MICHAEL R. JASKE
Representing
CALIFORNIA ENERGY COMMISSION STAFF
1516 9th Street
Sacramento, California 95814
Telephone: (916) 654-4777
Facsimile: (916) 654-4901
This Appendix represents the proposal and opinion of California Energy Commission Staff, and is not intended to represent the consensus or approval of the Ratesetting Working Group.
This option describes a comprehensive, phased distribution function unbundling process. The component services included in the retail distribution function (presently restricted to the UDC) are ultimately divided into three main 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; and (3) bundled monopoly services required of all customers. Unbundled monopoly services may be final services of interest to consumers or intermediate services of interest to private energy service providers (ESP). The process begins by the UDC providing some services on an unbundled basis that are of interest to direct access providers in order to develop the intelligence needed to make more informed judgments about the suitability of full scale competitive unbundling. The goal of this option is to develop a package of unbundling, pricing, and PBR incentives that leads to increased societal economic efficiencies.
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. It proposes 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. Finally, difficult component service pricing issues under incentive PBR structures must be resolved to avoid market power issues of the incumbent monopoly. An integrated decision, including unbundling, service pricing, and PBR incentive structure, should be developed and implemented as a package to ensure that the most efficient market structure evolves.
The essence of this option is that comprehensive
distribution function unbundling should be accomplished, can be
accomplished in an orderly manner through time, and that it is
feasible for some portion of it to be ready for implementation
as early as 1/1/98 if the CPUC adopts a process with this date
in mind.
This proposal describes a process of component service unbundling, pricing, and PBR treatment that will remove responsibilities from the proposed UDC and rely to a greater extent on consumer choice and private market providers of services. It includes elements of three facets of retail distribution restructuring: (1) unbundling, (2) unbundled component service pricing, and (3) the PBR incentive structure for the distribution monopoly. While each of these three aspects will be discussed separately, this suggested process emphasizes developing them jointly to ensure that a complete market structure exists that will lead toward improved market efficiencies.
All of these facets must be developed together as an integrated package. If any of the three elements are omitted, then the problems of market power, cross subsidy, or unfair competition could result. None of these outcomes are desirable.
Component service unbundling consists of taking the responsibilities of the proposed distribution function of the UDC and breaking them apart into separate services, some of which may be opened to competitive supply.
This proposal suggests a clarification to the definition of the term unbundling as used by the CPUC. There are two dimensions in which unbundling needs to be clarified. We suggest parties resolve this terminology concern at an early date, lest confusion about terminology cloud real policy disputes.
First, the CPUC's direction to investigate unbundling in D.96-03-022 and its discussion in the RWG combines two distinct considerations that should be considered separately, e.g. (1) identification and separate accounting of each component service from a larger group of services for transparency and enhanced customer choice, and (2) eliminating the incumbent exclusive, regulated monopoly franchise in favor of multiple, competitive suppliers for this component service. Discussions of consumer choice and unbundling which preceded D.96-03-022 used the term "unbundling" in the more narrow sense of separation, not necessarily in the sense of both separation and competitive supply./ The benefit of considering these aspects of restructuring individually is that it offers another option for the CPUC to select in its efforts to restructure the retail portions of the electricity industry.
Second, the CPUC's use of the term unbundling does not carefully differentiate to whom the product or service is being offered. There are components within the distribution function which today are intermediate services in delivery of bundled electricity, that when unbundled are of interest not just to end use consumers, but also to energy service providers. In fact, much of the impetus for retail distribution function unbundling comes not from consumers but from emergent suppliers who wish to make use of these component services as intermediates toward their provision of generation services to end use customers.
We suggest the following four definitions to resolve these two terminology concerns. These definitions use combinations of component separation, competitive supply, and final versus intermediate services that should all be investigated. The first two are well understood and have been frequently used by the parties, but not always in a consistent manner. The last two are new, and represent an attempt to provide useful terminology for this debate.
a. bundled monopoly supply means that many distribution and customer services are supplied in a fixed bundle by the franchise monopoly, with no competitive supply opportunities.
b. unbundled multiple provider supply means that many distribution and customer service functions are both identified separately and that they are provided by multiple suppliers in a market setting.
c. unbundled monopoly supply of final services means that distribution and customer services are identified separately and that end use consumers have a choice of different levels of service with commensurate price differentials, but that a regulated monopoly is the only service provider.
d. unbundled monopoly supply of intermediate services means that certain services now included within the distribution function which are critical to private energy service providers are unbundled, perhaps at one or more levels of quantity or quality, for these suppliers to purchase and use in their process of delivering their products and services to consumers.
