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 METERING AND BILLING IN RESPONSE TO DECEMBER 23, 1996 ORDER OF ADMINISTRATIVE LAW JUDGE 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

JML:JGM:DOCUMENT.01

Enclosures

cc: All Parties of Record

(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: January 21, 1997 I. INTRODUCTION 1II. EDISON'S DEFINITION OF UNBUNDLING 6A. Background/Overview 6B. Framework 7C. Edison's Proposal 8III. UNBUNDLING ARRANGEMENTS 10A. Edison's Proposals 101. Price Signal Benefits 102. Continued Regulation Of Reliability And Accountability Functions 11B. Other Proposals 13IV. MARKET POWER ISSUES 20V. LEGAL ISSUES 22A. Unbundling Distribution Metering And Billing Is Neither Authorized By Nor Compatible With AB1890 22B. Marketers Contend That The CPUC Has No Authority To Regulate Them 24C. The Proposal To Facilitate Competitive Unbundled Services By Providing Bill Credits Based On The UDC's Average Avoided Cost Potentially Raises Serious Constitutional Takings Issues 24VI. EDISON'S AUTOMATED METER READING PROPOSAL 26A. AMR Costs and Cost Savings 26B. Indirect AMR Benefits 27C. AMR Cost Recovery 29VII. CONCLUSION 29

FIGURE 1 AMR Revenue Requirements and Cost Savings

FIGURE 2 Indirect Benefit From Improved Price Signals

APPENDIX A Common Costs

APPENDIX B CCES Metering and Billing Comments

A wide range of parties have had the opportunity to present the California Public Utilities Commission ("Commission" or "CPUC") with their views and recommendations on metering and billing in a restructured industry. Southern California Edison Company ("Edison" or "Company") believes that its proposal achieves the key policy objectives set forth by the Commission and is also consistent with the desire of parties seeking the ability to provide value-added services on a competitive basis./

Edison proposes to install hourly meters on a systemwide basis. This capability will enable all consumers, particularly residential and small commercial customers, to participate in direct access and achieve the full benefits of a competitive generation market. Systemwide implementation of hourly metering can be accomplished for an average net cost of about 25¢ to 50¢ per customer per month over a four- to eight­year period following the rate freeze. As revealed at the full panel hearing, the cost of piecemeal installation of hourly metering capability is on the order of three to nineteen times more expensive, depending on the selected technology.

Edison's proposal provides "baseline" hourly metering capability in the only cost­effective way. Edison's system will have an open architecture design and will be fully compatible with more sophisticated and expensive services that marketers seek to provide. Thus, customers will be free to choose, and the marketplace can determine, the nature and extent of value­added services.

In reviewing the evidence presented on the question of whether to unbundle revenue cycle or other distribution services,/ it is important for all parties and the Commission to focus on the task at hand: implementing direct access and competition in generation by January 1, 1998 ¾ only 345 days away ¾ without compromising the integrity, safety, or reliability of the delivery of electricity to the people of California. Despite unbundling proponents' urgings, this Commission's role is not to establish a safety net of subsidies for putative competitors./ Whatever opportunities to affect the future provision of electric service lie before the Commission, its primary responsibility is to assure the successful working of California's electricity infrastructure. The decisions the Commission will make in the next few weeks will determine whether direct access is effectively implemented on time, or bogged down in a morass of premature, poorly thought-out, and ill-defined ambitions. These decisions will also determine whether meaningful direct access will be a viable option for every consumer, or whether it will be a viable option only for the select few.

The most important questions the Commission must ask itself in evaluating each unbundling proposal are: (1) is it essential for the implementation of direct access by January 1, 1998; (2) will it help or hinder the implementation of direct access for all customers as rapidly as possible; and (3) what impact will it have on the reliability of the restructured electric infrastructure? The Commission now faces another key decision point. It can either continue successfully down the road it has pursued for the last year and a half, or it can take a detour which may well lead to a less expeditious and less desirable end point, such as Electric Service Providers ("ESPs") choosing the customers they wish to serve, rather than customers' choosing the services they wish to receive.

The Commission is responsible for ensuring the operation of a safe, reliable and least­cost electricity system with universal access for all consumers in California not just those who can afford to purchase their own meters. Edison's proposal to install for all customers in its service territory an open architecture Automatic Meter Reading ("AMR") system readily accessible to ESPs is designed to timely implement direct access and to make it available on a universal basis as rapidly as possible. Edison's AMR proposal is squarely responsive to the Commission's determination  articulated in its Restructuring Policy Decision  that hourly metering is essential for customers to obtain the benefits of direct access. Chief among those benefits are price signals inducing customers to alter their pattern of electricity usage in response to Power Exchange prices, and enhanced operation of the distribution system including improved outage detection and service restoration without waiting for customers to report a problem. These and other benefits described later in these comments clearly demonstrate that Edison's proposal represents the best means to provide the greatest number of Californians access to the competitive generation market as soon as possible, while preserving their freedom easily to compare, contrast and switch power providers without financial penalty or artificial restrictions. At the same time, Edison's AMR proposal will not hamper, and in many instances could facilitate, market entry of value­added services through the availability of data to ESPs and other third parties.

In his December 23, 1996 ruling, ALJ Weissman invited parties to submit their recommendations and comments on four topics pertinent to the question of whether to unbundle revenue cycle or other distribution services as some marketers have proposed. The four topics are: (1) the appropriate definition of unbundling; (2) the proposed unbundling arrangement; (3) market power concerns; and (4) legal issues. Edison's recommendations and commentary on each of the of the four topics designated in the December 23, 1996 ruling are presented in Chapters II through V. In brief, Edison comments as follows:

In these Comments, Edison also provides additional information on its AMR proposal in response to interest expressed by the Commissioners at the full­panel hearing. The benefits to California's electric consumers of Edison's proposal, which were briefly noted above, are described in greater detail in Chapter VI.

