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

RE: In The Matter Of The Application Of SOUTHERN CALIFORNIA EDISON COMPANY (U 338­E) Proposing The Functional Separation Of Cost Components For Energy, Transmission And Ancillary Services, Distribution, Public Benefit Programs And Nuclear Decommissioning, To Be Effective January 1, 1998 In Conformance With D.95­12­036 As Modified By D.96­01­009, the June 21, 1996 Ruling of Assigned Commissioner Duque, Decision 96­10-074, And Assembly Bill 1890__________________

Dear Docket Clerk:

Enclosed for filing with the Commission are the original and eight copies of the APPLICATION OF SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) 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.07

Enclosures

cc: All Parties of Record in R.94-04-031/I.94-04-032

(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: December 6, 1996

I. BACKGROUND 2II. POLICY PRINCIPLES 4III. COST OF SERVICE 4IV. REVENUE REQUIREMENT 5V. FUNCTIONAL RATE UNBUNDLING 71. Energy 82. CTC 83. Transmission 94. Distribution 95. Public Benefit Programs and Nuclear Decommissioning 9VI. CURRENT AND FUTURE REGULATORY PROCEEDINGS 13VII. STATUTORY AND PROCEDURAL REQUIREMENTS 14A. Statutory Authority 14B. Legal Name And Correspondence - Rules 15(a) And 15(b) 15C. Articles Of Incorporation - Rule 16 15VIII. DOCUMENTS FILED IN SUPPORT OF THIS APPLICATION 16IX. CONCLUSION 17

SOUTHERN CALIFORNIA EDISON COMPANY (Edison or Company) hereby applies to the California Public Utilities Commission (Commission or CPUC) proposing the functional separation of cost components for generation, transmission, distribution, Competition Transition Charge (CTC), Public Benefit programs, and nuclear decommissioning. This proposed separation of cost components, which is intended to be effective on and after January 1, 1998, conforms with the directives set forth by Assigned Commissioner Duque in his Ruling dated June 21, 1996 (June 21 ACR) in the electric industry restructuring proceeding (R.94­04­031/I.94­04­032), Commission Decision No. 96­10­074,/ and the cost recovery procedures and rate design principles mandated by Assembly Bill (AB) 1890./

1. BACKGROUND

In its Roadmap Decision in the electric industry restructuring proceeding, the Commission directed the utilities to file by July 15, 1996 proposals for "separating their rates into identifiable components."/ Edison filed its proposal,/ outlining the conceptual aspects of the functional rate "unbundling" necessary to achieve the Commission's goal of establishing a competitive market in electricity generation by January 1, 1998.

In his June 21 ACR, Assigned Commissioner Duque directed Edison, Pacific Gas and Electric Company, and San Diego Gas & Electric Company to file on November 15, 1996 Applications including "implementation level detail in three areas":

The June 21 ACR further required the applications to "reflect any resolution at FERC [the Federal Energy Regulatory Commission] regarding the T&D [transmission and distribution] separation." In addition, the recently enacted restructuring legislation, AB 1890 requires the unbundling in rates of charges for the recovery of costs of Public Benefit programs and nuclear decommissioning.

On October 25, 1996, the Commission issued its "Opinion Ordering the Separation of Transmission From Distribution Costs and Requesting Comment on Related Items" (Ratesetting Decision)./ The Commission's Ratesetting Decision confirmed the scope of this application in Ordering Paragraph No. 1:

By November 15, PG&E, SCE and SDG&E should file their total ratebase and base rate revenue requirement based on our last authorization and should separate this total between transmission and distribution, consistent with FERC orders./

In its Generation Performance­Based Ratemaking (PBR) Application, the Company proposed a change to its cost separation methodology. In addition, on October 30, 1996, FERC issued its decision approving, with minor modifications, Edison's proposed jurisdictional split between transmission and distribution facilities./ Edison has based its calculations for this Application on the assumption that the Commission will adopt both of the foregoing proposals. Accordingly, pursuant to the June 21 ACR and the Ratesetting Decision, Edison files this application, with supporting prepared testimony, for functional unbundling of the Company's rates for electric service to be rendered on and after January 1, 1998.