Up to this point in time, parties to the RWG have discussed only the first two of these three options. Unbundled, monopoly supplied service should be a consideration for distribution function restructuring. The following examples illustrate the differences in these definitions. An example of a possible unbundled, monopoly supplied final service of interest to a substantial number of customers is higher power quality. It is certainly infeasible for several aspects of power quality to be resolved by the customer itself, rather the distribution entity must act on its "side of the meter." If there are higher quality and higher cost options that can be made available to final customers, then they should be.
An example of a component service where the unbundled, monopoly option might be particularly helpful can be found in billing. Classification as a track 1 service has been frequently proposed by potential generation service providers, since virtually all suppliers of services bill their customers for these services. Others point out that the UDC may be the ultimate recipient of perhaps 60 percent of the total bill for electricity services, thus justifying the UDC as the exclusive billing agent. Still others say that the consequence of both entities billing customers independently is a level of cost duplication for small customers that will effectively preclude private supply of generation services, e.g. direct access will not be offered. However, if the UDC performed consolidated billing but permitted the energy service provider to include customized material for such customers, then the desire of the ESP for brand awareness and customer contact could be satisfied while eliminating the duplication of costs from independent billing. This is actually an example of a possible unbundled, monopoly supplied intermediate service of interest to aggregators supplying generation services to small customers. The UDC is already designated as the billing agent for the public goods charge, with revenues remitted to the CPUC or some new institution for funding of public goods programs. Similarly, some aggregators would be willing to use the UDC as a billing and collection agent, with revenues remitted to the ESP. This makes billing an intermediate service for the ESP.
To ensure that unbundling enhances, rather than detracts from, efficient supply, prices of component services must be set properly. Distortions will occur if prices are either too low or too high. If prices are set too high for a monopoly supplied intermediate service, such as billing and other revenue cycle services, which direct access providers use as inputs this will discourage entry of efficient competitive suppliers. In order to ensure competitive markets result in the most efficient suppliers, such prices must reflect the monopoly's true incremental costs. Similarly, in the case of multiple-provider supplied final services, if the monopoly prices are too low, as a result of cross-subsidy for example, this will discourage efficient competition.
An agreed upon costing and pricing methodology is needed to ensure the realization of efficiency enhancing prices. Such a methodology would have several important characteristics. It would establish acceptable methods for estimating the UDC's true incremental costs associated with component services. Where necessary, it would provide the flexibility needed to reflect different incremental costs associated with providing the same service to different groups of customers. It would adequately treat questions associated with the treatment of attributable fixed costs. It would also deal with common costs that are not attributable to a single service, but that are attributable to a combination of services. Because of the likely prevalence of such common costs, it is important to recognize that any acceptable methodology must be comprehensive enough to deal with combinations of component services which share common costs. It will generally not be possible to rely upon a methodology that prices one component service at a time. For example, in accordance with the theory of contestable markets, a system of price floors and price caps have been recommended in the few instances in which components and combinations of components have been unbundled and offered by a regulated monopoly. The CPUC has developed some experience in tele-communication restructuring with pricing "bundles" of component services that seem to be related.
Because any acceptable methodology will be complicated, and therefore slow to implement, as a practical matter the unbundling and pricing of component services will depend upon the mixed monopoly/competitive firm. For market participants to trust that competition is fair, such a firm will be required to have incentives to apply the methodology in a reasonably accurate way. The workability of unbundling in this setting is therefore closely linked to the design of PBR to provide these incentives.
Implementation of an appropriate distribution PBR mechanisms is essential to avoid inappropriate cross subsidies. PBR mechanisms should be developed that provide proper, and avoid improper, motivation to the mixed monopoly/competitive firm. The incentives that drive pricing of component services and potentially encourage distorted pricing are likely to be different under alternative regulatory schemes. A pure price cap mechanism could, in principle, be designed that minimized such distortions. Such a price cap could cover all of the UDC's component services. Or, as has been the practice in the tele-communication industry, separate price caps could be applied for bundles of closely related, interdependent services. In the case of distribution activities such bundles might consist of: (1) distribution circuits and associated maintenance, (2) revenue cycle services (metering, communication, billing, revenue processing), and (3) customer service.
