I. EXECUTIVE SUMMARY
II. INTRODUCTION
A. Necessity For Direction From CPUC [Edison -- James Lehrer]
1. Items Around Which The RWG Has Achieved Consensus [Edison -- James Lehrer]
2. Items That Some Parties Contend Need Prompt Commission Decisions In Order
To Achieve The Goals Of D.9603022 [Edison -- James Lehrer]
B. Description Of The Extent Of Unbundling (End State) And Process Decisions
Needed -- Describe Relationship Between Track1/Track2 And The Option1-4
Framework [PG&E -- Dave Rubin]
C. There Are Multiple Proposals That Have Been Made By The Various Parties [TBD]
III. DEFINE OPTIONS -- EXPLAIN DISTINCTION BETWEEN THE VARIOUS OPTIONS
REGARDING THE DEGREE OF UNBUNDLING
A. Defer Distribution Unbundling Issues Entirely Until After January 1, 1998
[Edison -- James Lehrer]
B. Set Process In Place Now To Identify And Complete Further Unbundling
Post-January 1, 1998 [PG&E -- Dave Rubin]
C. Selective Distribution Unbundling By January 1, 1998 And Additional
Unbundling Post-January 1, 1998 [SDG&E -- David Croyle]
D. Comprehensive Distribution Unbundling Over Time Beginning By January 1, 1998
[CEC -- Mike Jaske]
E. Fundamental Reworking Of The Way In Which Utilities Obtain Earnings
Option 4 Plus Additional Unbundling Of Capital [Agland -- Patrick O'Donnell]
IV. OPTION 1 [EDISON -- JAMES LEHRER]
A. Description Of The Extent Of Unbundling
1. Track 1 Items
2. Track 2 Items
B. CPUC Policy Decisions
C. Sequence Of Analyses And CPUC Decisions To Implement The Option
1. Describe The Information Requirements For Track 1 and Track 2 Items
2. Describe The Procedural And Analytical Steps That Need To Be Taken For
Each Set Of Items
3. Make A Proposed Schedule For Addressing The Requirements In (1) and (2)
D. Projected Implications Of Options: Characterize The Range Of Opinions
1. Extent Of Expected Customer Participation By Customer Type, Size, Or Other
Important Feature
2. Cost Shifting
3. Utility Incentive Structure
4. Other Issues
E. Summary Of Pros And Cons -- Or As An Appendix -- This Is The Section In
Which Parties Can "File" Their Position On The Option In Question
V. OPTION 2 [PG&E DAVE RUBIN]
VI. OPTION 3 [PG&E DAVID CROYLE]
VII. OPTION 4 [CEC MIKE JASKE]
VIII. OPTION 5 [AGLAND - PATRICK McDONNELL]
II.
INTRODUCTION
In his June 21, 1996 ACR, Assigned Commissioner Duque ordered the Ratesetting Working Group ("RWG") to address which issues should be "Track 1" and which issues should be "Track 2" in a report to be filed on August 26, 1996. [May 8 ACR, pp.] The RWG has designated those functions or services that are essential to enable Direct Access by January 1, 1998 as Track 1 items. This is consistent with the June 21 ACR definition of track 1 items as being those "that are necessary for the implementation of direct access and must be in place on or before January 1, 1998" as opposed to track 2 items which are "those issues that are desirable but not necessary for Direct Access implementation"
There is consensus among all parties that the following five items should be unbundled on utilities' tariffs to support the January 1, 1998 deadline to establish a competitive market for generation:
(1) Generation;
(2) Transmission, including ancillary services;
(3) Distribution;
(4) Competitive Transition Charge (CTC); and
(5) Public goods.
