I. INTRODUCTION
A. Necessity For Direction From CPUC
B. Summary of Options
1. Option 1
2. Option 2
3. Option 3
4. Option 4
5. Option 5
C. Notice Regarding Comments

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE
STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission's Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation	)))))	R.94-04-031 (Filed April 20, 1994)
Order Instituting Investigation on the Commission's Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation	))))))	I.94-04-032 (Filed April 20, 1994)

JAMES E. PRICE

Facilitator for
RATESETTING WORKING GROUP

Division of Ratepayer Advocates
505 Van Ness Avenue
San Francisco, California 94102

Telephone: (415) 703-1797

Facsimile: (415) 703-1981

Dated: August 26, 1996

INTRODUCTION

In his June 21, 1996 ACR, Assigned Commissioner Duque ordered the Ratesetting Working Group ("RWG") to address which issues should be "Track 1" and which issues should be "Track 2" in a report to be filed on August 26, 1996. The RWG has designated those functions or services that are essential to enable Direct Access by January 1, 1998 as Track 1 items. This is consistent with the June 21 ACR definition of track 1 items as being those "that are necessary for the implementation of direct access and must be in place on or before January 1, 1998" as opposed to track 2 items which are "those issues that are desirable but not necessary for Direct Access implementation."

There is consensus among all parties to the RWG that at least Generation, Transmission (including ancillary services), Distribution, Competitive Transition Charge ("CTC"), and Public Goods (the "Five Consensus Items") should be unbundled on utilities' tariffs to support the January 1, 1998 deadline to establish a competitive market for generation. However, the RWG has struggled to determine the extent (if at all) to which distribution services need to be unbundled in order to support the Commission's stated policy goal of making direct access available to customers of all sizes and classes beginning in January 1998. Some members of the RWG believe the Commission must address first the question of whether further unbundling is in the public interest. They believe that unbundling only the "Five Consensus Items" by January 1, 1998 achieves the Commission's stated goal. They also believe that attempting to engage in further unbundling before January 1, 1998--including considering the threshold public policy issues--could jeopardize this goal.

Other members of the RWG believe that customer choice will be restricted, especially for smaller customers, unless certain services are unbundled by January 1, 1998. This unbundling could range from a few distribution services to a fundamental change in the way in which utilities realize earnings. They believe that insufficient unbundling will undermine the formation and financial viability of retail firms.

This report therefore summarizes a range of options so that the Commission can provide additional direction regarding the Track 1/Track 2 issues. The appendices to this report present five options for unbundling as sponsored by one or more parties. These appendices represent the views of their respective authors and do not reflect a consensus of the RWG.

Necessity For Direction From CPUC

The Commission made the following statement in its Roadmap decision: "The goal in this area is to unbundle distribution services, so as to facilitate customer choice." (Roadmap Decision, Section 4a.) The RWG is concerned that the statement can be interpreted in a number of ways. Does this statement mean that distribution should be unbundled from the other four functions, i.e., generation, transmission etc. or does it mean that the individual distribution services, i.e., metering, billing, etc. should be unbundled?

If the Commission intended the former interpretation, then the RWG does not need any additional direction in order to meet the Commission's November 15 deadline for unbundled rate filings.

If, on the other hand, the Commission intended the latter interpretation, the RWG needs additional guidance as to how much unbundling should take place and over what timeframe. The appendices to this report present a range of unbundling options to assist the Commission in making its determination. In clarifying its policy in this area, the Commission needs to consider whether distribution service unbundling is in the public interest. The RWG recommends that the Commission consider at least the following issues in reviewing the various options:

1. The extent of distribution service unbundling necessary to provide the Commission's desired level of customer choice for all customers;
2. The potential tradeoffs between the extent of distribution unbundling and the timing of the implementation of direct access;
3. The potential tradeoffs between the incremental costs of additional unbundling and the value to customers;
4. The potential tradeoffs between the degree of accuracy of the cost estimates used for the unbundling of distribution services and the timing of the implementation of direct access;
5. The relationship of costing methods used for unbundling distribution services to the Commission's concerns about avoiding cost­shifting;
6. The relationship between the extent and timing of distribution unbundling and consumer protection and education;
7. The need to establish general principles and standards that will minimize regulatory oversight and litigation;
8. The need for and extent of the UDC's ongoing obligation to act as an exclusive default provider for those not selecting alternative suppliers or for those returning from service with alternate suppliers; and
9. The need to balance the opportunities and responsibilities of the market providers.

