1. Alternative Approaches to Implement Distribution Unbundling

It is clear that there are several unresolved differences among the participants in the working group. These differences are revealed in RWG discussions, in related discussions in the Direct Access Working Group (DAWG), and in the July 15 rate filings directed by the CPUC. The most conservative stick with D.95-12-063 which creates the UDC as a new entity which retains all of the distribution and customer service functions of the current utility. The most liberal read D.96-03-022 and various ACR as already determining that the UDC distribution function will be unbundled, and the only remaining questions are when and how extensively. Therefore, different positions on how to address the track 1/track 2 problem correspond to different interpretations of the evolving CPUC policy on retail distribution restructuring.

These positions fall into four basic groups:

a. no distribution function unbundling on 1/1/98 and deferral of discussions of this subject until after the CPUC issues definitive decisions on rates for 1/1/98;

b. no distribution function unbundling on 1/1/98, but a process starting now to develop data and a working approach for identification of various unbundled distribution function "end-states";

c. selective distribution function unbundling to take effect by 1/1/98 as a device to increase the likelihood of success of direct access, with perhaps more to occur at an unspecified later date; and

d. comprehensive distribution function unbundling to take effect on 1/1/98.

The remainder of this brief paper will further describe these positions, and provide working schedules consistent with each of them. This consolidated discussion of all principal alternatives should permit a more informed decision balancing resources required, impact on vital activities, and providing intelligent input into the ultimate policy decisions that the CPUC must make.

Option A: No Unbundling, Deferred Consideration

Option A provides no unbundling of the distribution function until sometime after direct access begins. Further, the assessment of distribution function unbundling is deferred until after 1/1/98.

In its discussions within the RWG, SCE has clearly expressed its preference for no distribution function unbundling, and no consideration of the topic until everything necessary to implement D.95-12-063 has been completed. In effect, this postpones consideration of distribution function unbundling until after 1/1/98, with the date of implementation off into the future, perhaps year 2000. SCE and PG&E appear to support this proposal by the language of their July 15, 1996 filings with the CPUC on unbundling and rate design by proposing that rates be unbundled into five components: generation, transmission, distribution, CTC, and public goods charges.

SCE directly questions the benefits of distribution function unbundling and indicates the necessity for the CPUC to publicly debate this proposed action. [SCE, July 15, 1996, p. 4]

Option B: No Unbundling, Expeditious Consideration

In this option there are no track 1 distribution services. The presumption is made that the distribution function outlined in D.95-12-063 remains intact and that the current IOUs are transmogrified into UDCs on 1/1/98. All distribution function services are designated as candidates for track 2 assessments.

Several parties have expressed support for ultimate distribution function unbundling, but at a time when resources permit a deliberate consideration by the parties and the CPUC itself. Some prospective electricity aggregators, based on their experience with natural gas core aggregation, firmly believe that the distribution function must be unbundled, but that practical considerations require deferral of the details of this matter until later into 1997 with implementation sometime after 1/1/98.

Option C: Selective Unbundling on 1/1/98

In Option C, some distribution function services are classified as track 1, and are opened to competition effective 1/1/98 and rates for monopoly services are adjusted for this possibility. In addition, since the IOUs know how to supply these services, and may even be essential to continue to supply them to those parties who wish to receive them from the UDC, it will be important to understand how this might happen. At least two possibilities exist. First, the UDC is permitted to provide both monopoly and competitive services, and appropriate regulatory safeguards are developed and implemented to ensure that cross subsidies do not advantages the UDC in a competitive arena by shifting portions of costs for the competitive services to monopoly services. Second, the unit of the IOU/UDC providing the competitive service is spun off from the IOU/UDC to be a competitive company, either standalone or purchased by an existing business.

Several aggregation interests, as well as SDG&E, have suggested that direct access will not be successful for small customers unless duplicative costs are eliminated. Reasoning that aggregators are unwilling to forego direct billing of their customers, and perhaps believing that they will have to install their own interval metering and communication systems, they resolve this service duplication by deleting metering and billing as monopoly services within the distribution function. These services, and perhaps some others, would be made competitive, so that providers of direct access services would be enabled to provide these services to their customers, and the customer would elect to drop UDC service for these activities. Over time, perhaps additional services might be unbundled.

The services identified at the June 26, 1996 meeting of the RWG include:

a. billing,
b. metering,
c. customer service and support, and
d. uncollectables/collections.

It is clear that much additional effort is needed to precisely define these services, to identify subsidiary activities, and to ascertain precisely what might be designated as competitive and what must remain as a monopoly service. For example, discussions within DAWG have identified a number of activities collectively comprising metering, and each of these presents various issues that must be assessed in order to determine whether that specific activity can be offered competitively.

Option D: Comprehensive Unbundling Through Time, Beginning 1/1/98

Option D presumes that a policy decision can be made which determines that the UDC will shrink the scope of its responsibilities outlined in D.95-12-063 to some much smaller set, with the net result that many portions of the distribution function now assigned to the UDC are re-designated as competitive activities.

