FW: M.Parti Response to UDC Load Profile Workshop Report

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> From:	Applied Econometrics, Inc. [SMTP:parti@INETWORLD.NET]
> Sent:	Monday, June 30, 1997 12:43 PM
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> Subject:	M.Parti Response to UDC Load Profile Workshop Report
> 
> This response is presented in two forms: 
>  1. as an unformatted text message included in the main body of this
> email
> document;
> and,
>  2. as an attached MS Word 6.0 document with full formatting.
> 
> I suggest that you try to read the attached word document (called
> "PartiRsp.Doc"), since the formatting helps to delineate the main
> sections
> of the paper.  If you can't read the attached document, because of
> incompatible encoding schemes, etc., then just read the unformatted
> text
> version that follows.  It's not pretty, but all the words are there.
> 
> Give me a call, or send email if you have any questions.
> 
> 
> Regards,
> 
> Michael Parti
> Applied Econometrics, Inc.
> 331 Ninth St.
> Del Mar, CA 92014
> 
> Voice: 619 - 755 - 1266
> Fax:   619 - 455 - 1511
> email: parti@inetworld.net
> 
>                    ===============================================
> 
> 
>                     A Response To The Utility Distribution Company
>         Report On The June 5, 1997 Direct Access Workshop On Load
> Profiling
>                                  By 
>              Michael Parti, Applied Econometrics, Inc. 
> 
> This is a response to the Utility Distribution Company (UDC) report on
> the
> June 5, 1997 workshop on load profiling by Applied Econometrics, Inc.
> (AEI),
> a consulting firm.**   AEI believes that electric industry
> restructuring
> should foster competition in, at least, generation and retailing.  All
> the
> electricity retailers should be able to use a mix of price and other
> marketing incentives to attract customers and improve their load
> shapes.  In
> this regard, our ESP clients should be allowed to use our econometric
> consulting services to find and attract an optimal mix of customers.  
> 
> '---------------------------------------------------------------------
> -----
> /**  FOOTNOTE:
>     331 Ninth St.; Del Mar, CA 92014; email: parti@inetworld.net
>   AEI is in the business of providing load-related planning and
> marketing
> information to natural gas and electricity firms in the U.S. and
> abroad.  We
> have been in business since 1980 and we invented the Conditional
> Energy
> Demand technique, one of the staple techniques for econometric load
> analysis
> (Bell Journal Of Economics, Spring, 1980).  AEI's goals in the current
> proceeding are to aid the transition to competition; and, in the
> longer run,
> to provide load shape and other information to the energy market
> participants. If the transition to competition is not expedited, AEI's
> fortunes would be adversely affected along with the ratepayers and the
> other
> non-UDC commercial organizations.
> '---------------------------------------------------------------------
> ------
> 
> In this response to the UDC Load Profile Workshop report, I will first
> discuss the necessary requirements for a load profile method that will
> foster retail energy competition.  After this, I will describe the
> shortcomings of the UDC approach to load profiling, and offer a set of
> practical solutions to the problems of implementing a good load
> profiling
> system.  In this connection, I advocate the use of retailer-developed
> load
> profiles.  In our final section, I discuss the incorrect UDC attacks
> on
> retailer-developed load profiles. 
> 
> I. How can we recognize a good load-profiling method?
> Price competition and other marketing competition will be severely
> hampered
> if the ESP retailer cannot distinguish the load shapes of its
> customers from
> the UDC's energy customers.  Consider, for example, the case of an ESP
> retailer who provides incentives for efficient air-conditioners.  Any
> resulting reduction in the retailer's peak-load costs would not be
> taken
> into account in settlement procedures for load-profiling customers
> unless
> there were a measurable difference in loads between the ESP's
> customers and
> the power customers of the UDC.  If these peak-load cost savings could
> not
> be realized in the settlement procedure, there would be a diminished
> profit
> incentive for the retailer to offer such programs.
> 
> In addition, there is a related equity issue that arises if the
> settlement
> procedures do not take profile differences across customers into
> account.
> It is not fair to shift the energy costs of high peak consumers to
> consumers
> with relatively flat load profiles.
> 
> For related reasons, the CPUC has stressed the importance of
> accounting for
> customer load differences in the settlement procedures.  In fact,
> there are
> several references to this principle in the CPUC's  May 6, 1997
> decision
> 97-05-040.  The following phrase appears in the section on Aggregation
> Of
> Customer Loads as well as in the Conclusions Of Law number 33.
> 
> "All customers and retail providers should be allowed to aggregate
> their
> loads in whatever fashion they can arrange, so long as the settlement
> procedures are capable of accurately calculating who is responsible
> for what."
> 
> Even apart from the May 6 decision, this concern with reasonable
> settlement
> accuracy is one of the CPUC cornerstones of equitable rate-making.
> For
> example, a similar principle is also applied to optional rate
> schedules as
> follows (see the State Of California Public Utilities Code, 1997,
> section
> 378):  
> 
> "The commission shall authorize new optional rate schedules and
> tariffs,
> including new service offerings, that accurately reflect the loads,
> locations, conditions of service, cost of service, and market
> opportunities
> of customer classes and subclasses."