1. POLICY PRINCIPLES

There are several major policy principles upon which this application is based. Among these principles are (i) the rate freeze mandated by AB 1890, (ii) residual determination of CTC for all rate schedules, tariff options, contracts, (iii) the inclusion of all Power Exchange (PX) charges in the cost of energy, (iv) excluding the use of load profiles for customers with hourly meters, (v) the linkage between the 10% rate reduction for residential and small commercial customers and the issuance of the Rate Reduction Bonds, and (vi) a rate credit approach to the determination of a starting point for a distribution­only PBR rate. Chapter II of Exhibit SCE­1 discusses the statutory support for and the reasonableness of Edison's position on each of these points.

1. COST OF SERVICE

In its Application relating to Generation PBR,/ Edison filed extensive prepared testimony explaining its proposed method of attributing costs between Edison's generation and nongeneration functions. This "Cost Separation Testimony" was included in Exhibit SCE­5 of that application, which is pending Commission review. In addition, Edison recommended in Revisions to ACRA/RCRA Procedures Testimony, included in Exhibit SCE­6 of the Generation PBR application, that the portion of Reduced Cost Recovery Amount (RCRA) currently reflected for transmission be transferred to distribution. Since litigation of cost separation issues in this proceeding would be duplicative of the Generation PBR proceeding, Edison proposes to litigate cost separation issues in the Generation PBR proceeding where such testimony was originally filed.

In the event Edison's Generation PBR proceeding is delayed such that it becomes clear that a decision may not be issued before January 1, 1998, Edison will propose that the Cost Separation Testimony and the Revisions to ACRA/RCRA Procedures Testimony be addressed in this or another appropriate proceeding so that it may be decided before January 1, 1998. In order to plan for that contingency, Edison has included to the accompanying Prepared Testimony (Exhibit SCE­1), a copy of the Generation PBR Cost Separation Testimony as Appendix C and a copy of the Generation PBR Revisions to ACRA/RCRA Procedures Testimony as Appendix D, and incorporates that testimony herein.

1. REVENUE REQUIREMENT

In Chapter IV of Exhibit SCE­1, Edison presents an overview of its existing cost recovery procedures as well as the cost recovery procedures the Company proposes to establish on January 1, 1998. In addition, Chapter IV includes Edison's forecast 1998 revenue requirement and a description of the associated ratemaking for: (1) distribution, (2) transmission, (3) Public Benefit programs, and (4) nuclear decommissioning. Due to the residual determination of the generation rate as a result of the rate freeze mandated by AB 1890,/ there is no longer a need to forecast generation or CTC­related revenue requirements.

In this Application, and as supported by the accompanying showing, Edison is requesting the Commission to explicitly adopt the following findings:

1. The current Electric Revenue Adjustment Mechanism (ERAM) and Energy Cost Adjustment Clause (ECAC) balancing accounts are eliminated effective January 1, 1998.
2. Edison's proposed Miscellaneous Adjustment Mechanism (MAM) balancing account is adopted effective January 1, 1998. The MAM revenue requirement will be collected through the non­PBR component of distribution rates in the Miscellaneous Adjustment Mechanism Billing Factor (MAMBF).
3. The current California Alternative Rate for Energy (CARE) balancing account will be retained on January 1, 1998.
4. CARE administrative costs currently collected through base rates will be collected through the Public Benefit charge effective January 1, 1998.
5. The nuclear decommissioning revenue requirement adopted in Edison's 1995 General Rate Case (GRC) will be reflected in a separate nonbypassable nuclear decommissioning charge effective January 1, 1998. Edison's proposed Nuclear Decommissioning Balancing Account Mechanism is adopted effective January 1, 1998.
6. The cost separation ultimately adopted in Edison's Generation PBR Application (A.96­07­009) or an alternative proceeding will be reflected in January 1, 1998 rates.
   

