TURN's Recommendations for the Unbundling Working Group

Retention of Baseline Rate Structure

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.

Retention of the Baseline Rate Structure in Residential Electric Tariffs

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.

Refinement of Line Extension Allowances

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).