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Reforming California: Reflections on the Morning After

Fortnightly Magazine - December 1998

who go elsewhere to procure power. We must not shelter the PX from market forces. If it is to be an important part of the industry, it must innovate. If it is protected by regulators and other policy makers, it will lose any incentive to modernize and will fall back on the old mentality (em one that builds a silent bank account of future stranded costs, a stockpile of obsolescent technology, and outmoded business practices.

3. Boost Shopping Credits. Direct access customers receive an energy credit representing the costs they avoid when they buy their electricity from a competitive electric service provider. In California, we should increase this credit by including in generation costs all appropriate procurement and retailing costs.

In other words, the PX credit should include not only the energy price generated by the hourly bidding process of the PX, but also the PX costs paid by the utilities. That includes the costs the PX must pay the ISO, as well as the costs of operating the PX. Furthermore, any upfront development fees paid by the utilities as full requirement customers should be included as well. To prevent double recovery of these utility costs, they should be amortized over a reasonable period and recovered as part of the competition transition charge to keep the utility whole. To not reflect these costs as part of the energy credit understates the procurement costs of the utility. An understated energy credit, without these costs paid by the utility to the PX, will undermine the competitive market.

Moreover, all customer service and inquiry costs must be recovered from generation supply sources, including generation procured through the PX. While some utility executives argue this cost is relatively small, the direct-access business that must stand or fall on slim margins; inclusion of these costs is vital to ensure fair competition. Advertising and marketing costs as well should be considered for inclusion in this energy credit. Here again, the utility can be made whole because the annual cost of customer service and customer inquiry allocated to generation would continue to be recovered from customers for whom the utility still procures generation.

4. Unbundle Distribution Rates. The Commission must develop truly unbundled rates for the utility distribution company, or UDC. By unbundling, we ensure that consumers who no longer require certain utility distribution services will no longer pay for them.

While these unbundled rates shouldn't be effective during the rate freeze, we must still move quickly to unbundle various rate components of the distribution charge. This unbundling, referred to as "add-on unbundling," will rationalize the pricing of these services. True unbundling allows competitors to mix and match services and functions of the UDC. As we have seen in telecommunications, this type of unbundling enables visionaries to launch innovative products and services by combining elements of the basic UDC services with their own.

5. Don't Stop with Gas. California must develop a competitive natural gas market, so that energy service providers can provide a panoply of energy products, not just electricity.

If the California retail electric market is to