In either approach the price caps should be sufficient to cover the total costs, including all relevant fixed and common costs, that an efficient firm would need to incur in order to supply these services. In theory, such a price cap would allow the UDC to earn a competitive return. Such average price caps would also provide the incentives desired to avoid distorting component service pricing. This is because any under- or over-pricing of one component could only be offset by offsetting over or under pricing of some other component.
Complications will arise in implementing such a price cap concept in practice so that various adjustments will inevitably be made. Such adjustments will be needed to address the quality of service measures, productivity improvements, and the possible reduction in the scope of the regulated distribution monopoly.
To the extent such adjustments are tied to the estimated costs of their monopoly supplied services, this will tend to distort the monopoly's incentives to price component services properly. Under these circumstances a monopoly can benefit by underpricing, i.e. cross-subsidizing, competitively supplied components and shift costs to monopoly supplied components that might be subject to profit sharing.
As a practical matter, the more sensitive PBR price or revenue caps incentives are to a monopoly's own cost of supply, the greater the incentive to distort component prices and the correspondingly greater requirement for building in regulatory checks and balances.
Having explained each of the three closely intertwined elements of this proposal -- unbundling, pricing, and PBR incentive treatment -- the following specific sequences of steps define the proposed process:
The CPUC needs to establish a costing and pricing methodology for unbundled services that results in competitively neutral prices that ensures that UDCs and ESPs win market share on the basis of their ability to supply services efficiently. This pricing methodology should be consistent with PBR incentive treatment and any rate or revenue caps.
Those component services (or subsidiary activities) which are essential for delivery of generation service providers should be unbundled and priced first, so as to permit direct access market to operate.
Once the principles of the methodology has been established, and it has been applied to essential services for direct access, it can be refined for application to other monopoly supplied final services and to the more complex issue of a regulated monopoly competing with private firms in the markets for unbundled, competitive services. An ongoing process should be established that is responsive to market forces. SDG&E's proposal has many of the appropriate features of this process./
Customers or rival firms should have reasonable opportunities to challenge the UDC application of the appropriate costing and pricing methodology, but this should not be a vehicle to institute CPUC micro-management on the UDC's actions.
Implementation of an appropriate distribution PBR mechanisms is essential to avoid inappropriate costshifting and to address the need for continuously revised base rate, quality of service measures, and productivity improvements that are compatible with the possible reduction in the scope of the regulated distribution monopoly.
Assurance of universal access to electricity services should remain as a policy for California, but the mechanisms to accomplish this may need to be different in the restructured retail environment resulting from this proposal. Evaluating the possible necessity for subsidies, their funding source, and their implementation mechanisms must be undertaken as part of this process.
The initial discussion of these issues within RWG developed the "track 1 vs. track 2" terminology. The original track 1 versus track 2 terminology classified changes in component service supply relative to 1/1/98. If it was "unbundled" prior to 1/1/98 it was track 1, and if was ultimately unbundled after 1/1/98 it was track 2. No special term was provided for a service component that was unbundled in the sense of separation, but not of competitive supply; clearly some such items are quite feasible. It is unclear whether any component services should be unbundled, competitively by 1/1/98. There many questions that must be resolved before offering services in either a competitive or monopoly supply situation. Monopoly-supplied unbundled services seem much more feasible. This option proposes an arrangement in which services move to this unbundled, monopoly-supply status, and then transition to subsequent final treatment later, after experience with consumer's and ESP's interest.
The closest analogy to "track 1" in this proposal are the subset of unbundled, monopoly supplied intermediate services that are essential to successful direct access. Whether any are essential is unclear, but the CPUC should determine quickly whether it believes that there are any such essential services. If any are determined to be essential, it is important that the CPUC identify a specific implementation date, or perhaps a series of implementation dates for different items. Failure to identify a specific process will create uncertainty, and uncertainty reduces the motivation of utilities to conduct the analyses needed and reduces the effectiveness of the participation of private parties with a stake in the decision.
