has revenue cycle components with distinct retailing
elements. Even the overall revenue cycle of the utility can be
further unbundled into meter reading, billing, and other severable
parts. It is not beyond the pale for the Commission to potentially
find that many more underlying functions may eventually be unbundled
one from another as a result of federal policies that will certainly
emerge and evolve over time.
The process of unbundling can be likened to the peeling
of an onion. Under each layer, there is another layer that can
be peeled away, or further unbundled, if you will. The Commission
should fully expect and more importantly, seek the
further unbundling of distribution functions to assure that retailing
costs are truly unbundled from distribution. Only this strategy
will yield a competitive market such that future retailers will
be able to compete on a level playing field with the utility distribution
companies. In short, the development of a competitive retail
market requires the unbundling of retail costs from
wholesale services and the sole recovery of these costs from utility
retail customers.
Dated August 1, 1997 in San Francisco, California.
__/s/ Jessie J. Knight, Jr.___
Jessie J. Knight, Jr.
Commissioner