> 
> 
> 
> II. The UDC approach to load profiling is flawed because it doesn't
> account
> for customer load profile differences in the settlement process.
> The proposed UDC load profiling method has several problems.  Most
> importantly, the UDC load profiling method allows only one load
> profile for
> each of the major rate classes in the settlements process. As noted in
> the
> previous section, this means that important customer load-timing
> differences
> (and PX price differences) will not be taken into account in the
> settlements
> process.  Unfortunately, this also means that 
> · the UDC load profiling method does not comply with the explicit
> settlement
> accuracy instructions of the May 6, 1997 CPUC decision; 
> · under the UDC method, price and marketing competition for customers
> will
> be reduced; and, 
> · under the UDC method, inequitable and unnecessary cost-shifting from
> high-volume peak consumers to flat-load customers will occur.
> 
> In addition, the type of load profiling planned by two of the UDC's
> (PG&E
> and SDG&E) is based only on load shapes in previous years.  This
> approach is
> called static load profiling.  It should not be used for cost
> settlements
> because it is so loose an approximation of the current loads that it
> cannot
> account for the current weather patterns, changes in consumption due
> to
> trend-related changes in the economy, or any changes in loads
> resulting from
> lower electricity rates and new energy marketing programs under
> competition.
> Furthermore, these static load profiles are apparently
> weather-normalized.
> This means that expensive peak loads resulting from any future extreme
> temperatures would be understated in their profiles.  Fortunately, SCE
> plans
> to offer dynamic load profiling at some (unspecified) time.  This SCE
> approach (apparently suggested by the CEC) has the advantage that it
> measures concurrent billing-period load profiles, rather than
> employing
> profiles from previous years.  The SCE approach, however, still
> suffers from
> the settlement-related problem that it provides no differentiation
> (segmentation) of load profiles within the traditional rate classes.  
> 
> More generally, there seems to be a major area of confusion concerning
> the
> dual role of the UDCs as distribution companies and as default
> retailers of
> energy.  This confusion is related to a corresponding dual role for
> load
> profiles: viz., they are to be used in calculating the energy charges
> relevant to settlements, as well as the size of the CTC charges.  The
> dual
> roles for load profiles are a key issue in the current setting: while
> the
> UDC's plan to measure the load profiles for all the customers on their
> distribution systems, none of them have any plans for measuring the
> load
> profiles for their own retained energy customers for settlement
> purposes.
> Some might argue that it is defensible to use a
> distribution-system-wide
> load profile to calculate the appropriate value of the CTC payment.
> In
> assessing the UDC load shapes used for power settlement purposes,
> however,
> it is clear that we need to know the load profiles of the subset of
> the
> UDC's customers that buys power from the UDC.
> 
> 
> III. Phasing in defensible load profiling: a practical approach
> Unfortunately, the UDC position seems to address load profiling
> implementation problems by simply delaying consideration of any
> solutions.
> This type of problem-solution approach leads to unnecessary
> cost-shifting
> and delays in implementing a competitive market structure.  In
> addition,
> this approach hinders our ability to learn from experience and adapt
> to any
> load shape segmentation problems that may arise in connection with
> industry
> restructuring.  Although there are serious concerns about
> differentiating
> customer load profiles, the UDCs do not even want to start hearings
> about
> segmented load profiling options until the second quarter of 1998 (see
> section 7 of the UDC Load Profile Workshop Report).  Using the UDC
> approach
> then, any progress toward implementation of full customer-specific or
> even
> group-specific load profiling would be unnecessarily delayed until
> 1999, or
> later.  
> 
> How should we deal with the timing and implementation issues inherent
> in
> load profiling?   
> 1. Form an independent load profile evaluation entity.
> The CPUC should form, immediately - not in 1998, a load profile
> evaluation
> group on the staff of the CPUC or the CEC.  The purpose of this group
> would
> be to assess the accuracy of retailer load profiles, including UDC
> load
> profiles, for settlement and CTC calculation applications.  There is
> no
> reason to delay the solution of these difficult problems, unless the
> goal is
> to delay the implementation of viable competition in the electricity
> industry.  It is important that this evaluation group be independent
> of any
> of the retailers.  In addition, the evaluation group should encourage
> innovative and sound methods for estimating load profiles.    
> 
> 2. Allow retailers to estimate their own load profiles, immediately.
> Generally, the new ESPs are starting with insufficient information for
> claiming a credible aggregate load shape for their customers.  This
> does not
> mean their retail efforts should be delayed.  It simply means that
> they
> should use a default load shape until they feel that they can estimate
> their
> own.  What should the default be?  If no better option exists, they
> could
> use the UDC load profile until they have the resources to estimate
> their
> own.  This does not mean, however, that an ESP should be prohibited
> from
> using its own load shape for settlement purposes as soon as it does
> have
> good load shape information on its own customers.   As noted above,
> this
> would reduce cost-shifting by increasing the settlement accuracy of
> the
> retailer power generation costs and would also promote innovative rate
> and
> marketing programs.  Accordingly, we would support giving each
> retailer the
> opportunity to use its own load shapes as soon as it can demonstrate
> that
> they are based on procedures that are as defensible as the best
> alternative
> load shapes.  Each retailer (including each UDC) should be prepared to
> demonstrate that the details of its load profiling methods are sound
> and to
> show that its load profile calculations are reproducible. 
