As discussed in the technical advisory subcommittee of the rate unbundling working group, Toward Utility Rate Normalization (TURN) has identified two technical issues associated with the Commission's decision on restructuring the electric industry which we believe should be endorsed by this particular working group: 1) retention of the baseline structure in residential rate design, and 2) refinement of line extension allowances for electric utilities. The technical subcommittee has already expressed endorsement of both of TURN's recommendations on these two issues and therefore, TURN is bringing both of these issues to the larger working group for consensus and closure.
Currently, baseline rates are the foundation for electric tariffs for
California's residential class. Baseline rates were mandated by the California
State Legislature in the early 1980s and were designed to simplify the
residential lifeline structure and to make the residential rate tariff
simpler to understand and administer. Baseline rates ensure that residential
electric (and gas) customers receive a minimum amount of electricity at
the lowest cost possible. The first block, quantity, or tier of energy
is normally priced at between 75 and 85% of the utility's system average
rates, while quantities of electricity above this first tier or block of
kWh is then priced at a higher rate. Baseline rates provide two positive
benefits. First, (as previously stated) they provide a minimum amount electricity
at the lowest possible costs, which obviously provide benefits to low usage
residential customers, who are also most likely to be low-income customers.
Second, they provide a naturally pricing incentive to residential customers
to conserve energy, because when residential customers use energy above
their baseline quantities, they pay a higher rate for that energy.
TURN asks that the Rate Unbundling Working Group keep the status quo
of baseline rates, and ensures that this type of residential rate structure
is maintained on, and after, January 1, 1998, regardless of what form the
Commission's final restructured industry takes.
First, it should be stated that this is not a new concept and it is
also not a difficult one to understand or adopt. When the Commission deregulated
the gas industry and unbundled commodity procurement of gas, it maintained
baseline rates for residential customers. Essentially, the Commission separated
the commodity portion of gas on residential customers' bills (along with
a line item for commodity procurement, which is a small portion of residential
rates) and combined the remaining portion of residential costs into a two-tiered
baseline structure. There was little to no controversy over this policy,
and implementation and maintenance of the baseline structure for residential
rates remained intact.
TURN proposes the exact same concept for residential electric rates
under restructuring. In this case, power exchange would remain a line item
(including any proposed energy procurement charges, which also should be
a small component to the overall residential rate). The remaining components
of the residential rate would presumably include: 1) distribution costs;
2) transmission costs; 3) competitive transition costs (CTC); and 4) public
goods charge. All of these cost components would be combined (similar to
gas today) and used as the basis for a two-tiered inverted (baseline) block
rate for residential customers. This recommendation provides a smooth transition
for residential customers into the Commission's restructured environment,
and maintains a rate structure that is easy to understand and administer,
provides benefits to low-usage customers, and retains and complies with
the California Legislature's original intentions when it established baseline
rates for residential customers.
Briefly, TURN asks that the Unbundling Working Group recommend that,
as a natural outgrowth of the Commission's intentions to restructure the
electric utility industry, the Commission refine the current line extension
allowances for new customer hookups so that they are based only on the
revenues that would be received by utility distribution companies (UDC)
in the new restructured industry.
The process for hooking up new customers (either residential or nonresidential
customers) for utility service (either electricity or gas) is covered under
the utilities' line extension rules. Among other things, line extension
rules govern the construction and cost responsibility between new customers
(i.e., developers of new projects, either residential or nonresidential)
and the utility for establishing new customer hookups.
CPUC Decision 94-12-026 established new line extension rules and policies
for California's major electric and gas utilities. Part of the change in
the line extension rules was to provide what is termed "revenue-based"
allowances. These "revenue-based" allowances are essentially
credits to developers which pay for, either a portion or all of the line
extension (depending on the circumstance) in exchange for future "revenues"
that the utility would receive from the new customer over time. The old
line extension rules provided these "allowances" in the form
of "free-footage" of equipment, while the new rules have converted
the past level of "free-footage" into "dollars".
The component of utility rates which are used to calculate allowances
are known as the utilities' "base annual revenues". Essentially,
"base annual revenues" are the utilities' rates which covers
the fixed investment portion of utility costs, and includes the utilities'
embedded costs of transmission and generation. Base annual revenues do
not include the marginal cost of generation associated with the utilities'
energy cost adjustment clause (ECAC) costs-which are fuel and purchased
power. ECAC costs have been excluded from calculation of allowances because
it has been universally agreed upon that new customers and developments
actually increase these costs to the utility-rather than decrease these
costs to the utility.
Given the concept that line extension allowances symbolize the future revenues that will be received by the utility, which in turn is meant to justify existing ratepayers' investment in that new customer hookup equipment, the Commission's decision to restructure the electric industry has resulted in the need to refine line extension allowances to more appropriately reflect the future revenues that will actually be received by utilities in the restructured industry.
The Commission has recognized that its intentions to restructure the electric industry must result in the unbundling of current utility rates, which obviously is the reason that this working group has been formed. This working group has also agreed (with no controversy) that a portion of the utility rates that must be unbundled must be generation and transmission costs, since these costs will be paid to the power exchange, and the independent system operator-respectively. The future revenues that the UDC will actually be receiving from new customers in a restructured environment will be distribution revenues (to pay for the embedded and marginal costs of their distribution system). Thus, the "revenue-based" allowances that would justify any new investments should be limited to those revenues that would be received from what has been called the "Utility Distribution Company" (UDC). This would mean that the allowances should be based on distribution revenues only, and that allowances based on any revenues above those would be absolutely unjustified and inappropriate.
Therefore, TURN recommends that the Unbundling Working Group recognize that line extension allowances in the Commission's restructured environment should be refined to be based on distribution revenues, and that the Commission make an explicit decision to do so.
It should be noted that TURN believes that the appropriate timing and
forum for refining line extension allowances should be in 1997 and implemented
within the Commission's current rulemaking on line extensions (R. 92-03-050).