Proposed list of items to be unbundled

Prepared by Agland Energy Services, Inc.
For the Unbundling/PBR Working Group
In Preparation for the May 29, 1996 Workshop

The purpose of this paper is to outline the items that we seek to be unbundled through the efforts of the working group and the utilities. While our interests are much more broad than this, there are several items which are being championed by no other parties and, therefore, we restrict our discussions to those orphaned topics.

The specific items that we seek to be unbundled, which we have not been requested by other parties, are five within three categories:

Tariff Unbundling:
1. For each utility, we propose the creation of a wholesale and retail distinction in the nature of their services, thereby, insuring that competition is on an even footing with the utilities for serving the needs of all customer classes. This would be done on an initial basis for January 1, 1998, with more detailed activities during subsequent phases. This component of unbundling is critical to insure the ability of the marketplace to competitively service the small commercial and residential classes; therefore, making at least an initial, surrogate level is critical for January 1, 1998.
2. For all utility tariffs and charges, define the mechanism associated with fully prepaying the charges. These include the CTC as well as the other embedded costs for the various tariffs to insure that if the customer fully prepays the tariff charges, variable costs and capital charges are handled differently. At a minimum, we would contend that the ability to prepay the CTC by January 1, 1998 be in place, with the broader rights later on. Possibly permitting a pilot program of the broader program would be extremely helpful to illustrate and examine the opportunities and implications of the broader application of prepayments.
Unbundling of Utility Credit Protections:
1. For all utilities, a portion of the utility credit protections should be unbundled, most specifically, the uncollectables account and the right to have the utility terminate service to customers failing to pay invoices to market firms that comply with specified operations and billing protocols. To insure full market coverage to the smaller customers, this element is critical for January 1, 1998.
Creation of explicit processes by which the marketplace can productively participate in the operations of the system and be a force to expand unbundling in the future:
1. Data availability and operating parity: It will be the key to a properly unbundled system that there be considerable system operating data available to the marketplace. The purpose is to insure that both private generation facilities and their counterparts, privately organized interruptible and curtailable loads, be able to monitor system demands with the same level of accuracy as the utilities themselves. Just as the utilities, through the Power Exchange and the Independent System Operator, will need to watch system performance both regionally and system wide, so will private market participants. This information needs to be based on the best information available to enable all participants an equal ability to plan both the construction and operations of that cascade of resources used to insure reliability to customers. We view this component of information parity to be critical for January 1, 1998.
2. Initiation of a portion of the regulatory agenda: While there is considerable discussion of what areas may be eligible for competitive pressures, the abstract nature of those claims and the discussions which follow are difficult to weave into the fabric of restructuring. It is critical that the CPUC recognizes the limitations of this centrally administered restructuring and the importance of maximizing the input of the creative marketplace. Therefore, by January 1, 1998, we deem it very important that there be an initial set of standards by which to judge, test and then implement expansions to the competitive arena, vis a vis the monopoly utility arena. Therefore, unbundling is to be an organically driven ongoing process, not a specific project taken on at a specific point in time.

Our motives are two-fold. First, we wish to insure that at each point in time we are offering to customers the best possible choices in reducing costs and avoiding duplications of costs by unbundling areas of potential redundancy. The key issue in our program is to insure comparability between the remaining utility functions and the private market offerings, within a dynamically evolving system. Second, we want to empower the marketplace to be an active member of the system, able to observe, anticipate and devise solutions to system issues. This not only needs to be at the operations level, but also in the initiation of regulatory solutions, including solutions which would expand unbundling into the areas of current utility service.

For no class of customer are these five unbundling concerns greater than for the small commercial and residential class of customer. The key is to make comparable:

The transactions costs (including such items as credit evaluations and risks),

Universality (avoiding cream skimming based on customer size, load profile or other characteristics),

Cost reduction (providing customers with the opportunity to get the best results out of their utility system commitments), and

Cost of service (small customers will typically be very service intensive per dollar of energy expenditure).

It should not even be controversial that for the smaller customer classes to meaningfully participate in the restructuring, that firms taking on these customers be able to provide a broad level of service commensurate with that level provided by the utilities. To have the utilities retain the full complement of services, to continue to invest in an intensive and extensive customer interface and to continue to enjoy the right to unavoidable cost recovery for the complete system of customer service and support functions will preclude the ability of the marketplace to fairly compete in the small customer arena.

Following is our specific list of items:

1. Tariff Unbundling:

To date, the primary basis for cost unbundling has been around the unbundling of generation, transmission, and distribution costs. This first generation of unbundling, based on the functional segregation, is consistent with the current operations of the monopoly system, but we believe that it is too limited for the proper gestation of a competitive marketplace. The problem is that it fails to recognize the redundancies of the system inherent in expanding the nature of customer business relationships. What must be understood is that the foundations of competition can only be laid in those areas where there is a removal of some portion of the utilities cost structure. California, through this restructuring process, is setting in motion a long term process which will be with us for many years. The structural devices implemented, even if not fully fleshed out, will dictate not only the actions of the participants, but also the in tellectual paradigms employed. That is why we believe that a very broad view of unbundling is critical at this juncture to insure that the maximum possible opportunity for the competitive marketplace is afforded through the designs established from the unbundling working group.