> 
> 3.  Establish a regulatory feedback and control mechanism to assure
> that we
> can evaluate the accuracy of the UDC and retailer load profiles, and
> make
> fine or gross adjustments as needed
> The load profile evaluation entity should be in regular communication
> with
> the ISO to discuss any regularities that the ISO observes in system
> load
> errors.   This information should be transmitted to the retailers who
> would
> be expected to respond.  In the case of persistent serious errors, a
> thorough independent review of each retailer's load profiles would be
> undertaken at the expense of the retailers.   The CPUC should
> establish
> appropriate incentives to encourage retailers to submit accurate load
> profiles.
> 
> 
> IV.  The UDC objections to retailer-developed load profiles are simply
> general attacks on competition 
> Section 2 of the UDC load profile workshop report contains three
> primary
> objections to retailer-developed load profiles
> · the so-called "customer churning" effect;
> · the verification/fraud issue; and,
> · the necessity for independent regulatory oversight of load profiles.
> 
> I will discuss each of these issues as well as the
> financial-indifference
> point raised by the UDCs in section 2 of their load profile workshop
> report.
> 
> "Customer Churning" is a necessary part of competition.
> "Customer churning" refers to the movement of customers from retailer
> to
> retailer (including the UDCs as retailers).  Clearly, it is impossible
> to
> have a competitive market with no possible movement of customers.  The
> UDCs,
> however, allege that some sort of sampling problem occurs if the ESP
> retailers are allowed to develop their own load profiles as customers
> move
> across retailers.  Let's consider two possible types of sampling
> problems
> that could occur in this situation: a) the effect on the accuracy of
> the
> UDCs distribution-system load profile; and, b) the effect on the
> accuracy of
> the differentiation of customer load profiles across retailers within
> a
> distribution system.   Neither of these problem areas seems to have
> anything
> to do with the identity of the entity performing the load profiling,
> as long
> as sound measurement methods are employed by ESPs and UDCs. 
> 
> a) Distribution System Sampling Problems: Any ESP retailer's
> development of
> its own load profile has little to do with the accuracy of the total
> distribution-system load profile developed by the UDC unless the UDC
> employs
> added sample data obtained from the ESP retailer.  Unless the ESP
> retailer's
> sample is faulty, however, it seems curious to suppose that an
> addition of
> data points would diminish the accuracy of a combined ESP/UDC sample.
> In
> fact, it is very likely that the UDC will not use the ESP retailers'
> samples.  This means that if the UDC has maintained an adequate sample
> of
> the customers on its distribution network, then the total
> distribution-system load profile will be just as accurate as it would
> be if
> the "churning" had not taken place, unless the characteristics of the
> customers change in response to the competitive process (e.g., lower
> ESP
> rates may lead to higher energy consumption for some customers).  This
> change in the behavior of some customers has nothing to do, however,
> with
> the question of whether the ESP's settlement load profile is developed
> by
> the UDC or the ESP.   The only way to solve this
> distribution-system-wide
> sampling problem is simply to eliminate competition so that customer
> characteristics and prices do not change.  This, however, is a high
> price to
> pay to solve a small sampling problem.
> b) Differentiating retailer load profiles within a distribution
> system: As
> noted above, if retailer load profiles differ, then competition
> promotion
> and equity considerations are served by reflecting the load
> differences in
> settlement processes.  Unfortunately, again as noted above, none of
> the UDCs
> are willing to measure the load profiles of the subset of their
> customers
> who purchase power from them.  This means that the UDCs can have no
> credible
> load profile to be used for settlement purposes unless 1) the ESPs'
> customers just happen to have the same load profiles as the average
> UDC
> retained power customer; or 2) there are very few customers served by
> the
> ESP retailers.  In such a setting, the ESPs can serve a cost-saving
> purpose
> for the UDC: the load profiles of the customers who buy their energy
> from
> the UDCs can simply be computed as the distribution-system load
> profile
> residual after accounting for the loads of the ESP customers on the
> distribution system and any other known factors.  Since the UDCs wish
> to
> economize on measuring their own power customers' load profiles, the
> UDCs
> would benefit, not be harmed, by the existence of retailer-developed
> load
> profiles. 
> 
> The verification/fraud issue cuts both ways.
> The key characteristic of the settlement problem is that load profiles
> can
> differ across ESP retailers and UDCs.  Given the unnecessarily
> inaccurate
> nature of the UDCs' planned settlement load profiling method
> (one-load-profile-per-customer-class), it is clear that it would lead
> to
> correspondingly unnecessary cost-shifting across retail entities.
> Although
> the UDCs defend their inaccurate settlement load profiling method on
> cost-containment grounds and they attack possible ESP inaccuracies as
> fraud,
> the inaccuracy problem seems to be a consequence shared by both the
> cost-containment and fraud approaches.  In such a setting, we seem to
> have
> the choice of a virtual certainty of unnecessary settlement
> inaccuracies if
> we adopt the UDC approach or the possibility of unnecessary settlement
> inaccuracies if the ESP load profiles are not properly reviewed.  On
> balance, it would seem preferable to minimize unnecessary settlement
> inaccuracies by encouraging ESP retailer-developed load profiles and
> instituting proper review procedures.  