1. EDISON'S DEFINITION OF UNBUNDLING
   1. Background/Overview

In its Electric Restructuring Policy Decision, D.95­12­063 as modified by D.96­01­009 (the "Policy Decision"), the Commission presented its vision and goals for a restructured electric industry in California. That vision included in part: (1) competition in generation involving both multiple suppliers and the establishment of a Power Exchange ("PX") to oversee the spot market for generation and to ensure transparent hourly price signals; (2) the implementation of direct access (customer choice of real­time metering) for some members of all customer classes no later than January 1, 1998, with universal availability to all customers no later than five years thereafter;/ (3) the creation of an Independent System Operator under the jurisdiction of the Federal Energy Regulatory Commission ("FERC") to ensure open, nondiscriminatory transmission services for all generation providers; and (4) incentive regulation of utility distribution companies ("UDCs") to provide cost­effective nondiscriminatory distribution to all customers within their service territories. To diffuse utility market power, today's investor­owned utilities would voluntarily transfer all transmission facilities to the Independent System Operator ("ISO") for management and divest at least 50% of their generation capacity prior to January 1, 1998; be required to sell power from any remaining generation capacity only to the PX; purchase power from the PX; and supply power to customers at the PX price with no mark­up during the five­year transition period beginning on January 1, 1998. In return, UDCs would be allowed the opportunity to recover from consumers over a limited time the stranded costs associated with these fundamental changes in the regulatory ground rules, referred to as transition costs or CTC.

AB 1890, signed into law in September 1996, in large part reiterated and legislated all of the above. It also mandated among other things that rates be frozen at 1996 levels on January 1, 1998 and reduced by issuance of "rate reduction bonds" to achieve a rate reduction of at least 10% for residential and small commercial customers and that there be no difference in rates other than generation rates during the transition period for all customers.

1. Framework

To implement its Policy Decision, in D.96­03­022 (the "Roadmap Decision"), the Commission required as a first step that utilities separate their various activities among the three main functions: generation, distribution, and transmission. (D.96­03­022 at pp. 2­3, 16, 19.) This "functional unbundling" was necessary to enable utilities to unbundle their rates into generation, distribution, transmission and public goods or benefits costs to determine separate charges for each ¾ "rate unbundling" ¾ to prepare for January 1, 1998 when distribution services are provided by UDCs, transmission services by the ISO, and generation by multiple suppliers. (Id. at pp. 2­3, 21, & 34­37.) Rate unbundling can include both unbundling of products (separate identification of specific services or products offered) and rate design. (Id. at p. 33.)

Later, in Commissioner Duque's Assigned Commissioner's Ruling of June 21, 1996, the parties were encouraged to focus "only on resolving those issues necessary for implementation by January 1, 1998" (emphasis added). Commissioner Duque also reminded the parties that "[i]mplementation of the Policy Decision only requires unbundling of costs to produce distribution rates."

1. Edison's Proposal

As defined in its December 6, 1996 filing in this proceeding (the "Ratesetting Filing"), Edison's proposal for rate unbundling necessary for January 1, 1998 is to explicitly identify rates for energy, transmission, distribution, CTC, Nuclear Decommissioning, and Public Benefits on its tariff sheets. In the Ratesetting Filing, Edison specified in detail how it would calculate each of these rates, although of necessity, certain rates were illustrative, in anticipation of the FERC ruling on FERC­jurisdictional transmission rates.

Edison's proposal for rate unbundling, coupled with its proposal to provide real time­of­use metering capability through AMR to all customers in its service territory, achieves the Commission's principal goal in these proceedings ¾ to facilitate competition in the generation market and to implement direct access by January 1, 1998 and universal accessibility to all customers as rapidly as possible. If both proposals are adopted, consumers would be able to compare rates for power received through the PX with rates offered by competing generation suppliers. Marketers could either consolidate Edison's bills with theirs, or ask Edison to bill for them. Any and every customer would be able to select virtual direct access  hourly metering through the PX  after the transition period with no additional hardware requirements. The Commission would be able to provide consumers and marketers with all of these benefits without wasting resources on further unbundling, and without risking delay or universal availability of direct access.

It is obvious to all participants in these proceedings that the complexity of achieving a restructured electrical market by January 1, 1998 is already taxing every stakeholder's resources. At best, further unbundling of rates would be a lengthy, difficult and contentious exercise. As has been aptly stated in the Roadmap Decision, "the essential components of the competitive framework must be completed well before the date on which the new market structure is to become operational." (D.96­03­022 at p. 4 (emphasis added).)

To require proceedings to unbundle rates beyond the level Edison proposes runs the risk of disrupting the entire restructuring effort, with no significant attendant benefits. Indeed, several groups, including the California Large Energy Consumers Association ("CLECA") and the California Manufacturers Association ("CMA"), as well as the California Small Business Association ("CSBA") have pointed out the potential issues of disruption and consumer confusion likely to accompany a precipitous  and unnecessary  unbundling of distribution services. The Commission also recognized the enhanced risk of fraud directed at consumers in newly deregulated markets in its Roadmap Decision. (D.96­03­022 at p. 24.)

Edison's approach is consistent with both the Commission's directives and AB 1890. It meets the needs of the public and the newly emerging competitive generation market, while satisfying the goals and requirements of the Commission and the Legislature. For all of the above reasons, it would be counterproductive as well as harmful to embark on further unbundling of the distribution system at this time.

