White Paper on

The Retail Energy, Efficiency, and Environmental Services Competition (RE³SCO) Restructuring Plan
for Restructuring the Electric Utility Industry

A Customer Focused Approach to Restructuring

February 1998 Update

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Executive Summary

Restructuring the electric utility industry provides a golden opportunity to deliver more of the energy services that individual customers and society want and need at lower cost. In order to deliver improved energy services for customers -- as well as achieve consumer protection, environmental protection and competitiveness objectives -- fresh approaches to electric utility regulation and competition are essential. Restructuring provides the opportunity to establish more effective mechanisms for the energy services industry to achieve the full range of customer and societal objectives. To achieve these objectives, restructuring must extend beyond creating competition in the generation of power to encompass building a fully competitive retail energy services market.

Implementing the Environment and Consumers (RE³SCO) Plan for restructuring the electric industry will lower costs to consumers and deliver the level of reliability they want. Implementing the RE³SCO Plan for restructuring will also deliver more of the societal goals for environmental protection, consumer protection, competitiveness, energy efficiency, renewable energy, and international security. To obtain these customer and societal benefits, customers must be given real choice about the energy services they consume and choice of providers of these services. Also all retail energy services providers must have equal access to retail customers and to the physical systems needed to serve customers. The RE³SCO plan for restructuring the electric utility industry will delivery the benefits of electric utility restructuring to all customers, including those customers who are not interested in making retail energy services choices. Restructuring the electric utility industry involves restructuring the entire energy services industry and these terms are used interchangeably in this paper.

The RE³SCO Restructuring Plan is a Customer Focused Restructuring Plan

The current approach of depriving customers of the ability to choose their energy services suppliers has two particularly negative consequences. First, the current approach deprives the retail energy services market of the benefits of direct customer decision-making input. Second, the current approach deprives the retail energy services market of the benefits of the entrepreneurial drive of competitive energy services suppliers which spurs the innovations needed to meet customer demands and societal objectives.

The RE³SCO for restructuring the energy services industry (defined by the Retail Access Comparability Standards) returns control to the customers and provides a customer focused approach to restructuring that will satisfy both direct customer and societal objectives.

The RE³SCO Restructuring Plan for the energy services industry is guided by the RE³SCO Customer Bill of Rights:

1) Offer Customer Choice - give customers choices and control over the energy services they receive and over the providers of these services.

2) Foster Full Competition - permit access to utility customers by allowing energy service providers to use common carriers to distribute services, thus creating a level playing field for all industry stakeholders.

3) Easy-to-understand Pricing - provide customers with direct unbundled price information on energy and reliability services.

4) Sustain Attainment of Societal Objectives - establish a systems benefits charge to ensure that programs promoting energy efficiency, renewable energy, and environmental improvement as well as those providing assistance to low income households, and other noteworthy objectives continue to be offered. These programs should be administered by an independent agency and the providers selected competitively where ever possible..

5) Address Market Power Issues - give utility generation and service companies the ability, through empowerment, to compete on a level playing field without unnecessary regulation.

The RE³SCO Plan Implements the RE³SCO Customer Bill of Rights

The RE³SCO Plan for restructuring the energy services industry implements the RE³SCO Customer Bill of Rights and delivers benefits for all customers and retail energy services providers. RE³SCO Customer Bill of Rights ensures that:

• All retail customers have effective and equal access to the full range of energy services and free choice among the full range of suppliers for these services

• All retail energy service suppliers have effective and equal access to all customers and to a full range of system common carrier services including: energy transportation, coordination, reliability, billing, customer energy use information, and metering services

• Effective mechanisms are in place to assure achievement of societal objectives in the energy sector.

• Full mitigation of the market power, cost shifting, and self dealing potential created by affiliated transactions so that a fully competitive retail energy services market is created that provides a level playing field for all energy service providers.

The RE³SCO Restructuring Plan Delivers Benefits to Customers by Invigorating the Competitive Retail Energy Services Market and Maintaining Needed Regulation

The RE³SCO Plan for restructuring the energy services industry makes the retail energy services merchant function and the power supply function fully competitive. The RE³SCO plan provides full regulation of the transmission and distribution and reliability functions and provides mechanisms for achieving societal objectives not achieved by the market alone.

• Retail Energy Services Merchant Function: The marketing and supply to customers of energy services including: heating, cooling, ventilation, lighting, drive power, as well as information and communications services. Components of the supply of these services include: electricity, energy efficiency, load management, gas, equipment, and management services. Fully competitive under RE³SCO Plan.

• Electricity Generation Function: The production of electricity by central power generation stations, distributed power generation facilities, and renewable energy facilities. Fully competitive under RE³SCO Plan.

• Transmission, Distribution, and System Reliability Function: The transportation, system operation, and system reliability maintenance services needed to deliver electricity to customers. Competitive acquisition of generation and load reduction services needed to maintain system reliability. Fully regulated monopolies under RE³SCO Plan.

• Achievement of Societal Objectives: These objectives include universal service, low-income programs, cleaner air and water, greater energy efficiency and increased use of renewable energy sources. TheRE³SCO Plan maintains mechanisms for identifying societal objectives and supporting attainment of societal objectives that the market alone does not attain.

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TABLE of CONTENTS

Section 1 Introduction to Retail Energy, Efficiency, and Environmental Services Competition (RE³SCO) Restructuring Plan

• Aligning Interests and Objects

• Customer Options for Acquiring Energy Services and Choosing Providers

• Empowering the Customers and Providers

• Criteria for Evaluating Restructuring Proposals

Section 2 RE³SCO Customer Bill of Rights

• Overview of Components of RE³SCO Customer Bill of Rights

• Description of Each Component of RE³SCO Customer Bill of Rights

- Offer Customer Choice

- Foster Full Competition

- Easy-to-understand Pricing

- Sustain Attainment of Societal Objectives

- Address Market Power Issues

Section 3 Benefits to Stakeholder Groups

• Direct Customers
• Society: The Indirect Customer
• Environmental, Consumer, Renewable Energy and Energy Efficiency Advocates
• Regulatory Commissions
• Utilities
• Energy Services Companies

Section 4 Transition Steps in Restructuring

• Overview
• Restructuring Transition Costs
• Restructuring Decision Making: A Public Process

Section 5 Conclusion

Appendices:

Appendix A:

Description of Model Open Independently Managed Competitive Acquisition of Increased Efficiency, Renewables, and Emissions Reduction

Appendix B:

Criteria for Regional Transmission Tariffs

Appendix C:

Municipal Utilities, Cooperative Utilities, and Other Democratically Governed Retail Energy Services Providers

Appendix D:

Action Plan for Restructuring Implementation

Appendix E:

Registration and Licensing in the Provision of Retail Energy Services

Appendix F:

Consumer Protection in a Multi-Provider Retail Energy Services Market

Section 1: Introduction to Environment and Consumers (RE³SCO) (RE³SCO) Restructuring Plan

For Restructuring the Electric Utility Industry

A Golden Opportunity

In order to deliver improved energy services for customers -- as well as achieve consumer protection, environmental protection and competitiveness objectives -- fresh approaches to electric utility regulation and competition are essential. Restructuring provides a golden opportunity to establish more effective mechanisms for the energy services industry to achieve the full range of customer and societal objectives. To achieve these objectives, restructuring must extend beyond creating competition in the generation of power to encompass building the foundation for a fully competitive retail energy services market .