Timing considerations are inextricably tied to the issues identified above. Prior to the unbundling of products and services, specific market rules and associated responsibilities would need to be defined, cost studies would need to be performed, and prices would need to be approved and communicated. Moreover, the unbundling of certain specified products and services, if mandated, may need to be phased in over a measured period of time in order to ensure an orderly transition. Therefore, it is important that the Commission determine the extent (if any) to which it wishes to have the utilities develop costing studies to support the potential unbundling of distribution products and services either before or after January 1, 1998 and the timeframe within which it wishes to hear the debate over the fundamental issues enunciated above.

Summary of Options

The specific relationship between Track 1 and Track 2 items and Options 1 through 5, as defined below, can be viewed as a matter of both the extent of unbundling and the timeline over which this unbundling proceeds. As discussed above, Track 1 items are those deemed to be "necessary for the implementation of Direct Access and must be in place on or before January 1, 1998" (June 21 Assigned Commissioner Ruling). A number of parties have posited that unbundling only "The Five Consensus Items" is sufficient to meet this criterion. Options 1 through 5 seek to capture a range of possible outcomes regarding the extent to which any additional unbundling might occur, and when these additional products and services might be unbundled.

Option 1

Option 1 identifies the Track 1 items as Generation, Transmission (including ancillary services), Distribution, Competition Transition Charges ("CTCs"), and Public Goods (collectively, the "Five Consensus Items"). This will require the IOUs to separate their bundled revenue requirements into these five functional categories, a process involving refunctionalization of assets and direct assignment and allocation of common costs and administrative and general expenses. Proponents believe that determination of Track 2 items, including the threshold policy and methodological issues associated with such unbundling of distribution products and services, must be deferred until after the start of direct access in order to avoid any risk of delaying the implementation date.

Option 2

Option 2 calls for unbundling of the Five Consensus Items to meet the January 1, 1998 deadline for Direct Access. In addition, Option 2 identifies a separate, parallel process within the Ratesetting Working Group process to identify potential distribution services that are candidates for unbundling. Under this Option, parties will begin now to evaluate which Track 2 items are candidates for post-January 1, 1998 unbundling, determining what Commission decisions are necessary for additional unbundling to proceed, specifying the needed cost studies, and engaging in essential groundwork. Proponents believe that Option 2 will best balance the need to implement Direct Access by January 1, 1998 with the desire to address the possible unbundling of distribution services.

Option 3

Option 3 supports unbundling the Five Consensus Items and further unbundles selected distribution services under Track 1. Option 3 selects certain "revenue cycle" services for Track 1, chosen from metering, billing, customer and uncollectibles services. Services are screened according to criteria which will differentiate between competitive (retail) and monopoly ("UDC") services and determine whether the UDC is or is not the default provider. Monopoly services remain bundled with exclusive UDC franchise rights. Other competitive distribution services are identified, prioritized and unbundled after January 1, 1998 (Track 2) as new retail products and services are identified. Option 3 unbundles UDC cost savings (credited to the bill) when retailers, rather than the UDC, provide the service. Where the UDC is the default provider, UDC cost savings are based on marginal attributable costs. Where the UDC is not the default provider, UDC cost savings are based on higher average attributable costs. Proponents believe that Option 3 meets CPUC goals and achieves a balance among the nine evaluation criteria defined in this report (e.g., ensure timely direct access and support retailing).

Option 4

Option 4 provides a comprehensive, phased distribution function unbundling process in which the component services included in the retail distribution function now restricted to the UDC are ultimately divided into three categories: (1) unbundled and competitively provided by multiple organizations, which might include the UDC; (2) unbundled, but provided exclusively by a monopoly at two or more levels of quality at the customer's choice; and (3) bundled monopoly services required of all customers. The process begins now with an assessment of what services fit into each category and then determines when to make these changes. A limited number of services may be appropriately unbundled by January 1, 1998. The proponents believe that the process should begin by unbundling some services duplicative of direct access providers under monopoly supply in order to develop the intelligence needed to make more informed judgments about the suitability of full­scale competitive unbundling. Their view is that, while distribution function unbundling is a key element of consumer choice, no party has sufficient information to judge what "end state" can be supported by markets. This option does not require a priori judgments about which services can be successfully shifted to the unbundled, competitive market; and is proposed to be an orderly process under which a succession of unbundling and competitive supply opportunities can be tested, while preserving the possibility of a regulated monopoly as the "end state" for some services.