> 
> Everyone agrees: we need independent regulation of load profiles.
> The UDCs allege that a lack of regulatory oversight would make the use
> of
> retailer-developed load profiles unattractive.  Actually, the problem
> is
> broader than that.  A lack of regulatory oversight would allow both
> UDCs and
> ESPs to claim load shapes that may have no relation to actual retail
> energy
> consumption patterns.  Clearly, this is a top-priority area in which
> an
> independent entity at the CPUC or the CEC could aid the competitive
> process
> by assuring the contending retailers that no cost-shifting is
> occurring
> because of unnecessarily inaccurate settlement load profiles.
> 
> The UDCs wish to be financially indifferent to the application of load
> profiles.
> In the previous portion of this section, I discussed the UDCs fears
> that
> they might be harmed by load profile inaccuracies.  During the
> load-profiling workshop, however, some of the UDCs expressed a fear
> that
> they might not be able to recover their stranded asset costs if
> retailers'
> settlement costs were allowed to reflect their load profiles with 100%
> accuracy.  Their argument seemed to be that they might lose most of
> their
> flat-load customers to the ESP retailers.  They suggested that this
> customer
> loss, combined with the rate cap provision of AB1890, would make it
> impossible to collect a full stranded-asset payment from the
> high-peak-consuming customers who remained with them.  This argument
> was
> presented as an interesting theoretical possibility.  It did not seem
> to be
> important enough, however, to warrant the presentation of any UDC
> spreadsheet or computer simulation exercise that would show whether
> any
> reasonable market assumptions would lead to their speculated result.
> 
> 
> In fact, there are several countervailing effects that may lead to
> faster
> stranded asset collections than the UDCs anticipate.  This could
> occur, for
> example, because the 10% decrease in price ordered by AB1890 will
> promote
> greater kWh consumption considering standard price responses (negative
> short- and long-run price elasticities). Note also that since the ESP
> prices
> will probably be lower than UDC prices, the positive effect on kWh
> consumption, and thus the stranded asset cost collections, may be even
> greater for ESP customers than if these customers were to stay with
> the UDC.
> 
> On balance then, it seems inappropriate and somewhat nonsensical to
> adopt a
> speculative and unanalyzed UDC plan to speed up stranded asset
> collections
> by using the UDC load profile plan (one load profile per rate group).
> This
> is particularly true 1) since their plan may not actually speed up
> their
> stranded asset collections; and, 2) since their plan would interfere
> with
> the quid pro quo of stranded asset collections: reasonable steps
> toward
> competition.  
> 
> Finally, the question of UDC financial indifference to the application
> of
> load profiles also touches on the effect that load profiles have on
> the
> market position of the contending retailers.  If the UDCs regard the
> ESP
> retailers as potential competitors, then the UDCs will have an
> incentive to
> advocate types of load profiles, and to adopt other strategies that
> will
> minimize the effects of competition.  In particular, if UDCs expect to
> compete for energy customers sometime in the future, it may be in
> their best
> long-term financial interest to retain energy sales in order to
> minimize the
> costs of reacquiring energy customers lost to ESPs.
> 
> In this connection, note that the following description of a possible
> aggregation process appears in the section on Aggregation Of Customer
> Loads
> in the CPUC's  May 6, 1997 decision 97-05-040.
> 
> "The fourth alternative is a two step process where the UDC acts as a
> market
> facilitator for other aggregators, and eventually, in the
> post-transition
> era, the UDC may act as a private aggregator, subject to certain rules
> and
> conditions that the Commission may impose on the UDCs to address
> potential
> market power issues."
> 
> If a UDC expects to be competing for the customers of the ESPs at a
> later
> time, it may not be in its long-term financial interest to act as a
> temporary market facilitator for other aggregators.  Accordingly, 
> · to assure that the UDCs are financially indifferent to the
> application of
> load profiles; and more broadly,
> · to encourage the UDCs to be market facilitators, 
> the CPUC may consider redefining the post-transition-era roles of the
> UDCs
> so that they will not have an incentive to compete with the ESPs for
> energy
> customers.  
>   

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\par }\pard\plain \s2\qc\keepn\nowidctlpar \b\f4\fs22 Report On The June 5, 1997 Direct Access Workshop On Load Profiling
\par \pard\plain \s3\qc\keepn\nowidctlpar \b\f5 {\fs22 By 
\par }\pard\plain \qc\nowidctlpar \f4\fs20 {\b\f5\fs22 Michael Parti, Applied Econometrics, Inc.}{\cs23\b\f5\fs22\super \chftn {\footnote \pard\plain \s22\qj\nowidctlpar \f4\fs20 {\cs23\fs18\super \chftn }{\fs18 
 331 Ninth St.; Del Mar, CA 92014; email: parti@inetworld.net}}}{\fs22 
\par }\pard\plain \s16\qj\nowidctlpar \f4\fs20 {\fs16 
\par }This is a response to the Utility Distribution Company (UDC) report on the June 5, 1997 workshop on load profiling by Applied Econometrics, Inc. (AEI), a consulting firm.{\cs23\super \chftn {\footnote \pard\plain \s22\qj\nowidctlpar \f4\fs20 {
\cs23\fs18\super \chftn }{\fs18 
 AEI is in the business of providing load-related planning and marketing information to natural gas and electricity firms in the U.S. and abroad.  We have been in business since 1980 and we invented the Conditional Energy Demand technique, one of the stap
le techniques for econometric load analysis (Bell Journal Of Economics, Spring, 1980).  AEI\rquote 
s goals in the current proceeding are to aid the transition to competition; and, in the longer run, to provide load shape and other information to the energy market participants. If the transition to competition is not expedited, AEI\rquote s fortunes wou
ld be adversely affected along with the ratepayers and the other non-UDC commercial organizations.}}}
  AEI believes that electric industry restructuring should foster competition in, at least, generation and retailing.  All the electricity retailers should be
 able to use a mix of price and other marketing incentives to attract customers and improve their load shapes.  In this regard, our ESP clients should be allowed to use our econometric consulting services to find and attract an optimal mix of customers.  