1. UNBUNDLING ARRANGEMENTS
   1. Edison's Proposals
      1. Price Signal Benefits

Edison described how it would accomplish the unbundling in its Ratesetting Filing. (Ratesetting Filing, ch. V.) Briefly, the overall generation component would include CTC and the actual PX charge for energy, the former being determined residually by subtracting all other components from the frozen charges on each rate schedule. Transmission rates will be designed after FERC adopts a revenue requirement for facilities transferred to the control of the ISO. The Distribution rate will be determined residually by subtracting the Transmission rate from the nongeneration PBR rate. Finally, Public Benefits and Nuclear Decommissioning rates will be determined on a cents per kilowatt hour basis.

In its Metering and Billing Filing, Edison proposed AMR, an innovative and inexpensive systemwide approach, that would make direct access and vital consumption/price information available initially to 85% of customers, including residential and small business customers. Briefly, Edison would retrofit or replace existing meters so that they would automatically broadcast a customer's hourly usage to pole­top receivers. These would transmit the data to other computers where customer data would reside. Each customer could then take advantage of hourly price signals. (Since prices change on an hourly basis, there is no need for more frequent reads although it is possible they may be more frequent.)

These data in Edison's database would be available to third parties and the AMR system will also be able to accommodate "value added services." Edison's AMR vendor, Itron, selected through a lengthy competitive bidding process, has demonstrated the workability of the system. Because systemwide installation would allow Edison to take advantage of scale economies and to eliminate manual meter reading, the system would be substantially less expensive than any other proposal. It would add about $0.25 to $0.50 a month to each customer's bill after the rate freeze. If Customer Choice in Electric Services ("CCES") is correct that taking advantage of hourly price signals will save each consumer an average of $8.45 per month, AMR is a very good deal./

1. Continued Regulation Of Reliability And Accountability Functions

Edison's current distribution system supports its maintenance of system reliability. Customers know whom to call in the event of an outage; Edison monitors system usage to assist in predicting loads. If others assume customer service functions, Edison will still need to respond to outages. AMR supplies that functionality./ Systemwide introduction of AMR will have other benefits. It will facilitate outage detection and control, and improve distribution losses through expanded use of switched capacitor banks. We believe these benefits to be substantial. We discuss these points further in Chapter VI, which responds to questions about our AMR proposal raised at the Full­Panel Hearing. Third­party telephone centers  advocated by some  on the other hand, may well lead to customer confusion, delaying responses to outages.

The Commission has recognized that distribution services are essentially of a monopoly nature. In D.96­09­045, in a proceeding relating to reporting requirements and safety and reliability standards for transmission and distribution system inspection, maintenance and replacement cycles, Finding of Fact 10 states:

The portions of the electric system which are subjects of this investigation are for the provision of service that is monopolistic in character, likely to remain monopolistic for the foreseeable future, and requires protection from the pressures of competition in the generation sector.

(D.96-09-045 (mimeo), at p. 35.) The public interest in a safe, reliable and least­cost distribution system is best served by providing distribution services on a regulated rather than a competitive basis:

This Commission has . . . faced concerns that changes to the electric market . . . would negatively affect the reliability of service[s]. The Commission's answer to these objections ­­ raised for nearly 20 years in response to any effort at competitive entry to the generation market ­­ was to insist that reliability, and the cost of providing it, would continue to be a regulated monopoly. . . . The distribution companies are tasked with the obligation to continue to provide on a nondiscriminatory basis "quality distribution services" that do not "jeopardize service reliability or safety as it relates to distribution."

(Id. at p. 8 (citation omitted).)

In the same vein, the Policy Decision recognized that continued Commission oversight of metering through regulation of the UDC was clearly in the public interest:

Our primary concern, is that our oversight of the utility includes the assurance that these services meet specific service, safety, and reliability standards. Therefore, we are requiring the investor owned utilities to install the new RTP [real-time pricing] or TOU [time­of­use] meters. Assurances of these standards, in our view, must continue in a competitive market, although they may require our oversight responsibilities.

(D.95-12-63, as modified by D.96­01­009 (mimeos), at p. 80.)

D.96-09-045 also recognizes that customer service contacts such as billing services, call center operations and the utilities' responsiveness to service orders are integral both to distribution services and any measure of reliability of distribution services, and therefore should be regulated:

[T]he commission has also made a general commitment to retaining high­quality service in monopolistic markets. Billing services, call center operations, and the utility's responsiveness to service orders are among the types of customer services related to the electric distribution system that we intend to continue to oversee even as generation becomes competitive. We want to ensure that utilities "continue to provide quality distribution services[.]"

(Id. at p. 27 (page references omitted; emphasis added).) Such regulation includes the need for public dissemination of information related to reliability and safety,/ as well as the need to monitor utility quality of service on an individual customer basis./

1. Other Proposals

ESPs and others emphasize the need to promote the development of "value added services," many of them non­energy related services such as security alarms. But there is no need to "unbundle" metering, billing and other distribution services to achieve this goal. Edison's AMR proposal was crafted specifically to facilitate these value­added services, because it is built on an open architecture and permits third parties to do consolidated billing of retail customers. Hourly metering functionality will enhance energy management, allowing customers to take advantage of price signals. Edison does suggest that if a market is to develop, market forces, not an additional layer of regulation, should provide the impetus. All agree that the costs of metering and billing are minor compared to energy. That being the case, since Edison will provide the foundational platform, the Commission should not construct an additional regulatory edifice to promote the arrival of services the marketing community says competition inevitably will bring.

A number of stakeholders advocate unbundling of what they call "revenue cycle" services, among which they include metering, meter reading, billing and customer service information systems. (E.g., Office of Ratepayer Advocates ("ORA") Metering and Billing Filing at pp. 1­2.) Their definitions of unbundling would require a system of bill credits based on averages of the costs the UDC purportedly avoids by not having to serve those customers served by third party ESPs. These proposals raise a host of problems. Edison comments on only a few of the most important issues here.

