July 26, 1996

DRA

Issue: Obligation to Serve

7.4.1 Obligation to Connect

7.4.1.1 Introduction

Restructuring is making old notions about the obligation to serve obsolete.

For the vertically integrated utility, the obligation to serve once meant the requirement to connect end users and to assure them reliable, bundled electric service. Later, the obligation to connect and take power from QFs was added. Under restructuring, however, electric supply will become competitive, and the utility distribution company (UDC) will serve competing suppliers as a common carrier. Already, the Energy Policy Act and FERC rulemaking have transformed the formerly "voluntary" choice to provide transmission service to competing suppliers into an obligation to serve. As restructuring proceeds, utilities will no longer have an obligation to supply electrons to direct access customers. Utilities will retain the need to plan for the needs of their remaining bundled customers and to report those needs to the power exchange, but electric procurement for bundled utility customers will become the obligation of the power exchange.

Restructuring will also transform the obligation to provide ancillary services. Previously, utilities were responsible for furnishing all ancillary services. However, under restructuring, the Power Exchange will procure ancillary services for UDC core customers, and ancillary will become the ultimate responsibility of the ISO (Independent System Operation). Responsibility for operating the transmission system, managing transmission congestion, and balancing system supply and demand will also devolve to the ISO.

Thus, under restructuring, the obligation of the utility to supply electrons and ancillary services ends. The obligation to connect wholesale and retail customers, however, remains. Indeed, it expands into an obligation to offer common carrier access to T&D based on comparability to a new class of T&D customers: competing generators and retail providers who need access to T&D to reach wholesale and retail customers.

7.4.1.2 Purpose and Scope

This section will deal separately with the obligations of the utility to retail users, and to competing wholesale or retail service providers; it will also address the obligations of the ISO and the power exchange. Our principles are:

o An obligation to provide a function exists only where there is a continuing natural monopoly.

o No obligation to perform a function exists where there is workable competition.

o The comparability principle regarding transmission access and pricing is extended to include retail customers distribution.

7.4.1.3 Obligations to Serve End Users

7.4.1.3.1 Obligations that the UDC will have:

1. The UDC will connect end users to the distribution system at fair and reasonable rates.

With the elimination of the obligation to generate or procure electric supply, the UDC's obligation to serve end users is reduced to an obligation to connect them, subject to line extension and other rules that may apply.

2. The UDC will deliver energy from competing retail providers to end use customers at fair and reasonable rates based on the comparability principle.

Comparability and open access to T&D are crucial to permitting retail providers to compete for end use customers. Unbundling of T&D costs facilitates open access.

3. The UDC will plan for the energy and ancillary service needs of bundled customers and will submit those needs as its demand bid to the PX.

This obligation to plan for the needs of bundled customers is a vestige of the former obligation to generate or procure electric supply.

4. The UDC will take back "returning" direct access customers. Subject to notification requirements that may apply.

7.4.1.3.2 Obligations that the UDC will not have:

5. The UDC will be default provider for customers not served by competing providers. Service to low income and any other "high risk" customers served by the UDC will be supported by the Public Purpose Low Income surcharge fund.

6. The UDC will not be the provider of last resort of energy or any ancillary services to direct access customers.

Direct access is by definition competitive, so no obligation to serve will exist for the UDC. Distribution ancillary services such as grid or voltage support and reliability will be the responsibility of the ISO. Ultimately, they should be unbundled so that wholesale and retail competitors providers can self-provide ancillary services.

7. The UDC will not be obligated to provide metering, billing or other competitive functions to direct access customers or customers with contracts for differences.

Metering, billing and other competitive functions are competitive, so no obligation to serve will exist for the UDC. Indeed, one could argue that no obligation exists for the UDC to provide metering etc. to bundled customers. ESCOs providing energy management services are capable of providing competitive services such as metering.

8. The UDC will not be obligated to provide any competitive customer service such as energy efficiency, load management or power quality to any customer.

Functions provided by competitive markets by definition are not part of a monopoly obligation to serve.

7.4.1.4 UDC Obligations to Serve Competing Wholesale and Retail Providers and Generators

1. The UDC will have the obligation to connect central and distributed generators to the transmission or distribution system at fair and reasonable rates.

Analogous to the obligation to connect end users is the obligation to connect competing generators, subject to interconnection standards and tariffs, and other rules that may apply.

2. The UDC's transmission system will have the obligation to provide open, non-discriminatory transmission wheeling service to all generators and retail providers at fair and reasonable rates, pursuant to ISO protocol.

Transmission wheeling is covered in FERC rulemaking, and is based on the comparability principle.

3. The UDC will have the obligation to provide open, nondiscriminatory distribution wheeling service to all retail

competitors and distributed generators at fair and reasonable rates.

This extends open wheeling access to distribution based on the comparability principle, so that those competitors can reach customers. This permits of generators connected to distribution to sell either to wholesalers or retail customers. It may result in ad hoc extension of ISO jurisdiction into distribution.

4. The UDCs will have the obligation to expand transmission and distribution facilities at fair and reasonable rates. The UDCs and their affiliates will be obligated to not substitute their own distributed generation for T&D upgrades or expansion.

Under restructuring, T&D deferral by UDCs is undesirable because expansion of T&D is necessary to accommodate competing generators and providers in their efforts to reach wholesale and retail customers. Furthermore, utility-owned distributed generation would also defeat vertical unbundling. It would also entail cross-subsidization and monopoly leveraging from the T&D function into generation and retail services, which are competitive. Competing generators and providers should have the option of constructing T&D expansion, paying the UDC to provide T&D expansion, or strategically locating generating plants to avoid T&D expansion.

5. The UDCs will have the obligation to bill competing providers for their use of UDC distribution plant. This will permit competing providers to offer bundled service to customers.

6. The UDC will be obligated to make customer-specific data available to competing retail providers with the consent of the customer.

This is necessary to help create a level playing field between the UDC and its potential competitors. The fee charged to competing providers for such information will be the UDC's cost of gathering and disseminating such information.

7.4.1.5 Obligations of the ISO

1. To balance supply and demand.

2. To oversee the use of transmission, and, where applicable, distribution, by competing generators and providers.

3. To manage transmission congestion.

4. Ancillary service planning will be the responsibility of the ISO. The UDCs and their affiliates will be obligated to not substitute their own distributed generation for ancillary service.

7.4.1.6 Obligations of the Power Exchange

To procure electricity and ancillary services to fill the needs of bundled UDC customers, and UDC customers with contracts for differences.

7.4.1.7 Obligations of Generators, ESCOs, Aggregators, Brokers, etc.

None, except to obey the law. These are competing agents.