JAMES M. LEHRER
Senior Counsel
Attorney for
SOUTHERN CALIFORNIA EDISON COMPANY
2244 Walnut Grove Avenue
Post Office Box 800
Rosemead, California 91770
Telephone: (818) 302-3252
Facsimile: (818) 302-1935
This Appendix represents the proposal and opinion of Southern California Edison Company, and is not intended to represent the consensus or approval of the Ratesetting Working Group.
Option 1 limits unbundling for January 1,
1998 to the Five Consensus Items: Generation, Transmission, Distribution,
CTC, and Public Goods; and defers a determination of any further
unbundling to beyond the start of direct access.
Following the Commission's directive in the Restructuring Policy Decision, which was reiterated in Assigned Commissioner Duque's May 8, 1996 Ruling (the "May 8 ACR"), all parties have agreed that Track 1 unbundling includes the unbundling of the IOUs' costs of generation, transmission, and distribution on their tariff sheets./ Consistent with this and other key restructuring policy decision directives that the new market should continue support of public goods programs, and that IOUs should recover stranded costs both Edison and PG&E have submitted proposals in their July 15 filings to limit the initial unbundling to generation, transmission, distribution, public goods charges, and CTC, and to present the associated rate design.
There are several reasons for this approach. First and foremost, achieving the Commission's January 1, 1998 deadline for implementation of direct access must be the primary goal. The five items currently identified as on Track 1 are the only items necessary to enable direct access by January 1, 1998. Unbundling these five items, performing the required cost studies, determining the various revenue requirements, designing rates for each, and obtaining Commission approval in the next sixteen months will require significant ongoing effort on the part of the Commission, IOUs and other stakeholders.
Further, successful resolution of the unbundling proposed in this option is only one of myriad complex and resourceintensive tasks that must be completed to accomplish the Commission's January 1, 1998 goal. For example, the design, establishment and operation of the Power Exchange, Independent System Operator ("ISO"), and UDC, as well as the appropriate communication links among these entities, the new market retailers and utilities, and any necessary legislation or regulation of such must also be completed and in place by January 1, 1998.
Finally, the Ratesetting Working Group ("RWG") recognized and states in the consensus portion of this Report at page 3:
In clarifying its policy in this area, the Commission needs to consider whether distribution service unbundling is in the public interest.
The RWG, at the same page, recommends no fewer than nine issues for the Commission to consider in reviewing its options, all nine of which are central to the determination of what extent, if any, unbundling of distribution services would serve the public interest. The Commission should not jeopardize the underlying goal of restructuring -- to achieve lower energy costs for all customers without compromising reliability or safety -- by attempting a hasty, premature or speculative determination of these fundamental and pivotal public policy issues. Yet, to devote the time, resources, and careful attention necessary to develop the evidentiary foundation requisite for an informed, reasoned and sound decision could seriously overburden the limited resources of the Commission and the stakeholders, placing in jeopardy the goal of implementing direct access by January 1, 1998. To maximize the probability of achieving both of these goals, we propose to delay consideration of what extent, if any, unbundling of distribution services is in the public interest until postJanuary 1, 1998.
We cannot designate any items as Track 2 until
the determinations included in Section III below have been
made.
No policy decisions are required for Track 1 other than an affirmation that the initial level of unbundling should be limited to the Five Consensus Items.
By contrast, Edison and other parties with years of experience in the electric services industry recognize that the unbundling of distribution services raises important policy issues -- specifically, whether such unbundling is either appropriate or more fundamentally even in the public interest. If, prior to January 1, 1998, the Commission decides to deviate from its chosen path of functional unbundling only, these policy issues must be debated and resolved in a public forum as soon as possible to prevent disruptive or subjective efforts to unbundle. This debate must address at least the following:
The Commission simply cannot ignore these issues
by ordering the unbundling of distribution services at this time,
in the absence of an evidentiary record upon which to base a reasoned
judgment on these crucial matters. Thus, before the Commission
embarks on this course, it should convene evidentiary hearings
to determine whether the public interest would be served by the
unbundling of distribution services. To maximize the possibility
of meeting the Commission's January 1, 1998 goal for direct
access, we propose that such hearings occur after January 1,
1998.