Cost Shifting

Although commentators have clothed themselves in the rhetoric of competition, what they are asking for in reality is subsidies. At the heart of the discussion of essentially every advocate of "competition" in distribution services is a demand for credits so that the consumer is not "double-charged." The fundamental flaw in this suggestion is that an effort to "level the playing field" artificially will never result efficient or accurate pricing. If the Commission decides that competition in distribution services is desirable, fairness and economics suggest it deregulate those services, remove all of their costs from rates, and allow the UDC to charge true market prices./ In any event, it should not attempt to establish a system of regulatory cost credits.

As Edison discussed in detail in its December 20 Metering and Billing Filing, the computation of credits is far more difficult than its proponents recognize. (Metering and Billing Filing at pp. 48­49.) Interestingly, ORA attempts to support its unbundling position by noting that Edison's metering contract rates for municipalities may be less than the rates Edison charges its own customers. (ORA Metering and Billing Filing at p. 17.) The reason for this, of course, is that the incremental costs to meter in a small, high­population density area or existing Edison routes are smaller than in Edison's overall territory. This is precisely the point we have emphasized here.

If credits are based on average avoided costs, their use will inevitably promote cherry­picking: competitors' marketing to the lowest cost customers but obtaining a credit based on average avoided cost. Significantly, not one of the advocates of cost credits has contested this analysis. In effect, they are seeking not to protect customers from paying duplicate costs, but to obtain a subsidy from remaining ratepayers.

This is a key flaw in SDG&E's model. (SDG&E Metering and Billing Filing, Section IV.) Its apparent simplicity is achieved at the cost of failing to calculate the real costs avoided when particular customers leave the system. It is worth noting that even on an average basis, SDG&E's estimated avoided costs are quite low, although SDG&E makes certain very restrictive assumptions. (Id., at pp. 8, 13­32.) It assumes that retailers will undertake the responsibility for "all other meter services," such as checking for theft and meter operations. It assumes that retailers will provide an accurate read so that the UDC will not have to obtain and verify the data. It assumes that retailers will send bill inserts. Each of these assumptions, basic to SDG&E's methodology, is problematic. Each illustrates the complexities attendant to attempting to estimate avoided costs without detailed information as to what services the UDC will be required to perform.

Certain other misconceptions are also likely to contribute to cost shifting. For example, the ORA has proposed that capital and O&M costs (that would presently be allocated to generation) should continue to be allocated to generation after unbundling. We discuss the error in this argument in detail in Appendix A./

Contractual Billing Arrangements Are Not A Valid Precedent For Forced Regulatory Unbundling

While some parties advocate broad product and service unbundling, they illustrate their point with situations in which businesses voluntarily entered into arrangements with third parties. Where a regulator is very unlikely to be able to set prices accurately, private parties may enter into arrangements that properly account for the market. For example, while a number of those submitting comments on December 20 have suggested that entities like VISA could provide billing services, the financial institutions that participate in VISA do so voluntarily. Moreover, there is a substantial difference between what VISA does and an electric utility company's billing functions. In a VISA transaction, the merchant computes the bill, presents it to the customer and essentially gives a copy to VISA. VISA then pays the merchant and bills the customer. VISA is really just a method of extending credit which the merchant prefers not to extend on its own. In contrast, an electric utility measures a customer's electricity usage, computes an appropriate bill and sends it to the customer.

Some commenters likewise mistakenly argue that airline reservation systems are third­party operations, independent of the airlines they serve. In fact, all were started by and are still largely owned by one or more airlines ¾ Sabre by American Airlines, Galileo/Apollo by United Air Lines, USAir and certain European carriers, World Span by Northwest Air Lines, Delta Air Lines and TWA and System One by Continental and a company owned by various European carriers. No regulator required any airline to use these systems; rather, they grew in response to private parties' needs.

In short, no unbundling proponent has identified any industry in which a regulatory agency has denied any market participant the right to measure and bill for the services it provides.

Supposed Competitive Benefits

A number of parties base their arguments for broader unbundling solely or largely on the projected benefits of competition, drawing on examples that have little or no relation to electricity. Edison agrees that true competition (as opposed to the regulatory subsidies proposed here) can foster innovation. But the nexus is not as automatic as some parties suggest. The Commission must bear in mind critical distinctions. Most important, neither airlines nor credit cards are as essential as electricity.

CCES purports to demonstrate the utility of unbundling with a raft of examples. However, a number of these examples are misleading.

· The post-divestiture "decline" in long-distance telephone rates (see CCES Metering and Billing Filing, chart 2) is purely a reduction in access fees paid to local exchange carriers, i.e., a reallocation of costs back to the LECs./

· As CCES has conceded, innovation in telecommunications didn't suddenly begin with deregulation. Researchers at Lucent Technology's regulated forerunner, Bell Labs, invented arguably the most important device for the technologies discussed here, the transistor, in 1948, decades before deregulation.

· In the airline industry, neither computerized reservation systems ("CRS") nor lower prices resulted from deregulation. CRS began in the early 1970s, to handle the increasing volume of paperwork. The largest drop in fares occurred a decade before that when jets replaced propeller planes. Deregulation did not arrive until 1978.

· CCES's charts 4 and 5 of customer complaints and on­time arrivals are virtually meaningless. First, it is well­understood that airline complaints decreased because the public became aware they were useless: neither the FAA nor the airlines did anything with them. Second, the definition of "on­time" changed several times during the period of CCES's chart. The FAA stopped considering mechanical problems as a basis for being late and the airlines later lengthened their stated flight times.

In their discussions of the benefits of competition in other industries, marketers principally point to industries without an obligation to serve the customer, such as airlines or credit cards. For example, after deregulation, the major airlines simply stopped serving many small towns and cities.

