Docket Clerk
California Public Utilities Commission
505 Van Ness Avenue
San Francisco, California 94102

RE: R.94-04-031/I.94-04-032

Dear Docket Clerk:

Enclosed for filing with the Commission are the original and five copies of the COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) ON THE RATESETTING WORKING GROUP REPORT in the above-referenced proceeding.

We request that a copy of this document be file-stamped and returned for our records. A self-addressed, stamped envelope is enclosed for your convenience.

Your courtesy in this matter is appreciated.

Very truly yours,

James M. Lehrer Senior Counsel

JML:JGM:DOCUMENT.01

Enclosures

cc: All Parties of Record
ALJ Steven Weismann
Miriam Ebke, CACD

(U 338-E)

ANN P. COHN
JAMES M. LEHRER

Attorneys for
SOUTHERN CALIFORNIA EDISON COMPANY

2244 Walnut Grove Avenue
Post Office Box 800
Rosemead, California 91770

Telephone: (818) 302-3252

Facsimile: (818) 302-1935

Dated: September 13, 1996

Option 1, as proposed by Edison, is the only one of the five unbundling options presented in the Ratesetting Working Group Report which maximizes the chances of meeting the January 1, 1998 target for implementing direct access and competition in generation. Edison's recommendation is that the Commission adhere to its present course of unbundling only the functions of generation, transmission, distribution, CTC and Public Goods until the January 1, 1998 deadline goal has been achieved. Before any further unbundling takes place, it is essential that the Commission carefully consider the impact of distribution product and service unbundling on customer protection and electric system reliability, and the potential for consumer confusion.

PG&E's proposal (Option 2) also adheres to functional unbundling only before January 1, 1998, but begins considering the policy implications of unbundling distribution products and services in parallel with the implementation of direct access and competitive generation. This would jeopardize the successful and timely accomplishment of the Commission and the Legislature's goals.

Options 3, 4, and 5, proposed by SDG&E, the CEC, and Agland Energy Services all have significant shortcomings. SDG&E would unbundle any product or service identified by a retailer as competitive, but would use a short­hand hastily­approved estimate of avoided costs instead of the detailed, accurate cost studies necessary to foreclose marketers from "cherry picking" of low cost­to­serve customers. The CEC asks the Commission to put the cart before the horse, by revisiting D.95­12­063, as modified by D.96­01­009, the Restructuring Policy Decision, to make a "general decision" to unbundle distribution products and services, then to analyze the effects of such unbundling later, after it has occurred. Agland proposes a total regulatory paradigm shift involving a complex scheme to assure marketers a profit in distribution products and services, most likely at the expense of the utility's customers.

In addition to threatening the direct access timetable with premature, unnecessary and extremely burdensome side issues, Options 2 through 5 would lead to hasty and ill­considered unbundling with inadequate attention to consumer protection and education. They would jeopardize the orderly transition called for by the Commission and the Legislature, and also pose the risk of undermining system reliability by experimenting with a host of unbundled products and services before the basic direct access and competitive generation infrastructures have been put in place. Finally, they would bypass the threshold public policy inquiry as to the extent, if any, to which distribution unbundling is in the public interest.

The Commission should view with skepticism options proposed by marketers to serve their needs, which do not also clearly demonstrate the benefits which those options will provide to consumers. Option 1 will facilitate an orderly transition to a deregulated electric generation market, while maintaining system reliability. The other options either move too quickly in view of available resources (jeopardizing the direct access timetable) or worse, would deregulate distribution before the benefits and costs of such deregulation have been properly considered.

The following comments are submitted by Southern California Edison Company ("Edison") in response to the five options appended to the August 26, 1996 Ratesetting Working Group Report (the "RWG Report"). These options contain different proposals regarding the extent, if any, to which products and services of the electric industry distribution function should be unbundled prior to the January 1, 1998 deadline for achieving competition in electric generation and direct access.