It is important that any services the CPUC wishes
to designate as track 1 be identified as quickly as possible,
because various industry representatives assert that some component
services must be classified as track 1 for direct access
to generation services will not actually be provided to residential
and small commercial customers. Determining that some services
are track 1 must be completed early enough that providers of these
services can prepare themselves to enter the market. Preparation
requires sufficient leadtime to: (1) plan and conduct market
research, (2) identify, purchase and become familiar with
hardware and software required, and (3) hire and train employees.
Such a determination would be needed by summer 1997 at the latest.
Following the recommendation of this option would require the CPUC to both make new decisions and refine some of its existing decisions. Table 1 provides a comparison of old decisions to be modified with new decisions to be made in the framework of the major steps included in this process proposal.
There are several existing CPUC decisions which must be clarified or restated to be consistent with this recommended option. First, D.95-12-063 defines the UDC as the exclusive monopoly entity for all distribution function products and services. Metering received specific emphasis in two ways: (1) requiring that RTP/TOU meters be installed for all customer classes other than small commercial and residential, and (2) determining that meter installation could be opened to private entities once appropriate standards for meters were developed and implemented. Second, this proposal elaborates upon the succeeding D.96-03-022 direction to parties to investigate distribution function unbundling into products and services.
There are several new decisions that the CPUC must
make in order to implement this recommended option. First, the
CPUC would have to definitely unbundle at least some component
services, and more likely to offer others to competitive supply.
Second, a component service costing and pricing methodology would
have to be developed that integrated with a PBR incentive structure.
Third, some revisions of the UDC responsibility to provide services
to current customers who encounter difficulties in securing services
in competitive markets. This is the universal access issue that
has already been broached in tele-communications, but perhaps
is even a larger issue for electricity than for tele-communications./
Table 1
Summary of Necessary Policy Decisions
| Facet of Unbundling | Previous CPUC Decisions | Potential New Decision |
| 1. unbundle the distribution function into component services | a. D.95-12-063 does not make this decision, but D.96-03-022 begins an investigation | a. Make a formal commitment to unbundled some portions of the distribution function and to open some subset of these to competition |
| 2. classify services and activities by three (or more) "end state" categories | D.95-12-063 directs DAWG to develop proposed standards which, once adopted, would permit non-utility installation of meters | identify all services to be unbundled and their ultimate supply method: monopoly or competitive (reconciling previous metering decision) |
| 3. develop UDC prices for services based on cost of service | D.96-03-022 required utilities to submit a cost of service proposal, but 6/21/96 ACR deferred this requirement | direct utilities to conduct studies resolving attributable cost issues--fixed vs. variable, common, etc. |
| 4. identify how PBR would interact with monopoly supply and competitive supply of service | a. no general direction of distribution PBR b. D.95-12-063 directs installation of RTP/TOU meters for all customers other than residential and small commercial, but offers no investment recovery method | PBR needs to be designed to address a shifting responsibility of the UDC, requiring revisions for: base rate revenue, quality of service measures, productivity assumptions, etc. |
| 5. allow unbundling, monopoly supply for specific services | NA | determine how multiple levels of service and prices to be determined, and how much oversight on tariffs |
| 6. review and assess customer response to unbundled service offering and readiness for competitive supply | NA | customer interest is important because: volume of service may influence pricing, interest may correlate with competitive options |
| 7. UDC responsibility for and cost subsidies of universal access to services | UDC retains an obligation to connect all customers to the PX and to provide all distribution services | alternative approaches to achieve universal access may be required, especially with funding cost subsidies rather than through price distortions |
There are both analytic and procedural activities that must be determined in greater detail to implement this option. This section provides some indication of these efforts. Further elaboration must be developed to provide a full specification necessary to implement this proposal.
Among the discussions that must take place are: (1) development of the appropriate costing and pricing methodology, (2) evaluation of component services, their subsidiary activities, and alternatives for unbundling and opening them to competitive supply, (3) safeguards to permit the regulated monopoly to provide competitive services, (4) resolution of universal service issues, (5) customer interest in multiple levels of service quality for unbundled, monopoly provided services, and (6) exploration of the concept of creating standalone monopolies that are independent of the UDC./
It is essential to develop the appropriate costing and pricing methodology that is at the heart of this proposal. As noted earlier, much of this exists in SDG&E's July 15, 1996 filing, but some of the details recommended there would need to be revised to be acceptable.