Restructuring Needs to Address the Entire Retail Energy Services Market

To be effective electric utility industry restructuring needs to bring all energy and efficiency resources into direct competition at the retail customer level so that the lowest cost way of meeting the customers need can be identified and brought forward by the competitive market. For this reason utility industry restructuring and energy services industry restructuring can be used interchangeably and these terms are used interchangeably in this report.

Restructuring Needs to Focuses on the Customers

The current approach of depriving customers of the ability to choose their energy services suppliers has two particularly negative consequences.

First, the current approach deprives the retail energy services market of the benefits of direct customer decision-making input.

Second, this approach deprives the retail energy services market of the benefits of the entrepreneurial drive of competitive energy services suppliers which spurs the innovations needed to meet customer demands and societal objectives.

The RE³SCO Restructuring Plan is the Customer Focused Restructuring Plan

The Retail Energy, Efficiency, and Environmental Services Competition (RE³SCO) Plan for restructuring the energy services industry (defined by the Retail Access Comparability Standards) provides a customer focused approach to restructuring that will satisfy both direct customers and societal objectives.

In a restructured world, customers will be offered many more choices regarding energy services. Society will bear the consequences of these decisions. Decision makers contemplating industry restructuring must evaluate how effectively each proposal achieves the full range of societal objectives -- including energy efficiency, renewable energy sources, lower costs, consumer protection and environmental protection. Table 1 lists the objectives of both the direct customer and society as a whole.

While there is some room for hairsplitting over the relative importance of these objectives, we cannot ignore the steady progress of society toward recognizing and addressing the consequences of our direct energy services choices. That's because these consequences become more apparent and increasingly unavoidable over time. Addressing these consequences will remain an important feature of the state, national and international political landscape.

The RE³SCO Restructuring Plan focuses on how energy services can be delivered to customers more effectively and how society's goals and objectives can be more effectively met by utilizing competitive markets. It aims to make as broad a spectrum of energy services as possible available to customers so they can acquire services tailored to their particular needs. Customers will have the option of compiling an energy services package from scratch or buying a complete package if they do not want to bother with the details. They will also be able to select from a broad spectrum of energy services providers -- ranging from single-service suppliers to those who offer the full range of energy-related services.

By removing the current barriers that restrict customer choices of energy services and energy services providers and by aligning the incentives in the marketplace with the objectives of society, a structure will be created to efficiently achieve the objectives of individual customers and of society as a whole.

Aligning Interests with Objectives: The Key to Satisfying Customers and Societal Objectives

The RE³SCO Plan for energy services industry restructuring is based on starting with a focus on customers and working to align the interests of the industry players as closely as possible with societal objectives. Following this formula, all segments of the energy services sector where markets are feasible are made competitive. The Retail Access Comparability Standards for implementing this model include mechanisms to adjust competitive market outcomes, if necessary, to achieve the full range of direct customer and overall societal objectives. Customers are the direct source of information about what they want. Giving customers choice and control will enable them to provide direct input into which retail energy services are provided in the marketplace. The result is a new structure in which both the generation and retail energy services markets are fully competitive. The transmission, distribution, reliability, and system coordination functions are provided by fully regulated companies (UTILCOs) that provide these services to all users on a common carrier basis.

Table 1

Give Customers Access to the Full Spectrum of Energy Services and Providers

Giving customers access to the full spectrum of building blocks for energy services options shown in Table 2 allows them to acquire a bundle of energy services that closely fits their individual needs. If retail energy services companies are allowed to provide and have access to this full spectrum of building blocks, they will be able to match customer needs better than they can today.

Table 2

Customer Options for Acquiring Energy Services

The RE³SCO Restructuring Plan gives customers as broad a spectrum of options for acquiring energy services as possible (see Table 3). This range of options includes offering customers an energy services provider if they do not want to bother with the complexity of choices. It also includes enabling customers to exercise full control over their energy services by developing a package of services from the ground up, if they so desire. To accomplish these objectives, customers need to be given a wide range of options for acquiring their energy services. At the same time, energy services companies must have the ability to offer a full spectrum of services in order to best meet customers needs.

Giving customers access to as broad a spectrum of energy services providers as possible affords them a better opportunity of finding the ideal mix of providers for their needs. This spectrum of energy services providers will cover the range from single-service suppliers to those that offer a complete package of energy services (see Table 3). By giving energy service companies the opportunity to fill whatever niches they choose, they will be best able to meet varying customers needs.

Table 3

Empowering the Customers and the Retail Energy Services Market

Under the Retail Energy, Efficiency, and Environmental Services Competition (RE³SCO)   restructuring plan with a fully competitive retail energy services market, Retail Energy Service Companies will be empowered to provide the full spectrum of energy services. Retail Energy Service Companies will provide the retail merchant function of bringing customers together with the bundle of energy services that they want. This merchant function consists of providing customers with the full range of retail energy services, including:

* All types of retail energy fuels
* Energy efficiency equipment and services
* Performance contracting services
* Acting as the agent for customers in acquiring retail energy services
* Brokering energy supply services
* Indoor environment management services
* Complete facility management services
* Aggregating retail customers and aggregating the full range of energy services to meet the needs of these customers

The diverse retail market will provide an equally diverse range of opportunities for service suppliers. These Retail Energy Service Companies will include companies that provide one particular service, several services, and Super Retail Energy Services Companies that provide the complete range of energy services.

Under the RE³SCO plan for restructuring, regulators will no longer need to provide price regulation where competitive markets can be established. However even where markets can be established, regulatory involvement in non-price issues such as reliability will continue. Where monopolies remain in place such as transmission and distribution, regulation will continue much as in the past. Regulatory planning processes will still be needed but its focus will shift to place greater emphasis on identifying where the market is falling short of achieving the full range of societal objectives -- and establish market mechanisms to make any necessary adjustments to make up such short falls.

Regulatory processes also will include setting distribution access charges for distribution system connections in order to fund increased levels of energy efficiency improvements and renewable energy sources -- as well as for supervising the bidding processes to acquire these services. Regulators will need to set the distribution access charges for distribution system connections to fund universal service, low-income services and establish bidding processes for acquiring these services. The regulatory process also will take on functions to help support the development and maintenance of new, vigorously competitive markets.

Criteria for Evaluating Restructuring Proposals

There are two basic criteria for evaluating restructuring proposals:

• Does the proposed restructuring improve the delivery of energy services by effectively addressing the full range of objectives for customers and for society as a whole?
  
• How efficiently does the proposed restructuring accomplish these objectives?

Any proposal to restructure the electric utility industry is incomplete unless it explicitly includes mechanisms for delivering improved energy services to direct customers and for achieving societal objectives. The challenge for all stakeholders in the energy services industry is to bring forward and jointly refine restructuring proposals until they meet these criteria.

Consumer and environmental advocacy organizations, as well as regulators serving the public interest, will have significant responsibilities in any decision-making on restructuring. Progressive utilities, generators and energy services companies also will have voluntary responsibilities to provide leadership in supporting a restructuring plan that serves consumer and environmental interests, while still, providing shareholder opportunity.

