FINDINGS

1. The Commission issued its Affiliate Transaction Rules in Decision (D.) 97-12-088, and modified these Rules in D.98-08-035.

2. Rule VII governs the provision of nontariffed products and services by the utilities. Rule VII.E requires that utilities file with the Commission prior to offering a new category of nontariffed product or service.

3. Pacific Gas and Electric Company (PG&E) filed Advice Letter 2166-G/1890-E 1425-E on July 12, 1999, requesting Commission approval to offer a new category of nontariffed service entitled "Third Party Meter Reading Services."

4. Notice of AL 2166-G/1890-E was made by publication in the Commission's calendar and by mailing copies of the filings to parties in OIR/OII 97-04-011/97-04-012 and interested parties in accordance with Section III of General Order 96A.

5. Protests to AL 2166-G/1890-E were filed by PHASER Advanced Metering Services (PHASER) on August 11, 1999, Enron Corporation (Enron) on August 11, 1999, utility.com (UC) on August 11, 1999, and the Office of Ratepayer Advocates (ORA) on July 30, 1999. Letters in support of the advice letter were sent to the Commission by the cities of Santa Rosa, Dinuba, Sunnyvale, and Gonzales.

6. Under this proposed service, PG&E employees, while reading the meters of the utility's customers, would read the on-site meters of third parties such as cities, water service districts, utility districts, and other third parties who desire the service.

7. The service would also include incidental on-site meter maintenance (such as trimming vegetation and removing dirt), and recommending more extensive work or repairs when needed.

8. PG&E also plans to offer consulting services related to meter reading and improvements in information collection.

9. PG&E expects to be able to accommodate 10 customers and up to 200,000 third-party meters in the next two years using their present work force, 410 full-time and 360 part-time meter readers. These workers currently read 8 million gas and electric meters each month.

10. PG&E will not use this service to provide meter reading for its tariffed products, direct access customers, or to Electric Service Providers.

11. D.99-04-021 adopted an interim mechanism to determine the share of net other operating revenues (OOR) to go to ratepayers. This methodology is described in PG&E's Application 98-05-007.

12. D.00-06-058 requires PG&E to file for a permanent revenue sharing mechanism in its next PBR application on September 1, 2000.

13. ORA alleges that PG&E's calculation of the net OOR is in violation of D.99-04-021.

14. ORA states that PG&E's proposal would include in costs labor and overheads that are already covered in rates, essentially double counting these costs, to the detriment of ratepayers and in violation of D.99-04-021.

15. PHASER states that PG&E's proposal could result in anti-competitive behavior through pricing that does not cover the full cost of providing the service.

16. PHASER recommends that PG&E be required to offer this service through an unregulated affiliate in order to prevent cross subsidy and the abuse of the utility's market power.

17. UC suggests that the Commission require PG&E to offer meter reading service to ESPs at the same terms offered to third parties, so that ESPs can also enjoy the price benefits of the utility scale economies.

18. Enron Corporation (Enron) argues that utility meter readers are not the type of "assets" contemplated by Rule VII.C.4. The use of labor "downtime" to provide additional lines of service is not what the Commission envisioned by this Rule. If there are some excess employees, as this proposal implies, "the ratepayers should not be burdened with" their associated costs.

19. Enron also argues that the meter readers have "not been shown to be necessary and used for utility services or available for nontariffed services" consistent with the Rule.

20. Enron states that PG&E will subsidize this service, discouraging competitive entry into this market. The company claims that this will harm both Enron and the competitive market, and wants the service to be offered through an affiliate of the utility.

21. Enron states that the Commission's policy underlying Rule VII is that nontariffed services, in most cases, should be offered through an affiliate.

22. PG&E filed a Motion to Dismiss and Response to ORA's July 30, 1999, protest on August 6, 1999, and filed a Motion to Dismiss and Response to the August 11, 1999, protests of Enron, PHASER, and UC on August 19, 1999.

23. ORA filed a response to the Motion on August 27, 1999, and Enron filed a response to the Motion on August 25, 1999.

24. Rule VII.E.4 allows the utility to file a motion to dismiss the protest within five working days if it believes the protestant has failed to provide the minimum grounds for protest required. The protestant has five working days to respond to the motion.

25. The Motion to Dismiss ORA's protest was filed within the time limit specified in the Rule. The Motion to Dismiss the protests of Enron, PHASER, and UC was filed six working days after they were filed at the Commission.

