II. Background

Since April 1998, SCE has offered service to two distinct types of customers. Bundled service customers receive the full range of electric services from SCE, which include energy procurement and delivery. SCE customers could also choose, under the DA option, to purchase energy from an energy service provider (ESP). SCE continues to deliver electricity to both DA and bundled service customers.

A. Rate Freeze

Total rates were frozen at levels in effect on June 10, 1996 for all customers. Bundled service customers paid these frozen rates for the duration of the transition period (January 1, 1998 through March 31, 2002 or a Commission-authorized earlier end date). These frozen tariff rates included a generation rate component. The generation rate component was unbundled into the market price and a competition transition charge (CTC) component. The CTC was calculated residually as the difference between the fixed generation rate component and the market price, where the market price was based on SCE's cost of procuring power from the Power Exchange (PX) and the California Independent System Operator (ISO). All customers paid the CTC and the CTC revenues were used to pay for SCE's stranded generation costs, also known as transition costs.

B. The Avoided Cost Credit

SCE calculated a market price for billing purposes utilizing the cost and quantities of power purchased from the PX. This PX price was used to determine the contribution to the recovery of CTC (when compared to the generation rate component of frozen rates) and also represented SCE's avoided cost of procuring energy. The PX component of the generation rate was either applied to recover the cost of purchasing power for bundled service customers or given as a credit to DA customers. The credit reflected the fact that DA customers had chosen to procure their energy through an ESP rather than SCE. So long as the market price, or DA credit, remained below the generation component of the customer's frozen rate, the DA customer continued to make a contribution to CTC in exactly the same manner as a similarly situated bundled service customer.