These responsibilities arise because direct consumers, society as a whole, and our environment will pay the full price of the chosen approach to restructuring. Consumers will pay for the direct costs via their energy services bills; they will absorb environmental impacts as changes in the quality of life; and they will pay taxes for state/federal efforts to undo any environmental problems that may result from the overall summation of energy services choices.

Decision makers contemplating industry restructuring must evaluate this plan and others on how effectively and efficiently each proposal achieves the full range of societal objectives -- including energy efficiency, increased use of renewal energy sources, lower costs, consumer protection, and environmental protection.

Customers are the direct source of information about what they want. Giving customers, choice and control will enable them to provide direct input into which retail energy services are provided in the marketplace. Giving customers access to the full spectrum of energy services options allows them to acquire a package of energy services that closely fits their individual needs. If retail energy services companies are allowed to provide the full spectrum of energy services, they will be able to match customer needs better than they can today.

Section 2: Retail Access Comparability Standards

The RE³SCO Restructuring Plan is implemented with the Retail Access Comparability Standards shown in Table 4.

Table 4:Retail Access Comparability Standards

Offer Customer Choice

1. Give all customers the right to choose their retail energy services providers at the same time

Giving customers the right to choose their own providers of retail energy services enables them to vote with their pocket books. If they do not like the prices, service or options provided by one supplier, they can shop around. Choice removes the burden from customers of having to pay for power supply investments unless they contract for those investments. It is important to give all customers choice at the same time so that cost shifting to any remaining customers without choice does not occur. (The pressure to do this would be tremendous.) Providing the benefits of restructuring to customers who do not want to bother with making choices is addressed by the provision for making competitively procured bundled packages of energy services available to all customers (see Standard No. 2 below).

Customer choice gives retail energy service providers direct incentives to deliver what consumers want, and to develop new and improved services. These incentives will motivate new market entrants as well energize existing retail energy services providers. These incentives will encourage utilities to move/spin off some services from under the restrictive regulated environment into the competitive marketplace -- where they will no longer be confined to a regulated rate of return.

Customer choice frees state regulators from the price regulation business wherever competitive markets can be established to discipline prices. Customer choice gives environmental groups the opportunity to develop and/or promote retail energy services packages that feature higher levels of efficiency, renewable energy sources and environmental emission reduction. This will allow their members and other consumers to vote directly in the marketplace on "green" issues with their energy services selections and the payments made for those services. Developing products for these customized services represents a new market opportunity for energy services providers.

2. Use an independently managed, open competitive process: to select providers of optional bundled retail energy services packages for customers not interested in choosing energy services suppliers for themselves; and to select service providers of last resort.

In order to prevent cost shifting, it is important that all customers be given the choice of energy services suppliers at the same time. Some customers, however, will not be motivated to participate actively in the retail energy services market. To bring these customers the benefits of industry restructuring, State Public Utility Commissions will design packages of energy services for these customers -- and select a set of qualified suppliers through open bidding.

The same suppliers selected in this process will be used as providers of last resort and where necessary will be paid for these services from distribution access charge funds. Under the present industry structure the utility spreads the costs of acting as the provider of last resort over the rest of the customers and the RE³SCO plan funds the activity in the same way, except it allows the use of bidding to select the provider of these services.

This is a very workable solution since there are currently enough providers of bundled retail energy services to meet current customer needs (e.g., retail energy services divisions of utilities) and there are also many new players who want to enter this business. Public Utility Commissions can develop several packages of bundled retail energy services and put these out for bid periodically to a qualified list of providers. Customers would then be asked to select one of these packages and one of the approved providers. If they still show no interest in making a selection, they would be assigned a package of bundled energy services along with an approved provider (chosen through a competitive bidding process). At any time, of course, customers could choose to enter the marketplace and select energy services providers themselves.

On the other hand, if these customers (primarily small users of energy) are forced to stay with their local utility as the provider of retail energy services -- while larger customers are given choices -- the pressure to shift costs to these small customers will be tremendous.

Easy-to-understand Pricing

3. Provide customers with direct, unbundled price information on the costs of both energy and reliability services

Electric service delivered to customers is basically composed of two distinct products: energy and availability of energy on demand. Having energy available on demand all of the time is more expensive than only having it available most of the time. The particular balance that each customer finds desirable between cost and availability of energy on demand depends on the particular uses being made of the energy by the customer.

Customers buy a mixture of these two products whenever they buy electricity. The energy product which is measured in kilowatt hours (kWh); and the availability of energy on demand is measures in frequency and duration of periods on non-availability. The cost of each of these products varies over time as the level of system electric load and the generation available to serve this load varies relative to the varying total system electric load.

For most customers these two products are presently available only as bundled service with no customer choice about the combination of the two products in this bundled service. Giving customers to purchase these products separately so that they can choose how much of each product they want is call unbundling these services or products.

When customers do not have access to unbundled information for both energy and reliability, they are unable to select a customized fit to their particular needs that delivers what they actually need at the lowest cost. This creates three separate problems.

(a) The first problem is that the customer is prevented from meeting their particular energy services needs at the lowest cost.

(b) The second problem is that the acquisition process for regional reliability resources only has good access to half of the reliability resources available, those on the supply-side. The acquisition process for regional reliability resources has poor access to the other half of the reliability resources, those on the demand side.

(c) The third problem is that society bears the burden of the impacts of poor energy service choice made by customers and their energy services suppliers due to their being deprived of real information on the cost impacts that their energy usage choices.

The RE³SCO plan solves these problems as follows:

(a) Customers will be provided with direct and unbundled information about the costs of the energy service choices they make-- including both the energy costs and reliability costs. This will allow both customers and retail energy service providers to identify packages of energy services that minimize customer costs for these services. If this is done customer's energy services bills will reflect the impact of changes in energy usage or changes in the effect the customer has on system reliability. As a result, any changes in the system costs of providing service due to customer choices, will also be directly reflected in the customers energy services bills. These system costs of providing service being reflected in the bills provides price signals which are beneficial to both customers and providers because each can adjust quickly to reliability and cost issues.

(b) A direct competition between supply-side and demand-side reliability resources can be accomplished in a variety of ways. A simple way this direct demand-side and supply-side competition can be accomplished initially is for the independent regional network manager to acquire callable reliability supply services in the form of kW of available generation or kW of load reduction through a bidding process. Allowing generators, aggregators of generators, customers willing to have their load controlled and aggregators of customers willing to have their load controlled all to bid to provide callable reliability resources to the independent regional system operator will create a very lively market for reliability supply resources.

Creating this direct linkage between supply-side and demand-side information will allow customers and their retail energy services providers to bring demand into real-time control and real-time dispatch -- just as the supply side is now controlled. This will allow users to effectively bid usage reductions into the energy market just as power suppliers bid supply into the market.

Making real-time price information available to customers for energy and reliability services will be a gradual process. Customers with significant opportunities to reduce their costs will be motivated to get real-time metering and demand-side control capability rapidly. Making customer metering available as a common carrier service provided by the distribution utility and also allowing new entrants into the customer metering services market will speed the delivery of real-time metering and demand-side control capability to customers. See the section of this paper on common carrier metering, billing and customer information for more information about this.

In the meantime, approximations can be used to give consumers this energy and reliability cost information. For example, customers could be given choices by a Retail Energy Service Company of how many hours per year they would like to bid interruption of a portion of their full load into the electricity reliability market -- and receive corresponding reductions in the cost of service over the year. A Retail Energy Service Company that aggregates a number of customers could implement this approach with simple customer load control devices.

