Unbundling/PBR Working Group
Report and Recommendation
It is our belief that the primary role of the working group is to provide focus to the CPUC on a philosophical foundation for each key area in which the Working Group has a "jurisdictional" interest. It is then from this foundation from which the details for implementation may be evaluated, based upon filings by the individual utilities. Without that foundation level guidance and focus, the group and the remaining CPUC proceedings will be working in reverse order. It would be like arguing over building design details without the ability to discuss whether our building is in the right place in the first place. It is inevitable that we will all be promoting design features intended to make best use of the foundation upon which we believe the "system" rests. That means that, as we engage in discussions on policy and practice, we need to be confident that our foundation is agreed upon, through either consensus or CPUC decision. Because of the inevitable difference in opinion that will exist, we believe that is the initial purpose of this group to determine those areas for which the disparate interests can achieve consensus, and then focus the CPUC on those topics which only they can direct the process. This paper is an attempt to do some of that, but to also attempt to craft a set of recommendations for a broadly unbundled electric industry, which encourages competition for all customers.
Based on the early meetings of the Unbundling/PBR Working Group, our interpretation is that the three topic areas of focus that pertain to the output of the group are:
1. Unbundling, including:
2. Performance Based Ratemmaking, including :
3. Utility Focus, specifically:
Taking each of these in turn, based on comments from the working group's previous sessions, the parties presenting this presentation believe that a diverse and competitive marketplace can only be created if a broad unbundling is undertaken, PBRs are made consistent with that unbundling and the utilities are enabled to focus their attention on the creation of this new industry.
Topic #1, Unbundling: The group has spent considerable time discussing two separate topics related to unbundling, and each topic is comprised of several parts. The first broad topic is the philosophical basis for unbundling, which we see as comprised of two issues: i) a statement of principles and how to determine the best interests of ratepayers, and ii) what is to be initially unbundled and how to keep the process dynamic to accommodate change. The second broad topic, is the speed for implementing unbundling, and how to insure follow-through on those areas deferred. Also in this second topic of implementation speed is the issue of "unbundling light", for those areas deemed important to be included in the January 1, 1998 implementation date, but for which full analysis and ratemaking procedures are incomplete by that date.
1. Philosophical basis for unbundling: This is comprised of two areas. First are the objectives, which form the basis for evaluating ratepayer benefits and selecting items to be unbundled, and second are the dimensions of what is to be unbundled in order to focus the system on the future.
A. Unbundling objectives: This provides the foundation for evaluating the ratepayer benefits, and provides the basis for evaluating proposals for expanding the areas of service which could be open to unbundling.
Cost reduction and monitoring: As has been stated by the CPUC, this exercise is not productive unless we are actually going to realize true cost savings.
We need to be able to monitor the savings realized, which are driven by a recognition of what costs would have been, had the restructuring not occurred.
This topic is to focus on true cost reductions, and avoidance of duplication. Thus, where new market relationships carry with them service obligations, it is incumbent on the system to reduce the obligations and costs realistically, but concretely to insure that those providing the services are able to collect for them.
This process also needs to recognize service value enhancements that may occur, to determine the true net cost impact, from the perspective of the energy users.
avoidance of cost shifting: It should be expected that any initial design based on the current system will invariably fail this test, due to the currently in place system of subsidies and balancing arrangements. However, it will be very important to recognize, when customer classes realize different levels of market attention, when that difference is the result of cross subsidization between classes. This topic includes the cost shifting not only between customer groups, but within the supply community. Thus, costs incurred by one service supplier should be able to be charged by another.
system flexibility: The system design needs to be able to operate in a dynamic marketplace, and be constructive to the development of new ways of doing business
universality: The system is open to all levels and classes of customers to participate and benefit, beyond just the indirect cost reduction effects of a marketplace, but also the direct participation in the marketplace's supply of products and services.
B. The Three dimensions of unbundling, or What to Unbundle: The conceptualization of what we are suggesting can be best achieved through analogy to the reference to the new marketing and supply firms as utilities based not on territory, but on services, or to use the term coined by Illinova, the virtual utility. In this model, from the perspective of the customer, the customer purchases energy and services from their utility, and this may be any of several different parties, each of whom can field the full range of services deemed "utility like". That is the essence of unbundling, to permit the marketplace to offer the full range of services, without having a pre-existing entity retain a variety of duplicative roles or proprietary functions requiring continued primary customer contact.