A. The second generation of cost unbundling, the wholesale versus retail distinction: Fundamentally, as we restructure, we need to unbundle based on the structure of the industry we seek not merely based on the cost categories of today. If we seek a competitive environment, we need to insure that our model for restructured cost accounting takes on the dual level of unbundling envisioned. This dual model includes on one axis the functions of generation, transmission, and distribution. On the other axis, we have those activities which the CPUC believes are and will remain inherently utility functions, versus those functions which are part of the market and competition.

In this model, the utilities are remaining as the entities within whom there will reside a fiduciary responsibility to maintain and manage the system on behalf of all participants. These participants include, for all products and services to proliferate out of the restructuring, utility marketing, private marketing, producers, and consumers. It should be a clear goal of the CPUC, in its efforts to minimize system costs, to insure a minimum of duplication. In this regard, defining a primary customer relationship, and the activities which necessarily go with it, becomes an understandable, albeit fuzzy, point of distinction between what remain as part of the fiduciary role and what is to become competitive.

Therefore, our focus in this section, is to see unbundled for each and every tariff the portion of costs which includes, but is not limited to, such items as marketing, customer service, a variety of ancillary services, system operations, billing/invoicing, and meter reading. Our goal is to break out the wholesale level costs of these services from the retail level costs for providing these services. Specifically, where a marketing/aggregating firm takes on the customer contact responsibilities, marketing personnel, customer service functions, direct billing and collections, plus a number of operating tasks, some portion of these should become avoidable by the utility. Most fundamentally, these are long run avoided cost issues, as the utilities look at:

The location, distribution, and staffing of customer service offices,

As the utilities look at upgrading of computer systems to handle disaggregated billing and combinations of services, as well as the customer interface of that data system,

As the utilities look at upgrading or even retaining the current level of customer assistance activities which integrate DSM and other information and customer assistance programs,

As the utilities look at various ways to augment system operations tasks, based on the performance and monitoring of customers either regionally or by class.

For all of the above, and many more, there must be a segregation of the wholesale level support activity from the competitive retail activities. In the former, the utilities must undertake for the system tasks and costs which manage the operations and dispatch of the system as a fiduciary for all parties on a non-discriminatory basis. In the latter, we have those direct service functions that define the retail consumer interface. Stated another way, there needs to be a designated primary customer contact, and it is that party who is to be permitted to bill for the provision of direct customer services. The result would be that cost recovery of retail level services is a competitive issue, while cost-of-service recovery of wholesale level services is considered part of the fiduciary function.

These primary customer contact firms would receive bulk consumption data from the utility or other approved metering firm, would receive and provide bulk information related to reliability indicators appropriate to the characteristics and location of their customers, and would eventually handle all direct customer issues. In this regard, they, including the retail component of the utilities, can be viewed as a wholesale customer of the fiduciary utility entity.

The importance of this comes from the basic fundamental fact that product and service sales, customer support (including credit and collections), product development, and the host of customer information activities that employ thousands of utility staff members are entirely duplicated at marketing companies. However, if only the utility has the prerogative to charge for these functions, then the system is dissuading the marketing community from providing the broader rang e of services required to both dynamise the market and to properly serve the smaller customer classes.

The appropriate segregation of these wholesale and retail functions will be an arduous task, and we doubt that it can be fully completed by January 1, 1998. However, it will be imperative to the creation of an active market at the small user level that surrogate measures be developed. We would call this "unbundling light" as part of the initial phase, with the more detailed and evolutionary aspects continuing. Part of this could be to develop an implementation program where costs are avoided by the utilities at the time of system modification; meaning that these retail functions are deemed to be shed over time, thereby increasing in magnitude after starting at some more modest level. This foundation would at least signal to the marketplace the intended direction of the Commission's structure and the prospects that there would be a basis on which marketing companies could invest in the provision of services and programs to meet her etofore unmet customer interests.

We would propose one suggestion regarding the segregation of costs. We contend that they become avoided to the extent that a significant percentage of market penetration has been achieved (i.e. as was done in calculating electrical avoided costs, a given amount of market penetration was assumed, rather than try to define the curve that specifies the marginal avoided costs at each one unit of customer action from negligible to significant participation rates). The primary customer service and marketing activities provided by the utility for the marketer's customers would be to the marketer/aggregators. As is done for phone calls to PacBell's directory information, requests by the customers and the aggregators for services from the utility that exceed some defined level would cause incremental fees to be paid.

B. The third dimension of tariff unbundling, capital costs versus variable costs: With the maturation and increasing sophistication of the financial markets, the ability to prepay utility tariff charges offers a number of opportunities for marketing companies to creatively package services together and reduce costs. Nowhere is this more clear and important than in the carrying costs of the CTC. To permit customers and their aggregators to prepay the CTC, and ideally the rest of their tariff charges, would provide the maximum opportunity for cost savings, service flexibility, and the creation of new ways to servicing customers. It goes without saying that if customers are to be forced to pay the CTC, as a cost to restructure the industry, they should be given every possible opportunity to minimize the costs to themselves.