26. The response of Enron was filed four working days after the Motion regarding its protest was filed.

27. The response of ORA was filed 15 working days after the Motion was filed, but the filing requested permission to file late as the cognizant analyst was on vacation during this time. This request should be granted.

28. The Motion to Dismiss filed on August 19 should also be received although it is a day late.

29. PG&E claims that ORA is unhappy with the conclusions of D.99-04-021, but that it should wait to address these concerns until these interim Rules are reviewed in PG&E's PBR proceeding.

30. PG&E says that it complies with the requirements of D.99-04-021, and that it has submitted information about its cost allocation methodology in its Periodic Reports on Non-tariffed Products and Services, first filed on September 14, 1998.

31. PG&E says that ORA wants "all" costs included in the calculation of appropriate costs, but claims that PG&E's use of what it calls "incremental" costs is consistent with D.99-04-021. The utility claims that these costs include no embedded costs, and that the labor-related fixed costs it includes is consistent with D.99-04-021.

32. PG&E says that ORA's argument that including labor costs which are already in rates as part of incremental costs double counts these costs ignores the fact that rate cases are only estimates, and that the utility may spend more or less than that estimate.

33. Further, under a PBR environment, it benefits ratepayers when less cost is allocated to utility service, as it increases the profits to be shared with ratepayers.

34. PG&E argues that the protests of Enron, PHASER, and UC are without merit and do not comply with Rule VII.E.3.

35. PG&E asserts that the claims of "anti-competitive behavior" advanced by the protestants are not sufficient to satisfy this Rule, and that these issues were fully litigated in D.97-12-088.

36. PG&E acknowledges that PHASER comes closest to compliance with the Rule by alleging that PG&E's entry into its market would be predatory and anticompetitive, as the price charged by the utility could be less than full cost, as the utility posses significant market power.

37. PG&E claims that this simply shows that PHASER "fears competition" and that such fears should not be the concern of the Commission, and that the Rules were not designed to allow competitors to block entry by the utility.

38. PG&E claims that it has no market power here, but simply has a cost advantage.

39. PG&E says that it "will allocate its incremental costs to this service, and will price it according to market conditions."

40. PG&E states that the provision of nontariffed products and services was never limited to tangible assets by the Commission, as Rule VII refers to both assets and capacities.

41. PG&E's proposal includes the use of vehicles and other equipment, as well as the use of surplus labor from the meter readers.

42. PG&E claims that its use of its own meter readers makes this capacity "necessary and useful in providing tariffed utility services," as required by Rule VII.C.4.

43. PG&E states that D.97-05-039 ordered the unbundling of such services for the direct access market, not the target market for this proposal. The utility already offers this service to Electric Service Providers on a tariffed basis.

44. D.98-09-070 says, "we must balance competing objectives to promote competition, provide the utilities with a reasonable opportunity to recover costs and protect customers from unfair pricing." (p. 7)

45. PG&E argues that the harm alleged by the protestants are to their own businesses, not to consumers.

46. PG&E says that charging a lower price in the market, due to increasing economies of scope or scale, is supported by case law, and the company provides several cites to support their position.

47. PG&E asserts that if it were to be required to offer this service through an affiliate, its customers would be deprived of the fruits of these "economic efficiencies."

48. The cities of Santa Rosa, Dinuba, Sunnyvale, and Gonzales wrote to the Commission in support of PG&E's advice letter.

49. The cities say they want "access to the most cost-competitive service providers" and that they want "the freedom to choose the best service provider" and the ability to capture any efficiencies available from multiple meter readings.

50. The cities of Dinuba and Gonzales add that "[i]n general, we believe all service providers should be allowed to compete for our business, and that the market place should set the price for these services."

51. Rule VII.E.3 requires that protestants provide the Commission with at least one of two things: either the specific Rule, law, decision, or Commission policy the proposal will violate, "with reasonable factual detail;" or an explanation of the harm the protestant will suffer if the Commission approves the proposal.

52. If ORA's allegation regarding the understatement of sharable OOR is correct, ratepayers would be harmed. ORA has thus satisfied Rule VII.E.3 and the protest is not rejected.

53. Enron and PHASER each argue that the proposal is anticompetitive and that, as competitors or potential competitors, entry by the utility into this market would harm them as well as the market.