Allowing the demand side to be fully interactive with the supply side is one of the most significant opportunities in the whole restructuring equation. This means that in addition to the supply-side options competing among themselves in the marketplace for the retail customer's business, they also will be competing with the full range of demand-side options.

Foster Full Competition

4. Provide common carrier transmission, distribution, system coordination and reliability services -- with an independent provider, regional transmission and distribution tariffs, and regional planning

Transmission and distribution wheeling services and a number of related services need to be made available on a common carrier basis. These related services include: transmission coordination, reliability coordination, generation/supply dispatch coordination, and a bidding mechanism for allocation of oversubscribed transmission facilities. Such common carrier services are necessary to provide the fundamental transmission, distribution, reliability and coordination services that allow wholesale and retail service competition. As regulated monopoly services, they need to be available at cost-based prices-- and in ways that are easy to understand and use-- so that customers can capture the benefits of competitive retail markets.

These services need to be available to all customer and retail energy services companies that use transmission and distribution systems. For all transmission and distribution system users, these services need to be equally available and according to the same:

* Rules of use
* Priorities of service
* Cost-based rates for services
* Access to the full range of services
* Bidding system for allocating use of oversubscribed parts of the transmission system (allocating transmission capacity to the highest economic use and using any extra revenue generated this way to pay for transmission system improvements so that the owners do not receive excess profits ( monopoly rents ) due to being the only available service provider.)
* Access to system planning and operating information
* Access to transmission and distribution planning processes to address facility improvement needs

Transmission and Distribution Access

In order to facilitate regional power supply competition and the delivery of benefits to customers, regional transmission service tariffs are needed that cover regions conducive to convenient transmission use rather than current utility transmission ownership boundaries.

The present system, with many tariffs each covering a single utility's transmission system, creates a barrier to competition in the energy services industry and to the delivery of the benefits of this competition to customers. This system creates for transmission users the burden of dealing with multiple transmission service providers and using multiple tariffs, even for simple power purchase transactions. In order to deliver the benefits of regional power supply competition to customers, all transmission users must pay regional transmission service tariffs covering multiple transmission owner regions that reflect regions of convenient transmission use rather than transmission ownership boundaries. These regional tariffs will greatly simplify power supply transactions and will avoid the pancaking of transmission tariffs that create barriers to economically desirable power supply transactions.

In this case, common carrier service regulated resources means that all users of the wires, or energy services transportation and coordination assets can enter and exit at any point on the system, pay the same prices as other users (including the owners) and have the same access to use of these assets as any other user. This is necessary to mitigate market power in the energy services marketplace.

The implementation of improved transmission access that can be used to deliver benefits to customers has been a slow process. Since the Energy Policy Act of 1992 gave the Federal Energy Regulatory Commission the authority to order transmission access, however, the speed of progress on transmission access policy and implementation have greatly increased. The Federal Energy Regulatory Commission has been leading a spirited march toward open transmission access.

Customers only receive benefits from transmission and distribution access that is actually available and implemented in ways that are easy to use. Strategies for making the benefits of transmission access available to customers need to recognize that open access to transmission and distribution systems is still not generally available in the United States. Currently, distribution access is rarely available anywhere in the country. Transmission tariffs are only on file for a fraction of the 130 significant transmission systems. And where access is available, it is only on a utility-by-utility basis. The Federal Energy Regulatory Commission is pushing for transmission access, and progress is being made, but it is not yet in place.

State Public Utility Commissions have an important role to play in ensuring that distribution access is available so that customers can take advantage of the full range of energy services options.

In order to speed delivery of the benefits of transmission and distribution access to customers, three implementation steps can be identified in a rough order of priority based on relative benefits made available to customers by each step (see Table 5 for Transmission and Table 6 for Distribution). All of these steps are important. In some cases, it may be possible to accomplish these steps simultaneously.

Table 5: Steps for Implementing Useful Transmission Access Tariffs

Table 6: Steps for Implementing Useful Distribution Access Tariffs

The first step is to make sure that regional access to transmission systems and distribution systems is really available on a practical, easy-to-use basis. Moving from no access to real access will capture the greatest portion of the potential benefits for customers of open transmission and distribution access. Experience to date has shown that where transmission access has been complicated and hard to use, it frequently has not really been available. Ensuring truly open access to the transmission and distribution systems is required to create a competitive power supply and competitive retail energy services markets that give customers access to the full range or energy services options.

Customers will benefit from power supply competition that reduces the cost of power production. Power production costs will be minimized if the power supply market operates efficiently on a regional basis. This would require tariffs to remove the barriers to efficient regional transactions. In order to maximize the benefits that the competitive power supply market can deliver, customers must have access to transmission on a regional basis through regional tariffs. Implementing regional tariffs will actually simplify the development of transmission access by reducing the number of proceedings and by making the approach used throughout the region consistent. The time is ripe for the Federal Energy Regulatory Commission to order regional transmission tariffs. As part of this step, State Public Utility Commissions and the Federal Energy Regulatory Commission need to define a path for implementing distribution tariffs that cuts through jurisdictional issues. It is time to develop standardized, easy-to-use distribution tariffs that include provisions for State Public Utility Commissions to set and collect distribution access charges. These charges would fund increased levels of energy efficiency, renewable energy resources, emission reduction, low-income programs, and any restructuring transition costs that are approved for recovery.

In this first step it is also important to implement open regional transmission planning processes. Transmission and distribution planning and siting processes are the long-term components of transmission and distribution access. If the necessary facilities are not in place, no one has access. The question of what facilities are necessary is a societal question that involves balancing costs, benefits, environmental impacts and other public concerns with the alternatives available. In the end, society as a whole will bear the costs and environmental impacts of the choices made. Transmission users will bear the cost of any necessary facilities constructed. Both society as a whole and transmission users have an interest in seeing that only the necessary facilities are installed.

These open regional processes will address the needs of all transmission users on an equal basis. The process will develop planning information to a highest common denominator standard that meets the information needs of all affected parties -- including but not limited to, all transmission users, all states within the region, the Federal Energy Regulatory Commission and the transmission users. This will avoid unnecessary rework in the planning, siting and construction of transmission facilities for the ultimate benefit of customers. The time is ripe for transmission users to commit to the highest common denominator regional transmission planning standards in regional transmission planning. The necessary components of such regional transmission planning standards and tariff are listed in Appendix B.

Minimizing the Costs and Environmental Impacts of Transmission and Distribution System Expansion Through a Targeted Area Transmission and Distribution Planning Process

A Targeted Area Transmission and Distribution Planning Process which considers distributed resources including end use efficiency, load management, local generation as well as transmission and distribution alternatives is needed to minimize the cost of providing adequate and reliable transmission and distribution service to customers.

In order to accomplish this an open transmission planning and siting process is needed that includes a systematic, information based process for identifying the system problems and for developing and evaluating potential solutions. Transmission system and distribution system control operation and maintenance by the same ISO is desirable because frequently transmission problems can be solved at the lowest cost if tradeoffs between transmission and distribution solutions and combinations can be evaluated in an integrated way.

