MANY STATES ARE CONSIDERING THE IDEA OF opening billing and metering to competition at traditional distribution companies. %n1%n Electric utility executives can no longer assume that a regulated monopoly distribution company, or "disco," will retain control of both the "wires" function and billing and metering services. %n2%n
This new prospect raises questions: Should a disco seek to retain billing and metering as a regulated monopoly, complete with the obligation to serve all customers requesting electric connections? Or should the company ask its legislators and regulators to remove the burden of the obligation to serve and allow the utility to compete freely for profitable segments of the retail billing and metering market?
Utilities should evaluate these questions in terms of achieving long-term profitability for stockholders: What's the best environment to boost disco profits and enhance the brand image or customer loyalty? Whichever the future (em whether billing and metering services are regulated or deregulated (em distribution utilities will face potential advantages and disadvantages. A few simple guidelines can help a disco choose whether to abandon markets for billing and metering services, or to retain and grow that share.
If the disco is risk-averse and inefficient in providing billing and metering services, then rate-of-return regulation offers the best probability of protecting profits. Or, if the disco is efficient in billing and metering (but still risk-averse), then performance-based pricing regulation might offer a chance to increase profit share. Conversely, if the disco is a risk-taker, and there's a fair playing field, deregulation of billing and metering might help the company increase profits. However, without a level playing field, the disco might consider selling off its billing and metering operations altogether.
I recommend no fixed path, but it's certain that the firm that dominates billing and metering markets will win control of links to the customer.
Regulated Metering: Points at Issue
Continued regulation in billing and metering will guarantee an increasing revenue stream. However, the utility may find itself overwhelmed by a flood of transactions for direct-access service and forced to serve uneconomic customers.
INVESTMENT NEEDS. When retail choice becomes available, many electric retail customers will be on hourly billing to take advantage of the competitive generation pricing market. This change could force regulated discos to install hourly energy meters or extract usage data from customer load profiles. Billing operations will have to become more sophisticated to accommodate time-of-use generation pricing, which most likely will involve multiple suppliers. %n3%n
Is the disco savvy enough to take on such investment? If so, the decision could lead to an expanding rate base, even in times of a stagnated connection market, since customers will require new meters or retrofits.
CHOICE OF MODEL. How the disco is regulated in the future may strengthen or weaken the economic advantages of retaining regulated billing and metering services. If the disco operates under traditional fair-rate-of-return regulation, expansion of metering and billing services will generate additional distribution rate base and ultimately extra income (em assuming regulators perceive the investment as prudent. This traditional regulation reduces the risk of recovering costs to expand assets to meet a growing segment for billing and metering. Regulators probably will be more sympathetic to enhancing the rate base because the changing electric industry forces the disco to make these types of investment decisions.
If, however, the disco operates under performance-based pricing, the profits aren't guaranteed unless the expanding services are provided efficiently. Otherwise, the stockholder would carry the burden of lower profits. If the disco has exhibited poor load-profiling capabilities or an antiquated billing system, stockholders (via management) might incur risk to recommend performance-based regulation. In an expanding billing/metering market, costs may be insurmountable, leaving the stockholder vulnerable.
THE SOCIAL WELFARE. In any event, the disco must first convince legislators and regulators that a monopoly in billing and metering will serve the best interests of the utility and the consuming public.
A regulated distribution utility will assume the obligation to serve, meaning that every household in the service territory with electric load requirements enjoys the right to receive wires, billing and metering service from the disco at some reasonable level of reliability, no matter how difficult or expensive it may be to reach or serve a customer.
With this obligation to serve, the disco will already have in place an enormous infrastructure, allowing the utility to conduct billing and metering services at a very low marginal cost. %n4%n This structure of low marginal costs could help the disco minimize longer-term price hikes to retail customers, offering a logical argument to retain billing and metering operations as a regulated monopoly.
PRICING STRUCTURE. Under the price-setting mechanisms in place today at most investor-owned utilities, billing and metering costs are collected through a "postage-stamp" design called a customer charge or fixed monthly price. If billing and metering should remain regulated, the disco should advocate continued use of postage-stamp pricing.