The RWG has struggled to determine the extent (if at all) to which distribution services need to be unbundled in order to support the Commission's stated policy goal of making direct access available to customers of all sizes and classes beginning in January 1998.. Southern California Edison Company ("Edison") and Pacific Gas and Electric Company ("PG&E") believe that unbundling the consensus items by January 1, 1998 achieves the Commission's stated goal, while attempting to engage in further unbundling could jeopardize this goal. Some other members of the RWG believe that, in addition to the five consensus items, certain distribution services should be unbundled by January 1, 1998 if the Commission's goal is to be achieved by that date.. In fact, some members of the RWG believe that, not only must distribution services be unbundled, but return on the capital must be unbundled as well, in order to enable aggregators to serve residential consumers. This report therefore summarizes the different options and various parties' positions so that the Commission can provide additional direction regarding the Track 1/Track 2 issues.
There are three basic questions around which decisions regarding unbundling need to be made. The first two relate to the desired end state - how extensive is the contemplated unbundling of distribution services, and on what basis is that determination to be made? The third is a question of timing - specifically, when is it necessary (or desirable) to unbundle the service(s)identified in the response to the first two questions?
There are a host of CPUC decisions that are relevant to the determination of the extent of unbundling:
Experience from the deregulation of other public utilities industries, such as natural gas and telecommunications, suggest that the unbundling of "products and services" has significantly lagged the introduction of competition in the "fundamental" service (e.g., long distance services in the case of telecommunications, commodity procurement in the case of natural gas). The issue at hand is whether it is most appropriate to follow in the path of these other industries or whether the electric utility industry should follow its own direction, and if so, what direction makes the most sense given the somewhat unique features of electricity relative to these other markets.
The specific relationship between Track 1 and Track 2 items (see Table 1) and Options 1 through 5, as defined below, can be viewed as a matter of both the extent of unbundling and the timeline over which this unbundling proceeds. As discussed above, Track 1 items are those deemed to be "necessary for the implementation of Direct Access and must be in place on or before January 1, 1998" (June 21 Assigned Commissioner Ruling). A number of parties have posited that only "the big five" - generation, transmission (including ancillary services), distribution, public purpose programs and CTCs - meet this criterion. Options 1 through 5 seek to capture a range of possible outcomes regarding the extent to which any additional unbundling might occur, and when these additional products and services might be unbundled.
Options 1 and 2 propose that no additional unbundling occurs prior to January 1, 1998. They differ in that Option 1 defers extensive consideration of track 2 issues until after January 1, 1998, while Option 2 begins the process of defining the services and products for further unbundling efforts, specifying the needed cost studies and engaging in the relevant groundwork prior to January 1, 1998. Option 3 provides selective unbundling of distribution services prior to January 1, 1998 through a bill credit for customers using alternative providers. The specific services have not been defined. Option 4 begins as Option 3 but contemplates the eventual complete unbundling of all competitive distribution services, i.e., those that do not have natural monopoly characteristics, per Commission determination. Option 5 initially parallels Options 3 and 4 but goes beyond these options in proposing a pilot program for a prepayment tariff option and ultimately addressing the fundamental premise for rate regulation of the UDCs.
Option 1 entirely defers consideration of Track 2 items until January 1, 1998 and includes only the five consensus items as Track 1 items: Generation, Transmission (including ancillary services), Distribution, Competition Transition Charges (CTCs) and Public Goods. For the IOU's, separating bundled revenue requirements into these five categories requires data-intensive refunctionalization of assets as well as direct assignment and allocation of "common costs" and administrative and general expenses. Moreover, the specific avoided cost credits for newly unbundled distribution services, if any, will quite often be a case-by-case determination conditioned upon a range of considerations, such as the incumbent utility's obligation to serve, the degree of competition, the extent of market penetration, locational attributes (where relevant), etc. There is some concern that the additional time and resources required to determine whether any distribution services should be unbundled, address policy issues such as obligation to serve and avoidance of cost shifting, perform cost of service studies for each unbundled service and develop associated pricing methodologies may delay implementation of direct access past January 1, 1998. Under this option, all Track 2 issues are deferred for Commission action at some unspecified time after January 1, 1998.