CCES appears seriously to underestimate the cost of installing meters on less than a systemwide basis./ As pointed out by Itron Corp. in its Comments on Design and Implementation of Direct Access Programs, filed on September 26, 1996, at p. 40, and Appendix II­2, the controlling feature for the system cost is infrastructure, not the cost of manufacturing individual meters. As a consequence, installing more than one metering system, even in an area with more than twice as many customers as Edison has, would raise installation costs by 23%; adding yet a third system would raise them by 47%. (Id.) That is precisely why Edison has proposed systemwide metering, as opposed to many individual metering services.

Finally, because of the high prices, it is apparent that marketers assume that many customers, in particular residential customers, will continue to use load profiles, thwarting the Commission's goal of achieving the benefits of hourly access. As discussed above, the Commission has focused on achieving the benefits of real­time price signals for all consumers.

Consumer Protection

In calling for "competition," marketers ignore consumer protection. Their proposed unbundling of metering and billing would create safety, operational, consumer protection, and confidentiality problems. New firms entering the generation market will create such problems; unbundling metering and billing would greatly exacerbate these problems.

1. MARKET POWER ISSUES

Throughout the restructuring process the Commission has been vigilant in its examination of the market power issues surrounding generation supply, and with good reason. Consumers will benefit most from a market structure that ensures all competitors the opportunity to compete on a level playing field.

Market power arises when any market participant has the ability to unduly influence the price of a competitive service or to restrict the entry of other competitors. Neither of these circumstances exist under Edison's proposal for metering and billing. Edison proposes to offer baseline metering and billing services as an integral part of its regulated distribution function, with the prices and the terms and conditions of service subject to the jurisdiction of this Commission. At the same time, ESPs would be free to enter the market and offer value-added metering and billing services on a competitive basis to any customer that desired them.

Edison's proposal for metering and billing in a restructured industry ensures a level playing field for all market participants, without unbundling these services and their costs. This structure facilitates market entry of ESPs, minimizes switching costs, and encourages the development of value-added services.

In contrast, the unbundling proposals put forward by marketers in this proceeding would not create true competition at all, but rather a system of subsidies designed to allow new entrant providers the opportunity to cherry-pick select groups of high-value customers. Under these proposals, it is the new entrant service provider that would be capable of exercising market power, by installing expensive infrastructure that could create barriers to competitors, or by charging for switching meters. Rather than giving customers the power of choice, these proposals would limit choice.

It is certainly possible that technological changes could reduce the barriers to entry that currently exist for AMR as a result of the high fixed network cost. If this is the case, and assuming UDCs go ahead with AMR, we would expect to see "high end" users gradually install their own meters to reap the extensive benefits claimed. As technology advances, there would be further penetration of competitive metering solutions. Edison's AMR proposal does not prevent third­party competitive entry. Rather, it allows new technology to develop at its own pace, and allows the market to determine the choice of appropriate technologies.

Facilitating Market Entry

With our AMR proposal, generation providers that want to enter the market without incurring the significant scale sensitive costs of metering can do so, while those who perceive economic benefit in specialty metering and therefore want to install specialized systems can do so as well. Ease of market entry is particularly important to attracting suppliers capable of delivering the benefits of competition to all market segments, especially residential and small commercial customers.

Minimizing Switching Costs

With systemwide installation of AMR, customers are free to switch generation suppliers without having to pay for a new meter each time. Creating a situation in which an ESP could link metering service to the selection of a generation supplier would have the potential to erect a significant barrier to the ability to switch suppliers, potentially dampening competition in supply markets./

Encouraging Development of Value-Added Services

Systemwide installation of hourly metering will enable all customers to alter their energy usage in response to variations in electricity prices. This capability will broaden the market for energy management systems, particularly among residential and small commercial customers. In addition, Edison's AMR proposal enables multiple providers to access customer usage data. Any market participant, with appropriate customer authorization, can access the AMR database using standardized communications protocols. This open access system thus enables a competitive information business to develop and evolve in ways that best meet consumers' needs.

Some parties have asserted that unbundling of metering and billing is necessary to encourage the market for non-energy, value-added services, such as home security and toxic gas detection. This claim is without merit. For example, the market for home security systems is extremely competitive. There is no evidence whatsoever that ownership of the electric meter is needed to foster competition in markets for non-energy, value-added services.

1. LEGAL ISSUES

There are significant legal impediments to the current unbundling proposals. Certain provisions of AB 1890 preclude plans that shift costs or that would allow third parties to charge a different price for revenue cycle services than the UDCs. Marketers have contended that the Commission has no authority to regulate them. Moreover, depending on the nature, extent and implementation of unbundling, it may violate the Takings Clauses of the United States and California Constitutions.

1. Unbundling Distribution Metering And Billing Is Neither Authorized By Nor Compatible With AB 1890

Public Utilities ("PU") Code Section 368(b), requires that the components of rates for distribution be the same for both UDC-bundled and direct access customers in any particular rate class. Section 368(b) states (in pertinent part):

The cost recovery plan shall provide for identification and separation of individual rate components such as charges for energy, transmission, distribution, public benefit programs, and recovery of uneconomic costs. The separation of rate components required by this subdivision shall be used to ensure that customers of the electrical corporation who become eligible to purchase electricity from suppliers other than the electrical corporation pay the same unbundled component charges, other than energy, a bundled service customer pays.

Thus, even if multiple providers of various distribution services are permitted, a key element of competition for such service ¾ price differentials between providers ¾ is forbidden by this section. Moreover, as a practical matter, there is no way distribution charges would be uniform for direct access and UDC-bundled customers in the same rate class unless all providers of distribution services, whether UDCs or retailers, were required to charge exactly the same rates. Thus, the proposals for unbundling of metering and billing are fundamentally incompatible with the restructuring legislation./

In AB 1890, the Legislature indicated its desired degree of unbundling. In freezing rates and in requiring unbundled customers to pay the same amounts for service as bundled customers, it clearly showed a disinclination for unbundling beyond the functional level during the transition period.