1. FUNCTIONAL RATE UNBUNDLING

In Chapter IV of Exhibit SCE­1, Edison describes how its rates are proposed to be unbundled into separate charges for energy, transmission, distribution,/ CTC, Public Benefit programs, and nuclear decommissioning costs. Edison also describes how it proposes to charge direct access customers for the ongoing transmission and distribution services provided by the utility and the nonbypassable charges for transition costs, Public Benefit programs, and nuclear decommissioning costs. Edison further describes how it proposes to implement the 10% rate reduction for residential and small commercial customers, as well as the surcharge applicable to these customers to repay the costs of the Rate Reduction Bonds mandated by AB 1890. Finally, Edison describes how it proposes to unbundle certain special rates and contract rates to conform with recent legislation.

Section 368 of the California Public Utilities (PU) Code requires that utilities "set rates for each customer class, rate schedule, contract, or tariff option, at levels equal to the level as shown on electric rate schedules as of June 10, 1996, provided that rates for residential and small commercial customers shall be reduced so that these customers shall receive rate reductions of no less than 10 percent for 1998 continuing through 2002."/ Therefore, the unbundling of rates into the six components listed above will not change the total rates/ charged to customers./ As described below and as explained in Edison's showing, the rate unbundling proposed in this Application is required to facilitate competition in provision of generation services and to account for the different ratemaking treatments applicable to the various components.

1. Energy

Unbundling generation costs is fundamental to the restructuring of the electric services industry. The generation rate will consist of two components: the PX energy charge and the CTC. Identification of the PX energy charge will enable customers to evaluate prices charged by alternative generation suppliers and by those offering bilateral contracts. Edison's proposal for determining the PX energy charge is described in Section B.1.a. of Chapter V of Exhibit SCE­1.

1. CTC

CTC must be unbundled to ensure its nonbypassability and to enable the separate tracking of transition cost recovery. In its Cost Recovery Plan filed with the Commission on October 15, 1996, Edison described how transition costs will be recovered subject to the rate freeze required by AB 1890 by subtracting the costs of energy, transmission, distribution, Public Benefit programs, and nuclear decommissioning from the frozen rate levels. Section B.1.c. of Chapter V of Exhibit SCE­1 describes in detail how transition costs will be collected from all customers through the nonbypassable CTC.

1. Transmission

Establishment of the Independent System Operator (ISO) requires unbundling the costs of the transmission facilities transferred to the ISO's control, since these facilities will become subject to FERC ratemaking. Separate ratemaking treatment for transmission facilities requires specific identification of the transmission component in customers' rates. Edison's proposal for unbundling transmission rates is described in Section B.2.a. of Chapter V of Exhibit SCE­1.

1. Distribution

The Restructuring Decision requires utilities to provide nondiscriminatory distribution service to all customers, including direct access customers, within their service territories./ Transparent prices for this service must accompany such nondiscriminatory access. Edison's proposal for unbundling distribution rates is described in Section B.2.b. of Chapter V of Exhibit SCE­1.

1. Public Benefit Programs and Nuclear Decommissioning

Section B.2.c. of Chapter V of Exhibit SCE­1 describes Edison's proposals for establishing nonbypassable charges to recover the costs of Public Benefit programs and nuclear decommissioning as required by PU Code Sections 379 and 381.

Appendix B to Exhibit SCE­1 contains illustrative unbundled January 1, 1998 rates for all of Edison's retail rate schedules. Development of final 1998 rates and tariffs must await completion of several critical path steps:

• FERC authorization of Edison's 1998 transmission revenue requirement and decision regarding FERC/CPUC jurisdiction over unbundled retail transmission rate design;
• Commission decision regarding Edison's cost separation proposals filed in the Generation PBR and appended to Exhibit SCE­1 of this Application;

• Establishment of ISO settlement protocols;
• Establishment of protocols governing provision of ancillary services;
• Issuance of Rate Reduction Bonds; and
• Establishment of ISO interruption criteria for nonfirm customers.