This option differs from Option 1 only in that it sets a schedule for the potential selective unbundling of distribution services, beginning January 1, 1998 after the Track 1 items described above have been unbundled. This Option thus calls for a separate, parallel process within the Ratesetting Working Group process to identify additional distribution services that are candidates for unbundling and begins the tasks necessary for unbundling these services after January 1, 1998. With this separate process in place, direct access can begin on January 1, 1998 with the unbundled Track 1 items listed above, while the parties make progress toward addressing further unbundling.
Option 3 provides "selective unbundling" prior to January 1, 1998 some parties believe that, even before the retail market surfaces and the services to be provided in that market are revealed, certain services are identifiable which will enhance the offerings of prospective retailers. Margins on the electricity commodities are likely to be thin , yet retailers believe they need to provide services to customers that are currently bundled as part of the utility's distribution services. While certainly not free, bundled distribution services may be perceived as free by customers, making them reluctant to pay retailers for the same service, potentially undermining the emergence of competition for smaller customers. . The role of unbundling, then, is to credit the customer who chooses the retailer with the cost savings to the UDC (if any) so that the customer does not have to pay twice for the same service.
Option 3 only addresses competitive distribution services (i.e., services that do not demonstrate any natural monopoly characteristics) and requires the determination as to whether the UDC is to be the default provider of a competitive service. Default provider status of the UDC may change over time. During the infancy of retailing and the emergence of retail suppliers, the UDC may serve as default provider until the market matures. Alternatively, the UDC may continue in the role of default provider even in the end state when the retail market has fully matured. There are two aspects of the "default provider role", i.e., default to those who choose not to elect bundled services, and/or default to those who select alternate suppliers, but for whom the UDC must "standby" in case this supplier fails to perform.
If the UDC is default provider, both the UDC and retailer may provide similar services. This option thus requires the UDC to estimate a "credit" based on: (1) marginal attributable cost savings if it does not provide the service to a customer but is the default provider or (2) based on average attributable costs if it neither provides the service to a customer nor serves as the default provider. Under Option 3, the UDC will keep competitive services bundled until it no longer provides the services under any circumstances, unless the Commission determines that the rate for the service should be fully unbundled (as in the case of storage unbundling for natural gas utilities.) Rates will remain the same as before except that a credit will be offered to those who take the services from retailers instead of the UDC.
Under this option, the UDC may continue as default provider for some but not all competitive services for which a retail market has not emerged despite the fact that retail customers continue to have and express a need for those services. Monopoly services, on the other hand, containing elements of natural monopoly, are integral to the planning and safe and secure operation of the distribution system, and are maintained as an exclusive franchise of the UDC under Option 3. These services can remain bundled and no service price or credit need be posted in the transition or end state.
Comprehensive distribution function unbundling presumes that a CPUC policy decision determines that the scope of responsibilities of the UDC should shrink to a small set compared to those outlined in D.95-12-063. The unbundled monopoly aspects of distribution would be reduced to a technical and economically efficient minimum, with all other services provided on either an unbundled, or both an unbundled and competitive basis. Some portions of the distribution function now restricted to the UDC are re-designated as "competitive" activities provided by multiple organizations, which might include the UDC outside of its monopoly service activities. Further, there may be various component services that can be unbundled and provided at two or more levels of quality, although exclusively supplied by a monopoly. 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 some portion of it should be considered for implementation as early as 1/1/98.
Option 5 would create a complete segregation between all of utility's retail functions and its wholesale functions, under a structure where a new class of marketing company is created in which the local utility retail affiliate is but one member. This would involve a fundamental change in the manner in which the utility earns its profits so as to bring its incentives in line with the other members of that class of marketing firms.