Thus, the territorial utilities become fiduciaries, acting as wholesale managers of systems operated on a nondiscriminatory basis for the public's convenience and necessity. In turn, the retail arms of the competing marketing firms, including those of the territorial utility that may serve as the default supplier for non-electing customers, become competitors for the business of the energy consumers in all rate classes. Balancing, customer service, curtailment implementation and all issues associated with the customer interface ranging from contracting through billing, credit and collections and terminations would be officiated according to standardized protocols by the primary service providers. The regional utility handling the infrastructure, including the ISO and Energy Exchange would have the responsibility to notify their bulk participants of where and when that shortages and limitations require action, as well as operating and financial issues associated with the movements of power. Reporting by the ISO and Energy Exchange would be identical to utility distribution groups and/or marketing affiliates, municipal utilities such as Long Beach or Palo Alto, and to independent marketing companies. Financial responsibility would have to be demonstrated to operate at this level including the use of specified performance and operations standards to insure the maintenance of customer safety, health and welfare issues ( such standards for delivery security of energy during peak demand periods and/or where customer health and safety could be impacted).
Unbundling under this model, which we believe is the only one able to achieve the goals outlined above, is extensive, and exists within three dimensions. The result is a very large number of combinations of rebundled products and services which can result. This is a the defining element of a properly functioning marketplace, product diversity. These three dimensions are, as described by the characteristics by which the segmentation of services and functions is made:
1. Physical function and regulatory jurisdiction:
2. Wholesale versus Retail:
Within the distribution function we see unbundling being initiated primarily based on the service level of the particular function or service being evaluated. Those activities directed to specific customers would be unbundled, to minimize the duplication of costs and services between the utility serving a fiduciary function for the system and the customer service firms vying to meet customer needs. We conceptualize two classes:
Wholesale Level: on behalf of all system participants,
Retail Level: on behalf of specific end users (Illustrative list attached)
3. Cost Creation and service comparability:
The need within this dimension is to make sure that the structure of cost incurrance is consistent with the least cost means of system ownership and operations. As part of this is cost minimization and further avoidance of service duplication. Thus, for each of the utility functions, including retained generation and transmission, we would segregate out the costs of ownership and financing from the operating costs.
Ownership and finance Charges: As the largest single cost, efficiencies here have dramatic effects. There are two issues here which, when tied together, produce opportunities for both significant cost savings and expanded customer participation in diverse approaches to energy products and services.
First, segregating out the costs of financing from the rights of ownership or contractual control offer considerable savings, based on the past experience and current proposals in other regions. For this, customer obligations to pay for facilitates become more directly tied to the repayment to the capital markets for the financing of those facilities.
Second, the utility credit protections, by which the utility shareholders are willing to provide liberal credit terms to all customer classes. This needs to be unbundlled to insure that the private market is not forced into redlining.
Operations Charges: This arena of most PBR programs to date, need to be broken out into those activities which lend themselves to competitive supply versus monopoly style PBR design programs. Driving this distinction would be the evaluation of these functions from the perspective of whether they are a wholesale or retail activity.
2. Speed of unbundling: The key here is to tread the fine line between being comprehensive to insure that the items that need to be unbundled to achieve the goals are identified, implemented responsibly and monitored realistically. It is imperative to avoid the confusion that prevailed during the first 6 months of the implementation of capacity release under the interim rules that went into effect on August 1, 1991 in the natural gas restructuring. We glean three issues under this topic of unbundling speed that have been the basis for discussion within the Working Group.