Edison plans to submit its final 1998 rates in late 1997 by Advice Filing following resolution of these issues in the appropriate proceedings.

In this Application, and as supported by the accompanying showing, Edison is requesting the Commission to explicitly adopt the following functional rate unbundling proposals:

1. Generation rates will be determined residually, by subtracting transmission, distribution, Public Benefit and nuclear decommissioning charges from the total rates as of June 10, 1996.
2. CTC will further be determined residually by subtracting the PX energy charge from the total generation charge.
   a. The PX price for a given hour will be the weighted average price of energy in the day­ahead and hour­ahead markets for that hour as adjusted for administrative cost, settlements, ancillary services, and congestion fees.
   b. Direct access customers will be provided a credit based on this hourly weighted average energy price and their usage during each hour of the billing cycle./
3. Nongeneration PBR base rates will be developed using the methodology set forth in Advice Letter 1191-E, updated to 1998 by the CPI-X update rule.
   a. Edison will design transmission rates using an Equal Percentage of Marginal Costs (EMPC) method to recover the 1998 FERC authorized transmission revenue requirement.
   b. Edison's proposed transmission rates will be developed using the transmission component of marginal cost revenue responsibility adopted by the Commission in D.96­04­050 in Phase 2­A of Edison's 1995 GRC.
   c. Transmission rates will be established in accordance with the procedure described in Section B.2.a. of Chapter V in Exhibit SCE­1.
   d. A rate credit approach is adopted effective January 1, 1998 to determine the starting point for the PBR component of Edison's distribution rates. The appropriate portion of transmission rates based on the FERC­adopted transmission revenue requirement will be subtracted from nongeneration PBR rates resulting in PBR distribution rates as described in Section B.2.b of Chapter V of Exhibit SCE­1.
   e. To the extent that the FERC revenue requirement includes categories of costs not reflected in the Nongeneration PBR, those costs should be deducted from the revenue requirement prior to the calculation of the distribution PBR starting point.
   f. Remaining non-PBR distribution revenues will be recovered on an equal cents­per­kWh basis.
4. The nonbypassable charges for Public Benefit programs and nuclear decommissioning costs will be recovered on an equal cents­per­kWh basis.
5. For Domestic rate schedules, the baseline/nonbaseline rate differential will be reflected exclusively in the CTC during the term of the rate freeze.
6. For interruptible rates, the interruptible credit will be reflected exclusively in CTC during the term of the rate freeze.
7. Edison should seek to modify its tariffs to reflect settlement of the ISO interruption criteria when the ISO assumes responsibility for the operation of the interruptible program.
8. The 10% rate reduction for residential and small commercial customers required by AB 1890, contingent on issuance of Rate Reduction Bonds, will be implemented through a 10% bill credit for customers in the Residential and GS­1 rate groups. Funding for the principal, transaction costs and interest associated with the Rate Reduction Bonds will be provided through a cents­per­kWh surcharge applied to bills of customers receiving the bill credit.
9. All eligible low­income customers will continue to receive the 15% CARE discount. For CARE customers on general service rate schedules, Edison will calculate the CARE discount based on the total rate before subtracting the PX energy charge.
10. Customers taking service under special rate contracts or options will have a lower CTC than that reflected in the otherwise applicable tariff, consistent with PU Code Section 368, which requires setting rates for contracts or tariff options at levels equal to those in effect as of June 10, 1996.
    