1. Marketers Contend That The CPUC Has No Authority To Regulate Them

The marketers have shown a notable insensitivity to consumer interests. Despite AB 1890, Enron opined that "restructuring may result in cost reduction to some customers and perhaps cost increases to others."/ Likewise, in the January 15, 1997 forum, its representative acknowledged that there would be "glitches," without an apparent awareness that this Commission, mindful that 32 million Californians depend on electrical service, has a responsibility to minimize "glitches."/

Marketers have challenged the Commission's authority to regulate marketers' practices in dealing with consumers./ This could leave consumers at the mercy of the least ethical marketers.

1. The Proposal To Facilitate Competitive Unbundled Services By Providing Bill Credits Based On The UDC's Average Avoided Cost Potentially Raises Serious Constitutional Takings Issues

Because the cost credit that marketers demand as part of unbundling would be based upon an average avoided cost calculation for all customers or subgroups of customers, it will inevitably result in monetary losses for the UDC that raise significant questions under the Takings Clauses of the United States and California Constitutions. It is well established that the state may not compel a utility to use its unregulated assets to provide service to the public unless it provides the utility with an opportunity to obtain a "reasonable" return on its investment commensurate with the risks the utility faces. (Duquesne Light Co. v. Barasch (1989) 488 U.S. 299, 310­15; Bluefield Waterworks & Improvement Co. v. Public Service Comm'n of West Virginia (1923) 262 U.S. 675, 678 et seq.) The cost credit regime proposed by certain parties would imperil this right by allowing third-parties to cherry pick low cost customers for meters, metering, billing and information services, and eventually perhaps other services as well, while requiring the UDC to provide those services to higher cost customers at a loss.

Because AB 1890 freezes the rates that a UDC may charge for services, legislative changes would be necessary to compensate the UDC and to avoid an unconstitutional taking. Even if the UDC is allowed to raise rates for the group remaining after cherry picking occurs, the overall cost of service for customers will spiral upwards rather than downwards because of the uneconomic effects of such cherry picking.

In Brooks Scanlon Co. v. Railroad Commissioner (1920) 251 U.S. 396, 399, the Supreme Court ruled that a court cannot look to a business entity's unregulated profits to offset losses that occur within the regulated area of its business:

A carrier cannot be compelled to carry on even a branch of business at a loss, much less the whole business of carriage. . . . The plaintiff may be making money from its [unregulated] sawmill and lumber business but it no more can be compelled to spend that than it can be compelled to spend any other money to maintain a railroad for the benefit of others who do not care to pay for it.

(Id.; see also Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805, 816-21 (provision that allows insurance companies to challenge regulated rates only when insolvency is imminent is unconstitutional because "insolvency" is defined with reference to the "financial position of the company as a whole," including business income not subject to regulation).) Thus, deregulation of the electric power industry could increase the possibility that the proposed cost credit regime will result in an unconstitutional taking. If more and more of the business of the UDC become unregulated, the Commission would have a decreasing ability to afford the UDC the opportunity to obtain a fair rate of return on the regulated areas of its business. For this reason, serious constitutional takings concerns can arise from the cherry­picking that will inevitably result from the cost-credit regime proposed by parties advocating "competition" with respect to billing and metering of UDC-provided services./

1. EDISON'S AUTOMATED METER READING PROPOSAL

At the January 15, 1997 Full­Panel Hearing, Edison was asked to provide further specific information with regard to installing an AMR system initially covering the approximately 85% of its customers where such a system is currently most cost­effective. We there indicated that the direct cost savings from AMR would cover most, but not all, of the costs, and that we could install AMR for an additional 25¢­50¢ per customer per month over a four­ to eight­year period following the rate freeze. We were also asked about any indirect ratepayer benefits that would result from AMR, such as improved outage detection and reduced line losses.

1. AMR Costs and Cost Savings

Edison's proposed AMR system will cost about $360 million to install. Over an expected 15­year depreciation life and taking into account the taxes associated with our investment recovery, employee retraining and severance costs, and the annual operating costs of the AMR system, the net present value of AMR revenue requirements would be about $525 million, as depicted in Figure 1. Cost savings from AMR, which are principally due to eliminating manual meter reading (labor costs and vehicle expense) and reducing the cost of correcting meter reading errors, offset most of this cost, leaving about $75 million net present cost which must be recovered outside of currently authorized ratemaking, i.e., Edison's nongeneration PBR./

On January 15, 1997, we were asked how the additional costs of AMR would compare with a more limited installation of real­time meters for larger customers (20 kW and greater peak demand, corresponding to Edison's GS-2 and TOU-8 rate categories). Based on the figures in our December 20, 1996 filing, at $20 per meter per month, and assuming 120,000 GS­2 and TOU­8 customers would require meters, the cost of the specified individual meters would be about $30 million per year./

1. Indirect AMR Benefits

A comparison of AMR costs and cost savings does not fully reflect ratepayer cost effectiveness because AMR provides additional meter functionality which creates indirect ratepayer benefits. The $75 million of net present costs can be viewed as the cost of moving from a once-per-month meter functionality to an hourly meter reading functionality. Thus, ratepayer benefit is positive if the indirect benefits exceed $75 million. We believe these indirect benefits to be substantially larger than $75 million over the life of the AMR investment.