To do this requires a clear breakout of variable costs and capital costs as the accounting effects of prepayment of these cost will vary considerable. For the capital charges, including most components of the CTC, the rate base will decline over time, while for variable costs, prepayments would be based on a net present value of estimated costs not yet incurred.

Therefore, for each and every tariff, we want broken out the portion which is capital cost and the portion which is variable cost. The CTC needs to be specifically identified. In all cases, we want the ability to prepay these charges and therefore need to be able to make the allocations between:

The full embedded cost of facilities within each customer's rates, including those which are CTC derived and those which are for the remainder of rate base.

The variable costs which apply to each tariff, and the discount rate that applies to prepaying costs which have not yet been incurred. Again, this would be segregated between the CTC component and other parts of the tariffs.

2. Credit protections:

For the system as a whole, the utilities provide very liberal credit terms, without violating sound business practices because of a number of credit protections that are unique to the monopoly utility model. We would like to see many of these credit protections become unbundled in a manner that enables parties providing services to electric customers to employ the same credit terms as employed by the utilities. As is the theme through-out this presentation, this is most important for the small commercial and residential classes of customers where credit analysis and monitoring can eat up a very significant percentage of gross revenues. While there are many devices which produce the web of credit protections for the utilities, we are most concerned to see by January 1, 1998, two items made available for explicit participation by the marketplace.

Uncollectibles Account: We would like this to become an FDIC-style insurance fund. All participating parties would pay into it on an equal basis, and all participating aggregators would have to demonstrate certain billing protocols. For example, standards of collections follow-up activities and other features of their presenting and following up of invoices would be defined. The key is to permit marketing companies the right to use the utility standard of credit eligibility for the provision of services, and have the right to participate in this key device to protect the financial integrity of those service terms.

Customer terminations: While we propose that only the utilities retain the authority to disconnect customers, customers' failure to pay aggregators should be equal grounds for service terminations under the same terms as would be employed by the utilities. Public interest issues of allowing non-paying indigent and medical needs customers to remain on service would become explicitly handled within the uncollectibles accounts.

3. The future expansion of competition into all possible niches and crevices of the energy supply and delivery system:

We must remain humble as we confront the task to restructure the entire electric utility industry and recognize that it can at best be an iterative process of learning and experimentation. A major goal of the restructuring is to unleash the creativity of the marketplace to create new solutions for current problems, and through that competitive effort to both reduce costs and improve services. To us, this means that for the marketplace to provide true and competitive services, non-utility firms need to be incorporated both into the system's operation and its long term design. This means much more than merely receiving consumption data from the utilities on customers and being parties of interest in CPUC filings. It directly means that market participants have the opportunity to operate at parity with the utility facilities because they know what the utility personnel know and when the utility personnel know it. Further, it means that t he market participan ts have nearly equal standing in front of the CPUC to propose solutions to problems.

A. Operations Parity, unbundling data access: As part of this, we must recognize that all parties taking on a primary customer relationship, and all parties taking on a bulk supply relationship where the issues of reliability and ancillary services become part of the bulk supply program will require considerable information on system parameters. Specifically, such information as constraint points, overall system load versus system capacity, the regional breakdown of the load/supply equation, and many other factors. We believe that it is critical that the data made available to the ISO from the utilities must be available to the marketplace to insure that both are in a position to play a productive role in anticipating needs, rather than being caught blindsided by evolving system constraints. This information will be valuable for more than short-term operations issues, but also for asset deployment issues as well. For example, when determining where to build facilities and where to contract for load shedding, having detailed information on regional constraints influencing power quality and reliability will be very important.

B. Unbundling the responsibility for regulatory solutions: Unbundling must be recognized as a long-term process not a specific project taken up at a specific point in time. The key to that is to explicitly incorporate a means for the system to move the dividing line between those areas which are open to competitive pressure and those which are to remain as part of the fiduciary role of the monopoly utilities. Many functions and activities have been proposed, including billing, metering, dispatch, voltage control, spinning reserve, regional firming of the distribution system with local generation, etc., yet we cannot simultaneously leave the options open for all services while setting in motion a workable program in 1998.

While it will not be possible for the system to fully unbundle all activities for January 1, 1998, we contend it is critical that the system acknowledges the ability of the marketplace to come up with new ways of doing business which will offer considerable opportunities for cost savings and/or service improvement. In this regard, to rely only on the utilities for research and development and to rely only on the utilities and the CPUC for the design of new options will continue to seriously limit the ability of the marketplace to become a restructuring tool. Instead, this failure will continue to relegate the creativity of the marketplace to finding and expanding primarily bypass options.

Our proposal, therefore, is that an explicit part of the unbundling for January 1, 1998, be an initial mechanism through which the marketplace may propose, test, prove, and then implement improvements to the system. Those proposals, developed with private funds for specified audiences, would need to meet a clear set of standards, such as no cost shifting, service improvement, ability of a multi-participant and competitive marketplace to service the marketplace, demonstrated market interest, and possibly a host of other issues. The utilities would be free to propose newly competitive programs where they could show that the development of the concepts and their implementation was with shareholder, not ratepayer resources.

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