54. Enron further asserts that this sort of service was not envisioned by the Commission when it developed Rule VII, that the Rule was designed to exploit excess capacity of capital, not labor, and that the Commission's policy is to have such services offered through an unregulated affiliate if practicable.

55. These questions of potential harm and conflict with Commission policies are sufficient to satisfy Rule VII.E.3 and thus these protests are not rejected.

56. UC also argues that this proposal is anti-competitive and that the Commission's policies against anti-competitive practices by the utility would thus be violated by this proposal.

57. This statement satisfies the requirements of Rule VII.E.3 and thus the protest is not rejected.

58. PG&E argues that other utilities are already providing this service and, as such, PG&E should be allowed to enter this market as well. These services were listed by other utilities in advice letters submitted to the Commission on January 30, 1998.

59. However, no products or services were "grandfathered" by the Commission.

60. It is a mistake to suggest that the Commission would allow the provision of a product or service simply because a similar product or service was offered by another utility at the time these Rules went into effect.

61. Rule VII.C lists requirements that must be met for all products and services offered by the utilities. If these conditions are not met, the utility must discontinuing offering the product or service, even if it was offered before implementation of the Affiliate Transaction Rules.

62. In addition, it is clear that the Commission is interested in ensuring that any new category of product or service is offered in the public interest. It is not sufficient that new offerings satisfy Rule VII.C, but they must also meet the additional conditions imposed by Rule VII.E.

63. Enron argues that meter readers are not the type of assets envisioned by the Commission for exploitation under this Rule.

64. While this is true, the parties advocating these Rules in R.97-04-011/I.97-04-12 list several examples of what they would consider acceptable nontariffed services, including "third-party use of technical employees on an `as available' basis. . . ." (D.97-12-088, mimeo p. 80)

65. PG&E points out, however, that most of the surplus capacity used to provide this service is not in labor, but in the trip to the meter. The increased efficiencies should be largely in the meter reader's ability to read multiple meters with one visit to the customer's premises.

66. Rather than scale or scope economies, these efficiencies are due to the Law of Variable Proportions.

67. As such, it is clear that this proposed service utilizes a portion of the utility's assets or capacity.

68. Further, it is equally clear that this meter reading capacity was created to facilitate the provision of the tariffed utility service.

69. The proposed meter reading service satisfies Rule VII.C.4.a and b.

70. What the utility does with these lower average costs is the crux of the issue here with many of the protestants and parties.

71. Potential customers of this service would like to see lower average costs go to them in lower price.

72. The potential competitors are concerned that such pricing would be anti-competitive in violation of Commission policy, Rule VII.C.4.e, or Rule VII.E.1.d.

73. The Commission was concerned at the time it issued D.97-12-088 that utilities might interfere with the development of competitive markets if they provide services themselves rather than through their affiliates.

74. Such interference would happen through the exercise of market power by the utility.

75. In a competitive market the firms charge the price determined by the interworkings of supply and demand. A firm with market power, however, has the ability to manipulate the price it charges to its advantage.

76. The firm could, for instance, hold its price above average costs in an effort to make a long-run profit. Alternatively the firm could hold its price below the average cost to undercut what other market participants have to charge, thus preventing entry into the market.

77. This latter action would clearly interfere with the development of this market, or could interfere with the efficient working of an existing competitive market.

78. The utility seems to recognize the importance of a market-determined price.

79. According to the utility, "[a]ll pricing will be market-based."

80. PG&E does not explain how this market price will be determined by the company.

81. The utility, protestants, and the cities all seem to recognize the importance of market-based prices based on healthy markets for services.

82. PG&E defines a "market rate" as one set by willing participants "in a free and competitive market."

83. PG&E says that it "does not intend to provide an offer of service at less than its costs."

84. PG&E will "ensure that the prices it offers exceed the costs incurred in providing non-tariffed meter reading services."

85. The utility explains that "[i]t is not anti-competitive for PG&E to enter the market for non-tariffed meter reading services, so long as PG&E charges a price that is greater than its costs."

86. PG&E also points out that there are few cost-based barriers to entry in this market.

87. PG&E has collected information from its potential customers regarding recent bids for this service by other meter reading services, and has conducted, and will continue to conduct, time and motion studies to determine actual costs.

88. D.99-04-021 cautions that, "PG&E remains responsible to set its prices and terms of service in a manner that is consistent with an open and fair competitive market. We may find it necessary to limit PG&E's pricing discretion in specific instances. The company remains answerable before this Commission and appropriate courts of law for any anti-competitive aspects of its non-tariffed products and services."