In order to support assessment of various component services, a more complete and uniform list of component services and their subsidiary activities must be developed. There are various lists complied by parties (SDG&E's July 15 report provides one) which are "floating around." Once the CPUC directs parties to begin this process, then these should be consolidated and a common version used as the basis for further discussions.
In addition, how these various activities might be offered as monopoly supplied quality-differentiated services (as either final or intermediate services, or both) or competitive services must be explored. This can provide input to the CPUC about the possible set of services that the CPUC will designate as essential to support direct access.
As noted above, there are theoretical (and a few real world) developments that illustrate how price floors and price caps for services and bundles of services can be established to permit the UDC to operate in the competitive market. Specific proposals need to be identified, reviewed, and assessed for their advantages and disadvantages. A final approach will have to be selected by the CPUC.
This will be a complex and contentious task, since it sets the stage for permitting the incumbent UDC to continue to offer services in competition with emergent private firms. While this can be construed as anti-competitive, and in fact it may well be, our goal is not competition at all costs, but more efficient supply of component services to customers. Part of the efficiency possibilities are permitting the UDC to continue to provide these services, at least to some customers. It is possible, for example, that the UDC may be the low cost provider of base service for some component, while their are niches which private entities are best able to serve.
Customers will need to be educated about the options made available to them, and assessments of the degree of customer interest should be conducted.
One possibility discussed at some length in the DAWG process for metering and communication services is the concept of a standalone INFOCO monopoly. The rationale for this being a separate monopoly from the UDC is that a metering, communication systems, and perhaps usage database organization could easily encompass electricity, natural gas, and water utility services. Since this goes far beyond the scope of the electric utility, or a natural gas utility, or a water utility, the functions of each grouped together and kept distinct from the physical distribution activities might be a useful alternative to consider.
There are six major steps that would be required
to implement this proposal.
a. This proposal retains IOU tariff applications
for 1/1/98 rates on 11/15/96 since functional unbundling must
still be accommodated no matter what the CPUC decides to do with
further unbundling of the distribution function. The adjudication
of some aspects of those proposals can proceed without resolution
of distribution function unbundling, but during the spring new
information resulting from further unbundling would have to be
joined with the earlier IOU applications, considered by the CPUC,
and an ultimate decision made by the same June 30, 1997 date now
established.
b. The CPUC must make several decision concerning
retail unbundling schedule is essential as early as possible so
that the framework of retail unbundling can be established. At
the current time the direction of D.9603-022 recognizes
that investigation is necessary, but provides no schedule and
no process to make key policy decisions. An Assigned Commissioner
Ruling can be helpful in matters of scheduling, but a full CPUC
decision may be needed for policy resolution. Specific CPUC decisions
on this framework must be made and explicit direction to the RWG
to develop alternative proposals within the bounds of CPUC guidance
must be issued, with work products to be filed in late winter
1997.
c. The Ratesetting Working Group should be requested
to develop alternative approaches to implement the pricing and
costing methodology proposed here. The RWG's deliberations to
develop options must continue in parallel with the formal applications
which are due 11/15/96, testimony from parties and hearings during
the winter, and during the intervals that parties can shift their
attention from advocacy for some issues to cooperative discussions
of others.
d. The CPUC must determine whether there are any
essential component services, and direct the RWG and parties
to focus their efforts on these services.
e. IOU sponsored cost studies must start early in
this process and results are to be used in revised tariffs in
the first half of 1997. If necessary, these cost of service studies
should be conducted in two parts: (1) an urgent assessment
of essential unbundled services, and (2) a subsequent
delivery of information on other services and, perhaps, a refinement
of information provided in step (1).
f. PBR incentive structures that are applicable to
the circumstance of a regulated distribution entity that starts
in 1998 as a UDC, but shrinks over time to a LINECO. No present
PBR mechanisms automatically address the possibility that the
scope of services provided would change, and thus the base revenues,
the measure of quality of service, and productivity assumptions
and other aspects of PBR would also have to change. Since this
is different than any PBR applications yet submitted to the CPUC,
it may be necessary to defer PBR applications and their implementation
until the CPUC clarifies its intent regarding distribution function
unbundling.
