This Position Paper is presented by the UTILITY SOLUTIONS Partnership, Inc., a nonprofit corporation representing the end-user stakeholder interests of hospitals in California.

Background:

My name is Michael Manning, and in 1989 I petitioned the CPUC to modify its rules to allow California public schools to purchase core natural gas from a source other than their local utility company. In 1991, the Commission ruled favorably on the petition with an Order which is referred to as the SPURR Decision. A three year pilot was extended to four years before it finally achieved permanent status. The struggles were many which shall remain the topic for another time. However, the "lessons learned" could benefit the current Commissioners as they take on the even more monumental task of restructuring the state's electricity industry.

Lessons Learned:

The Commission's core natural gas program has failed during the six years of its existence. During the pilot phase, participation was limited to 10% of the available core market. It was then to expand to 100% without any participation restrictions other than market forces. Initially, over a dozen core aggregators registered with the utilities to do business in California, and many more began to position themselves. The program began in 1991 with high expectations and enthusiasm. But by 1993, only 5% of the core load in the Southern California Gas Company had enrolled, and that number has now declined to 3.5%. Similar customer dissatisfaction has occurred in both PG&E's and SDG&E's territory where participation hovered around 5% before dropping nearly in half. Most natural gas core aggregators have abandoned California so that now there are only three, and none are actually growing the program.

Our regulatory attorney, Patrick Power, informed us early in the process that we would enjoy initial success because the utility commodity price for natural gas was too high. Mr. Power predicted that at some point the aggregator and utility company's commodity price would somewhat equalize due to the presence of competition. When that occurred, there would be little advantage to the customer to buy natural gas on the open market. His message to us in 1989 was that a competitive commodities-only market would not work in California. He was right.

In contrast, the California non-core natural gas program which began in 1985 offered large industrial customers more than just an unbundled commodity opportunity. As a result, the non-core competitive market has thrived for over ten years with upwards of 95% customer participation!

The following is a contrast of two CPUC natural gas programs:

Core Aggregation = Failure

Non-Core Program = Success

What is the essential difference between these two CPUC natural gas programs?

Core Aggregation = Commodity-only program

Non-Core Program = Greater unbundled opportunities

Predictions:

There is fear among many that the CPUC will design and approve a commodity-only Direct Access program in California. If this occurs, the small commercial and residential customer will stay away just as they did in the Commission's natural gas core aggregation program. Small commodity margins will attract large volume users even with the added costs of ancillary services. Although the Commission's Open Access policy is to serve all classes of customers, in reality large customers will benefit, and small customers will not see enough advantages to participate unless full unbundling occurs.

With the cost of meters and additional Direct Access pass-through charges, there must be sufficient profit margin potential for power marketers to risk their efforts for each class of customers.

Recommendations:

The UTILITY SOLUTIONS Partnership, Inc. on behalf of hospital facilities throughout California urge the Commission to seriously consider every feasible opportunity to unbundle electricity services. We are particularly concerned about the carrying costs of utility facilities including the Competition Transition Charge (CTC). Capital costs need to be open for competition. A competitive market plan could provide funds to hospitals that would reduce the carrying costs component within the utility rate base. By pre-paying the CTC, it may be possible to lower a hospital total utility bill by 10%-20%.

CTC charges are nearly half of a hospital's utility bill. We recommend that the CPUC fully investigate the CTC pre-payment opportunity and consider a limited pilot to test the theory. If a pilot is allowed, our hospitals would participate. There may even be greater potential for customer savings on CTC charges than on Open Access commodity sales if the Commission is willing to unbundle the CTC.

We further recommend that the CPUC create a check-list of potential redundant services that may occur within the Direct Access program. >From this list, many unbundling opportunities will likely surface.