Should Metering Stay at the Stand-Alone Disco?
line of business. An independent "below-the- line" subsidiary may supply the answer for continuing to supply billing and metering services. In a deregulated market for billing and metering, the distribution utility might feel economically liberated from the arduous task of reading the meter and billing for consumption for every customer. The parent company of the disco may prefer to move this operation "below-the-line" (where its subsidiary will compete with other vendors) while the disco continues to enjoy benefits from offering a sole-supply wires service.
The beauty of this type of divorce is highlighted when the disco has recovered all its wires costs in a fixed charge. %n10%n Assuming the stand-alone disco has 100 percent of the wires costs wrapped into a fixed monthly charge, the disco now only has to transact with dozens of third-party suppliers instead of a million customers. If the disco prices wires services by voltage level, the billing process for obtaining wires revenue is somewhat simplified. The disco asks the generation aggregator how many customers were supplied electric load and at what voltage level of service. The disco submits its bill based on a fixed monthly wires charge as applied to the number of customers within each voltage level of service, avoiding any metering activities.
STAYING MARRIED. Instead, however, the disco may choose to stay married to billing and metering markets because of the huge intangible value of retaining the customer relationship and because of the inherited infrastructure, which should produce low prices through economies of scale.
If the disco doesn't set up its own deregulated subsidiary, it may still outsource its billing or metering services to an independent vendor. This relieves the disco of day-to-day operations but gives it the advantage of maintaining contact with the customer. The disco could avail itself of a contracted billing service to advertise new services.
By contrast, however, a below-the-line spinoff would give the disco operation a diversified, stable and growing mix of base income. With greater risk involved in deregulated billing and metering, a separate subsidiary could offer more opportunities for the disco to earn higher equity returns from billing and metering than from the regulated wires segment.
INTERNAL COST STRUCTURE. Because of a disco's unique cost structure for billing and metering, the entity is at an extreme competitive advantage to price at low marginal cost. The short-run marginal cost to read the meter of new customers and to process the corresponding bill is probably close to the cost of a stamp to mail the bill each month.
This unique cost advantage gives the disco a chance to compound its pricing edge over competitors when avoided-
cost schemes are considered by regulators. If billing and metering services are deregulated, regulators will likely direct the distribution utility to apply its avoided cost of billing and metering (the flip side to marginal cost) as a credit to the bill of any customer choosing an alternative billing and metering service provider. It may prove highly unlikely, however, that a customer will find a long-run alternative service at less than the disco's avoided cost.