1. CURRENT AND FUTURE REGULATORY PROCEEDINGS

In Decision 96-03-022, the "Roadmap Decision," the Commission noted that pending and future filings, new compliance filings as a result of restructuring, considerations to modify the ERAM and new PBR filings, "must all be coordinated in a manner that is most efficient and workable for all concerned." The Commission indicated that it would be appropriate to restructure the regulatory proceedings in order to streamline and properly account for the new competitive environment./ In Chapter VI of Exhibit SCE­1, Edison presents its proposals for establishing new regulatory proceedings to replace current proceedings that are no longer necessary. It should be noted that these proposals pertain to the period of the rate freeze mandated by AB 1890 which eliminates the need for most proceedings currently established to forecast various components of the utilities' total revenue requirement. Edison will submit its proposals for proceedings necessary after year 2001 at a future date.

In this application and as supported by the accompanying showing, Edison is requesting the Commission to explicitly adopt the following findings related to future regulatory proceedings:

1. STATUTORY AND PROCEDURAL REQUIREMENTS
   1. Statutory Authority

This Application is being made pursuant to Sections 330, 334, 337, 338, 366, 367, 368, 369, 370, 371, 374, 375, 376, 379, 381, 382, 451, 701, 729, 739, 739.5, and 740 of the Public Utilities Code of the State of California, Rules 2 through 8, 15, and 16 of the Commission's Rules of Practice and Procedure, and prior decisions, orders, and resolutions of this Commission, particularly Ordering Paragraph No. 1 of D.96­10­074.

1. Legal Name And Correspondence - Rules 15(a) And 15(b)

Edison is a public utility organized and existing under the laws of the State of California. The location of Edison's principal place of business is 2244 Walnut Grove Avenue, Rosemead, California. Correspondence or communications regarding this Application should be addressed to:

James M. Lehrer, Senior Counsel
Southern California Edison Company
Post Office Box 800

2244 Walnut Grove Avenue

Rosemead, California 91770

Telephone: (818) 302-3252

FAX: (818) 302-1935.

To request a copy of this Application, please contact:

Susan Quon
Southern California Edison Company
P.O. Box 800
2244 Walnut Grove Avenue
Rosemead, California 91770
Telephone: (818) 302-2930
FAX: (818) 302-2304

1. Articles Of Incorporation - Rule 16

A copy of Edison's Restated Articles of Incorporation, as amended through June 1, 1993, and as presently in effect, certified by the California Secretary of State, was filed with the Commission on June 15, 1993, in connection with Application No. 93-06-022/ and is incorporated herein by reference pursuant to Rule 16 of the Commission's Rules.

1. DOCUMENTS FILED IN SUPPORT OF THIS APPLICATION

Accompanying this Application, and by this reference incorporated herein, are the following supporting documents:

1. CONCLUSION

WHEREFORE, Southern California Edison Company respectfully requests that the Commission:

1. Consider this Application and grant all of the relief requested herein;

2. Authorize Edison to make such changes to its tariffs as are consistent with the relief requested herein; and

3. Grant such other and further relief as the Commission finds to be just and reasonable.

Respectfully submitted,

SOUTHERN CALIFORNIA EDISON COMPANY

______________________________________
JOHN R. FIELDER
Vice President

ANN P. COHN JAMES M. LEHRER

By:	James M. Lehrer Senior Counsel

Attorneys for
SOUTHERN CALIFORNIA EDISON COMPANY

Dated: December 6, 1996

I am an officer of the applicant corporation herein, and am authorized to make this verification on its behalf. I am informed and believe that the matters stated in the foregoing document are true.

I declare under penalty of perjury that the foregoing is true and correct.

Executed this 6th day of December, 1996, at Rosemead, California.

John R. Fielder
Vice President

SOUTHERN CALIFORNIA EDISON COMPANY

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

I am an officer of the applicant corporation herein, and am authorized to make this verification on its behalf. I am informed and believe that the matters stated in the foregoing document are true.

I declare under penalty of perjury that the foregoing is true and correct.

Executed this 6th day of December, 1996, at Rosemead, California.

Susan L. Quon

SOUTHERN CALIFORNIA EDISON COMPANY

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