Further it needs to be recognized that end use efficiency load management, and renewable measures are frequently a part of the lowest cost solution to transmission and distribution problems. Requiring integrated transmission and distribution planning and siting processes is an important part of finding and implementing the lowest cost solutions to transmission and distribution problems. A second important component of minimizing the cost of providing adequate and reliable transmission and distribution services to customers is giving the transmission and distribution managers (ISOs) the authority to acquire local end use efficiency, load management, and renewable energy through open and competitive processes. If this authority is provided to the ISO, a simple approach can be used by transmission and distribution planners to identify where local area generation and/or end use measures can be combined into a lowest cost solutions to system problems. They will be able to identify the cost and time frame at the for a transmission or distribution solution and then request bids for provision of end use measures and local generation measures. Where enough end use and local area generation measures are proposed at a cost lower than the transmission or distribution solution. These measures can be implemented.

In summary the 3 steps for implementing transmission access are:

The First step establishes an independent regional system operator that runs the transmission system and establishes full protection against affiliate abuses are provided, owners signing long term leases of transmission facilities to an Independent System Operator would provide significant but not complete protection against affiliate abuses. Divestiture of generation and retail services businesses by transmission and distribution owners is not required in this first step.

The Second step is to move voluntarily to non-affiliated ownership of transmission and distribution. This is accomplished by spinning off affiliated generation and retail merchant functions from transmission and distribution owning utilities.

The Third step is to improve the system of providing this access where problems are identified through experience. Once transmission access has been implemented on a practical and easy-to-use regional basis, refinements to access that optimize the use of the transmission system should be explored wherever opportunities for increased delivery of benefits to customers are identified.

5. Provide common carrier services for customer billing, customer metering and customer energy use information using independent providers -- and also allow competitors to provide these services

Common carrier services are services provided an equal terms for all users. Several services that are presently included in regulated utility activities are not inherently monopoly services but there are some advantages to requiring the transmission and distribution wires service provider to provide these services on a common carrier basis to all potential users.

These services include customer billing, customer metering and customer energy use information. Encouraging other companies to market these services and making these services available on an unbundled, common carrier basis from the wires services utility or an equivalent provider of last resort will provide four important benefits:

* Give customers access to the full range of possible services and choice of providers.

* Make implementation of real-time metering more rapid.

* Ensure that there is a provider of last resort available in the marketplace.

* Help support a vigorously competitive retail energy services market by allowing focused providers of energy services to easily put together a comprehensive bundle of services.

Allowing a wires services utility to provide an affiliate (or itself) customer billing, metering and energy use information services without allowing all other retail energy services companies to use these services would give the utility significant market power. This would be especially detrimental if Retail Energy Service Companies are allowed to be affiliated with the regulated monopoly transmission and distribution service providers. Initially the independently operated regulated monopoly transmission and distribution service providers will need to provide these services on a comparable basis to all retail energy services companies. Other competitive providers of such services will be encouraged to market them as well. Having these services available in the marketplace will allow retail energy services providers to customize their services to meet particular customer needs. These competitive providers will be subject to basic standards such as those needed for system operation and planning, safety and reliability.

Once the RE³SCO restructuring plan has been implemented, a further step in using market mechanisms to price these common carrier services could be taken by using an open biding process to select the provider of these common carrier services.

Customer Billing, Customer Metering, and Customer Energy Use Information Services

Currently the customer billing, customer metering, and customer energy use information services of the regulated utilities are paid for by the customers and are not available for use by all the other energy service providers. This creates an unnecessary barrier to operations of the other energy service companies and represents a component of the market power exercised by the utilities. The RE³SCO plan makes these services available to all retail energy service companies.

The responsibility to provide common carrier customer billing, customer metering, and customer energy use information services is retained, at least initially, as services provided by the regulated monopoly transmission and distribution service provider. These services will available on a common carrier basis so that all Retail Energy Service Companies can use these common carrier billing services to collect payments from their customers for the full range of retail energy, efficiency, and environmental services.

Making these billing, customer metering, and customer energy use information services available to all Retail Energy Service Companies on a common carrier basis will reduce the barriers to market entry into the Retail Energy Services market and encourage robust competition in the provision of electricity, energy efficiency, renewable energy, and other energy services. Other competitive providers of customer billing, customer metering, and customer energy use information services will also be allowed. Making common carrier billing, customer metering, and customer energy use information services available to all Retail Energy Service Companies does not need to wait for implementation of retail access. Making these services will facilitate the provision of customer energy efficiency services even before the implementation of retail access.

There are several reasons for leaving the customer billing, customer metering, and customer energy use information functions with the regulated monopoly transmission and distribution service providers at least initially. First, the transmission and distribution services providers will need to have the capability of billing for the transmission and distribution services that they provide. Second, they will need to gather this customer energy use and customer demand information anyway for planning the system and maintaining reliability. Third, transmission and distribution services providers will need customer metering to obtain this data for customers that do not choose an alternate provider for these metering services.

If desired the regulated monopoly transmission and distribution services providers could be required to out source the provision of these common carrier billing, customer metering, and customer energy use information services using an independently managed open competitive bidding process to select the providers of these common carrier services.

Special Aspects of Customer Metering Services

Allowing the independent companies to also provide metering services will allow customers and Retail Energy Service Companies to select and install meters that meet their own particular needs. These independent providers of metering services will be required to provide metering that meets basic standards for accuracy, safety standards, and accuracy. Further these independent metering services providers will be required to provide specific customer energy and demand information to the transmission and distribution service providers so that duplicate metering is not needed. Allowing these independent providers of metering services into the market is likely to speed the installation of time of use and real time metering for customers.

Special Aspects of Customer Energy Use Information Services

All of the customer information collected by the regulated utility needs to be retained by the regulated monopoly transmission and distribution services providers and made equally available to all retail energy services providers. Independent companies will also be allowed to provide customer energy use information services.

The issue of confidentiality of this customer energy use information is unchanged by restructuring. The specific and detailed customer energy use and demand information is needed by the transmission and distribution service providers for planning the system, operating the system, and maintaining system reliability. Others energy sector participants need composite information on customer energy and demand by sector in order to participate in planning and public policy evaluations. Finally making as much of this information available to all Retail Energy Service Companies, as is possible given the constraints of confidentiality, will facilitate the delivery of energy efficiency by the full range of energy services providers. The more available customer energy use information is the more it will do to support a vigorously competitive energy services market. Two basic options on the level of availability are possible. One option is to make the specific customer energy use information publicly available except for customers that request confidentiality (For customers requesting confidentiality only composite information would be made public). The second option is to make only composite customer energy use information available except where the customer give permission to make the information available to a Retail Energy Service Company or to the public. The RE³SCO plan is compatible with either option.

Address Market Power Issues

6. Allow bilateral electricity trading and require reporting of only the physical transactions (not the prices) to the regional system operator

In each region an independent system operation will be needed to coordinate the physical operation of the generation system, the transmission system, and to maintain system reliability. In order to carry out these functions the regional system operator will need information about the physical characteristics of the transactions occurring. For this reason the RE³SCO plan includes the requirement that the physical characteristics of the transactions be reported to the regional system operator. In contrast to the need for information on the physical transactions, the regional system operator does not need to the prices at which transactions occur. For this reason the RE³SCO plan allows bilateral trading and requires reporting of only the physical characteristics of transactions and not the prices at which they occur.

