Enova/PE merger finds
California utilities learning
how to "micro-unbundle."
here's a meter war ticking away out West, pitting natural gas against electricity.
Enova Corp. is set to acquire Southern California Gas Co. through a merger with the gas utility's parent company, Pacific Enterprises. This strategy raises a tantalizing question: Can the new, merged company sell electricity "through" SoCalGas meters, using customer contacts on the gas side to grab market share in electricity from Southern California Edison, whose territory overlaps that of SoCalGas?
This prospect puts a new shine on electric/gas convergence. It shifts the focus from upstream commodities to downstream products. It redefines "customer relationship" (em from distribution functions to retail services, where the meter is king. In the pejorative, to those who want to keep control of their meters, it's called "micro-unbundling."
Simply stated, micro-unbundling describes the process of identifying the individual components of electric (or gas) utility distribution service, and asking whether such components should be broken out as deregulated services, opened to the market. The metering function marks one component.
Micro-unbundling could cede ownership of the customer gateway to unregulated marketers, allowing suppliers to provide telecommunications, Internet and other services. That is where the energy services industry will make most of its money under restructuring, some say, since commodities will sell strictly on price and carry thinner margins. That is one reason why many believe better meters are needed.
Micro-unbundling also has raised the question of whether gas deregulation should move lockstep with electric.
Edison's worst fears, reflected in its federal and state commission filings about the merged group's market power, are that through unbundling, Enova-PE will remain the only company in Southern California able to supply both gas and electricity. The company also worries Enova-PE will forage in Edison's market, first selling these (em and later, other (em services via SoCalGas meter sockets and years-old billing relationships.
Several million customer alliances are at stake in the overlapping territories. What those customers could see is the same confusion as England and Wales during unbundling there.
The most recent twist in this developing micro-unbundling scenario occurred in early March. An administrative law judge at the California Public Utilities Commission recommended that retail services, or "revenue cycle services," should be unbundled under an "open architecture" model, not a proprietary utility-owned model that would bar others in a free market. Edison favored the proprietary route. Companies could bill customers jointly with a supplier, or both the distribution company and the supplier could bill on their own, according to the ALJ.
If the PUC had accepted the ALJ's recommendation, all revenue cycle services performed by California utilities would have opened to competition. But it seemed to expose Edison in particular because of the dual-fuel option Enova-PE would enjoy (em an option that could build customer relationships and launch future service markets.
Who has the primary customer relationship? The ALJ seemed to say "whoever can earn it."
Before any resolution surfaced, however, politics intervened.
As sketched by Eric Woychik, a consultant to the Utility Consumers' Action Network, Democratic legislators, led by Senator Steve Peace, worried that if the ALJ decision were enforced and unbundling did not roll out with few consumer complaints, then they would bear the brunt of voter ill will, losing a slim political hold. The same legislators, after all, enabled the restructuring law, Assembly Bill 1890. So they decided to pressure the PUC not to accept the ALJ recommendation.
By mid-March, an alternate decision was awaiting release, based on a recommendation by California Commission President P. Gregory Conlon. But expectations were not high the date would be met, says Michelle Cooke, an adviser to Commissioner Henry M. Duque. Conlon reportedly is interested in hourly metering, which is Edison's proposal, and the less expensive, lower-tech option (em a position that conflicts with the ALJ's.
Southern California Edison raised two points in objecting to the early proposal. First, Edison claimed the distribution company should have the ability to measure and track the commodity it sells. Second, gas revenue cycle services should be unbundled simultaneously so that "an immense anti-competitive effect" isn't created.
But simultaneous gas-electric unbundling will not occur, notes Cooke. "I can say with certainty that in the context of the unbundling proceeding, we are not going to rule on whether gas should be unbundled as well."
According to Jim Price, a regulatory analyst in the PUC's Office of Ratepayer Advocates, the commission has been trying to encourage joint metering for years and asked utilities to examine the issue, but they "go off and do a study and make sure nothing comes from it."
"We're finding it difficult to believe that the commission would go forward with this sort of one-sided unbundling," observes Curtis Kebler, SCE's regulatory affairs manager. He believes the Legislature will weigh in on the issue.
Kebler says the SCE did not aim its complaint at Enova-PE: "It's just saying ... we don't think unbundling these revenue cycle services makes any sense, especially given the timing of where we are at with respect to broader restructuring implementation.