These charges are popular with consumer advocates. High-cost, low-use customers are subsidized by low-cost, high-use customers. These postage-stamp prices also have been historically set below cost to protect customers from "sticker shock." The postage-stamp customer charge also spreads uncollectible or bad-debt burdens over all customers. %n5%n Typically the customer charge is designed to recover these costs (em offering an added benefit to delinquent bill payers who still desire continued service.
UNECONOMIC CUSTOMERS. If billing and metering remains regulated, the disco likely will be required to continue to serve uneconomic customers. That means serving all distant, hard-to-reach and unsafe meter-reading locations. It also includes coordinating and enforcing bill collection and fighting energy theft. Since the disco is the sole provider of service, it should weigh the economic disadvantages of such a venture.
For these costlier customers, the disco will have to continue meter reading at subsidized prices. Traditionally, for electric utilities, some of these costs are subsidized through rolled-in kilowatt-hour charges (em either of the same rate schedule or of other customer groups. If the customer, living in a geographic area with low density, also exhibits a low-use electric profile, the costs will be paid by some other customer group. Does the disco want to continue to offer high usage charges for wires services to its high-use, most profitable customers? (This phenomenon makes third-party wires supply appear much more attractive. %n6%n)
As the default supplier, the disco must also continue to read meters for urban or inner-suburb customers who may impose high costs because of a low usage profile or higher delinquency rates for bill payments. These high-cost wires customers will pay well below the billing/metering expenses incurred by the disco. As large cities continue to deteriorate, and populations scatter to the exurbs or rural areas, these costs can only go up. Does the disco still want this billing and metering business? Or should this market be served by the city through some kind of social net taxing program?
TRANSACTION OVERLOAD. The disco should prepare itself for the onslaught of third-party generation suppliers that many expect to see when retail electric choice arrives nationwide. Is the disco sophisticated enough to handle this complicated market, with numerous retail supply transactions? Again, with the distribution utility undertaking the obligation to serve (a likely complement to any continuing monopoly franchise), the disco will inherit the task of billing wires customers for buying generation supply services from third parties. %n7%n The disco could find itself responsible for transacting hundreds of unique third-party deals. Will the disco have the infrastructure and technology to bill these purchases hour by hour for each and every customer?
If the disco has performed poorly in meter reading or billing, %n8%n regulation in the new retail choice market may not be something the disco is eager to tackle. If the disco feels confident, it must be prepared to take the risk of investing in hourly meters (or to do the research to extrapolate loads) for most of its customers. It must invest in sophisticated computers to handle all the hourly supply customer transactions.
SYSTEM BALANCING. The disco also must balance any generation supply measured at the meter with power injected into the wires system by generation suppliers. This task will require more sophisticated metering operations. If the disco is prepared to deal with supply imbalances with the customer, how will the disco serve the customer if the supply injection is less than the demand at the meter? The problem may require the disco to purchase backup peaking facilities to meet supplier imbalances with customers (em another risk for the stand-alone distribution utility.
Competitive Metering: Prospects and Strategies
For the stand-alone disco to remain profitable, and to realize long-term economic benefits from deregulation of billing and metering services, the utility must convince its local legislators or regulators to remove the obligation to serve imposed on the distribution company by traditional regulation. In other words, the disco won't be obligated to serve unprofitable billing and metering customers. In a competitive arena, fixed and variable customer charges will be de-averaged. Some customers will pay more depending on location and consumption habits; some customers will pay less. The disco should be allowed to serve cost-effective customers and ignore the rest. %n9%n
REASONS FOR DIVORCE. The wires disco may want a divorce from serving billing and metering markets because it could simplify its 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. Third-party billing and metering suppliers will probably counter the disco with their own low prices. However, for these companies to compete effectively, they'll have to maintain low prices in the short run through cross subsidies from their other diversified operations or assets.