The specific schedule for these procedural steps
has not yet been identified. It is at least partially dependent
upon the speed with which the CPUC can make a general decision
to embark on distribution function unbundling, on the degree of
accuracy that will be required of costing studies, and the extent
of essential services that are identified in the process.
This subsection briefly describes the projected implication of this option. Since there is little analogous experience in other industries or other states for electricity restructuring, the implications described here are highly uncertain.
This option implies that a succession of decisions will need to be made by the CPUC as component services are first unbundled and provided by the monopoly, and then later offered competitively. This contrasts to many of decisions of the CPUC in which a complete decision can be made at a specific point in time, with no requirement for an ongoing series of decisions. However, this also implies that a series of smaller scale decisions can be made which have greater opportunities to be correctable if markets operate differently than expected.
It is highly speculative to predict the interest of customers in unbundled services. There are a very limited number of small scale pilots or special circumstances in which customers have been given options. Most customers have no experience with such opportunities, so market research efforts requires them to respond to hypothetical cost vs. benefit tradeoffs. Nevertheless, existing market research points to considerable commercial and industrial customer dissatisfaction with the current service they receive, and considerable openness to changing suppliers. One survey found more than 50 percent of both commercial and industrial customers ready to switch. However, this research also indicates that many commercial and industrial customers are very interested in reliability and customer service, and less interested in price. In hypothetical tradeoffs, customers frequently choose enhanced services over reduced prices. This information suggests there is a market for unbundled services which allow customers to mix and match levels of service quality to obtain better perceived value for their electricity costs.
Very little information exists concerning residential customer choice. A direct access pilot begun in May 1996 in New Hampshire did find plenty of residential customers ready to participate, but the nature of that pilot was to provide approximately a 20 percent reduction in costs with minimal change in customer service or interface with suppliers,/ so offers little guidance as to residential customer interest in unbundled services.
Whether some of the component services are provided competitively (tracks 1 and 2) or monopoly-provided services are unbundled with respect to quality of service, an important consideration should be the design of policies to prevent costshifting among the component services. Costshifting and cross subsidies between component services can have important efficiency and equity implications. The allocation of common fixed costs is among the difficult to resolve for unbundled distribution services, especially when they have been provided through common facilities throughout the history of the utility.
When a monopolist, such as a UDC, supplies outputs in both competitive and monopolistic markets, it might have incentives to shift costs between the services in certain ways depending on the structure of incentives it faces. For instance, if the monopoly services are under the cost-of-service regulation, the monopolist will have tendency to charge prices in the competitive segments of the business that are lower than the corresponding marginal costs. This underpricing and overselling to drive the competition out, so called predatory pricing, would be possible if the competitive segment was cross-subsidized by the monopolistic segment through costshifting. The incentive effect is simple in this case, costs equal to the amount of losses incurred in the competitive segments shifted to the regulated segment will be recovered through the regulatory process. Regardless of the cause, the result of cross subsidization through costshifting to the regulated segments would be excessively high rates in these segments. At the same time possible predatory pricing in the competitive segment could lead to long-run monopoly situation and higher prices in this segment.
A proper implementation of the pricing and costing methodology, coupled with a complementary PBR incentive structure, proposed here would directly address these concerns.
This option proposes to directly link unbundling, pricing, and PBR. The incentive structure offered by distribution PBR is believed to be important to modulate the decision-making of the UDC if it sheds any of its component services and thus shrinks to a smaller scale entity. Along the way, however, PBR is believed to be an important determinant of the ability of the UDC to engage in cross subsidies for purposes of manipulating market outcomes. On the other hand, a PBR mechanism which provides pricing flexibility to the UDC can also be a means to ensure that the UDC can compete with private competitors on a basis which offers it an opportunity to be successful.
Assessment of alternative distribution component
services that should/could be unbundled has already begun in the
direct Access Working Group (DAWG) process. It has become apparent
that there are numerous complicated issues, many of which revolve
around avoiding duplication of services as a means of extending
cost-effectiveness of direct access further down the customer
size ranking. Metering, communication systems, and billing systems
issues have been discussed in various levels of detail. The forthcoming
DAWG report captures some of this effort. It is important that
there be a transfer of this debate and accumulated expertise from
the DAWG process into the RWG process, especially for those participants
of private interests who do not have the depth of resources to
participate in multiple retail restructuring forums.