This proposal would involve starting a pilot program as of January 1, 1998 with the following elements. (A more detailed description of program elements is set out in Appendix A):
This option identifies Track 1 unbundling on the tariff sheets of the IOU's generation, transmission, and distribution functions. 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 the utilities have submitted proposals to unbundle: generation, transmission (including ancillary services), distribution, public goods charges, and CTC and to present the associated rate design.
This approach does not definitively designate any items as Track 2 except by default (see Section B, below).
The RWG recognizes that certain threshold policy questions must be addressed to determine whether any further level of unbundling, specifically in the distribution service arena, is either appropriate or more fundamentally, in the public interest. [SDG&E has suggested a binary framework for addressing these issues: determining first which distribution services constitute natural monopolies and second which services the UDC must provide on a default basis to protect consumers and provide expected levels of safety and reliance, before unbundling only those service which fall into neither category. [CITE]] If the Commission decides to move beyond functional unbundling prior to January 1, 1998, these policy issues must be debated and resolved in a public forum as soon as possible to prevent subjective or disruptive efforts to unbundle.
Track 1 Items
In order to implement unbundling of Track 1 items, the following information is required:
The revenue requirement for transmission services and ISOprovided ancillary services would be based on the revenue requirement adopted by FERC for transmission facilities transferred to the ISO's control and the ISO's costs of providing ancillary services.
The distribution revenue requirement would be calculated by subtracting the FERCadopted transmission revenue requirement from the nongeneration revenue requirement this Commission adopts and adding other authorized revenues as appropriate.
The authorized transition costs on which a non-bypassable CTC would be based are to be determined in a separate proceeding. The IOUs are scheduled to file proposals on the methodology for determining these transition costs on August 30, 1996. The Commission must then adopt a CTC level.
After the Commission identifies public goods programs supported by the public goods surcharge, the revenue requirement associated for each program would be based on the authorized expense levels and cost of administration for each program.
The Commission needs to approve a methodology for allocating the revenue requirement for each item to rate groups and a rate design to recover the authorized revenues from customers.
Track 2 Items
Unbundling of distribution services will require the resolution of major policy questions on the desirability of such unbundling from the perspective of the consumer. In addition, customer protection principles would need to be established by the Legislature and the Commission. The Commission should consider issuing an Order Instituting Investigation ("OII") after January 1998 to hear and consider the evidence necessary to resolve these issues.
Track 1 Items
Functional unbundling must begin by assigning total costs to the generation, transmission, distribution and public benefits categories. Final separation between distribution and transmission, however, must await FERC's determination of the definition of transmission. Generation and CTCs will be separated based on the costs of power from the power exchange. Shared costs must be allocated to all functions.
Track 1 Items
Option 1 focuses present efforts on timely unbundling of the five consensus items included in Track 1 and deferring the debate on which, if any, items to include 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 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:
Track 2 Items
After January 1, 1998, the Commission should establish a formal process and schedule to decide policy issues for unbundling Track 2 items.
This option 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 all customers. These include purchases from the Power Exchange through the UDC, Contract For Differences (CFDs) around 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 depend largely on the differential in prices of energy under these two options, although the range of innovative products and services that many marketers have suggested would be strategically bundled with the basic commodity may also have a significant influence over customers' decisions. At this point in time, it is difficult to determine what the pricing differential will be for different groups of customers.
The marketing community asserts that the commodity margin will be small and as a result marketers will target only large customers, due to their volume of usage, as potential bilateral contracts customers. Others suggest that if this occurs, it would point to the success of the Exchange in providing lower energy prices to all customers, including smaller customers, and would not serve as an indictment of the restructuring process.
Option 1 entirely eliminates cost shifting between Direct Access and UDC customers. In addition, this option prevents inter- and intra-class cost shifting. By residually determining CTC on each rate schedule, every customer taking service under a given rate schedule would pay the same bill for non-generation 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, except in the provision of generation services. The modification in utilities' roles in provision of generation services has already been discussed in the restructuring policy decision.
same as in Option 1
same as in Option 1
Same as Option 1.
Track 1 Items
Same as option 1.