Some parties believe that comprehensive distribution function unbundling should be accomplished, can be accomplished in an orderly manner through time, and that some portion of it can be accomplished by 1/1/98. Achieving this end-state is viewed as especially easy if the residual role for the regulated monopoly resembles Prof. Hogans's LINECO, e.g. the distribution utility builds and maintains a distribution system (substations, primary and secondary distribution lines, poletop transformers), and ensures the reliability of these wires (routine tree trimming, equipment replacement as it ages, upgrades as safety and service requirements evolve, storm damage repair, etc.) to distribute electricity to end-use customers. The very narrow services of this regulated monopoly are relatively easy to identify, cost, and develop rate designs for, so the larger body of work for traditional cost of service studies can be avoided or minimized.

SDG&E proposes a multi-step process to ensure that some services are unbundled by 1/1/98, with a "rolling" opportunity for other services to be unbundled at a later date as competitive markets evolve. [SDG&E, July 15, 1996, pp. III-15-17].

2. Comparison of Schedules

Table 1 provides a summary of the schedules implied by these four alternatives, using a common set of activities and decision points for ease of comparison.

Option A:

This option permits no distribution function unbundling for rates effective 1/1/98, and the process for reviewing distribution unbundling does not begin until after direct access has been commenced. This option presumes that substantive work does not begin until early 1998, and is accomplished throughout 1998 and 1999. This option is consistent with a major policy investigation, with strongly contested views that are difficult for the CPUC to resolve. Only in early 2000 is a formal application for unbundled distribution rates filed with the CPUC. Such rates and permission for competitive parties to offer these services begins 1/1/2001.

Option B:

This option accelerates consideration of distribution function unbundling compared to Option A, but does not achieve the revised rates for track 2 services until 1/1/99. Much of the cost of service study, rate analysis, and other unbundling effort is conducted in 1997 and 1998.

Option C:

In contrast to Options A and B, this option would identify some distribution component services that could be unbundled as track 1 and included in rate changes effective 1/1/98.

Furthermore, since these unbundled services may be selectively chosen by direct access customers or their energy service provider independent of the generation services themselves, the CPUC must ensure that rates for such services are known at the time that marketers are trying to sign up customers. This suggests that final rates must be known in the fall of 1997, rather than at the end of 1997 as was the case in Options A and B. To meet this accelerated schedule for final conforming rates will require greater effort from utility staffs, or perhaps deferral of other regulatory proceeding work during the crucial summer of 1997 timeframe.

Option D:

Option D presents the most radical change from the assignment of responsibilities to the UDC in D.95-12-063, and relies heavily upon various statements in ACRs as supporting an interpretation of CPUC policy favorable to complete unbundling. Thus, in this option a considerable amount of the component services included within the distribution function are both unbundled and provided competitively. Much of this would be accomplished on a schedule similar to Option C, but rather than fixing a specific date at which time a set number of track 2 services are unbundled, perhaps they are unbundled when a competitor appears willing and able to supply them. SDG&E has proposed an approach that would permit this measured approach to be adopted.

3. Possible Resolution

The deep differences among the participants in the RWG reflect both policy disagreements and technical concerns about the workload required to conduct necessary cost of service studies to enable an accurate estimation of utility costs.

Technical Concerns

The technical concerns regarding the inadequacies of existing cost-of-service studies and the need for new studies are easily resolved, since consultants to the utility industry could be hired to aid existing utility staffs, or by the CPUC itself to directly perform the work required.

Telephone deregulation provides an approach which may be considered for the electricity industry. The CPUC essentially directed telephone unbundling using existing cost of service study data discounted somewhat arbitrarily, and provided an opportunity to the telephone company to petition for higher costs on the basis of improved information. This provided an incentive for the utility to determine how important these new cost-of-service data were among the many things it was attempting to accomplish.

Policy Concerns

The policy concerns of some utilities about jumping directly to competitive supply of components of the distribution function may also be resolvable.

The CPUC's direction to investigate unbundling in D.96-03-022 and its discussion in the RWG combines two distinct considerations that should be considered separately; namely, identification and separate accounting of each component service from a larger group of services for transparency and enhanced customer choice, and removing the requirement than such a component service be supplied exclusively by a regulated monopoly. In earlier California Energy Commission (CEC) discussions of consumer choice and unbundling, unbundling was used in the more narrow sense of separation, not necessarily in the sense of both separation and competitive supply. The benefit of considering these aspects of restructuring individually is that it offers another option for the CPUC to select in its efforts to restructure the retail portions of the electricity industry.

There are three combinations of component separation and competitive supply that may be investigated. Two are well understood and represent extremes on a continuum. The third lies in the middle. The following definitions clarify the options:

bundled monopoly supply means that many distribution and customer services are supplied in a fixed bundle by the franchise monopoly, with no competitive supply opportunities. This is what the CPUC describes as a UDC in D.95-12-063.

unbundled monopoly supply means that distribution and customer services are identified separately and that customers have a choice of different levels of service with commensurate price differentials, but that the regulated monopoly is the only service provider.

unbundled competitive supply means that many distribution and customer service functions are both identified separately and that they are provided by multiple suppliers in a competitive market setting. Among the narrowest of the possible remaining monopolies is Prof. Hogan's LINECO.

