K v-s 2. Vj/i 1 . ; UMASS/AMHERST 31E0bb 027Q 3bMZ 1 POWER CHOICE A Plan to Deregulate Elements of the Electric Industry in Massachusetts l/NfVSBSflY OS Mtifeftjp&rc RECEIVED AUG03199B ^CUMENTS <~CTJON Division of Energy Resources of the Commonwealth of Massachusetts William F. Weld, Governor Gloria Cordes Larson, Secretary Argeo Paul Cellucci, Li. Governor David L. O'Connor, Commissioner February 13, 1996 .. . TABLE OF CONTENTS PAGE EXECUTIVE SUMMARY I. -. 1 H. THE PLAN: Power Choice 3 A. VISION OF THE INDUSTRY 4 New Corporate Structure for All Electric Companies 4 1 2. Customer Choice of Suppliers 4 3. Regional Wholesale Market Structure 5 4. Universal Service/Consumer Protection 6 5. Basic Generation Service for All Customers 6 6. Environmental Improvement 6 THE TRANSITION B. 7 Department Rulemaking 7 1 2. Independent Transmission System Operator 7 3. New England Power Exchange 7 4. Pilot Programs 8 5. Rate Cases 8 6. Deregulation of Generation Pricing 8 7. Customer Education 8 8. Marketing by Retailers 8 9. Introduction of Direct Retail Access 9 10. Separation of the Retail Function 9 Interim Recovery of Stranded Costs 9 1 1 12. Stranded Costs 9 13. Regulation of Generation During the Transition 10 14. Separation of the Generation Function 10 15. Energy Efficiency/Renewable Energy Technologies 10 A C. Participants In Restructured Electric Industry 11 m. CONSISTENCY OF PLAN WITH THE DEPARTMENT'S AUGUST ORDER 13 A A. Principles For Restructured Electric Industry 13 1. Provide the broadest possible customer choice 13 a. Role of Bilateral Contracts in Customer Choice 13 b. Role of Spot Market in Customer Choice 14 c. Packaged Services 16 d. Load Aggregation 16 Power Choice -i- February 13, 1996 © 2. Provide all customers with an opportunity to share in the benefits of increased competition 17 3. Ensure full andfair competition in generation markets. ... 18 a. Open Access to Generation Suppliers 18 b. Reliability 18 c. Vertical Market Power 20 d. Uniform Tariff 21 4. Functionally separate generation, transmission, and distribution services 22 a. Vertical Market Power 22 Separate Generation from Distribution and (1) Transmission 22 (2) Separate the Remaining Retail Functions from Distribution 22 (3) Lease Transmission Assets to the ISO 24 b. Horizontal Market Power 24 c. Incentive Regulation and Threat of Antitrust Litigation Not Sufficient 25 5. Provide universal service 26 a. Universal Service/Consumer Protection 26 (1) Guaranteed Access to Electricity 26 (2) Consumers' Rights 26 b. Affordability for Low Income Consumers 27 c. Basic Service for Non-Contract Customers 27 6. Support andfurther the goals of environmental regulation. 31 . a. Air Emission Reductions and Other Environmental Improvements 31 b. Competitive Demand-Side Management 32 c. Renewables Technologies 33 7. Rely on incentive regulation where a fully competitive market cannot exist, or does not yet exist 35 a. Distribution 35 b. Transmission 37 c. Generation 37 B. Transition From A Regulated To A Competitive Industry Structure 39 . . Honor existing commitments 39 1 . a. Overview 39 b. Asset Eligibility 39 c. Mitigation of Stranded Costs by Market Valuation ... 40 d. Incentives to Renegotiate Above-market Power Sales Agreements 42 Power Choice -ii- February 13, 1996 .. , e. Regulatory Assets 43 Minimize Anticompetitive Effects of Collection 43 f. Timing of Recovery of Stranded Cost 44 g. h. Transfer Rights 44 Impacts of Competition on Local Communities 45 i. 2. Unbundle rates 47 a. Avoid Cost Shifting 47 b. Avoid Cross-Subsidies 47 Timing 47 c. 3. Seek near-term rate relief. 48 . DSM 4. Maintain programs 50 5 Ensure that the transition is orderly and expeditious, and minimizes customer confusion 51 a. Department Procedure 51 c. Retail Access Pilot Programs 54 d. Public Information and Involvement 55 e. Ownership of Generation by Distribution Companies 56 . . f. Collaboration to Develop Implementation Details .... 57 RATE STRUCTURE IV. 59 INCENTIVE REGULATION OF DISTRIBUTION COMPANIES V. 61 A. Formula for Annual Caps Per Customer Class 61 Adjusted Cost of Service for Distribution Service 62 1 2. Quality and Reliability Performance Index 63 3. Distribution Losses Index 63 4. Low-Income Customer Support Allocation 64 & 5. Research Development Adjustment 64 B. Rate Design 65 . . C. Rate-of-Return Bandwidth 66 D. Implementation Plan 67 Appendix A: PARTICIPANTS IN A RESTRUCTURED ELECTRIC INDUSTRY 69 . Power Choice -iii- February 13, 1996 SUMMARY EXECUTIVE I. In August of 1995, the Massachusetts Department of Public Utilities issued Order 95-30 declaring its intention to provide retail electricity customers with choice of supplier and move electric companies toward separation of their generation, transmission and distribution functions. The Order directed three electric companies to develop plans to restructure their operations and file them with the Department by February 16, 1996. The Massachusetts Division of Energy Resources (DOER) herein offers Power DOER Choice, its own version of a generic electric