"That situation is made even more egregious by the fact that the proponents of this are advocating it in a fashion that's entirely one-sided, and would position, especially in light of the merger, the merged company to really use regulated gas ratepayer infrastructure to pick off electricity customers. And that's really just an unacceptable situation."
When it comes to measuring and tracking a commodity sold by a distribution company, Kebler insists metering is SCE's "commercial right."
"You really ought to be able to measure and bill for what you provide. You ought to be able to run your own cash register ... we're not aware of any environment where the regulators have done this.
"Geez, [if] we lose control of the metering, we have no ability to determine and settle this new marketplace. The whole settlements process with an hourly marketplace, it's going to be extremely complex just to effect settlements in any case, even if you had a uniform metering base."
Bob J. Resley, who works for Enova subsidiary San Diego Gas & Electric as restructuring project director, counters SCE's stance with his own observations.
"It is our unshaking position that this market should be opened up to all potential players," says Resley. "We are not seeking at all to dominate any part of this market through regulation. Our position in regulation is not to somehow open the market in a way that favors one utility over another or one [subsidiary] over another, but to open the market to all players. If it then turns out that Enova or Edison or Acme Energy from Peoria wins the battle, that's what we want to see happen."
Resley says regulation needs to allow retailers to assemble something more than a pure commodity for customers.
"To us, the debate should not be at all about would a customer want to go choose a meter or go choose a bill but rather allowing the emerging retailing market, retailing function, to offer products like that as part of a bundle of services to customers," he says.
Resley says Kebler's "cash register" position is interesting. "Considering in the commission's restructured world, a commodity that is measured by a meter is intended to be supplied, at least at the choice of the customer, not by the utility, but by the power exchange. So I don't quite get that part. It isn't the utility who needs the cash register. It is the marketer who is supplying the kilowatt-hours to the customer, or it's the power exchange."
He says the only way to know which technology will work will be to open the market. "We think it would be a mistake to mandate any one technology right now. You've numbed technology then and you've answered the question before you even let other entrants answer it.
"There's nothing that strikes me about an unbundled world where everyone can compete ... that gives any one person any advantage over anyone else. It's in the opposite. If our goal is to somehow lock this up, then we would be
somehow supporting a decision that says only the existing utilities can provide these functions."
The commission has a goal of issuing a merger decision by the end of the year, and has received a motion for a marketing affiliate rulemaking (em all factors that tie into micro-unbundling. If the three matters aren't settled simultaneously, it could lead to market advantages for Enova-PE.
Cooke says that is true, but it is her expectation (em not an official position (em that the commission would release all the proceedings at once, with the unbundling rulemaking perhaps coming first. (She notes the commission has yet to decide on opening an affiliate rulemaking.)
The same issues are likely to leak over into Los Angeles, should the City Council, by its restructuring prerogative under AB 1890, open its 1.34-million-customer service territory to competition. The Department of Water & Power now serves those electric needs; SoCalGas supplies the gas.
Edison and Pacific Enterprises are already skirmishing over winning a piece of the Los Angeles retail services market through a DWP "alliance." In March, the city-owned Department of Water & Power was preparing a request for proposals for a corporate pairing that would cover such items as wires, meters, meter reading and customer service.
PE officials have come before the Council and the DWP board suggesting that they be the partner in customer service because of their proximity; Edison has made the same argument.
A City Council decision was expected by April on the RFP. On opening its territory, the Council has until January 2000, but will hold hearings this year.
Local market observers say the warring utilities know exactly what they're trying to achieve (em they want to forge customer relationships through retail services, metering or billing.
Even without a merger, PE and Enova are positioning to provide "integrated energy services," via a joint venture. On March 13, they announced Energy Pacific, a new company that incorporates several existing unregulated subsidiaries. The core business will include energy commodity buying and selling and related energy management services, initially for large-business customers.
Woychik, also a consultant at Strategy Integration, tells his utility clients to get as close to customers as possible. "That includes, of course, creating opportunity through metering and billing.
"This is a most-toys-win, most functionality of meter provider wins in the long-term retail game, without a doubt," he says. "No one argues about that. If you want to stop the process of competition, you want the least functionality of the meter and the communications system."
By trying to bar technology, Edison would retain the monopoly billing and metering function, he says. "So Edison's approach is get the cheapest stuff out there fast, 'and we want to install it for everybody because we're big wonderful people that just want everybody to have direct access.' And my view of that, is pardon me, that is not their real intent, their intent is to limit control and have as much opportunity to limit direct access."