If the disco succeeds through short-run marginal cost pricing to keep out billing and metering competition, in time it will have to raise its price to recover the long-run cost of modern computer and metering equipment (em and also manage the risk of inviting new entrants into the market. %n11%n
BACKSTOP SERVICES. By default, the disco could walk into unprofitable backup billing and metering service, unless certain regulatory constraints are removed. The most dangerous position for the disco would be as the backstop provider to customers not effectively served by the market. This scenario is almost assured if the disco doesn't convince those in power to remove the obligation to serve. F
George R. Pleat is a senior pricing analyst at Baltimore Gas & Electric Co. The views and opinions here come from the author, not BG&E. This article was presented at the Competitive Billing Strategies Conference, sponsored by International
A High-Cost fund for Aunt Minny?
Suppose no third-party vendor wants to provide competitive billing and metering services for Aunt Minny, who lives in the country, because of the high cost, perhaps a few hundred dollars a month. The vendor could supply the service, but Aunt Minny is accustomed to her 55-per-month fixed charge. She refuses to pay such a skyrocketing price. Who will serve Aunt Minny?
Unless the disco can escape its obligation to serve, it will be expected to provide billing and metering for Aunt Minny at some reasonable price, maybe $20 a month. Still, the disco loses financially. Is this good business for a stockholder? Such is the fallout from competition.
A universal service fee might enable discos to recover most of their costs, but watch out for negative customer relations. And the problem with his scheme is regulatory lag. A fee is estimated on a snapshot of the billing and metering costs. If the fee doesn't keep up with labor costs, then service may prove unprofitable. A disco doesn't want to be constantly going before regulators to request universal fee increases. This prospect would also hurt the disco's brand image--and do nothing for customer loyalty.
1 California was set to offer retail choice in electric supply by Jan. 1, with customers able to choose their own billing and meter companies. The startup now appears postponed until March 31, 1998. Moreover, while the state has deregulated metering and billing, the latest guidelines assign responsibility to energy service providers and utility distribution companies for collecting, transferring and processing metering data for their respective customers. ESPs and UDCs may contract with independent meter vendors, but end-use customers may select their metering services only from the ESP or UDC. See, Decision 97-12-048, Dec. 3, 1997 (Cal.P.U.C.).
2 For this discussion, the term "customer billing services" would include: (1) bill processing (including revenue) for generation supply and wires service, (2) operating the call center and (3) managing credit and collection activities. Meter operations would include: (1) meter reading, (2) installation and (3) corresponding operation and maintenance.
3 The disco that has a track record in providing efficient metering and billing services has the best probability of providing more sophisticated billing and metering systems to accommodate the expected growth in this area. An efficient provider will finds ways to meet the technological hurdles while pricing for a profit. A poor performer historically might be entering an expanding market where its costs are too high and regulatory lag prevents full recovery of these expenses.
4 The cost of reading one more meter within a neighborhood is very small, since the disco already must read every meter for any new installation. The cost of processing one extra bill is minuscule because of mainframe processing capability required to meet the needs of hundreds of thousand of customers.
5 Bad-debt expenses, depending on service territory demographics, can be a significant portion of the traditional utility's billing costs.
6 For a discussion of competitive wires pricing, including the idea of a fixed charge for wires access service, see George R. Pleat, "Pricing and Profit Strategies for a Stand-Alone Electric Distribution Company," Public Utilities Fortnightly, Jan. 15, 1997, p. 23.
7 It's presumed under a regulated disco billing and metering services market. The disco would have to provide the customer with the generation supply bill.
8 For instance, an electric utility may be estimating a significant number of meters because it can't access in-the-house meters, and/or because it didn't have remote meter reading. Consequently, this condition will add to operating costs because of annual true-up activities with actual meter reads.
9 The definition of cost-effective customers may go beyond the traditional price-greater-than-cost parameter. Some delinquent customers may prove to be positive assets for the disco. Annual bad debts bring tax benefits. Also, for newly acquired accounts, some customers might be first-time non-payers because of the confusion caused by the complexity of retail choice. A simplified billing process may correct these bill payment defaults.
10 There are several incentives for the disco to move to a fixed-charge recovery of wires costs. See note 6. For added analysis of fixed versus variable charges, see Ronald Rudkin and David Sibley, "Optional Two-Part Tariffs: Toward More Effective Price Discounting," Public Utilities Fortnightly, July 1, 1997, p. 32.
11 This disco could prevent long-run entrants by acquiring technically advanced efficient equipment. The failure to pursue this goal could mean a reversal in market share.
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