utility restructuring plan. files DOER this plan to clarify the approach believes best meets the Department's guidance on restructuring and to provide a basis for agreement among all parties on how best to serve the needs of retail electricity customers. Section II of Power Choice presents the core elements of the plan, first in the form of a vision of a restructured electric industry and then the steps that must be taken to accomplish an orderly and expeditious transition. In the future, each of the presently regulated electric companies will be separated into unregulated generation companies and regulated distribution companies. Any qualified generator may offer electricity for sale, and a variety of companies vie to provide customers with choices of power and related services. Over a three year period, electric companies voluntarily divest themselves of generation assets and retail functions through sale or spin off to new companies of their creation. An Independent System Operator (ISO) operates the regional transmission A system and provides open access to that system at comparable tariffs to all users. separate and voluntary Power Exchange facilitates electricity trading on a regional basis through a spot market. The Distribution Company ensures that all customers receive electric service, administers low-income and consumer protection programs and provides electricity to customers who do not receive power from a competitive supplier. It recovers its costs through regulated rates based on the quality of service provides. it Environmental improvement continues through reduced emissions at existing power plants, and conservation and renewable energy programs are maintained by Distribution Companies through the transition period. Electric companies use a market-based valuation process for identifying and mitigating stranded costs in a way that is fair to both the companies and consumers. Stranded costs are recovered by Distribution Companies through the transition process in charges approved by the Department. Section III of Power Choice details how this plan meets the requirements of the Department's August, 1995 Order. Finally, the details of a performance-based rate structure for Distribution Companies is presented in Section V. Power Choice -1- February 13, 1996 Power Choice -2- February 13, 1996 H. THE PLAN: Power Choice The Department has directed each electric company to file "a plan for moving from the current regulated industry structure to a competitive generation market and to increased customer choice". D.P.U. 95-30 at 47. While not an electric company, the DOER hereby presents a restructuring plan, Power Choice, for consideration by the Department, electric companies, and other parties. This section presents the core elements of a .strategy that restructures the electric industry in Massachusetts in an orderly, expeditious, and straightforward manner. The elements are presented in summary form. Details are left to later sections of this filing. Power Choice is presented in two parts: first, our vision of the industry is summarized as it should be structured when the transition process is complete: second, the transition process needed to achieve a fully restructured electric industry is discussed. Power Choice -3- February 13, 1996 . A. VISION OF THE INDUSTRY New Corporate Structure for All Electric Companies 1 Each electric company fully separates all of its competitive generation and retail sales functions, so that the former electric company ultimately provides only two primary services directly to its customers: Distribution Service and Basic Service. Distribution Service is the local wires service needed to deliver electricity from the transmission network to the final consumer. Basic Service is electricity services provided to customers who have not chosen a generation supplier. The company that provides these two services is called the Distribution Company. 1 2. Customer Choice of Suppliers To assure that all customers have an unimpeded choice of suppliers, each Distribution Company that provides Distribution Service establishes: a. procedures for customers to choose their supplier of generation service; b. procedures to assure that Distribution Service is available to all customers and suppliers on a non-discriminatory basis, including assurance that interconnection standards and wires upgrade requirements and charges are necessary, reasonable and non-discriminatory; c. a Distribution Service tariff that is available to all customers and to all suppliers; d. procedures to track energy and power flows within the company's distribution system for purposes of settlement and balancing, and to appropriately bill each customer (or their supplier, if authorized by the customer) for Distribution Service; and 'The term "Distribution Company" is used throughout this Plan to refer to the regulated monopoly electric company after it has spun off or divested itself of its generation and competitive retail functions. Power Choice -4- February 13, 1996