The price signal benefit of inducing customers to alter their pattern of electricity usage in response to real­time power exchange prices is likely to be a very significant indirect AMR benefit. Our proposed four­year AMR phase­in ends about the same time the rate freeze ends, allowing customers to take full advantage of real­time prices at the earliest possible opportunity. Figure 2 diagrams the well­known economic principle showing how a movement from uniform pricing to two-period time differentiated pricing creates consumer benefits. We performed a simple sensitivity analysis based on demand elasticities of -0.15 to -0.3 and capacity values of $50-$87 per kW-year. This analysis suggests that customer benefits of $50­$75 million per year (middle range of the sensitivity analysis) are possible. Under this analysis, in one year consumers could obtain price signal benefits equal to the entire $75 million net present cost of AMR.

AMR will also create opportunities to improve our control and operation of the distribution system. Today, we have no way to identify an outage unless it causes an entire circuit (roughly 1000 customers on average) or major sections of the circuit to "trip." AMR will allow us to identify branch line outages, and dispatch repair crews without waiting for customers to report a problem./ Finally, we currently have relatively little capability to monitor voltage sag, final line transformer loadings, and line losses in our distribution system. AMR provides a means for obtaining real­time information about the performance of our distribution system, allowing us to take remedial action, such as load transfers or setting capacitor switching for voltage correction.

1. AMR Cost Recovery

Since Edison is subject to a rate freeze over the period 1998-2001, we are proposing to record the net costs of AMR into a balancing account for later recovery. With interest, we project about $100 million would accrue in this account by the end of 2001. This amount can be recovered by surcharging customer rates at a rate of from $0.25 to $0.50 per customer per month which would provide recovery over a four­ to eight­year period.

1. CONCLUSION

For the reasons stated in Edison's written and oral submissions in this proceeding, Edison urges the Commission to adopt its proposal for metering and billing as set forth in its December 20, 1996 Metering and Billing Filing.

Respectfully submitted,

ANN P. COHN JAMES M. LEHRER

By:	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: January 21, 1997

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 METERING AND BILLING IN RESPONSE TO DECEMBER 23, 1996 ORDER OF ADMINISTRATIVE LAW JUDGE 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 21st day of January, 1997, at Rosemead, California.

______________________________________________
Susan Quon

SOUTHERN CALIFORNIA EDISON COMPANY

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

The Office of Ratepayer Advocates (ORA) includes in its comments in response to D.96­12-074 a discussion of common costs, and makes specific recommendations regarding the treatment of common costs for generation unbundling./ This discussion presents an erroneous interpretation of common cost principles, which leads to incorrect recommendations. Since common cost issues are as relevant to metering and billing unbundling as for generation unbundling, we have developed some simple examples to illustrate the fallacy of ORA's statements.

Common costs "occur" or "are found" in multi-product firms when a single asset can be used in producing more than one product, and this joint use creates cost savings. In Edison's December 20, 1996 comments we provided a very simple example, a tax and estate planning firm that is able to share a single computer to provide both tax service and estate planning services./ As separate firms, a tax firm and estate planning firm would each require a computer. Thus, the multi-product firm would spend $3,000 on a computer, while two separate firms would spend a total of $6,000. For the multi-product firm, the computer is a common cost, and the proportion of the $3,000 allocated to each business line is merely an accounting question./ Note that it is the savings associated with joint use of the asset which makes the assets' costs common. If the multi-product firm required two separate computers, one for each business line, then each business line would be assigned the full $3,000 cost of a computer and there would be no common costs.

In its comments, ORA states the following:

"In their December 6 Ratesetting filings, both Edison and PG&E propose to allocate none of the residual common costs (after direct and indirect cost assignments) to generation, invoking incremental costing principles. This would, of course, raises the loading of common costs on the distribution and other regulated functions. ...ORA does not agree that the regulated share of residual common costs should be increased because of the event of unbundling. If the generation function needs the capital and O&M that would be presently allocated to it, such capital and O&M should continue to be needed after unbundling. Any residual common costs not needed by the UDC (including its ServiceCo) after unbundling can in principle be shed through rental agreements, or through other means but in any case should not be part of the unbundled allocation of residual common costs to distribution."

While it may be true that the generation function will still need the services that are currently provided by common assets, after unbundling takes place, this point is irrelevant. The key point is that when a multi-product firm reduces or eliminates a business line (due to divestiture or the entry of new firms) the opportunity for savings from use of common assets is diminished, and the cost of the remaining products goes up.

In the example of the tax and estate planning firm, each business line might be allocated $1,500 of computer costs. If the combined firm breaks up into two separate firms, the new tax firm would see a $1,500 increase in its computer costs, equivalent to the amount of common costs allocated to its former estate planning business line, because it would need a stand-alone computer. However, the estate planning firm would also see a $1,500 increase, since it too would need a stand-alone computer. Thus, ORA's suggestion that common costs allocated to generation should not be "shifted" to distribution is wrong. We are merely recognizing that the effect of eliminating generation as a business line eliminates the opportunity to take advantage of the cost savings from jointly using assets, and that higher distribution costs are a necessary result of generation divestiture.

Finally, ORA suggests that residual common costs can be shed through rental agreements. This is an oxymoron -- if the functional services provided by an asset can be subdivided through leasing or rental, the asset does not create common costs. For example, if a stand-alone tax firm could somehow rent a computer one-half time for $1,500, and meet all its business needs, it would do so. In this case, the combined tax and estate planning firm could either enter into two $1,500 computer rentals or buy and share one $3,000 computer. In neither case would there be common costs, since there would be no cost savings arising from joint use of a single shared computer.