\par \pard\plain \qj\nowidctlpar \f4\fs20 {\fs16 
\par }
In this response to the UDC Load Profile Workshop report, I will first discuss the necessary requirements for a load profile method that will foster retail energy competition.  After this, I will describe the shortcomings of the UDC approach to load profi
ling, and offer a set of practical solutions to the problems of implementing a good load profiling system.  In this connection, I advocate the use of retailer-developed load profiles.  In our final section, I discuss the incorrect UDC attacks on retailer-
developed load profiles. 
\par \pard \qj\nowidctlpar\brdrbtw\brdrs\brdrw15\brsp20 {\fs16 
\par }\pard\plain \s1\keepn\nowidctlpar \b\f5 I. How can we recognize a good load-profiling method?
\par \pard\plain \s16\qj\nowidctlpar \f4\fs20 Price competition and other marketing competition will be severely hampered if the ESP retailer cannot distinguish the load shapes of its customers from the UDC's {\i energy} custom
ers.  Consider, for example, the case of an ESP retailer who provides incentives for efficient air-conditioners.  Any resulting reduction in the retailer\rquote 
s peak-load costs would not be taken into account in settlement procedures for load-profiling customers unless there were a measurable difference in loads between the ESP\rquote 
s customers and the power customers of the UDC.  If these peak-load cost savings could not be realized in the settlement procedure, there would be a diminished profit incentive for the retailer to offer such programs.
\par {\fs16 
\par }
In addition, there is a related equity issue that arises if the settlement procedures do not take profile differences across customers into account.   It is not fair to shift the energy costs of high peak consumers to consumers with relatively flat load p
rofiles.
\par {\fs16 
\par }For related reasons, the CPUC has stressed the importance of accounting for customer load differences in the settlement procedures.  In fact, there are several references to this principle in the CPUC\rquote s  May 6, 1997
 decision 97-05-040.  The following phrase appears in the section on {\i Aggregation Of Customer Loads} as well as in the {\i Conclusions Of Law} number 33.
\par {\fs16 
\par }\pard \s16\qj\li720\ri810\nowidctlpar {\i \ldblquote 
All customers and retail providers should be allowed to aggregate their loads in whatever fashion they can arrange, so long as the settlement procedures are capable of accurately calculating who is responsible for what.\rdblquote 
\par }\pard \s16\qj\nowidctlpar {\fs16 
\par }Even apart from the May 6 decision, this concern with reasonable settlement accuracy is one of the CPUC cornerstones of equitable rate-making.  For example, a similar principle is also applied to {\i optional}
 rate schedules as follows (see the State Of California Public Utilities Code, 1997, section 378):  
\par {\fs16 
\par }\pard \s16\qj\li720\ri810\nowidctlpar {\i \ldblquote 
The commission shall authorize new optional rate schedules and tariffs, including new service offerings, that accurately reflect the loads, locations, conditions of service, cost of service, and market opportunities of customer classes and subclasses.
\rdblquote 
\par }\pard \s16\qj\nowidctlpar 
\par 
\par 
\par \pard\plain \s1\keepn\nowidctlpar \b\f5 II. The UDC approach to load profiling is flawed because it doesn\rquote t  account for customer load profile differences in the settlement process.
\par \pard\plain \s16\qj\nowidctlpar \f4\fs20 
The proposed UDC load profiling method has several problems.  Most importantly, the UDC load profiling method allows only one load profile for each of the major rate classes in the settlements process. As noted in the previous section, this means that imp
ortant customer load-timing differences (and PX price differences) will not be taken into account in the settlements process.  Unfortunately, this also means that 
\par {\pntext\pard\plain\f1\fs20 \'b7\tab}\pard\plain \qj\fi-360\li360\nowidctlpar\tx360{\*\pn \pnlvlblt\pnf1\pnstart1\pnindent360\pnhang{\pntxtb \'b7}}\f4\fs20 the UDC load profiling method does not
 comply with the explicit settlement accuracy instructions of the May 6, 1997 CPUC decision; 
\par {\pntext\pard\plain\f1\fs20 \'b7\tab}under the UDC method, price and marketing competition for customers will be reduced; and, 
\par {\pntext\pard\plain\f1\fs20 \'b7\tab}under the UDC method, inequitable and unnecessary cost-shifting from high-volume peak consumers to flat-load customers will occur.
