DAVID CROYLE
Pricing Principal
SAN DIEGO GAS & ELECTRIC COMPANY
8326 Century Park Court
San Diego, California 92123
Telephone: (619) 654-1124
Facsimile: (619) 654-1794
This Appendix represents the proposal and opinion of San Diego Gas & Company, and is not intended to represent the consensus or approval of the Ratesetting Working Group.
Unbundling the cost of providing competitive distribution services, and transferring responsibility for service delivery from the UDC monopoly to the competitive retailer, is crucial to the success of electric restructuring. Merely unbundling generation from transmission and distribution functions is inadequate. Customer choice goals must be satisfied before a viable, competitive marketplace can exist. Accordingly, Option 3 calls for unbundling of the most essential competitive distribution services as identified by the retail community -- Track 1 services -- by January 1, 1998. The so-called Track 2 services must be unbundled soon thereafter, in no event later than January 1, 1999.
Retailers have stated clearly that certain revenue cycle services, identified within the broad areas of metering, billing, customer and collection services, must be unbundled by the time direct access is available to all customers. Otherwise, many customers, particularly small customers, may not have the opportunity to participate. Proponents of Option 3 strongly believe that unbundling such costs can and must be done by January 1, 1998 in order for the Commission's customer choice goals to be met.
In order to eliminate any constraints on retailer access to customers, the remaining ("Track 2") competitive distribution services must be unbundled before retailers offer these new products and services. This calls for an aggressive unbundling schedule. Rapid Track 2 unbundling will depend upon the cooperation of UDCs and retailers who must work together to identify and prioritize the most essential competitive services.
Unbundling implementation requires a practical costing methodology which targets the most critical services and meets the aggressive unbundling schedule called for in Option 3. SDG&E proposes such an approach which focuses on the cost savings to the UDC when retailers provide the unbundled service. As described in SDG&E's July 15 filing, this practical costing method is based upon proven costing methods and sound managerial accounting principles.
Option 3 offers a balance of selective unbundling with a practical costing approach which achieves the CPUC's desire to unbundle competitive distribution services, ensures customer choice to all customers ( not just the largest few), enables retail firms to emerge, and moves toward a competitive market in which retailers can provide services which were once the exclusive franchise of integrated utilities.
Track 1 (by January 1, 1998) Distribution services which are essential to retailers must be identified and prioritized in order for direct access to be available to all customers on January 1, 1998. Under Option 3, essential revenue cycle services are unbundled by January 1, 1998. All indications from discussions within the RWG and with retailers suggest that revenue cycle services, such as metering, billing, customer and collection services, are candidates for unbundling in the near term because: 1. these services can be provided competitively; 2. these services do not impair UDC system reliability; 3. these services are of great interest to retailers. Track 2 (by January 1, 1999) As the retail market evolves, UDCs must continue to unbundle distribution services rapidly and responsively as new services emerge and retailers assume the responsibility as the primary service provider. Service classification and costing methods refined in Track 1 can be easily applied to emerging services. In order to maximize retailers' ability to provide customers choices for these services, rapid unbundling in Track 2 should be mandated by the CPUC.