Allowing bilateral trading gives buyers and sellers the flexibility to structure these transactions in ways that work best for each participant. Requiring reporting of prices to the regional system operator would create an unnecessary one size fits all approach to making deals and could create unnecessary barriers to transactions.

Several other prominent restructuring models (the evolving Voluntary POOLCO Restructuring Model and the Bilateral Restructuring Model) also allow bilateral trading with only reporting of the physical characteristics and not the prices.

Under whatever model is chosen, the system operator will need to be able to cover shortfalls in supply on a real-time basis, which means having callable options in hand to purchase either reductions in energy use or increases in energy supply. For this reason, under either model listed above, the regional system operator will need to a process for determining the prices at which these resources are available and a process acquiring these callable resources. This means that under both models there will be at least these reference electricity prices available for use in the marketplace. As a result, the chief difference between the evolving Voluntary POOLCO Restructuring Model and the Bilateral Restructuring Model is that under the Voluntary POOLCO Model, it is expected that the system operator will be involved in the financial side of more power transactions than under the Bilateral Model.

Either of these restructuring models are potentially compatible with the Retail Energy, Efficiency, and Environmental Services Competition (RE³SCO) Restructuring Plan if they are implemented in a way that is consistent with the Retail Access Comparability Standards so that a fully competitive retail energy services market at the customer level is created.

The important part of this for retail energy services customers and providers is that customers be allowed as much flexibility as possible in how they acquire energy services. The range of transactions that need to be available to provide this flexibility includes:

* Bilateral transactions where only the physical transaction needs to be reported to the system operator and not the price.

* Purchases from a central pool or from the system operator.

* Bilateral contracts for differences relative to the pool price or a central operator's spot price for power. (Contracts for differences are contracts that base payments between buyers and sellers on the differences between the specific prices for services specified in the contract and the varying prices for electricity in specified markets.)

7. Effectively address market power, self dealing and cost shifting issues so that utility generation companies and utility retail services companies have the opportunity to compete on a level playing field in retail markets without being encumbered by unnecessary regulation

An important part of restructuring is mitigating the potential for impairing retail energy services markets by market power, self-dealing or cost shifting by regulated monopoly service providers. This is important for two reasons: (1) Without this, utility generation companies and utility retail energy services companies will be deprived of the opportunity to compete on a level playing field in retail markets without being encumbered by unnecessary regulation. (2) These potential impairments of the retail energy services markets need to be prevented to protect the customers.

The problem is created when the same organization or affiliated organizations occupy side-by-side positions in both regulated and non-regulated parts of the business. This situation creates the potential and incentives for:

* Cost shifting to the regulated part of the business

* Non-arms-length transactions between the two parts of the business

* The use of market power by the regulated portion of the business to create advantages for the non-regulated part of the business (relative to other market participants that are only active in the non-regulated sector)

There are two approaches to addressing these issues:

The first is to choose new industry structures that create the risk of exercising market power, cost shifting, and self-dealing by regulated monopoly service providers, then a regulatory regime that strives to protect the customers and other market participants from possible abuses will be needed. This choice will impose regulatory burdens on utilities, utility generation companies, and utility retail energy services companies. This choice also will impose on customers and other market participants whatever abuse is not prevented by regulation. If this choice is made in restructuring, utility generation companies and utility retail energy services companies will be deprived of the opportunity to compete on a level playing field in retail markets without being encumbered by unnecessary regulation. If this path is chosen, strict regulations and reporting of all affiliated transactions must be instituted so that the same level of protection against affiliate abuses is provided as would be provided by divestiture. Further, the affiliates of the utility involved in affiliated transactions needs to bear as a stockholder expense all costs imposed on other parties. These other parties include the regulators, the other participants in the market, and consumer advocates and the costs include these they incur trying to ensure that abuse does not occur and the liability for any abuse that does occur.

On the other hand, if new industry structures are chosen that do not create the risk of exercising market power, cost shifting, and self-dealing by regulated monopoly service providers, then a regulatory regime that strives to protect customers and other market participants from possible abuse will be not be necessary. This choice will not impose regulatory burdens on the utilities, the utility generation companies, or the utility retail energy services companies.

In the long term as the competitive disadvantages of retaining the self-imposed burden of regulated affiliate relationships with regulated transmission and distribution service providers becomes clear, these affiliates will choose to be divested form the regulated utilities with which they are affiliated.

As indicated above, new industry structures can be chosen that impose this unnecessary regulatory burden on utilities and others -- or industry structures can be chosen that do not create the risk of exercising market power, cost shifting, and self dealing by regulated monopoly service providers. The pros and cons of the two possible approaches shown in Table 7.

Table 7: Pros and Cons of Various Approaches to Avoiding Distortion of the Retail Energy Services Market by Affiliated Transactions and Utility Market Power

Sustain Attainment of Societal Objectives

8. Use an independently managed open competitive process for any acquisition of increased energy efficiency measures, renewable energy sources or emission reduction

Current programs for acquisition of increased energy efficiency, renewable energy sources or emission reduction are frequently open only to the utility managing the program -- or, if there is a bidding process, it is usually managed by the utility. In the competitive retail energy services marketplace, this approach would give market power to the utility by creating a self-dealing relationship. Such problems can be avoided if the providers of the increased energy efficiency, renewable energy sources or emission reduction are selected through an open competitive process -- with the selection process run by an unaffiliated party that is not participating in the bidding. This is further discussed in Standard No. 9.

Using a competitive acquisition process would ensure that these services would be delivered at the lowest additional incremental cost. All energy services providers will be able to evaluate what additional services, the incentive would allow them to deliver, factoring in other market incentives. This approach also shifts the provision of these services from a burden on utilities to a business opportunity for motivated voluntary providers.

Regulators can design these competitive processes to include whatever performance guarantees -- or measurement and verification (M&V) standards -- that they deem necessary, since no one will be required to participate. Regulators, however, will need to balance the tightness of performance guarantees against the cost of increased energy efficiency and other services obtained. Finally, the results of these competitive acquisition processes will provide market information about the actual prices of incremental increases in the delivery of energy efficiency, renewable energy sources and emission reduction in the marketplace. When planning on how to best achieve long-term societal objectives, this information will be a major improvement over hearing-room estimates of the past.

Competitive retail markets for energy efficiency, renewable energy sources, and emission reductions will reduce the cost of acquiring increased levels of these benefits. The providers of increased efficiency, renewables, and emissions reductions will be exposed to all other incentives in the retail marketplace. As a result, they will be able to build the additional incentives provided into comprehensive improvement projects for the customers based on what additional activity the additional incentive will support.

For these competitive acquisition processes to be most productive, they need to avoid a command-and-control approach that defines the end uses to be addressed and how they should be addressed. Instead, these acquisition processes should:

* Define the ultimate objective, such as more energy efficiency, more renewable energy implemented, or more emission reduction.

* Define the project evaluation method to determine relative accomplishment of these objectives per dollar.

* Allow the creativity of project proposes to identify the haw these incentives can best be used to support increased implementation of energy efficiency, renewable resources or emission reduction.

* Make payments to providers only on the basis of measured and verified performance.

A more detailed description of a model competitive acquisition process is included in Appendix A.