Option 1, submitted by Edison, recommends that the Public Utilities Commission of the State of California (the "CPUC" or "Commission") adhere to its present course of functional unbundling only, until the January 1, 1998 goal has been accomplished. This course of action provides the greatest potential of meeting the Commission's deadline, without compromising system reliability or consumer protection.

All other proposals ­­ Option 2, submitted by Pacific Gas and Electric Company ("PG&E"); Option 3, submitted by San Diego Gas & Electric Company ("SDG&E"); Option 4, submitted by the California Energy Commission Staff ("CEC"); and Option 5, submitted by Agland Energy Services, Inc., et al. ("Agland") ­­ recommend that the Commission risk jeopardizing the January 1, 1998 goal by stretching already limited resources to attempt either preparation for and/or some degree of unbundling distribution products and services before January 1, 1998.

Options 3 through 5 contain additional related thematic defects:

We discuss these issues in more detail below.

Options 2 through 5 are rendered all the more ill­advised when one considers that unbundling distribution products and services is not necessary to achieve direct access,/ or for consumers to enjoy the benefits of competition ­­ all consumers will benefit from competition if competition results in lower generation prices. Moreover, unbundling distribution products and services has the potential to compromise system reliability and consumer protection, and to lead to unnecessary consumer confusion. Edison strongly urges the Commission to reject Options 2 through 5 and to continue to pursue the path most likely to lead to the successful, timely implementation of direct access and competition in generation.

1. INTRODUCTION

In designating a January 1, 1998 deadline to restructure the entire electric industry in California to achieve competition in electricity generation and direct access, the Commission committed to an enormously ambitious, far­reaching and noteworthy undertaking. The eyes of the nation and even the world are upon this state as we move quickly down this hitherto unexplored path.

As the Commission recognized in D.95­12­036, as modified by D.96­01­009, the keynote "Restructuring Policy Decision," the success of this venture ­­ achieving an orderly transition to direct access and the benefits of competition (lower energy rates) for all customers by January 1, 1998, without compromising consumer protection, system reliability, or the integrity of investor­owned utilities ("IOUs") ­­ depends on the willing cooperation, unflagging commitment, and sustained efforts of all stakeholders (the Commission itself, the California Legislature, the Federal Energy Regulatory Commission ("FERC"), IOUs, would­be generation retailers and aggregators, and consumers and their advocates). It depends as well on the successful establishment of complex new entities (the Power Exchange and the Independent System Operator ("ISO")) and communication pathways, and on effective public education. If this monumental task is to be accomplished in the next fifteen months as planned, it is crucial that the attention and available resources of the stakeholders remain focused on the goal.

1. Background

Towards this end, Assigned Commissioner Duque, in his June 21, 1996 ruling, ordered the RWG to identify Track 1 items ­­ those deemed essential to achieve direct access by January 1, 1998 ­­ and Track 2 items ­­ those which might be unbundled eventually, but are not essential to achieve direct access ­­ in a report to be filed August 26, 1996. The RWG participants reached consensus on five Track 1 items (the "Five Consensus Items"): Generation, Transmission (including ancillary services), Distribution, Competitive Transition Charge (CTC), and Public Goods. Despite repeated good faith efforts, no consensus was achieved regarding Track 1 items beyond the Five Consensus Items. Thus, the parties submitted five separate options for the Commission's review.

1. Summary Of Options

We briefly describe these options by reference to their primary presenter and recommended approach. Option 1 (Edison) recommends deferring all consideration of distribution product and service unbundling until direct access and competition in generation are implemented. Option 2 (PG&E) adheres to functional unbundling only before January 1, 1998, but recommends that proceedings be initiated before January 1, 1998 to examine the threshold issues preliminary to a decision to unbundle further. Option 3 (SDG&E) would bypass all policy considerations to unbundle any product identified by a retailer as competitive, substituting in place of detailed cost studies, a ballpark estimate of avoided costs. Option 4 (CEC) recommends that the CPUC make a "general decision" to unbundle distribution products and services,/ then proceed with unbundling before analyzing the effect of unbundling. If such unbundling produces undesirable results, the CEC would require utilities to rebundle. Option 5 (Agland) would completely unbundle distribution products and services, and give retailers and/or consumers the option of prepaying a utility's capital investment, but would require utilities to act as guarantors of any debt incurred during an initial pilot program, thus biasing the pilot program's results.