Option 3 addresses monopoly and competitive services separately. Monopoly services remain bundled and are provided exclusively by the UDC. Competitive services, on the other hand, are opened to the market with the most essential revenue cycle services unbundled in Track 1. The major features of Option 3 include the following: Classify Services as Monopoly or Competitive Services Criteria are established to distinguish between monopoly and competitive services based on whether there are safety, security, reliability or system integrity reasons to justify exclusive monopoly provision of these services. If retailers can provide the service without any harm to the distribution system, then the Commission should move toward allowing the competitive market to provide them on an aggressive time schedule. Determine Whether Competitive Services Need a Default Provider Criteria are established to distinguish between services that require a default provider and those that do not. This is an important consideration because the cost savings to the UDC varies depending upon whether the UDC retains service capabilities. Revenue cycle services are consistent with the range of services that demand a default provider. Unbundle UDC Cost Savings if Retailers Provide Service The rapid penetration of retailers into competitive distribution services requires a practical service costing methodology which can produce reasonable and timely estimates for Track 1 and, subsequently, for Track 2 services. SDG&E offers such an approach based on proven managerial accounting principles in which UDC cost savings are estimated for services that retailers can provide. There are two variants of this costing methodology: 1. Marginal Attributable Costs. If the UDC is obligated to serve as default provider, then the UDC must retain the capability of providing the service to those customers who choose the UDC bundled service, and others who choose to return to the UDC's bundled service at a later date. This method identifies and values UDC service activities and resources which can be avoided, but recognizes that certain costs will remain within the UDC to meet default provider needs. 2. Average Attributable Costs. If the UDC does not have an obligation to serve as default provider, then it need not retain resources and capabilities for that purpose. In this case, all attributable costs can be avoided. This cost method identifies and values UDC service activities and resources associated with providing the UDC service and assumes no service capability remains. Periodic Updates of UDC Cost Savings As costs change within the UDC and the pace of retail penetration accelerates, it will be necessary to update these cost estimates from time-to-time to provide the most current price signals to customers and retailers.
Endorsement of SDG&E's Costing Methodology SDG&E's costing methods were presented on June 26 to the RWG and further detailed in the July 15 unbundling filing. SDG&E proposes a demonstration of the method by the RWG Analysis Subgroup, using one or more services, to show that the method can be applied easily and produces reasonable estimates. The CPUC needs to endorse this methodology -- the only service costing method proposed in the RWG -- because it is both practical and reasonable. Requirement that All UDCs Use the Same Methodology To ensure consistency and conformity of unbundled cost-saving estimates, all UDCs should adopt the same approach to service cost unbundling. The CPUC must rule that all UDCs use this method to unbundle service costs to ensure equity to all parties. Support for Which Distribution Services to Unbundle Option 3 identifies essential revenue cycle services for Track 1 unbundling. The CPUC needs to endorse these priorities and mandate that all UDCs unbundle cost savings associated with these services to support direct access by January 1, 1998. Support for Streamlining Approval of Cost Estimates Proponents of Option 3 agree that cost-saving estimates should be: (a) "reasonable" not "precise,"/ (b) comparable among the UDCs, and (c) available sooner rather than later. The costing methodology proposed and applied to revenue cycle services, streamlines the process of reasonably estimating costs. Tariff review procedures must be streamlined as well to consider retailers needs. Default prices or reasonableness tests can be established to ensure compliance by the UDCs. Proponents believe that once services are identified, costs savings must be estimated and approved within 90 days. Benchmarks can be established for revenue cycle services to confirm that they are, in fact, reasonable.
Information Requirements By selectively unbundling only the highest priority services by January 1, 1998, and choosing to unbundle UDC costs savings where these services are provided by retailers, information requirements are kept to a minimum. Utilities already gather information on the cost of metering, billing, a customer and collection services. This information is currently used to establish performance measures, benchmark against peers, and reengineer these services to achieve better performance. In addition, some utilities have investigated outsourcing and to do so requires knowledge of the cost of providing these services in house. Obtaining the required data for these services will be straightforward. Cost Estimation Procedures As described in the July 15 report, this approach classifies services and unbundles their marginal or average attributable costs, depending on whether the UDC is the default provider. To provide essential information to retailers, both marginal and average attributable costs should be estimated. Schedule for Track 1 SDG&E will propose a demonstration of the costing method by the RWG Analysis Subgroup on September 5 and advocates that all UDCs apply this method to select services in the November 15 filing. Once the CPUC endorses Option 3, all major UDCs will perform cost studies for the remaining revenue cycle services identified in the November 15 filing, so that the remaining (mid-1997) service unbundling can be adopted by the CPUC by January 1, 1998, to meet the direct access implementation date. Schedule for Track 2 Track 2 calls for applying the same costing methods, used to estimate revenue cycle service cost savings by January 1, 1998, to the remaining competitive distribution services on an aggressive schedule. With the goal to allow retailers to provide competitive distribution services to retailers as soon as possible, Track 2 unbundling must be sufficiently rapid to keep pace with the emergence of retailers and retail services. Option 3 calls for a period of one year following January 1, 1998, to substantially complete unbundling of competitive customer services.