Track 2 Items
Following the issuance of this report (or "following A CPUC decision on this matter"?), the RWG, through its Analysis sub-team, would begin examining and applying the different methods for developing avoided costs for selected distribution services, under a range of different market penetration scenarios, and different presumed UDC roles and responsibilities as a default provider for the service. This would help the parties understand the rough magnitude of the possible avoided cost credit for these services, as well as the complexities associated with the development, administration and application of this credit. This process would help inform the Commission regarding the possible scale and scope of financial transactions that would be generated by this unbundling, and would provide useful background information supporting the issuance of the OII necessary to determine whether this additional unbundling would serve the public interest and lead to lower costs, as suggested in Option 1.
Track 1 Items
Same as Option 1
Track 2 Items
The Commission should establish a formal process and schedule to decide policy issues for unbundling Track 2 items after June 30, 1997.
Same as Option 1, except that, to the extent that this options advances the possible unbundling of selected distribution services, it could result in more aggressive activities on the part of marketers and thus a larger percentage of the residential and small commercial class would potentially be served under bilateral contracts at a given stage in the process.
Same as Option 1, provided that: a) any credits offered on selected unbundled services would be based on avoided costs reflective of the customer class and other relevant attributes (e.g., location, size, etc.).
Same as Option 1.
The following service categories are identified in Option 3 as those distribution services which could be unbundled before January 1, 1998: Potential candidates for this include metering services, billing services, customer services, and credit and collections services. These are essentially revenue cycle services which must be provided by any retailer who plans to offer electricity commodities to retail customers. The precise definition of those services will require further discussion but the selected distribution services will be defined and receive illustrative unbundling in the November 15 filing.
Once the initial step has been taken to unbundle the distribution services most essential to the emergence of retailers targeting small consumers , the UDCs would unbundle additional services which are duplicative in the context of the emerging retail sector While the services in this tier cannot be identified in advance, under this option the UDCs would be required to respond to this need and create a bill credit reflecting any UDC cost savings in a timely manner. In the end state, there are still competitive services (not demonstrating natural monopoly characteristics) provided by the UDC either because (1) customers prefer the UDC or (2) retailers do not offer the service.
1. New Decisions
The Commission would need to issue an order clarifying its early orders or alternatively addressing which distribution products and services would appropriately be unbundled on January 1, 1998 and to what extent (and through what process) additional products and services might also be unbundled.
2. For Clarification
The Ratesetting Working Group needs some clarification from the CPUC regarding its expectation that distribution services will be unbundled beyond/below the functional unbundling of distribution from generation and transmission. Specifically, does the CPUC intend that competitive distribution services within the distribution function need to be unbundled by January 1, 1998 in order to ensure a viable retail market? Furthermore, does the CPUC consider it desirable for the UDC to continue as the default provider for those competitive services it now provides or does it believe the UDC can eventually surrender this obligation to serve to retailers?
1. Information Requirements
The information requirements for a selective unbundling option should target the critical services first requiring a determination of those services, a detailed definition of activities associated with the services, and development of methodological details. The cost data required to perform essential cost calculations are available from IOU departments that provide the service, from the market place where these services may already be competitively provided, and from benchmarking studies by the three IOUs and other utilities.
2. Procedural/Analytical Steps -
The analytical procedures for implementing Option 3 have been identified in detail in San Diego Gas and Electric Company's July 15, 1996 filing. Under Option 3, certain revenue cycle distribution services are identified in the November 15 filing and their credits estimated. Beyond November 15, a process is established to identify other competitive distribution services which should be unbundled.
The CPUC would need to approve the criteria for classifying services as a monopoly or competitive services and, make a determination regarding the UDC's responsibility for default services.. Once the criteria is established, the need for ongoing regulatory oversight would be reduced to processing more routine utility filings (e.g., advice letters (?)) and addressing protests that might be filed by various parties to the process.