In view of the tremendous amount of work necessary to achieve direct access by January 1, 1998, Option 1 limits Track 1 items to the Five Consensus Items. This avoids risking the successful or timely implementation of direct access. Otherwise, the parties will be distracted by having to consider the complexities of whether or not, and if so how, to unbundle distribution products and services. This approach has a number of specific advantages:

Edison's proposal is fully consistent with AB 1890./ In contemplating the many tasks necessary to meet the January 1, 1998 deadline, the Legislature did not include unbundling distribution products and services in AB 1890. However, some of the key issues the Legislature has identified are relevant to the unbundling analysis. These include:

In light of the above, we believe that attempts to begin unbundling distribution products and services prior to or even shortly after January 1, 1998 would run contrary to the legislative goals. Aside from threatening the direct access timetable by overburdening the parties, Options 2 through 5 could result in hasty and ill­considered unbundling with inadequate attention to consumer protection and education, effects which would jeopardize an orderly transition called for by both the CPUC and the Legislature. Further, by creating an unstable and admittedly contingent environment, Options 3, 4, and 5 could also pose the risk of undermining system reliability and/or market stability and could lead to protracted litigation. For the reasons outlined above, as well as the more detailed objections set forth below, the Commission should adopt Option 1.

1. Consensus Policy Issues

Although the RWG participants could not agree on the extent of unbundling, they did reach consensus concerning nine public policy issues that the Commission should consider in reviewing the options (the "Consensus Policy Issues"). As presented at pages 3­4 of the RWG Report, the Consensus Policy Issues are:

1. The extent of distribution service unbundling necessary to provide the Commission's desired level of customer choice for all customers;
2. The potential tradeoffs between the extent of distribution unbundling and the timing of the implementation of direct access;
3. The potential tradeoffs between the incremental costs of additional unbundling and the value to customers;
4. The potential tradeoffs between the degree of accuracy of the cost estimates used for the unbundling of distribution services and the timing of the implementation of direct access;
5. The relationship of costing methods used for unbundling distribution services to the Commission's concerns about avoiding cost­shifting;
6. The relationship between the extent and timing of distribution unbundling and consumer protection and education;
7. The need to establish general principles and standards that will minimize regulatory oversight and litigation;
8. The need for and extent of the UDC's ongoing obligation to act as an exclusive default provider for those not selecting alternative suppliers or for those returning from service with alternate suppliers; and
9. The need to balance the opportunities and responsibilities of the market providers.

There is no record at this point to support a reasoned decision on these or other issues crucial to unbundling distribution products and services. Should the Commission decide to deviate from the path of functional unbundling only at this time, the importance of a careful and deliberate consideration of the Consensus Policy Issues by the full Commission cannot be overemphasized. The RWG participants identified these issues as essential to an informed decision on whether, and if so to what degree, distribution products and services should be unbundled prior to January 1, 1998. The focus of any such decision should be whether the proposed unbundling will benefit consumers and the public, not marketers.

1. COMMENTS ON OPTION 2: PROPOSAL BY PACIFIC GAS AND ELECTRIC COMPANY

Like Option 1, Option 2 identifies only the Five Consensus Items for Track 1, as these are the components which must be unbundled to implement the state's vision for a competitive generation market by January 1, 1998. However, Option 2 also proposes to begin a parallel process to "immediately identify potential distribution services that are candidates for unbundling after January 1, 1998." This work would precede a Commission OII to determine whether additional unbundling would serve the public interest and lead to lower costs.

The process described in Option 2 will require resources which are more productively engaged in implementing the restructuring policies already determined by the Commission and the Legislature.

