Several parties, led by TURN and El Paso, claim that PG&E has a conflict of interest in the operation of its gas system. TURN believes the conflict between shareholders and original system ratepayers arises from the Commission’s "let the market decide" policy, under which Line 401 was certificated. PG&E concedes that Line 401 competes against brokered Southwest pipeline capacity. TURN points out that when Line 401 wins that competition, shareholders retain the revenues. When brokered capacity wins, revenues accrue to ratepayers as credits to PG&E’s ITCS account. Because PG&E is responsible for marketing both of the competing products, it has a conflict of interest. TURN asserts that while PG&E would be expected to deny that it ever benefited from the conflict of interest, to deny its existence is simply not credible.
El Paso concurs, and claims that the conflict pervades PG&E’s operations. El Paso cites several examples: pursuit of subsidies for Line 401 through roll-in of the Line 401 revenue requirement with original system rates, setting of inflated minimum bids for brokered Southwest capacity, more extensive marketing efforts for Line 401 than for brokered capacity, PGT interruptible service discounting policies, backbone credit practices, inadequate consideration of gas supply diversity, and others. El Paso characterizes PG&E’s decision to terminate service over the El Paso pipeline when current service agreements expire as the ultimate manifestation of the conflict of interest. El Paso believes the conflict of interest has led to stranded costs of $101 million through May 1995.
PG&E argues that it has no conflict of interest in marketing its various holdings of pipeline capacity. According to PG&E, the term "conflict of interest" is no more than an inflammatory slogan unless it is coupled with the power to exploit the conflict, and marketplace competition prevents PG&E from doing so. PG&E claims that it has set up a competitive environment without creating incentives that favor Line 401 or El Paso capacity, and that it does not have the market power to take advantage of any perceived conflicts. Elements of PG&E’s plan include arm’s length operations by PGT, organizational separation of UEG and core procurement functions, and management vigilance against conflicts of interest.
The Public Utilities Code neither defines conflict of interest nor prohibits conflicts of interest within utility management. Direct regulation of utility monopolies is in large part meant to control or neutralize conflicts of interest between shareholders and ratepayers. Faced with increased competition in utility industries, it remains our duty to authorize regulatory schemes which minimize such conflicts. Our goal in this proceeding is to provide PG&E with incentives to exercise its discretionary management functions in an evenhanded manner, so that ratepayers receive fair treatment as PG&E executes its fiduciary duties on behalf of shareholders. In the context of this proceeding, a conflict of interest arises when PG&E has a duty on behalf of shareholders to contend for outcomes which its duty to ratepayers requires PG&E to oppose. We do not presume that PG&E will represent ratepayers if that representation will be directly adverse to shareholder interests. In our view, such a conflict exists whenever there is a reasonable possibility that the utility will not exercise its discretion fairly. We need not determine whether a conflict is actual, in the sense that preference or harm is supported by direct evidence, or only gives an appearance of conflict.
We concur with TURN and in part with El Paso in this dispute. Shareholders benefit when Line 401 serves market demand, and ratepayers benefit when brokered capacity serves the demand. By PG&E’s own admission, the two services compete for the same loads. There is a reasonable possibility that PG&E acts preferentially in favor of shareholders when it markets the two services. Therefore, PG&E has a conflict of interest.
It is more difficult to determine whether actual harm has ensued, as El Paso claims. In some circumstances, PG&E has clearly responded to the conflict of interest in favor of shareholders: through pursuit of rolled-in rates, by pricing Line 401 service to compete with brokered capacity, and by Line 401 marketing efforts that are more vigorous than capacity brokering efforts. PG&E’s actions have been successful. In 1994, Line 401 operated at approximately 71% of its design capacity, or approximately 51% of as-available capacity after subtraction of firm service quantities. By comparison, in 1994 PG&E sold approximately 53% of unused El Paso capacity under its capacity brokering program. Monthly charges to the ITCS memorandum account rose from 1994 to 1995, and PG&E predicts that sales of brokered El Paso capacity will decline. At the same time, more than 90% of Northern California deliveries over Line 401 were found to be eligible for the backbone credit, thereby increasing revenues to PG&E shareholders. El Paso’s vehement reaction to loss of PG&E as a pipeline customer is understandable, but we cannot agree with El Paso that termination of service to PG&E is the ultimate manifestation of the conflict of interest.
We will consider the consequences of PG&E’s future conflicts of interest in review of the Gas Accord.
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