\par \pard \qj\nowidctlpar 
\par In addition, the type of load profiling planned by two of the UDC\rquote 
s (PG&E and SDG&E) is based only on load shapes in previous years.  This approach is called static load profiling.  It should not be used for cost settlements because it is so loose an approximation of the current loads that it cannot account for the curr
ent weather patterns, changes in consumption due to trend-related changes in the economy, or any changes in loads resulting from lower electricity rates and new energy marketing programs under competition.  Furthermore, these static load profiles are appa
re
ntly weather-normalized.  This means that expensive peak loads resulting from any future extreme temperatures would be understated in their profiles.  Fortunately, SCE plans to offer dynamic load profiling at some (unspecified) time.  This SCE approach (a
pparently suggested by the CEC) has the advantage that it measures concurrent billing-period load profiles, rather than employing profiles from previous years.  The SCE approach, however, still suffers from the settlement-related problem that it provides 
no differentiation (segmentation) of load profiles within the traditional rate classes.  
\par 
\par More generally, there seems to be a major area of confusion concerning the dual role of the UDCs as distribution companies and as default retailers of energy.  This confusion is related to a corresponding dual role for load profiles: viz., they are to be 
used in calculating the energy charges relevant to settlements, as well as the size of the CTC charges.  The dual roles for load profiles are a key issue in the current setting: while the UDC's plan to measure the load profiles for {\i all}
 the customers on their distribution systems, none of them have any plans for measuring the load profiles for their {\i own retained }{\i\ul energy}{\i  customers}
 for settlement purposes.  Some might argue that it is defensible to use a distribution-system-wide load profile to calculate the appropriate value of the CTC payment.  In assessing the UDC load shapes used for power settlement purposes, however, it is cl
ear that we need to know the load profiles of the {\ul subset} of the UDC's customers {\ul that buys power} from the UDC.
\par 
\par 
\par \pard\plain \s1\keepn\nowidctlpar \b\f5 III. Phasing in defensible load profiling: a practical approach
\par \pard\plain \qj\nowidctlpar \f4\fs20 
Unfortunately, the UDC position seems to address load profiling implementation problems by simply delaying consideration of any solutions.  This type of problem-solution approach leads to unnecessary cost-shifting and delays in implementing a competitive 
market structure.  In addition, this approach hinders our ability to learn from experience and adapt to any load shape segment
ation problems that may arise in connection with industry restructuring.  Although there are serious concerns about differentiating customer load profiles, the UDCs do not even want to start hearings about segmented load profiling options until the second
 quarter of 1998 (see section 7 of the UDC Load Profile Workshop Report).  Using the UDC approach then, any progress toward implementation of full customer-specific or even group-specific load profiling would be unnecessarily delayed until 1999, or later.
  
\par 
\par How should we deal with the timing and implementation issues inherent in load profiling?   
\par {\b 1. Form an independent load profile evaluation entity.
\par }The CPUC should form, immediately \endash 
 not in 1998, a load profile evaluation group on the staff of the CPUC or the CEC.  The purpose of this group would be to assess the accuracy of retailer load profiles, including UDC load profiles, for settlement and CTC
 calculation applications.  There is no reason to delay the solution of these difficult problems, unless the
 goal is to delay the implementation of viable competition in the electricity industry.  It is important that this evaluation group be independent of any of the retailers.  In addition, the evaluation group should encourage innovative and sound methods fo
r estimating load profiles.    
\par 
\par {\b 2. Allow retailers to estimate their own load profiles, immediately.
\par }Generally, the new ESPs are starting with insufficient information for claiming a credible aggregate load shape for their customers.  This does not mean th
eir retail efforts should be delayed.  It simply means that they should use a default load shape until they feel that they can estimate their own.  What should the default be?  If no better option exists, they could use the UDC load profile until they hav
e the resources to estimate their own.  This does not mean, however, that an ESP should be prohibited from using its own load shape for settlement purposes as soon as it does have good load shape information on its own customers.   As noted above, this wo
ul
d reduce cost-shifting by increasing the settlement accuracy of the retailer power generation costs and would also promote innovative rate and marketing programs.  Accordingly, we would support giving each retailer the opportunity to use its own load shap
es as soon as it can demonstrate that they are based on procedures that are as defensible as the best alternative load shapes.  Each retailer (including each UDC) should be prepared to demonstrate that the details of its load profiling methods are sound a
nd to show that its load profile calculations are reproducible. 
\par 
\par \pard\plain \s20\qj\nowidctlpar \b\f4\fs20 3.  Establish a regulatory feedback and control mechanism to assure that we can evaluate the accuracy of the UDC and retailer load profiles, and make fine or gross adjustments as needed
\par \pard\plain \qj\nowidctlpar \f4\fs20 
The load profile evaluation entity should be in regular communication with the ISO to discuss any regularities that the ISO observes in system load errors.   This information should be transmitted to the retailers who would be expected to respond.  In the
 case of persistent serious errors, a thorough independent review of each retailer\rquote 
s load profiles would be undertaken at the expense of the retailers.   The CPUC should establish appropriate incentives to encourage retailers to submit accurate load profiles.