1. Option 2 Begins The Complex Process Of Considering Product And Service Unbundling Before The Fundamental Structure Of The Competitive Marketplace Has Even Been Established Inappropriately, Diverting Resources Required To Meet The January 1, 1998 Deadline

PG&E recognizes that answers to the nine Consensus Policy Issues contained in the RWG Report must be part of any determination of whether any further level of unbundling is appropriate or in the public interest. It makes far more sense to implement the fundamental structure of the new competitive marketplace for generation services before grappling with the complex issues raised by unbundling beyond what is needed for 1998.

Contrary to PG&E claims that Option 2 "assur[es] that all needed resources are focused first and foremost on unbundling the services essential to enable direct access by January 1, 1998," it is simply not possible to immediately begin work on investigation of further unbundling while also assuring that all resources are focused on unbundling of the Five Consensus Items. Option 2 includes establishing criteria for selecting the unbundling candidates, specifying the needed cost studies, and identifying potential avoided cost credits or other pricing mechanisms for each candidate. PG&E notes that among the factors to be considered by the RWG would be the utility's obligation to serve, the degree of competition, the extent of market penetration, and other factors relevant to the services in question. None of the above are simple issues, as witnessed by the failure of the RWG participants to reach anything even approaching consensus on any of these issues.

1. COMMENTS ON OPTION 3: PROPOSAL BY SAN DIEGO GAS AND ELECTRIC COMPANY

SDG&E's proposal, Option 3, would unbundle a category of "competitive" distribution functions. It would then estimate the marginal or average cost, depending on whether the utility remains as the default provider, for various distribution services deemed to be "competitive services," and reduce UDC revenues by those amounts for any customers lost to competition. Specifically, Option 3 requires a 3­step process: (1) classify services as monopoly or competitive services; (2) determine whether competitive services need a default provider; and (3) unbundle UDC cost savings if retailers actually provide such service.

This approach is seriously flawed:

• The determination of whether a service should be provided competitively is inappropriately left in the hands of retailers.
• The determination of monopoly vs. competitive services inappropriately focuses on the needs of retailers rather than the good of customers.
• The process proposed for establishing the level of credits for retailer­provided services ignores the inherent difficulty of regulatory approval of cost estimates.
• To avoid significant opportunities for "cherry picking" and uneconomic bypass, the process for establishing cost estimates would require a vast number of estimates and associated litigation for approval.
• Option 3's extensive list of Track 1 items is not necessary to establish direct access.
• The extensive list of Track 1 items ignores the myriad complex tasks and decisions required to implement direct access on January 1, 1998.

1. SDG&E's Determination Of Monopoly Vs. Competitive Services Inappropriately Focuses On The Needs Of Retailers Rather Than The Needs Of Customers

In disregard of the public and consumer needs, Option 3 responds almost totally to the needs of retailers. "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."/ "Distribution services which are essential to retailers must be identified and prioritized. . . ."/ "If the 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."/

This approach has two fundamental deficits. First, it does not specify who will determine if the distribution system will be harmed, or how that determination will be made. Second, the absence of harm to the distribution system per se does not necessarily mean that consumer needs and interests will be served.

The Commission has ample experience of what happens when new market structures are created based on the claimed needs of marketers. This was exactly the basis for creating the Standard Offer No. 2 ("SO2") and No. 4 ("SO4") contracts for the QF industry which are arguably the largest single source of stranded costs. During the development of the initial standard offers, QFs asserted that they required fixed payments to obtain financing for their projects. This led to the ten years of fixed payments in the SO4 contracts and the fixed capacity payments through the life of the SO2 and SO4 contracts, for which consumers have paid a very high price.

In the present situation, the Commission should carefully consider the long­term consequences of the marketers' proposals and view with skepticism proposals which do not address consumer interests. The Commission, as it historically has, must consider the interests of customers. Regardless of whether the interests of marketers would best be served by unbundling as many services as possible, a determination must be made that unbundling is in the best interests of customers. Rather than moving precipitously to satisfy the desires of one group of market participants, the Commission should fully evaluate the Consensus Policy Issues and any other relevant factors before opening up any distribution service to unbundling.