A command-and-control approach will limit the number of service providers and increase the cost of the incremental implementation acquired. An open approach will expand the number of providers and reduce the cost. These companies will include in their projects the transaction costs (including Measurement and Verification (M&V) of participating in the program. If the regulatory commission makes the criteria standards higher than necessary, the amount of increased efficiency will be reduced and less can be purchased with the available funds.

Got to Table 4: The List of Retail Access Reliability Standards

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9. Collect distribution access charges from all users to fund competitive programs for acquisition of increased energy efficiency measures, renewable energy sources and emission reduction, as well as to fund universal service and low-income programs

The distribution connection fees will include a distribution access charge to fund competitive acquisition programs to obtain increased delivery of energy efficiency, renewable energy sources and emission reduction. Also included in the connection fee will be a distribution access charge to fund universal service and low-income programs such as weatherization and winter shut-off moratoriums. These connection fees will be applied to all voltage levels so that it is unavoidable for all retail energy services recipients.

These distribution connection fees should be extended to gas distribution and bypass connections when the gas retail energy services sector is restructured, as well. When this is accomplished, the competitive retail energy services market will be able to internalize the issue of retail fuel switching between electricity and gas, and make the economically appropriate choices for each customer's situation.

Distribution connection charges will collect funds to cover the same types of costs that have been included in general tariffs in the past. They can be collected on the basis of both a capacity charge and an energy usage charge. Since all costs and societal objectives are unlikely to be fully internalized in the retail energy services market, the summation of individual decisions in a competitive retail energy services market are also unlikely to fully achieve long-term public interest objectives. Therefore, planning mechanisms will be necessary to identify these shortfalls and to fund the appropriate market adjustments. These are suitable activities for State Public Utility Commissions.

Competitive power supply markets are expected to hold down power supply costs, and the competitive acquisition of efficiency measures is expected to drive down acquisition costs. If the distribution access charge collects the same amount of money as has been used for efficiency and renewable programs in the past, the overall energy services costs for consumers will be reduced -- and the amount of efficiency delivered will be increased.

Section 3. Benefits to Stakeholder Groups

Customers

Customers will be able to choose their own energy services provider(s) and have a broader array of services at their disposal. Customers will be able to order packages of energy services tailored to their specific needs. They will receive energy and reliability services at a lower cost than is possible in today's regulated environment. They will directly influence the energy services market -- and the products offered -- by choosing the energy services and providers that deliver what they want.

Society as a Whole

Society as a whole -- the indirect customer -- will benefit through:

* Lower costs for energy services delivered to customers, which will help U.S. companies compete in the global marketplace.

* Increased delivery of energy efficiency and renewable energy sources.

* Reduced environmental emissions.

Environmental, Consumer, Renewable Energy and Energy Efficiency Advocates

These advocates will get lower costs and increased delivery of energy services, energy efficiency, renewable energy sources and emission reduction to customers as a result of increased competition. These things will occur for several reasons. First of all by themselves the drive of the market and innovations in the market are likely to spur greater achievement of these objectives. Second of the RE³SCO plan includes mechanisms to make good any shortfalls in achievement relative to the societal objectives. Third, the market mechanisms used in the acquisitions and delivery of efficiency, renewables, and emissions reductions will be more efficient than in the approaches used in the past.

Reshaped Role of Regulators

Energy industry regulators in a restructured environment will continue to play an important role in assuring that the public interest is properly served. Some of their current tasks will no longer be necessary, however. Others will change, and still others will need to be taken on.

Regulation will still be necessary because environmental externalities are unlikely ever to be fully internalized in a market-driven energy industry. Some open public planning process will continue to be necessary to set overall goals for energy efficiency and increased use of renewable energy sources. Regulators will need to set the level of distribution access charges to fund bidding programs to achieve these two goals. Competitive acquisition processes to acquire these services will be overseen by regulators. Distribution access charges also will fund acquisition of universal service and desired low-income services such as weatherization and winter shut-off moratoriums. The competitive acquisition processes to acquire these services will need to be developed, and the delivery of these services overseen by regulators, as well.

For the parts of the industry that remain under regulation (transmission and distribution services, for example), regulation can proceed much as in the past including activities like utility accounting reviews, planning, siting and rate setting. There may be refinements such as the increased use of incentives for providers of these services, but the regulatory responsibilities will be much the same. Planning for meeting long-term energy efficiency and environmental objectives will be easier to accomplish under the RE³SCO plan than it is today. That's because the market will provide information regarding the true costs of policy choices and the potential increase in energy efficiency, renewable energy sources and emission reduction.

An example of how planning will be easier under the RE³SCO plan is an evaluation of alternatives to a proposed transmission line addition to connect distant generation to loads. Under the present system, the question of whether increased energy efficiency at the receiving end is a lower-cost option considering the environmental impacts of the alternatives is very difficult to investigate. Under the RE³SCO plan, this question will be relatively easy to investigate because the market will be able to respond to the incentives to deliver all the energy efficiency that is cost-effective in the eyes of customers -- and the cost of incremental energy efficiency and renewables will be available from the competitive acquisition processes run by states in the areas affected. This applies on a large scale to regional transmission planning and on a small scale to targeted regional planning.

There will also be new sources of information to use in planning. Market prices for increased levels of efficiency, renewable energy sources and emission reduction will be available from the competitive energy services market. Each state's competitive acquisition processes for increasing the implementation of these three societal objectives will produce this information. On the national level, reporting under the voluntary reporting standards of Section 1605(b) of the Energy Policy Act of 1992 will provide significant information (available to regulators and the public) on the implementation level of these three objectives. As part of the US Department of Energy Fitness Program, the National Association of Energy Service Companies (NAESCO) has made a commitment to encourage its members to report all energy efficiency activities under the 1605(b) voluntary reporting program. The Energy Fitness Program is a partnership between the Department of Energy and NAESCO dedicated to removing barriers to the delivery of energy efficiency services by energy services companies.

Utilities

Utilities will be freed form the constraints of rate-based regulation wherever competitive markets can be established. The primary exceptions will be transmission, distribution and system coordination functions. Utilities that choose to continue providing transmission, distribution and system coordination services will continue to enjoy for these services the regulatory projections granted to monopoly service providers.

Energy Services Companies

Energy services companies will benefit under the RE³SCO plan through improved access to customers. Further, they will be permitted to provide customers with the full range of energy services. These two changes will create many new opportunities and expand existing opportunities to create and deliver energy services that meet customers needs.

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Transition Steps in Restructuring Section 4

Overview

If other industries are any indication, the transition from a regulation-heavy to a market-driven energy services landscape can be accomplished quite rapidly. The Airline Deregulation Act of 1978 contained a phase-out period to last about seven years, but the industry deregulated in one year and airlines quickly pursued competitive opportunities. Within weeks after the divestiture of AT&T in 1984, the Regional Bell Operating Companies began pursuing new competitive markets on a broad scale.

Restructuring Decision Making: A Public Process

In order to design a restructuring approach that furthers the public interest, all of the affected parties must be actively involved in the planning process. Regulators, consumer advocates and environmental advocates have an important responsibility during the transition period to make sure that public interest objectives are fully addressed. By following their self interests, utilities and other retail energy services companies will help ensure that the barriers to competition are removed wherever possible so that everyone has the opportunity to compete in an open retail energy services market.