There are several advantages of this option in comparison to other options that have previously been described in the RWG meetings. These include: (1) enhanced consumer choice, (2) improved options for small consumers, (3) increased certainty of ultimate distribution function unbundling, and (4) reduced chances of making a major error.
This option is the one most philosophically compatible with providing customers with maximum choice to determine their own destiny. Unbundling the distribution function is clearly feasible, whether it is desirable for all customers can only be proven by performing the experiment and observing the results. Economic theory says that society in general will be better off by allowing the preferences of individual customers to be satisfied more closely than can occur when a uniform bundle of services is imposed on all.
Unbundled, quality-differentiated service options even if provided exclusively by the UDC would permit ESPs to obtain intermediate services needed to operate in the direct access market. In its final services form, customers could explore their interest in these services on a standalone basis, and permit the utility to offer them with price differences that might come from current cost of service data. Current data might be considered sufficient when it is used to provide signals to customers intended to communicate different costs of two or more levels of service. Offering such opportunities to either ESPs or customers has several advantages:
(1) it allows ESPs access to intermediate services
that may be essential to successful operation of direct
access for small customers;
(2) it provides an opportunity to learn what customers
choose to do when they can make elective choices about quality
of service;
(3) it provides an initial signal to potential competitive
service suppliers about the market for unbundled services by revealing
the apparent cost versus benefit tradeoffs that real customers
are willing to make; and
(4) it allows direct access customers to reduce the level of service they obtain from the UDC if they are receiving similar services from their direct access provider, thus reducing (but not eliminating) concerns about duplication of services and costs.
If representatives of potential market suppliers are correct about the costs of doing business and the opportunities of beating PX prices by aggregation arrangements, then reducing duplication of services and of costs imposed on customers may be essential to creating a viable direct access market for residential and small commercial customers. Thus, either customers would make the purchase a final service, or the ESP would make the purchase as an intermediate service.
Compared to D.96-03-022 and RWG discussions that suggest postponing resolution of distribution function unbundling, this option provides a definitive signal to potential market participants that the CPUC is seriously intending to permit competition for at least some distribution function component services. This will increase interest in participating in a process to accomplish the details, in contrast to which the present uncertainty of scope and schedule tend to discourage participation.
This option provides a transition path which might
eventually arrive at a similar end-state as other alternatives,
but does so through greater reliance upon the UDC for the transition
period. Since these organizations exist, provide essentially the
same services now, and can be expected to be able to implement
this option successfully, the chances of a major error leading
to large problems with customer service and satisfaction are reduced.
I. DESCRIPTION OF OPTION 1II. THE DETAILS OF THE OPTION 1A. Component
Service Unbundling 11. Clarification of Unbundling vs. Competition
via Multiple Suppliers 12. Component Service Pricing 13. PBR Design
14. Sequence of Steps for this Proposal 1a) Establish A Proper
Costing And Pricing Methodology 1b) Unbundle Those Component Services
Essential As Intermediate Services For Direct Access Providers
1c) Extend The Application Of The Costing And Pricing Methodology
To Other Component Services 1d) Allow Reasonable Opportunities
To Challenge UDC Prices 1e) Implement Appropriate PBR Incentives
1f) Develop Universal Access Mechanisms 15. CPUC Determination
of Component Service Categories 1III. CPUC POLICY DECISIONS 1IV.
IMPLEMENTATION AND TIMING ISSUES 1A. Analytic Activity and Methodology
Development to Implement This Option 11. Development of the Costing
and Pricing Methodology 12. Evaluation of Possibilities for Component
Services 13. Safeguards Required to Permit UDC to Provide Competitive
Services 14. Customer Interest in Quality-Differentiated Services
15. Use of New Non-UDC Standalone Monopolies 1B. Procedural Steps
for Proposed Unbundling 1V. PROJECTED IMPLICATIONS OF THIS OPTION
1A. Extended Decision-Making Process for the CPUC 1B. Expected
Range of Customer Participation 1C. Cost-Shifting 1D. Operational
Importance of the Incentive Structure 1E. Possible Mechanism for
Resolution of Issues Raised in Other Forums 1VI. ADVANTAGES OF
THIS OPTION 1A. Enhanced Customer Choice 1B. Improving Options
for Small Customers 1C. Increasing Certainty for Future Service
Providers 1D. Reducing Chances of Major Error 1