Option 5

Option 5 proposes that three features be incorporated in the CPUC's end­state vision of the restructured industry. First, unbundle certain distribution services, thereby creating a first tier of retail service providers within whom the obligation to serve rests, one member of that group being the utility's retail arm. Participation in that group of retail service providers would be restricted to firms meeting financial and operating standards. In the end state, most distribution services would be both unbundled and offered competitively. Second, unbundle several of the credit protections used by the utilities such as the uncollectibles account, customer enrollment issues and customer terminations for failure to pay. Third, permit the prepayment of the tariff charges, inclusive of full prepayment of embedded ratebase, as a payment option within all electric tariffs, while changing no other features of the tariffs' terms of service. Implementation/testing of these proposed changes would be sequenced throughout the restructuring phase-in period. Proponents believe that a firm commitment to accomplish these changes within a reasonable timeframe is more important than the precise order or timing of them. Proponents further believe that these proposed changes are necessary to ensure that all groups of customers have access to competition and that most parts of the bundle, as perceived by the customer, are open to competitive forces.

Notice Regarding Comments

All parties submitting comments to this working group report should send an electronic copy to James E. Price, California Public Utilities Commission, Division of Ratepayer Advocates, 505 Van Ness Avenue, San Francisco, California, 94102, (415) 703­1797 for posting on the RWG website. Any party who is unable to access the website may contact James E. Price for further assistance.

Respectfully submitted,

JAMES M. LEHRER, Senior Counsel
SOUTHERN CALIFORNIA EDISON COMPANY

For: JAMES E. PRICE, Facilitator
RATESETTING WORKING GROUP

JAMES E. PRICE
Division of Ratepayer Advocates
505 Van Ness Avenue
San Francisco, California 94102

Telephone: (415) 703-1797

Facsimile: (415) 703-1981

Dated: August 26, 1996

Docket Clerk
California Public Utilities Commission
505 Van Ness Avenue
San Francisco, California 94102

RE: R.94-04-031/I.94-04-032
Electric Industry Restructuring

Dear Docket Clerk:

Enclosed for filing with the Commission are the original and five copies of the RATESETTING WORKING GROUP UNBUNDLING REPORT IN RESPONSE TO JUNE 21, 1996 ASSIGNED COMMISSIONER'S RULING in the above-referenced proceeding.

Following the practice of the Ratesetting Working Group (RWG) participants to share the workload associated with the Group's activities, Edison agreed to assemble, reproduce, file and serve the RWG Report on behalf of James E. Price (the RWG Facilitator), and the RWG participants who provided input to the document. Also on behalf of Mr. Price and the RWG, I would like to thank Ms. Cathy Yap for acting as the Group's central point of contact and editor of the consensus portion of the RWG Report.

We request that a copy of this document be file-stamped and returned for our records. I will transmit a copy of the file­stamped document to Mr. Price. A self-addressed, stamped envelope is enclosed for your convenience.

Your courtesy in this matter is appreciated.

Very truly yours,

James M. Lehrer

JML:jgm:DOCUMENT.05

Enclosures

cc: All Parties of Record, R.94-04-031/I.94-04-032

(U 338-E)

I hereby certify that, pursuant to the Commission's Rules of Practice and Procedure, I have this day served a true copy of RATESETTING WORKING GROUP UNBUNDLING REPORT IN RESPONSE TO JUNE 21, 1996 ASSIGNED COMMISSIONER'S RULING on all parties identified on the attached service list. Service was effected by means indicated below:

Placing the copies in properly addressed sealed envelopes and depositing such envelopes in the United States mail with first­class postage prepaid (Via First Class Mail);

Placing the copies in sealed envelopes and causing such envelopes to be delivered by hand to the offices of each addressee (Via Courier);

Transmitting the copies via facsimile, modem, or other electronic means (Via Electronic Means).

Executed this 26th day of August, 1996, at Rosemead, California.

______________________________________________
Flor Tolley
SOUTHERN CALIFORNIA EDISON COMPANY

2244 Walnut Grove Avenue
Rosemead, California 91770
Telephone: (818) 302-4021
Facsimile: (818) 302-3304