1. The Process For Establishing The Level Of Credits For Retailer Provided Services Ignores The Contentiousness Inherent In Regulatory Approval Of Cost Estimates

The process described in Option 3 sounds deceptively simple. Once a retailer identifies a product or service that should be competitively provided, the utility prepares an estimate of the cost avoided by not providing the product or service, and then an expedited regulatory process is instituted to approve the estimates./

An estimate, by its very nature, invites contention: there can be and often are widely ranging estimates for the same activity depending on the data available and the assumptions made. The reality is that the utility, consumer advocates, DRA, and marketers will all prepare their respective estimates and there will follow a lengthy, contentious Commission proceeding to determine the "avoided cost" of the service in question./ This would be undesirable and counterproductive. Indeed, the RWG reached consensus on the ". . . need to establish general principles and standards that will minimize regulatory oversight and litigation."/ SDG&E's proposal, however, is completely at odds with this recommendation.

1. The Process For Establishing Cost Estimates Would Either Provide Significant Opportunities For "Cherry Picking" And Uneconomic Bypass Or Else Would Require A Vast Number Of Estimates And Lengthy Litigation For Approval

SDG&E's ballpark approach has serious substantive as well as procedural flaws. Opening up individual distribution services to competition while requiring the utility to charge a single uniform price based on an average cost for those distribution services would inevitably result in "cherry picking" and uneconomic bypass. Customers who are cheaper to serve than the average would quickly be targeted by marketers causing the utility's costs to serve the remaining customers to increase. The only way to prevent this outcome would be to establish prices for a wide range of situations. However, this solution would require multiple iterations of the contentious process discussed above. The cost to constantly reforecast and litigate these issues would ­­ at best ­­ significantly erode any savings and ­­ at worst ­­ result in higher costs to customers.

1. The Extensive List Of Track 1 Items Ignores The Myriad Complex Tasks And Decisions Required To Implement Direct Access On January 1, 1998

One only has to browse the DAWG Report, the RWG Report, the Renewables Working Group Report, the ISO and WEPEX filings and the upcoming Low­Income Working Group Report to get a sense of the manifold decisions that must be made, business and regulatory processes, statutes and rules that must be created or changed to achieve direct access, even apart from any resolution of unbundling beyond the Five Consensus Items. This is exactly why Edison so strongly urges the Commission to defer consideration of unbundling beyond the Five Consensus Items until direct access has been achieved. To do otherwise seriously jeopardizes the possibility of achieving direct access by January 1, 1998.

Everyone participating in this restructuring process has already observed its impact on the Commission and the other stakeholders' resources. No one can effectively participate in all the working groups and other Restructuring­related activities to the degree desired; parties are at the point of having to focus on some activities at the expense of others. Things will only get worse if the Commission follows SDG&E's proposal and adds a multitude of new issues to be addressed.

1. COMMENTS ON OPTION 4: PROPOSAL BY CALIFORNIA ENERGY COMMISSION STAFF

Option 4, proposed by the CEC, ignores the June 21, 1996 ACR's request for a designation of Track 1 and Track 2 items. Rather, it essentially asks the Commission to revisit the Restructuring Policy Decision. Based on an assumption that the unbundling of distribution products and services will lead to market efficiencies, it assumes the Commission will decide it erred in not ordering such unbundling. Once the Commission makes "a formal commitment to unbundled [sic] some portions of the distribution function and to open some subset of these to competition,"/ the CEC would proceed by unbundling the distribution services "essential to successful direct access" by January 1, 1998; tellingly, it admits it does not know if any such services exist./

Option 4 next calls for the selective unbundling of services "of interest" to private energy service providers ("ESPs")./ If no competitive market developed, it would apparently "rebundle" these services and try again. The CEC asserts: "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./

The stated goal of Option 4 is to achieve a three­part endstate for distribution services:/ (1) some services would continue to be delivered on a bundled basis by the UDC; (2) some services would be unbundled and offered by the UDC at various levels of quality (a consumer or an ESP could select a particular level and pay only for that level); and (3) some services would be unbundled and sold competitively by a number of entities, including possibly the UDC./ The plan, as set forth in the RWG Report, is premature, incomplete, and overlooks the practicalities of the situation.