Option 1 focuses present efforts on the timely unbundling of the Five Consensus Items included in Track 1, deferring the debate on which items, if any, to unbundle in Track 2 until such time as direct access has been successfully implemented. Under this option, the Commission, as well as the parties, would devote all available time and resources in the near term to resolving the complex issues and completing the complicated tasks necessary to meet the January 1, 1998 deadline for direct access.
At the appropriate time, the Commission must approve the methodology for unbundling and rate designs for the five consensus items:
The Commission should establish a formal process
and schedule to be initiated following the start of direct access
to decide policy issues for potential unbundling of Track 2
items as discussed above.
Option 1 is based on the Commission's stated purpose of establishing a competitive generation market and customer choice of generation provider. To enable such a competitive market, several options are expected to be available to customers. These include purchases from the Power Exchange through the UDC, Contract For Differences ("CFDs") based on the Exchange price, and bilateral contracts. Whether any customers (or particularly smaller customers) elect to participate in bilateral contracts as opposed to taking power from the Exchange through the UDC will be significantly affected by the differential in prices of energy under these two options. At this point in time, it is difficult to determine what this differential will be for different groups of customers.
Some advocates for the marketing community assert that the commodity margin relative to the Exchange Price will be small and therefore predict marketers will target only large customers due to their volume of usage, as potential bilateral contracts customers. These advocates assume that the unbundling of distribution services is necessary to facilitate aggregation of small customers, without which they claim small customers will fail to benefit from the new market structure. However, even if this prediction proves correct, small customers unquestionably will benefit from the new market structure by obtaining the benefits of market dynamics as reflected in the Exchange price. Indeed, as the Commission recognized in the Restructuring Policy Decision, all UDC customers ". . .will be direct beneficiaries of the wholesale competition among generators in that the local utility will simply pass through its customers the prices which it has paid to procure power through the Exchange."/
Although the marketing community points to the coreaggregation program of the gas companies as an example of low participation by small customers due to a lack of unbundling, the gas experience demonstrates the success of competition in bringing the benefits of competition to small customers. As the Commission noted:
According to the parties, reduced program participation probably results largely from the program's success. Competition in core gas markets has motivated the utilities to improve their gas procurement practices and thereby reduce their gas costs./
In short, all customers will benefit by participation in the competitive generation market, either by taking power through the Exchange, under CFDs, or under bilateral contracts. Option 1 thus accomplishes the objective of allowing all customers to participate in and benefit from competition.
Option 1 entirely eliminates costshifting between Direct Access and UDC customers. In addition, this option prevents inter- and intra-class costshifting. By residually determining CTC on each rate schedule, every customer would pay the same bill for nongeneration services as if functional unbundling had not taken place.
Under Option 1, utilities retain the same incentive to provide reliable distribution services to all customers whether they acquire their generation services through bilateral contracts or stay with the UDC. This option does not result in any change in utilities' incentive structure at this time, except in the provision of generation services, as has already been discussed in the Restructuring Policy Decision.
This is the only option that allows sufficient time
for the Commission to evaluate essential public policy issues,
as well as the question of the UDCs' obligation to provide various
distribution services as default providers, and to determine
on an informed and deliberate basis which distribution
services, if any, exhibit natural monopoly characteristics. These
threshold questions also are raised by advocates of some other
options, but they overlook the time required to properly resolve
these complex issues. I. DESCRIPTION OF OPTION 1II. THE EXTENT OF UNBUNDLING 1A. Track 1 Items 1B. Track 2 Items 1III. CPUC POLICY DECISIONS 1IV. IMPLEMENTATION AND TIMING ISSUES 1V. IMPLICATIONS OF THE OPTION 1A. Extent Of Expected Customer Participation 1B. CostShifting 1C. Utility Incentive Structure 1D. Public Policy 1