The remainder of this Option 3 summary addresses each of the nine issues developed by the RWG and listed in the body of the report as critical in the CPUC's evaluation of the proposed options. Option 3 offers the right balance necessary to achieve the CPUC goal of real customer choice by January 1, 1998:
Unbundling is Feasible by January 1, 1998 There are three key features of this option that ensure that direct access implementation is accomplished by January 1, 1998:
Customer Choice is Assured to All Customers Ensuring customer choice to the smallest customers demands that UDC cost savings for essential services identified under Option 3 be unbundled by January 1, 1998. Revenue cycle services represent a higher proportion of the small customer's bill and without unbundling, retailers will be unable to market to these smaller customers. Option 3 takes the CPUC goal of "customer choice to all customers" seriously, introducing the voice of reason -- and reasonableness -- into the RWG debate. Reasonable Cost Estimates are Needed in the New World "Precision costing" is unattainable and needlessly delays the unbundling process. Retailers must have "reasonable" cost estimates. Default prices, guided by benchmark studies, can offer the requisite "reasonableness check" and avoid unnecessary regulatory oversight and challenges by parties who think the estimates are either too high or too low. Cost Method Minimizes Cross Subsidies and Cherry Picking Cross subsidy issues are addressed by a costing method that unbundles only marginal or average attributable cost savings and thus, leaves the rates for one group of customers unaffected by the decision of other customers to take service from retailers. Cherry picking is further discouraged by unbundling services into similar subcategories within which cost savings variances are small. For example, since meter reading costs differ in urban and rural locations or between residential and commercial customers, then cost savings may be needed by customer class and location. This avoids the cherry picking which occurs when rates are based on broad averages and competitors choose customers which cost less to serve Customer Protection and Education is Assured Since the focus of Option 3 is essential revenue cycle services, critical implementation issues designed to protect and educate the customer will have already been addressed in the Direct Access Working Group (DAWG). Metering and billing issues, for example, are being resolved within that group. Key implementation steps and market rules are being identified and developed through DAWG efforts. Issues addressed in DAWG, for example, include the timeliness and accuracy of meter reads and bills as critical customer protection issues. By choosing to unbundle revenue cycle services, unbundling can "piggyback" on DAWG activities to support the Track 1 timetable. Lengthy Regulatory Oversight Must Be Avoided Traditional utility thinking and regulatory procedures are outmoded in a competitive environment where timing is critical. Therefore, practical considerations need to replace the more traditional regulatory processes to make sure retailers are "enabled" without "disabling" the UDCs in the process. The costing method proposed under Option 3 simplifies the cost estimation process. With the review process also streamlined, compliance with the CPUC's goal of customer choice to all will be achieved. The Role of UDC as Default Provider Will Change Since the primary goal of Option 3 is to move toward a market where any services that can be, will be offered by retailers, the UDCs must move from exclusive provider to default provider and enabler of the competitive market over time. How quickly retailers will step up to and assume responsibility for competitive services, and how long UDCs will need to serve as default providers for essential services are open questions. However, Option 3 does provide a mechanism to begin the process of changing the role of the UDC and to keep pace with the development of a competitive distribution services marketplace.
The Commission must adopt an aggressive unbundling schedule for both Track 1 and Track 2 services. Unbundling of services is essential to customer choice and vendor viability. In order to achieve a market where retailers offer a wide range of competitive distribution services, customers must have the right to choose their supplier. The ability to choose must be available soon in order to meet the Commission's objectives for rapidly achieving a competitive electric services industry. Option 3 accomplishes the Commission's goals within the appropriate timeframe.
I. DESCRIPTION OF OPTION 1A. Extent of Unbundling 1B. Description of Option 1C. CPUC Policy Decisions 1D. Process and Timing 1E. Implications of Choosing Option 3 1F. Summary and Conclusions 1