Track one versus track two issues: This is merely the segregation of which items must and can be implemented by January 1, 1998 from the other issues. (Attach Working Group List Here)
Interim measures for Track One issues for which completion is not possible by January 1, 1998, but need to be included with place holder and/or surrogate measures within track one to insure that the structure of implementation is as close philosophically and operationally as possible to the longer term structure set out by the CPUC. Part of this includes the creation of limited scale pilot programs for a number of aspects of unbundling where real world experience is desired, but where the details are too complex to implement on a broad basis. (Attach Working Group List Here)
How to keep track two issues on track: All parties have expressed concern that once the restructuring gets to January 1, 1998, that the ability to continue to focus on these basic restructuring issues will be overwhelmed by the implementation details. As part of this is the concern that the marketplace's ability to come up with new areas of unbundling and service delivery will be provided a venue for proposing and evaluating the expansion of unbundling. (Create Suggested Structure)
Topic #2, Performance Based Ratemaking:
It is within the definition of this working group to focus attention on, and make recommendations regarding performance based ratemaking. However, it is our belief that the structure of the PBRs is initially dependent on the structure of the unbundled industry. Therefore, it is important for the CPUC to set out a competitive structure of the electric industry, and define within it a role for utility operations and activities, vis a vis the marketplace. That is the unbundling effort, described in the previous section. For all intents and purposes, those areas which are truly unbundled and are truly subjected to competitive pressures will end up having their performance measure become market share and begin to drop out of the old utility reasonableness and performance monitoring exercises. At that time, the discussion of PBRs for those services which remain bundled and are shielded from competitive pressures can become a fruitful and concrete.
In this regard, it is critical that the CPUC, utilities and ratepayers continue to look at current PBR proposals as temporary devices, operating in a current regulatory mileu. This means that unbundling discussions and decisions must not be restricted by the PBR programs currently filed, as that will produce an echo of the old system in the operations of the new.
Topic #3, Utility Focus
In order to achieve implementation of the system in the shortest possible time, with the best results we should immediately begin to focus the utilities on the new, restructured order. This means to reduce to the minimum level possible any filings and reporting based on the anachronisms of the old structure. Continuing to do so creates incentives to make deals and organize structures for cost savings based on these old structures, which invariably will limit the flexibility of the restructuring program. Further, there is a very clear trade-off between what can go into Track One issues, and the competing activities of the utilities within these anachronistic regulatory venues. (Utilities to elaborate here)
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Following are some possible examples of utility services that could be unbundled to promote competition. Many of these are activities which all companies serving customers would have to take on merely to create the direct customer relationship. The restructuring industry is trying to link transactions in a customized way, extending from the original fuel source, all the way through to, and including the primary energy consuming facilities. Therefore, the more diverse the range of functions that may be provided competitively, the broader range of options that can be created for customers. In the future for many customers, the energy sales transactions will become based on pounds of steam, amount of degree day heating, number of watts of lighting, etc.
The importance of the extensive unbundling comes from two sources:
1. Even though many of these items may translate into small total cost avoidance, the true measure is as a percentage of the total margin upon which the supply of services are based. Against that measure, the aggregate cost avoidance should be enormous. In a commodity industry based on huge volumes and narrow margins, these small increments of value become very significant issues in the ability to provide services, especially for the smaller customers.
2. As the utilities propose to reinvest, modify and adapt their services and functions, these proposals need to be in the context of being the primary service provider or direct customer manager for a reduced percentage of the retail customer base. Therefore, cost avoidance may evolve to a much more significant level over time.
While the following list of activities and services is intended to be illustrative, the actual guiding principal should be whether the function or service is directed at the consuming customer or whether it is part of the required activities to manage the system on behalf of all customers. In the development of utility tariff proposals, this more general criteria should be the guiding principle, not the following list of examples.
The following list is entirely separate from and additional to the list of typically discussed ancillary services such as voltage support, power factor control, curtailment/stand-by supply issues, and other parking services and reliability activities.
1.. Items coming out of the Wholesale/Retail Distinction from the Distribution Level:
I. Billing
II. Metering
III. Customer Service
IV. Service Orders
2. Cost Creation and Service Comparability Issues, pertaining to all utility functions and charges.
I. O&M
new or dedicated facilities
Emergency services
II. Capital/Operating Costs
III. Credit and collections
Customer Collections activities
Uncollectables account as an FDIC style insurance fund
customer terminations, centrally administered per standardized billing, collections and notifications protocols
IV. DSM and related utility conservation programs
V. Tariff/customer contract development and regulatory intervention costs as an at-risk endeavor for competitive services and functions