While some utilities will focus on preserving their captive customer base, others will join existing and new Retail Energy Service Companies in promoting a restructuring arrangement that provides level plying field access to customers in the service territories of other utilities.

Utility Industry Restructuring Transition Costs

The issue of transition costs will need to be addressed in restructuring. These costs will include both stranded investments and stranded customer benefits that may result from restructuring the electric utility energy services industry. Regulators will need to decide what the transition costs are, the extent to which recovery will be allowed, and what mechanism will be used to collect any transition costs that are allowed. Any collection of transition costs allowed should be collected through a separate distribution access charge for this purpose. Imposing these fees on the use of the distribution system will minimize the impact of such charges on the delivery of the benefits of restructuring to customers because they would only affect the cost of local transactions. On the other hand, collecting these fees through a transmission charge would reduce the ability to lower costs to customers because it would create a barrier to efficient generation dispatch for the entire regional system.

The ultimate decision of how much stranded investment exists and how much should be recovered will be based on the circumstances of each electric utility -- and how the investment risks were balanced between ratepayer and stockholders along the way. Since the decisions about construction, the prudence of investments in facilities, rates and risk sharing were made primarily at the state level, the information about these decisions resides at the state level. For these reasons, the decisions about the size and recovery of transition costs including stranded investment should be made primarily at the state level.

The appropriate level of these transition costs will likely vary from utility to utility and from region to region. In determining the appropriate level of transition costs to allow, all assets of a utility will need to be considered, except those that will remain monopoly services -- such as transmission, distribution and coordination facilities.

In the end, many utilities may decide that their own competitive interests are better served by writing off part or all of any stranded investments they face.

Transition Steps for the Utility Industry

With respect to the energy services industry, the RE³SCO Restructuring plan provides a path of actions to achieve this sequential progress. This action plan is included in the following section in this report and consists of three groups of actions:

(1) Step One Actions to make retail energy service market as competitive as possible in the absence of retail wheeling;

(2) Step Two Actions to support the transition to retail access;

(3) Step Three Actions to implement retail access.

The Step One Actions are all actions that can be taken now to increase the delivery of benefits to customers now, whether restructuring is under way, is being considered or not even on the table. The details of Steps One, Two and Three are described in Appendix D.

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Section 5. Conclusion

The Retail Energy, Efficiency, and Environmental Services Compton (RE³SCO) Plan for utility industry restructuring provides for:

* Empowering customers to choose the energy services and providers they want.

* Empowering all retail energy services market, empowering all providers including non-utilities and utilities, to compete in the retail energy services market.

* Collecting and using funds to achieve societal objectives, including increased levels of energy efficiency, renewable energy sources, environmental protection and low-income services.

Implementing the Retail Energy, Efficiency, and Environmental Services Compton (RE³SCO) Plan for utility industry restructuring will create a vigorously competitive retail energy services market that can deliver the full range of societal objectives including:

* Increased environmental protection,

* Increased consumer protection,

* Increased rate of technological innovation,

* Increased competitiveness,

* Increased international security, and

* Lower costs to customers.

Appendix A

Model Competitive Acquisition Process for Increased Energy Efficiency, Renewables and Emissions Reductions

An independently managed, open competitive process is needed for acquisition of increased efficiency, renewables, and environmental emission reductions. The incentive payments will be set at a level designed to make up any gap between the amounts of efficiency, renewables, and emission reduction delivered by the market alone and the societal objectives. The incentive payments for the desired results will be available to all service providers and only make payments for measured and verified performance. This will ensure that all customers and energy services providers have an equal opportunity to contribute to the increased delivery of energy efficiency.

Level and Focus of Acquisition is Decided in an Open Public Process

Decisions on level of activity and funding will be made in an open decision making process by the appropriate state agency, typically the Public Service Commission, in a long term planning process. These levels will be based on a determination in this process of:

* What the societal objectives are for energy efficiency, renewables, and emission reduction;

* The extent to which these objectives are being met by the market alone; and

* How much funding is needed to acquire any additional increment needed to achieve these societal objectives.

These acquisition programs should apply to all customer sectors both for equity reasons and to allow bidders greatest flexibility in identifying productive opportunities. No sunset provision on these programs is needed since these efforts should continue for as long as the market alone falls short of achieving societal objectives. The supporters of the RE³SCO plan further believe that the establishment of a fully competitive retail energy services market will greatly reduce the need for these interventions in the marketplace. The supporters of the RE³SCO plan are willing to let the future measured performance of this success motivate any future decisions on changes in the funding levels for these market interventions.

Funding

The competitive acquisition program will be funded by a distribution access charge that applies to all customers.

Administration of the Acquisition Process

A policy level Steering Committee of the acquisition process will be established by the responsible state agency, typically the state Public Service Commission, to oversee the acquisition process. This Steering Committee will include representatives of the affected state agencies, consumer interests, environmental interests, and providers of the desired services. This Steering Committee will have two functions: it will convert the decisions made in the public planning process into specific objectives and criteria to be used in the acquisition process; and it will select an independent non-affiliated contractor to run the acquisition process using objectives and criteria established by the Steering Committee. The objectives set by the Steering Committee for the acquisition process will be kept as general as possible so that the service providers have the incentive to seek out and identify the lowest cost opportunities to deliver those objectives as part of comprehensive projects for customers.

The incentive program for measured performance will specify the objectives as simply as possible. This approach the maximum amount of room for creativity by the retail energy service companies in identifying and capturing the best opportunities for achieving the benefits specified in the broad objectives for the money spent.

For the competitive acquisition program the Steering Committee will state in advance, for the next year, what incentives will be provided in each area and the funding cap for these incentives in each area. For example, for energy efficiency improvements in each sector (large industrial, small industrial, commercial and institutional, and residential, with each sector receiving funding roughly in proportion to its payments into the fund); the amount for renewables; and amount for emissions reductions. Payments will be made for measured performance. Measurement and verification standards that reflect what is generally acceptable to customers will be used so that the measurement and verification costs are kept low relative to the cost of the efficiency, renewable energy and emission reductions acquired.

The specified level of payments will apply to the measured and verified performance of all projects implemented during that year. The payments will apply to the measured and verified performance delivered over the life of the projects. The Steering Committee will be able to set incentive levels that vary by market sector so that the incentivized delivery of efficiency can be distributed across market sectors to the degree desired. Each year the Steering Committee will adjust the incentive payment levels for projects implemented the next year so that the delivered level of efficiency is adjusted to match the evolving target of making up to any gap between the societal objectives and what the market delivers by itself.

Competitive Selection of Specific Projects and Technologies by the Market

This competitive acquisition process will ensure that these services will be delivered at the lowest additional incremental cost as part of comprehensive projects. All energy services providers will be able to evaluate what additional efficiency services the incentive payments will allow them to deliver, factoring in all the other market incentives. Both customers and energy services providers have market incentives to develop comprehensive energy efficiency improvement packages for customers that are as aggressive as possible given the financial requirements of both parties. This incentive program will add another positive to the cash flow for each and allow providers and customers to implement more comprehensive projects. This approach shifts the provision of these services from being a burden on utilities to being a business opportunity for motivated voluntary providers.

APPENDIX B

Model Regional Transmission Tariff

A. General Description

The ability to use the transmission system is an important component of customer choice. If customers and their energy services providers cannot easily use the transmission system, their range of supply resource options is severely li