Before the Commission adopts CEC's proposal, it should first determine whether unbundling any distribution product or service is in the public interest. This determination should focus on the interests of consumers rather than on assumed market efficiencies or on the interests of ESPs.

1. The CEC Would Have The Commission Proceed Without Proof That Distribution Unbundling Is Essential At This Time.

The CEC admits that it does not know if any unbundling distribution product or service is "essential" to achieve direct access. Rather, the CEC simply concludes ­­ without factual support ­­ 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 January 1, 1998 if the CPUC adopts a process with this date in mind."/ Thus, it would disrupt the process of implementing direct access by January 1, 1998 to unbundle distribution products and services.

The CEC believes distribution unbundling will contribute to "market efficiencies."/ However, this premise is true only if the current form of distribution services, or the distribution services that evolve under a system of Performance­Based Ratemaking, are less efficient than the distribution services that would be offered competitively. The CEC, like the other parties advocating distribution unbundling, has offered no evidence to show that such is the case. Instead, CEC's approach is to unbundle first and to ask later whether unbundling is likely to create inefficiencies.

The CEC itself points out that there is very little empirical evidence of customer preferences. "There are [sic] a very limited number of small­scale pilots or special circumstances in which customers have been given options."/ Moreover, it appears that, while there may be preferences among commercial and industrial customers, "[v]ery little information exists concerning residential customer choice."/ It is quite conceivable and indeed likely that consumer preferences will vary among classes of consumers. Before embarking on a time­consuming deconstruction exercise, one should at least have some idea of what the potential market is.

There are at least three obvious practical problems with CEC's suggestion. First, transaction costs are overlooked entirely. It is likely to cost more to unbundle various subcomponents of distribution without considering first whether such unbundling will lead to efficiencies than to first study the components to determine whether unbundling is likely to be useful and attractive to consumers. Whatever costs are incurred by the parties in unbundling would be wasted if it were eventually decided to reverse that decision, if it is even possible to reverse. There would also be a "cost" in consumer confusion that could not be recovered. Second, the CEC seems to overstate the ease with which the regulatory system will rebundle if it turns out that unbundling does not work. Inevitably some parties will have an interest in seeing it continue; thus there will be delays to litigate such differences of opinion. Third, unless unbundling a service results in a recognizable avoidable cost reflected in a customer's bill, the costs involved in unbundling the item will exceed any consumer cost saving.

1. The CEC Focuses On What Aggregators Want, Rather Than On What Consumers Want

The CEC's proposal appears to rest on an acceptance of the positions of aggregators. For example, it begins by suggesting that "the UDC provid[e] 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 full­scale competitive unbundling."/ Indeed, the CEC candidly admits that "much of the impetus for retail distribution function unbundling comes not from consumers but from emergent suppliers. . . ."/ This is analogous to experimenting on a patient because it happens to be "of interest" to medical students. The more appropriate order is to determine first whether the proposed unbundled items will be useful to consumers.

This problem of perspective pervades the CEC's process discussions. The Commission's deregulation of the gas industry has not yet unbundled distribution services. The CEC, adopting the perspective of "emergent electricity aggregators with experience in [gas] core aggregation," suggests that the gas process has been "unwise."/ In fact, however, the Commission and others involved in gas deregulation have recognized that the reason more customers do not participate in core aggregation is that deregulation of other components of the gas industry has been successful in lowering prices charged by the gas utilities./

If the CEC's goal is "not competition at all costs, but more efficient supply of component service,"/ it is not clear that the best way to proceed is by precipitously dismantling systems that may more appropriately be left intact. While it is true that aggregators have an interest in dismantling, at this point in time the Commission has no basis for "providing a definitive signal to potential market participants that [it] is seriously intending to permit competition for at least some distribution function component services."/ In addition, the Commission has no mandate to place the interests of aggregators above those of consumers.