\par 
\par 
\par \pard\plain \s1\keepn\nowidctlpar \b\f5 IV.  The UDC objections to retailer-developed load profiles are simply general attacks on competition 
\par \pard\plain \qj\nowidctlpar \f4\fs20 Section 2 of the UDC load profile workshop report contains three primary objections to retailer-developed load profiles
\par {\pntext\pard\plain\f1\fs20 \'b7\tab}\pard \qj\fi-360\li360\nowidctlpar\tx360{\*\pn \pnlvlblt\pnf1\pnstart1\pnindent360\pnhang{\pntxtb \'b7}}the so-called \ldblquote customer churning\rdblquote  effect;
\par {\pntext\pard\plain\f1\fs20 \'b7\tab}the verification/fraud issue; and,
\par {\pntext\pard\plain\f1\fs20 \'b7\tab}the necessity for independent regulatory oversight of load profiles.
\par \pard \qj\nowidctlpar 
\par I will discuss each of these issues as well as the financial-indifference point raised by the UDCs in section 2 of their load profile workshop report.
\par 
\par \pard\plain \s20\qj\nowidctlpar \b\f4\fs20 \ldblquote Customer Churning\rdblquote  is a necessary part of competition.
\par \pard\plain \s16\qj\nowidctlpar \f4\fs20 \ldblquote Customer churning\rdblquote  refers to the movement of customers from retailer to retailer (including the UDCs as retailers).  Clearly, it is impossible to have a competitive market with no p
ossible movement of customers.  The UDCs, however, allege that some sort of sampling problem occurs if the ESP retailers are allowed to develop their own load profiles as customers move across retailers.  Let\rquote 
s consider two possible types of sampling prob
lems that could occur in this situation: a) the effect on the accuracy of the UDCs distribution-system load profile; and, b) the effect on the accuracy of the differentiation of customer load profiles across retailers within a distribution system.   Neith
er of these problem areas seems to have anything to do with the identity of the entity performing the load profiling, as long as sound measurement methods are employed by ESPs and UDCs. 
\par \pard\plain \qj\nowidctlpar \f4\fs20 
\par {\pntext\pard\plain\fs20 a)\tab}\pard \qj\fi-360\li360\nowidctlpar\tx360{\*\pn \pnlvlbody\pnlcltr\pnstart1\pnindent360\pnhang{\pntxta )}}{\ul Distribution System Sampling Problems:}
 Any ESP retailer's development of its own load profile has little to do with the accuracy of the total distribution-system load profile developed by the UDC unless the UDC employs added sample data obtained from the ESP retailer.  Unless the ESP retailer
's sample is faulty, however, it seems curious to suppose that an addition of data points would diminish the accuracy of a combined ESP/UDC sample.   In fact, it is very likely that the UDC will not use the ESP retailers\rquote 
 samples.  This means that if the UDC has maintained an adequate sample of the customers on its distribution network, then the total distribution-system load profile will be just as accurate as it would be if the \ldblquote churning\rdblquote 
 had not taken place, unless the characteristics of the customers change in response to the compe
titive process (e.g., lower ESP rates may lead to higher energy consumption for some customers).  This change in the behavior of some customers has nothing to do, however, with the question of whether the ESP's settlement load profile is developed by the 
UDC or the ESP.   The only way to solve this distribution-system-wide sampling problem is simply to eliminate competition so that customer characteristics and prices do not change.  This, however, is a high price to pay to solve a small sampling problem.

\par {\pntext\pard\plain\fs20 b)\tab}{\ul Differentiating retailer load profiles within a distribution system:}
 As noted above, if retailer load profiles differ, then competition promotion and equity considerations are served by reflecting the load differences in settlement processes.  Unfortunately, again as noted above, none of the UDCs are willing to measure th
e load profiles of the subset of their customers who purchase power from them.  This means that the UDCs can have no credible load profile to be used for settlement purposes unless 1) the ESPs\rquote 
 customers just happen to have the same load profiles as the average UDC retained power customer; or 2) there are very few customers served by the ESP retailers.  In such a setting, the ESPs can serve a cost-saving purpose for the UDC: the load prof
iles of the customers who buy their energy from the UDCs can simply be computed as the distribution-system load profile residual after accounting for the loads of the ESP customers on the distribution system and any other known factors.  Since the UDCs wi
sh to economize on measuring their own power customers\rquote  load profiles, the UDCs would benefit, not be harmed, by the existence of retailer-developed load profiles. 
\par \pard \qj\nowidctlpar 
\par \pard\plain \s20\qj\nowidctlpar \b\f4\fs20 The verification/fraud issue cuts both ways.
\par \pard\plain \qj\nowidctlpar \f4\fs20 The key characteristic of the settlement problem is that load profiles can differ across ESP retailers and UDCs.  Given the unnecessarily inaccurate nature of the UDCs\rquote 
 planned settlement load profiling method (one-load-profile-per-customer-class), it is clear that it would lead to correspondingly unne
cessary cost-shifting across retail entities.  Although the UDCs defend their inaccurate settlement load profiling method on cost-containment grounds and they attack possible ESP inaccuracies as fraud, the inaccuracy problem seems to be a consequence shar
ed by {\ul both} the cost-containment and fraud approaches.  In such a setting, we seem to have the choice of a {\i virtual certainty} of unnecessary settlement inaccuracies if we adopt the UDC approach or the {\i possibility}
 of unnecessary settlement inaccura
cies if the ESP load profiles are not properly reviewed.  On balance, it would seem preferable to minimize unnecessary settlement inaccuracies by encouraging ESP retailer-developed load profiles and instituting proper review procedures.  