Selected metering, billing, customer and credit & collections services can be unbundled and their marginal and/or average attributable cost savings illustrated in the November 15, 1996 filings made by the utilities with the CPUC.
Beyond January 1, 1998, retailers, consumers, or other parties could request the unbundling of specific bundled retail services that met the adopted criteria (discussed previously). The UDC would then be required to develop cost savings estimates within some reasonable period of time following this request.
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. On the other hand, statements from the marketing community underscore their concern about the relationship between the degree of flexibility in marketing types of services and their interest in serving the small customers.
2. Cost Shifting
Using the incremental costing approach to design bill credits will ensure that only cost savings are reflected in the credits, hence there is no risk of cost shifting.
3. Corresponding UDC Incentive Structure
2. Cons
The same services are unbundled as in Option 3 as of January 1, 1998 with illustrative bill credits shown for the most basic, essential revenue cycle services in the IOUs' November 15, 1996 filings.
In theory, all competitive services are unbundled in the end state and the UDC does not serve as default provider for any service. In practice, the UDC serves as default provider and unbundles services as per the need of the market, up to and including the full range of competitive services. However, monopoly services remain the exclusive franchise of the UDC in the transition and the end state.
The Commission would need to issue an order clarifying its early orders or alternatively addressing which distribution products and services would appropriately be unbundled on January 1, 1998 and which (and through what process) additional products and services would also be unbundled.
The CPUC must address the role of the UDC versus private competitors to provide competitive distribution services, neither burdening the ratepayers of UDC monopoly services with cost shifting from services provided competitively, nor advantaging the UDC compared to private firms by sharing information required for monopoly services with portions of the UDC providing competitive services.
The CPUC must determine whether how it wishes to provide competitive services to customers whom markets do not wish to serve at affordable prices. Which component services must be universally provided, at what level of service, by whom, and paid for through what mechanism(s) must be explicitly determined as part of the decision to unbundle the distribution function.
The CPUC would need to clarify its intentions as to which , competitive distribution services need to be unbundled by January 1, 1998 in order to ensure a viable retail market?
The Commission would need to clarify the specific direction of D.95-12-063 to permit metering by private parties when new standards for meters are promulgated and revise the directives for UDCs to install meters.
The same as Option 3 for the initial stages, but more comprehensive examination of utility costs would be required for full unbundling of designated services.
The same as Option 3 except, in the end state, all services are unbundled based on average attributable cost savings. During the transition to the end state, however, where the UDC remains the default provider, services are unbundled based on marginal attributable cost savings. Once the end state has been achieved, these credits are eliminated and overall rates reduced accordingly to reflect full average cost savings less any stranded costs. That is, credits are needed only as long as: (1) the UDC is providing the service to some but not all customers and/or (2) maintains the capability to serve as default provider to retail customers.
The same as Option 3 in the initial stages with the Commission conducting proceedings regarding the determination of competitive services, the manner in which each would be unbundled, the treatment of stranded costs, and the extent of any ongoing utility obligation to serve where competition is fully established. .
The same as Option 3 in the initial stages, with a second procedural stage considering the issues described at 3 above. Services might be unbundled in groups or one-by-one depending upon the degree of controversy.
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. 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.
An important consideration should be the design of policies to prevent cost shifting among the component services. Cost shifting 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.
The Commission would need to give careful consideration to the motivations that a mixed monopoly/competitive firm might experience and design appropriate incentive schemes to address this issue.
Unbundle credit protections: This would make the funds collected from all ratepayers under the Uncollectible Expense available to retailers, as well as the utility, to cover unpaid bills.
Unbundle ability to prepay embedded cost, on pilot basis: This would allow a customer on a pilot program basis to contract with a marketer who in turn prepays portions of the customer's bill (corresponding to the customer's allocated share of utility embedded investment). The marketer in turn collects this cost over time bundled together with fees for other services that are provided to the customer.