1. Option 4 Would Require Numerous Commission Policy Decisions

The CEC acknowledges that many of its proposals will require additional policy decisions by the Commission. Curiously, it seems to assume that the Commission will reach the outcome it argues for in every case. In fact, virtually every proposal it makes is likely to be contested by one party or another, so that the process will be long and torturous.

The CEC anticipates seven necessary policy decisions which will inevitably consume substantial Commission time and resources. These decisions include: (1) developing a list of distribution system services and subsidiary activities that is uniform among the UDCs; (2) establishing pricing safeguards so that competition may proceed, with the UDC as a possible default service supplier; (3) customer education and assessment of customer interest in products; and (4) consideration of an INFOCO./ Option 4 suggests that the Commission can make "a series of smaller scale decisions."/ However, as seen above, the decisions it contemplates are hardly "smaller scale."/

For example, Option 4 suggests that price floors and caps for specific bundled services can be established./ The CEC itself has recognized that this will be a "complex and contentious task."/ Clearly, it will require study, briefing and hearings. It is difficult to see why the CEC expects that such efforts can proceed in parallel with functional unbundling without jeopardizing the January 1, 1998 deadline./

In sum, the CEC has not shown any reason to begin the process suggested in Option 4 at this time. The process is academic and experimental, at best. It promises numerous, expensive and unnecessary proceedings, as well as unbundling and rebundling distribution products and services. Such a cavalier approach would result in wasted resources and needless customer confusion.

1. COMMENTS ON OPTION 5: PROPOSAL BY AGLAND ENERGY SERVICES, ET AL.

Option 5 of the RWG Report, sponsored by Agland, is the most radical recommendation for the Commission. It goes far beyond even the SDG&E and CEC proposals. Its basic ideas are impractical and unfair, requiring extensive legislation or subsidies by the utility to implement. Given the near proximity of the January 1, 1998 deadline, it would be counterproductive for the parties to have to address a complex new statutory proposal at this point in time. Moreover, it would be unfair to impose any undue burden on the utility or its customers.

More fundamentally, Option 5 emphasizes the dominant problem it shares with Options 3 and 4: it focuses on the wishes of aggregators, and is silent as to the needs of consumers and system reliability. Its stated goal is to open competition to small customers; however, it would accomplish this by trying to guarantee aggregators a profit in distribution services. It argues they cannot survive if they must do so on commodity margins, so it contends the Commission must initiate far­reaching changes in the distribution system. It suggests that Track 1 ­­ items necessary to achieve direct access by January 1, 1998 ­­ should include: (1) authorizing a pilot "prepayment" program, pursuant to which a third party, presumably an aggregator, could prepay a customer's share of utility investment; and (2) imposing the "obligation to serve" on an entire "class of Tier 1 Marketing Firms."/

Agland's lengthy and complex presentation rests upon several assumptions that are demonstratively false. Moreover, it virtually concedes that no present studies justify its recommendations for Track 1. Given its length, scope and highly conclusory nature, it is not feasible to attempt to refute every unsupportable assertion Agland makes in the time available for these comments. Rather, we will point out some, though hardly all, of its basic flaws and reserve a full discussion in the event the Commission wishes to give further consideration to Agland's proposal.

1. The Core Of Agland's Argument Is Manifestly Incorrect

Agland's argument that commodity distribution is unprofitable at the small consumer level ­­ its policy justification for its proposal ­­ rests on an analogy to the gas industry. It assumes that small customers have not benefited from competition in the gas industry and attributes this to the lack of unbundling of distribution services. The analogy misses the point: deregulation at the commodity level has lowered gas prices generally, so small consumers have benefited. Thus, there has been no need to deregulate distribution.