89. Thus, while PG&E has pricing flexibility, it must set prices that are not anti-competitive, and therefore do not discourage market competition or entry.

90. Prices should reflect those found in the market charged by incumbents.

91. All firms must cover their total costs in the long run in order to remain viable. This is true of PG&E as well.

92. PG&E says that it will charge prices which are higher than its costs. While the company is apparently referring to its "incremental costs," these should be total costs.

93. "Incremental costs," while apparently including direct overheads, exclude other fixed costs such as the embedded costs as well as Corporate Administrative and General costs. Such fixed costs must be recovered in prices by PG&E's unregulated competitors if they are to survive.

94. If the PG&E business unit offering this service is not required to cover these costs in its prices, it enjoys a cost advantage not derived from its own internal efficiencies. As discussed above, such cost advantages are anticompetitive and violate Commission policy.

95. PG&E should be required to supplement its advice letter to clarify its pricing methods and to explain how it intends to ensure that the total costs, not just "incremental costs," of this service are recovered in the prices it charges.

96. PHASER and Enron advocate that the Commission require the utility to offer this service through an affiliate.

97. PHASER and Enron are correct that the Commission's policy is to prefer that nontariffed products and services be offered by the unregulated affiliate rather than by the utility itself.

98. The Commission stated in D.97-12-088:

99. This preference for the use of affiliates is further supported by the wording of Rule VII, which starts with:

100. Similar phrasing can be found at the beginning of Rule VII.C.

101. The Commission has a policy preference for the use of affiliates to provide nontariffed products and services, and does not want Rule VII to be used to circumvent the market safeguards and separation actions represented by the Affiliate Transaction Rules.

102. However, the excess capacity to be used to provide this service, primarily the initial trip to the customer's premises, is not easily transferable to an affiliate. Much of the efficiencies that would be gained by use of the current meter readers on their existing routes would be lost.

103. We should not require this service to be offered through an affiliate at this time.

104. D.99-04-021, which established an interim mechanism for sharing net OOR, adopts PG&E's proposal to determine net sharable OOR through the allocation of "incremental costs related to the new offerings." Neither the decision nor Appendix A, adopted by the decision, defines incremental costs further.

105. PG&E's Application 98-05-007, leading to D.99-04-021, gives the following definitions:

106. On p. 11 of the application PG&E says that incremental costs are "directly attributable to the NTP&S."

107. ORA worries that under the current proposal costs already covered by ratepayers will now be subtracted from OOR to determine sharable revenues, thus counting these costs twice.

108. PG&E mischaracterizes ORA's position when it asserts that ORA wants all costs, including imbedded costs, included in this methodology. To do so would, in fact, decrease the revenues shared with the ratepayers.

109. The cost of supervision and management, vehicles (except for the marginal cost of fuel and maintenance if additional trips are required), office space, uniforms and equipment is not affected by the marginal increase in the number of meters to be read anticipated by PG&E. Such costs are not appropriately included in "incremental costs" under the sharing methodology.

110. The utility has 800 union employees, and can supplement this labor through its "hiring hall." If additional employees must be hired from the hiring hall to perform these services, some direct overhead costs, such as additional vehicles, uniforms, equipment and supplies, may be appropriately assigned under this mechanism.

111. However, such costs should be minimal in many cases, as PG&E claims, "[I]n areas where PG&E already collects gas and/or electric meter data at every premise, the incremental labor requirements for PG&E to read third party meters are low. . ." and can be met through use of its current employees and the hiring hall.

112. PG&E should be required to file a supplemental advice letter which explains how the utility plans to limit the costs it allocates to this sharing mechanism to those that are incremental and directly attributable to this service.

113. It is important that companies that may be affected by this proposal, because they are competitors or potential competitors, be informed about it.

114. There is no assurance that existing lists of interested parties include all or even many of the potential competitors for this service.

115. Two of the Protestants to this advice letter, PHASER and UC, are not included on these lists.

116. When PG&E files its supplement to this advice letter, it should serve the parties to R.97-04-011/I.97-04-012, the protestants to the advice letter, and other potential competitors and meter-reading industry associations, if any. These additional parties should be listed in the supplemental advice letter.

117. The protests should be granted or denied, as specified herein.

118. This Advice Letter should be granted, given the conditions specified herein.

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