4.	Second, the Commission should adopt a goal of promoting competition in metering and billing for its own sake because such competition will lower the costs of these services to consumers and stimulate innovative responses to customer specific requirements. There already is fierce competition in these areas, particularly at the wholesale level, and the MBIS market is not a natural monopoly. (Pps. 7-8)	Metering and billing are characterized by significant economics of scope and scale, causing significant issues about whether these "markets" can be freed from price regulation. Our proposals allow third parties to create value-added opportunities for consumers, while retaining a basic regulated framework for our metering and billing services. CCES Chart No. 6 should be examined carefully. First Data Crop., the largest credit and service company, is five times as large as its nearest competitor and has an operating return on sales that is twice that of its other competitors. Although costs per transaction have dropped over time, credit card providers continue to charge interest rates near 20%, despite considerable declines in market interest rates over the last decade.
5.	If we assume that competition induced each electric utility in the country to adopt the "best practices" or the most efficient procedures and technology for MBIS functions, consumers nationwide would save approximately $14.2 billion. See Chart 1, Cost Reduction Potential in Distribution attached hereto in Appendix A. (P. 13)	This kind of analysis is fraught with problems, as demonstrated by the thoroughly discredited "CAERR Study," which provided a similar comparison based on overall utility performance. Competitive industries have similar "best performer - worst performer" patterns; to suggest that every firm can achieve "best performer" status is naive at best. In terms of selling expense per customer, we suspect that Nordstroms is a worst performer and K-Mart a best performer. We doubt that this would cause Nordstrom's management to rush out to find ways to emulate K-Mart. Analyses such as Chart 1 have no probative value without a thorough analysis of inter-firm differences.
6.	In telecommunications, for example, "the unbundling of the value chain," or the division of plain old telephone services into many separately provided services, has led to significant cost savings for consumers, better customer service, and the evolution of a host of previously unoffered services. See Chart 2, Price and Cost Experience Curves and Chart 3, Value Added Services (Telco Example). (P. 13)	Lower long distance rates provide no solace for residential customers facing higher local access costs. Chart 2 is highly misleading, since the trend break shown in 1983-84 was the result of accounting changes which shifted costs from the long distance to local market, not deregulation-induced cost reductions. More importantly, CCES polemic on the benefits of competition sheds little light on the specific factual issues associated with metering and billing unbundling. We are all in agreement regarding the benefits of generation competition. Rhetoric on the so-called "value chain" is nothing more than a rehashing of old debates on restructuring.
7.	In addition, unbundling places financial and competitive risks on the service providers, not ratepayers, as is the case in the current regulated bundled monopoly model. See Chart 7, Matching Risk and Benefits. (P. 14)	Unbundling interstate telephone services has created a broad range of consumer risks and problems, including slamming, annoying telemarketing, high cost services from public telephones, etc. Chart 7 incorrectly minimized these risks. There will be consumer protection problems created by unbundling generation. These risks are greatly magnified if metering and billing services are deregulated, so that the UDC cannot serve as a neutral agent on behalf of its customers. Edison's proposals represent a hybrid of sorts, relative to the tradeoffs shown in Chart No. 7, since the UDC retains a fundamental regulated role in metering and billing for the services it provides while enabling competition at the generation level.

8.	More importantly, the competition fostered by unbundling of MBIS services will generate substantial consumer benefits through economies of scale and scope. At current installed costs (for replacing the utility electric meter with a retrofit unit) the cost savings associated with better energy management have a payback period for consumers of approximately 18 months. See Chart 11, Metering: Break Even Analysis. However, as more AMR meter units are sold into the market, and the benefits of these technologies are more fully utilized by consumers and suppliers, the experience of other industries tells us we can expect that the price of AMR metering equipment will decrease sufficiently within 5 years to shorten the payback period to 7 months or less. See Chart 12, Metering: Experience Curve Effect. (PPs. 16-17)	Competition among AMR suppliers is what has driven (and will drive) AMR costs down, not meter unbundling. We agree with CCES that there are significant economies of scale in metering. Unbundling creates a barrier to entry that may delay installation of AMR for smaller customers. Unfortunately, CCES break-even analysis is substantially flawed, and much longer payback periods are needed for AMR, even with the efficiencies that result from universal deployment. A typical residential customer using 500 Kwh per month. At an average price of 2.5¢/Kwh, the PX portion of a customers bill would be $12.50 per month. Incredibly, CCES suggests that AMR could result in energy savings of $8.45 per month.
9.	From an emerging competitive market perspective, if the Commission permits meter services to be bundled with utility distribution service, the Commission would actually limit access to the metering market for new entrants because the utilities would gain an unfair competitive advantage. This is because the utilities could retrofit the existing meter with their chosen version of new technology without having to construct new electrical facilities . (P. 18)	CCES misses the point. By retaining UDC metering services under regulation, as a non-discriminatory service, there is no opportunity for utility competitive advantage.

10.	Compare the experience of the telecommunications industry where local exchange carriers reduced their own billing and customer costs by 28%. See Chart 16, Customer Account Services: Billing System Opportunities. However, these same companies realized that utilizing third party billing companies who could concentrate on the specifics of the and 62% below their initial expense levels. See Chart 17, Customer Account Services: Third Party Billi ng Services. (P. 20)	We do not have access to the data used in these charts; and we note that Chart 17 represents hypothetical and unrealized values. CCES is not alleging that metering and billing unbundling is necessary to achieve these results, since these are cost savings among the LECs themselves. Based on the California experience, PBR ratemaking, rather than unbundling, may be the causative factor. Finally, achieving significant reductions in customer service costs is relatively easy, if the Commission is prepared to accept the resulting degradation of service quality.
11.	In other deregulated industries, companies have completely offloaded customer service without sacrificing customer quality. Indeed, an entire industry already exists that is geared toward managing other companies' customers. See Chart 21, Customer Account Services Outsourcing. (P. 22)	We are unaware of any governmental rules (and we doubt any exist) that require airlines to unbundle the services shown. Outsourcing is not unbundling. When a consumer buys a ticket on American Airlines, he/she goes to the American Airlines ticket counter, boards at an American Airlines gate, and relies on American Airlines' luggage handling. These services are intrinsically bundled with the overall service provided by American Airlines.