Next, Agland argues that although the current system of regulation assumes utilities are "very efficient buyers of capital," "the experience of Puget Sound Power and Light" in 1995 shows that one can finance a utility's physical assets, at a very low rate, solely by debt. Therefore, Agland asserts aggregators can borrow money in the markets, prepay a customer's share of a utility's investment in physical assets, and earn a profit by providing service to customers, as opposed to providing a commodity, which has a very low profit margin./ Agland's position, however, would require legislative authorization, which does not exist. Without a statutory right, as in the Puget Sound example, debt holders will certainly demand a higher return.

Agland also assumes that an obligation to serve justifies a regulated monopoly with a default provider, so that if the obligation to serve can be imposed upon various entities, there is no need for a default provider. Agland has it exactly backward: scale and scope economies justify the authorization of a franchise territory and the establishment of a monopoly utility in that territory with an obligation to serve, because otherwise some customers might not receive service. Agland has not demonstrated the absence of those economies. Its sole point in favor of its argument is: "[W]e cannot come up with a single service that we believe deserves this [bundled utility service] status."/ Agland has no study or analysis of any sort to support its assertion, yet it asks the Commission to begin a costly program based on that assertion.

It is also doubtful Agland's proposal will save consumers money: if a group of entities each act as a default provider, each must create the physical plant to serve the same territories, creating a hugely expensive superstructure. Alternatively, if each entity is given what amounts to a franchise in the particular locality, it is hard to understand how that would benefit consumers any more than having one entity with an obligation to serve. Agland attempts no answers to these difficult conceptual problems.

1. Agland's Recommendation For Prepayment Of Embedded Capital Is Functionally And Financially Impractical And Unfair

Agland suggests that customers, via aggregators, be permitted to prepay their "share" of utility distribution costs. Its theory is that only then will aggregators be able to participate in the "lucrative" distribution business. The problems with this suggestion are manifold:

Agland raises an immense number of difficult economic, regulatory, and financial issues. Agland's cryptic proposal does not even address those issues, much less begin to resolve them. It proposes a complete paradigm shift, without any demonstration of benefits to consumers.

1. CONCLUSION

Option 1 includes all the steps essential to achieve direct access by January 1, 1998. Its adoption will facilitate an orderly transition to a deregulated market in electricity generation, while maintaining system reliability. It does not foreclose eventual competition in distribution services, but merely postpones the consideration of such competition until there is adequate time to undertake the appropriate studies. Each of the other options either move too quickly in view of the available resources and/or, more seriously, would embark on actual distribution deregulation before it is known whether such deregulation is economically viable and whether it would benefit consumers. For the reasons set out above, Edison urges the Commission to adopt Option 1.

Respectfully submitted,

ANN P. COHN JAMES M. LEHRER

By:	James M. Lehrer Senior Counsel

Attorneys for
SOUTHERN CALIFORNIA EDISON COMPANY

2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California 91770

Telephone: (818) 302-3252

Facsimile: (818) 302-1935

Dated: September 13, 1996

I hereby certify that, pursuant to the Commission's Rules of Practice and Procedure, I have this day served a true copy of COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) ON THE RATESETTING WORKING GROUP REPORT on all parties identified on the attached service list. Service was effected by means indicated below:

Placing the copies in properly addressed sealed envelopes and depositing such envelopes in the United States mail with first­class postage prepaid (Via First Class Mail);

Placing the copies in sealed envelopes and causing such envelopes to be delivered by hand to the offices of each addressee (Via Courier);

Transmitting the copies via facsimile, modem, or other electronic means (Via Electronic Means).

Executed this 13th day of September, 1996, at Rosemead, California.

______________________________________________
Cheryl Morales
SOUTHERN CALIFORNIA EDISON COMPANY

2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California 91770
Don Fellows Southern California Edison 818-302-8175