\par 
\par \pard\plain \s20\qj\nowidctlpar \b\f4\fs20 Everyone agrees: we need independent regulation of load profiles.
\par \pard\plain \qj\nowidctlpar \f4\fs20 The UDCs allege that a lack of regulatory oversight would make the use of retailer-developed load profiles unattractive.  Actually, the problem is broader than that.  A lack of regulatory oversight would allow {\i both
}
 UDCs and ESPs to claim load shapes that may have no relation to actual retail energy consumption patterns.  Clearly, this is a top-priority area in which an independent entity at the CPUC or the CEC could aid the competitive process by assuring the conte
nding retailers that no cost-shifting is occurring because of unnecessarily inaccurate settlement load profiles.
\par 
\par \pard\plain \s20\qj\nowidctlpar \b\f4\fs20 The UDCs wish to be financially indifferent to the application of load profiles.
\par \pard\plain \qj\nowidctlpar \f4\fs20 In the previous portion of this section, I discussed t
he UDCs fears that they might be harmed by load profile inaccuracies.  During the load-profiling workshop, however, some of the UDCs expressed a fear that they might not be able to recover their stranded asset costs if retailers\rquote 
 settlement costs were all
owed to reflect their load profiles with 100% accuracy.  Their argument seemed to be that they might lose most of their flat-load customers to the ESP retailers.  They suggested that this customer loss, combined with the rate cap provision of AB1890, woul
d 
make it impossible to collect a full stranded-asset payment from the high-peak-consuming customers who remained with them.  This argument was presented as an interesting theoretical possibility.  It did not seem to be important enough, however, to warrant
 the presentation of any UDC spreadsheet or computer simulation exercise that would show whether any reasonable market assumptions would lead to their speculated result.   
\par 
\par In fact, there are several countervailing effects that may lead to faster stranded 
asset collections than the UDCs anticipate.  This could occur, for example, because the 10% decrease in price ordered by AB1890 will promote greater kWh consumption considering standard price responses (negative short- and long-run price elasticities). No
te also that since the ESP prices will probably be lower than UDC prices, the positive effect on kWh consumption, and thus the stranded asset cost collections, may be even greater for ESP customers than if these customers were to stay with the UDC.
\par 
\par On bala
nce then, it seems inappropriate and somewhat nonsensical to adopt a speculative and unanalyzed UDC plan to speed up stranded asset collections by using the UDC load profile plan (one load profile per rate group).  This is particularly true 1) since their
 plan may not actually speed up their stranded asset collections; and, 2) since their plan would interfere with the {\i quid pro quo} of stranded asset collections: reasonable steps toward competition.  
\par 
\par Finally, the question of UDC financial indifference to th
e application of load profiles also touches on the effect that load profiles have on the market position of the contending retailers.  If the UDCs regard the ESP retailers as potential competitors, then the UDCs will have an incentive to advocate types of
 load profiles, and to adopt other strategies that will minimize the effects of competition.  In particular, if UDCs expect to compete for energy customers sometime in the future, it may be in their best long-term financial interest to retain energy sales
 in order to minimize the costs of reacquiring energy customers lost to ESPs.
\par 
\par In this connection, note that the following description of a possible aggregation process appears in the section on {\i Aggregation Of Customer Loads} in the CPUC\rquote s  May 6, 1997 decision 97-05-040.
\par 
\par \pard\plain \s21\qj\li810\ri540\nowidctlpar \i\f4\fs20 \ldblquote The fourth alternative is a two step process where the UDC acts as a market facilitator for other aggregators, and{\*\bkmkstart UDCsAggregatorsInPostTransistionEra}
 eventually, in the post-transition era, the UDC may act as a private aggregator, subject to certain rules and conditions that the Commission may {\*\bkmkend UDCsAggregatorsInPostTransistionEra}impose on the UDCs to address potential market power issues.
\rdblquote 
\par \pard\plain \nowidctlpar \f4\fs20 
\par \pard\plain \s16\qj\nowidctlpar \f4\fs20 If a UDC expects to be competing for the customers of the ESPs at a later time, it may not be in its long-term financial interest to act as a temporary market facilitator for other aggregators.  Accordingly, 

\par {\pntext\pard\plain\f1\fs20 \'b7\tab}\pard \s16\qj\fi-360\li360\nowidctlpar\tx360{\*\pn \pnlvlblt\pnf1\pnstart1\pnindent360\pnhang{\pntxtb \'b7}}to assure that the UDCs are financially indifferent to the application of load profiles; and more broadly,

\par {\pntext\pard\plain\f1\fs20 \'b7\tab}to encourage the UDCs to be market facilitators, 
\par \pard \s16\qj\nowidctlpar the CPUC may consider redefining the post-transition-era roles of the UDCs so that they will not have an incentive to compete with the ESPs for energy customers.  
\par 
\par }