Create a tracking mechanism for capital recovery, based on energy consumption, as is done today: In the pilot program the utility would create a Customer Trust Account within which to track the initial prepayment amount (based on a forecast of consumption) and the actual level of customer's consumption so that a matching of the customer's share of embedded costs with the prepayment amount would take place over time.
Program modifications, based on market penetration and other program results.
Any broader scale implementation would be based on the Commission's evaluation of the pilot program's success.
The CPUC needs to state that it is intending for small customers to actually receive the direct benefits of competition, and that customer's are able to transfer their obligations to pay to third parties, without diluting the ability of the investing utility to achieve full cost recovery. n the longer run, issues associated with the terms of initial investment need to be redrafted, to insure parity of risk of capital deployment and recovery do not skew the ongoing carrying cost. Utility tariffs would have a new payments option added to them, enabling two ways to pay the utility bill,
The program is proposed on a pilot basis which would somewhat limit the data requirements. The program would require details regarding revenue requirements, selected customer usage patterns, and utility accounting procedures.
Adoption of a pilot program prior to January 1, 1998 with monitoring and review taking place as appropriate post January 1, 1998.
The CPUC should note that currently there is not one electric marketing company out of the dozens targeting California that are looking to serve small customers. It must be understood that to merely contract for service with a customer a marketing firm must have staff and facilities in place to:
These are not discretionary. Even the smallest customer contracted relationship will require all of these, just for a simple commodity sales transaction. The vast majority of customers, meaning 95%+ of the customer accounts have such small usage that one must assume commodity margins unlike those that exist in any commodity market in the world, just to produce enough margin to cover the direct cost of invoicing. (In other words, these customers lack the returns to scale that are present in the large customers.)
This is in the context of the utilities profitably providing service to these customers. They profitably serve small customers because they earn a return on their investment in plant, i.e., the "wires", rather than on the services provided to customers. Thus, if the CPUC is serious about all customers being eligible to receive the benefits of parties competing directly for their business, then the CPUC must provide a foundation for firms to compete at this small usage, service intensive level.
By paying the full, embedded cost, there should be no cost shifting introduced by this proposal. Instead, it is the means to discover existing cost shifting, and it is up to the CPUC to determine whether to correct these existing problems once they are pointed out.
If the Commission desires direct competition for services to consumers, then the utilities need to be compensated on a comparable basis to the marketers for those distribution products and services that are deemed competitive. If the utilities are risking their profits, based on the services the customers elect, there will be direct competition for customers. If the utilities are earning return on rate base in another portion of their business, as under the current ratemaking procedures, then they are not directly at risk for earnings based on their provision of customer services.
For each utility, we would propose that the term of the pilot be approximately two years. This time frame should sustain a relatively stable regulatory environment, offer enough time to initiate a program by a wide range of market participants, and begin to allow the CPUC to get a flavor of the character of the program that could result. However, it would be critical that there be an explicit time schedule, along with an explicit definition of thresholds for further action, review or modification.
For the program proposed, we envision four options available from which the CPUC would choose. Given that it is the cost of equity which the CPUC regulates, we suggest that this be the target for customer prepayments. It is our goal to recognize the low debt costs available to the utilities and to reward them for that, without impinging on their ability to secure those low costs. However, three other options exist that would produce a different utility capitalization over time at high participation rates. One, would not be a practical option during the pilot. In all cases, we envision that upon termination of the pilot, that capital prepayers not enrolling in a long term program would be bought out of the program and the shifting of value from the Customer Trust Account, back to the utility rate base. One of the reasons that we are proposing that the initial pilot program be very limited in size is this need to make the absorption of customers into the standard utility framework an inconsequential transaction, in the event the pilot is discontinued.
It is expected that this program offers an interesting check and balance to cost of capital proceedings. If the rate is too high, all customers will want to buy the facilities and none will want to sell them back to the utility at embedded costs. If the rate is too low, the reverse will be true. All customers would want the utility to keep the facilities, or will want the utility to buy back the facilities at the embedded cost.