To this point in time, parties to the RWG have discussed only the first and last of these three options. Unbundled, monopoly supplied, quality-differentiated service should be a consideration for distribution function restructuring. Since there are two options for "unbundling" many of the distribution activities assigned to the UDC, parties should consider the middle option of unbundling the component service, but retaining exclusive franchise by the UDC.

Unbundled, quality-differentiated service options provided exclusively by the UDC would permit customers to explore their interest in these services on a standalone basis, and permit the utility to offer them with price differences that might come from current cost of service data. Current data might be considered sufficient when it is used to provide signals to customers intended to communicate different costs of two or more levels of service. Offering such opportunities to customers has several advantages:

(1) it provides an opportunity to learn what customers choose to do when they can make elective choices about quality of service;

(2) it provides an initial signal to potential competitive service suppliers about the market for unbundled services by revealing the apparent cost versus benefit tradeoffs that real customers are willing to make;

(3) it allows direct access customers to reduce the level of service they obtain from the UDC if they are receiving similar services from their direct access provider, thus reducing (but not eliminating) concerns about duplication of services and costs.

CEC Staff Recommendation

The CEC is formally committed to the concept of distribution function unbundling, as expressed in 1994 Electricity Report, Chapter 2. In our previous Comments to the CPUC on this matter for the May 20, 1996 Scoping Workshop, we expressed caution that unbundling ought not disrupt successful implementation of direct access. This does not mean that some partial unbundling should be ruled out for implementation as early as 1/1/98.

In the absence of a definitive CPUC decision to support full distribution function unbundling, the CEC Staff recommends that a modified Option C be pursued, e.g. to have some combination of [unbundled, competitive] and [unbundled, monopoly] component services available on 1/1/98, with additional changes in subsequent years. As much should be unbundled as can be accomplished successfully. Furthermore, the CPUC needs to determine how its evolving policy on distribution function unbundling can be clarified so that Option D becomes the context for future work.

ACTIVITY/EVENT                               OPTION A     OPTION B       OPTION C     OPTION D       
1. IOUs file concepts                        7/15/96      7/15/96        7/15/96      7/15/96        
2. CPUC Decision on retail unbundling                                                                
   schedule
   a. WG report concerning track 1/track 2   08/26/96     08/26/96       08/26/96     08/26/96       
   b. adjudicatory proceeding/parties        09/26/96     09/26/96       NA           NA             
      comment
   c. CPUC Decision or Ruling                10/26/96     10/26/96       9/15/96      9/15/96        
3. IOU Tariff Applications for 1/1/98 Rates                                                          
   a. IOUs file proposed tariffs             11/15/96     11/15/96       11/15/96     11/15/96       
   b. adjudicatory proceeding                early 1997   early '97      early '97    early '97      
   c. final CPUC decision                    06/30/97     06/30/97       06/30/96     06/30/96       
   d. IOUs complete conforming tariffs       12/1/97      12/1/97        9/15/97      9/15/97        
4. Ratesetting WG discussions of unbundling                                                          
   a. review track 1/track 2 concept         resume 1/98  resume 1/97    underway     underway       
   b. identify component services            02/01/98     02/01/97       07/26/97     07/26/97       
   c. identify proposals for track 1         NA           NA             08/02/96     08/02/96       
      components
   d. identify proposals for track 2         03/15/98     03/15/97       08/09/96     08/09/96       
      components
5. Cost of service studies                                                                           
   a. develop cost of service study design   06/30/98     04/15/97       08/16/96     08/16/96       
   b. COS study design approved              01/01/99     06/15/97       09/15/96     09/15/96       
   c. IOUs implement studies                 03/01/99     12/15/97       10/01/96     10/01/96       
   d. IOUs submit study results              09/01/99     01/15/98       02/01/97     02/01/97       
   e. parties review results/provide         12/01/99     03/15/98       03/01/97     03/01/97       
      comments
   f. IOUs use results in rate tariffs       01/01/2000   05/15/98       04/15/97     use results    
                                                                         (amend #3a)  as needed      
6. IOU Tariff Applications for Track 2                                                SDG&E has      
   Rates                                                                              proposed that there
                                                                                      be an expedited
                                                                                      review process to
                                                                                      develop UDC rates as
                                                                                      competitive markets
                                                                                      emerge
   a. IOUs file proposed tariffs             03/01/2000   07/01/98       12/15/97
   b. adjudicatory proceeding                spring 2000  fall 1998      spring '98                  
   c. final CPUC decision                    summer 2000  late 1998      fall '98                    
   d. IOUs complete conforming tariffs       12/01/2000   12/15/98       12/15/98