Chris S. King, v.p. of CellNet Data Systems, which has 600,000 meters nationwide, including those at Pacific Gas & Electric and SDG&E, says it's obvious that one reason for the merger is to give SDG&E access to the electric customers in SoCalGas's territory.
"What this would do is it probably strengthens their ability to compete for those customers," he says. "They're already interfacing with those customers." Now, "they may come in and say, well you may want to stick with your current electric supplier, but let us do your metering and billing for you and we'll give you one combined bill."
King says he has changed his mind that metering should continue as a utility-owned monopoly. (Note: Last fall, King had endorsed a metering monopoly. See "Competition, at the Meter: Lessons From the U.K.," PUBLIC UTILITIES FORTNIGHTLY, Nov. 1, 1996, p. 22.) He bases his new opinion partly on the ALJ recommendation and "partly on just observing the evolution of the marketplace. And it appears inevitable that this sort of unbundling is going to happen as part of the industry deregulation."
David J. Cook of Cook, Perkiss & Lew, a San Francisco attorney who once worked for Pacific Gas & Electric, agrees customer relationships are what will matter in restructured markets (em along with the meter head.
"Ninety-eight percent of any business other than its hard assets lies in its customer relationships," he says. "And in the present format ... dealing with the customers whose primary relationship is one of vendor-vendee sale of service or goods, there's a preexisting relationship. And that preexisting relationship is based upon a massive billing and computer base. The access to these customers at the billing relationship is absolutely, positively everything." t
Joseph F. Schuler, Jr. is associate editor of PUBLIC UTILITIES FORTNIGHTLY.
Who Bills the Customer?
Excerpts from the ALJ's Proposed Decision
"[M]any interested parties have urged this Commission to allow competitive firms to provide their own consolidated billing, metering and other related services."
PG&E proposes ... three billing options:
1. Consolidated Supplier Billing (em distribution company would bill the energy supplier. Supplier in turn would provide a consolidated bill;
2. Consolidated Distribution Company Billing (em distribution company would place the supplier's energy charge on a distribution bill; or
3. Dual Billing (em the energy supplier and the distribution company would bill separately for their own services.
... or two metering options:
1. System-Wide AMR (em distribution company would retrofit almost all existing meters to allow for remote [automated] meter reading through radio transmission. The distribution company would have the sole right to install, calibrate and maintain the meter and would be allowed to recover the implementation costs from its ratepayers; or
2. Customer Choice (em competitive suppliers could furnish, for their customers, any meter technology meeting the utility's standards, so long as the utility would maintain the sole right to install, calibrate and maintain the meter to ensure that the utility's standards for safety, reliability and accuracy were met. This meter would replace the existing utility meter.
The SDG&E Model:
"[R]ecommends that the Commission not order the broad implementation of AMR technology, arguing that it would be too expensive, would limit entry of competitive suppliers and would limit technological innovation."
The Edison Model:
"[A]grees with PG&E, SDG&E ... that energy suppliers should be allowed to provide consolidated billing. In addition, Edison argues that it is acceptable for an energy supplier to install an additional meter in order to measure its sales and provide value-added services. However, Edison proposes keeping its own meter in place even where an energy supplier chooses to install one. ...
"[A]rgues that any savings it would face if the energy supplier provides billing or other related services would be insignificant, but that it would be unlawful to reduce a customer's distribution charges even though these services are avoided by the utility. ...
"[P]roposes adding AMR technology to the meters of 85% of its customers and charging its future distribution customers for the resulting net cost. Edison argues that this would be the fastest and cheapest way of making hourly pricing available to all customers."
The ALJ's Recommendation:
"In this decision, we conclude that competing energy service providers should be allowed to present consolidated bills that reflect the full cost of electricity and to provide for their customers meters other than those commonly furnished by the utility distribution company."
(em Proposed Decision on the Unbundling of Revenue Cycle Services, R.944-04-031, I.94-04-032,
Feb. 15, 1997 (Admin.Law.Judge, Cal.P.U.C.).
The Companies At a Glance
Pacific Enterprises (Southern California Gas Co.), Los Angeles
• $2.38 billion revenue
• 4.7 million electric customers
Enova Corp. (San Diego Gas & Electric)
• $1.87 billion revenue
• 1.1 million electric customers
• 700,000 gas customers
Totals if merged:
$4.25 billion in revenues
6.5 million electric and gas
Edison International (Southern California Edison Co.)
• $8.4 billion revenue
• 4.1 million electric customers
Source: 1996 PUR Analysis of Investor-Owned Electric and Gas Utilities; 1995 figures.
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