Upon receipt of the prepayment investment from the customer, or their representative, the utility would create a Customer Trust Account on the liability side of their balance sheet. For the first three implementation options, above, this account would be the simple repository of a weighted average share of all utility assets such that the depreciation schedule in this account would be identical for the utility's ratebase. This account would offset the increase in prepayment cash in their asset side of the balance sheet producing a net zero transaction for the utility shareholders. As part of the enrollment materials, there would be an explicit section that would specify that for the period of the pilot that prepayment of utility assets would confer upon the customer no rights associated with management, operations or disposition of the assets. In the case of option number 4, above, this account would contain both the prepaid capital charges, and the present value of the variable tariff costs.
In order to enroll, customers or their agents would pay the full, pro-rata share of utility embedded investment, based on each tariff, plus variable costs in the case of option 4, above. We would propose that during the Pilot, a limit of 5% of the rate base that could be prepaid, offered on a first come, first served basis. We would further suggest consideration that no rate class could exceed 5% participation until all other rate classes achieved at least 3% participation without CPUC review of the cause. Significantly disproportionate participation should serve as a signal to the CPUC that there is a cost allocation problem in the rates which would need to be evaluated. Again, this should be a pilot program and many parameters need to be looked at simultaneously.
Enrollment would be open to either customers or customer agents and the parties prepaying would be designated as the parties enrolling customers. Given the simple fact that enrollment would have no effect on the terms of service under a tariff, but instead only changes the timing of the payments due to the utility, there is no customer abuse concern here. Instead, it would be incumbent on the capital provider to insure that it had an arrangement in place to recover their charges from the customer prior to enrollment, otherwise the capital provider may face an inability to recover their costs.
Within this structure, it should be the right of the customers or their agents to designate to the utility which accounts they wish to allocate their prepayment to, and therefore qualify for enrollment. This provision is a critical element to insure that capital providers are able to allocate their investment in a manner that achieves full utilization. Failure of certain customers, reductions in energy needs and other reasons require that the prepaid capital be utilized by other customers, in a manner similar to the utilities' ability to reallocate costs to remaining utility customers.
Thus, we propose that capital suppliers would be free to un-enroll nonpaying customers and designate other customers to take advantage of these program at a small accounting fee.
The utilities are constantly re-investing in their facilities, to upgrade, improve or replace capital. To the extent that this is done without specific customers becoming liable for those improvement costs, these expenditures become an increase in the ratebase. Therefore, to keep the integrity of this prepayment program, these costs should become an annual increment required of prepayment program participants. Thus, if in a particular year, the utility reinvestment program is equal to 3% of the outstanding ratebase, then part of the requirement of program participants would be to prepay their share of that 3%.
The utilities would track the accrual of customer capital cost avoidance, to permit a monthly report for each participating capital supplier to track the remaining portion of their prepayment. Given the seasonal nature of many customers, and the unpredictably variable use of many customers both the utility and the capital supplier need to have a clear target of what customer enrollment is allowed for a given investment, and how that customer enrollment is allocated over time.
Upon designation by the capital provider that a customer is enrolled, the utility would switch the customers billing designation to the prepayment option of their same tariff. Customers would be free to designate their capital provider as the party to whom they would pay their bills, resulting in the capital provider paying the utility on the customer's behalf. This system is already in place for core aggregation, and with the prepayments in the hands of the utility, there should be no concern for the credit protections for these indirect utility billings.
Upon termination of the pilot program, either the customers and aggregators would rollover into the long term program or the utility would buy back the investment, re-enrolling the customers into the standard tariffs. Repurchases by the utility at this time would be at full, undepreciated value, based on the weighted average value of the Customer Trust Account. Further, at any time during the pilot, capital prepayment parties could withdraw from the program, by having the utility buyout the investment, subject to a "restocking fee" of 1% discount.