At the Ratesetting Working Group (formerly referred to as the Unbundling Working Group) meeting in San Francisco last Friday, July 26, most of the session was focused on Patrick McDonnell's presentation regarding unbundling the Utility's capital cost. It is generally understood that whatever direction one working group takes could have a direct influence on another working group. However, unless the information between the various groups is officially linked, the logical "tie-in" between the groups is likely to be lost. Therefore, I am bringing to your attention a few issues in hopes that you, as team leader of the Implementation Group, can be that "official" link. I also refer you to Michael Jaske who attended Friday's Ratesetting Workshop as he is doing a superb job in coordinating information for the various Direct Access participants.

July 26, 1996 meeting summary

Patrick McDonnell from Agland Energy Services, Inc. presented the following position regarding Direct Access:

• Commodity is a utility pass-through charge and represents approximately 4 cents per kwh
• Service represents approximately 5 cents per kwh and is also a utility pass-through charge
• Capital cost, which is the utility's profitability, represents approximately 3 cents per kwh

Discussion

1. In a commodity-only competitive market, the price differential to the customer between the utility and power marketers will initially favor the power marketers, but the UDCs will soon narrow that gap. Such was the scenario in the natural gas restructuring, and there is no reason to think otherwise for electricity.
2. If any gross inefficiencies exist within the UDCs on the delivery of electricity services, these problems will largely be corrected so customers will not likely overpay for ongoing services. Since the utility service fee is a pass-through, there is no competitive profit motive within this category for the UDC.
3. Competing companies and the Direct Access operating system itself will add both redundant and new fees to the restructuring efforts. Whatever benefits the customer eventually enjoys will occur after costs are covered and profits are achieved.
4. On a commodity-only competitive market, it is apparent that large end-use customers stand the best chance of gaining benefits. Residential and small commercial customers will not be offered enough margin to participate.
5. The Commission ordered that all customer groups shall have the opportunity of participating in Direct Access beginning January 1, 1998. If Direct Access becomes a commodity-only program, the Commission's wide-base participation requirement will not be fulfilled.
6. Not until Direct Access competition is open at the utility's profit level (capital costs) will all customer classes have an opportunity to benefit.

Lessons learned from the Commission's core aggregation natural gas program

1. The Commission's current rules allow for 100% customer participation in the core natural gas aggregation program.
2. Not even one single family residential customer has accepted the program.
3. Only 3-1/2% of eligible customers state-wide participate in core aggregation.
4. Most participants within the core customer class come from large gas consumers.
5. The core aggregation gas program offers customers a commodity-only opportunity.
6. The program started six years ago with a 40% commodity savings. Within a short period of time, that consumer margin vanished when the utilities began purchasing gas at market prices.
7. A commodity-only electric program will follow the same path as the core natural gas program.

Recommendations

1. The Commission fully unbundle its Direct Access program.
2. The Commission needs to explore every opportunity to allow competition by unbundling the utility's capital costs.
3. Working groups should identify every potential redundant service and explore ways to eliminate as much redundancy as possible.

Phase-In

1. There should be no artificial or bureaucratic obstacles for customers who want to participate in Direct Access.
2. Once CPUC procedures are in place (presumably January 1, 1998), customers who are ready with their required equipment and contracts should be allowed to participate.
3. To assure equity among all customer classes:
   • A tally of participants from each customer class needs to be maintained.
   • No quotas should be set; however, when any one customer class falls below a Commission established range, then the Commission should explore what the impediments are to that class and adjust its program accordingly. (This did not occur in the core natural gas program. The Commission has done nothing to correct the fact that no residential customers participate in the core aggregation program.)
   • The Commission should set up an evaluation process to assure success by identifying barriers to customer participation and then remove those barriers. This should be a part of the ongoing phase-in process.

Member, Association of Energy Services Professionals
http://www.aesp.org/AESP