The OIR/OII sets forth two objectives which guide our formation of the appropriate rules: (1) to foster competition and (2) to protect consumer interests. In this proceeding, we are concerned with the behavior of the Commission-regulated utilities, not the affiliates, in order to meet these objectives.
Given the current and past structure of the electric and gas industries and the obvious advantage of the incumbent utility as we move toward increasing competition, there is a clear need for these rules to promote a level playing field which is vital for competition to flourish. We consider the adoption of these rules as one of our most critical decisions in the electric industry restructuring process as we lay a solid foundation for competition.
The investor-owned utility's affiliates may be targeting the same customers that the investor-owned utility is currently serving or they might be offering services which the utility does not offer to the utility's customers. The presence of the investor-owned utility in the same service territory as a utility's affiliate raises market power concerns because of their ownership ties and the preexisting market dominance of the monopoly utility. We previously recognized that the development of competitive markets would be undermined if the utility were able to leverage its market power into the related markets in which their affiliates compete. (See D.97-05-040, slip op. at pp 64-67.)
We also articulated these concerns in SoCalGas' Performance-based Ratemaking Decision, D.97-07-054, slip op. at p. 63. "By the very nature of SoCal's monopoly position in the energy and energy services market, its access to comprehensive customer records, its access to an established billing system, and its `name brand' recognition, it may be that SoCal enjoys significant market power with respect to any new product or service in the energy field."
We have faced the issue of enacting appropriate affiliate transactions rules before, such as when we determined appropriate conditions in the formation of a utility's holding company, or in determining appropriate rules for certain areas of the telecommunications industry. In adopting holding company structures for the investor-owned utilities when markets were much less competitive, we largely relied upon the corporate separation of the regulated and unregulated entities and some cost accounting measures to protect against anticompetitve behavior within the new markets. With the advent of a marketplace characterized by increasing competition, we wish to ensure that the utilities' market power does not discourage competition, and does not foreclose the entrance of or disadvantage electric service providers and other businesses that are unaffiliated with the utilities. Rules focusing primarily on corporate separation and cost accounting may not be adequate to overcome the incumbent's advantage.
Moreover, affiliate transaction rules for the telecommunications industry may not be appropriate to transpose wholesale to this proceeding. The nature of the telecommunications industry and the pace at which it has undergone changes toward competition are significantly different than in the electric industry. Also, when we first developed rules for the telecommunications industry as it was becoming more competitive, we still regulated the telecommunications industry primarily under cost-of-service regulation. In the energy industries, we are moving away from cost-of-service regulation, and Edison, SDG&E, and SoCalGas are regulated under some form of performance-based ratemaking.
Therefore, at the infancy of implementation of electric industry restructuring, we choose to adopt rules that generally require more separation between a utility and its affiliate, rather than rules that rely almost exclusively on tracking costs. The fewer the transactions between the utility and its affiliate, the greater confidence we have that the affiliate lacks market power. In an ideal world, the utility would treat the affiliate as it would other, nonaffiliated firms. As highlighted by our discussion of the individual rules, rules that rely more on separation, and less on cost accounting solely, can minimize the likelihood of abuses. At the same time, rules that rely on separation are easier to monitor than rules that primarily rely on reporting requirements.
The CEC described the tensions between the benefits of integration (economies of scope) and encouraging market competition. It explains that electric industry restructuring was undertaken under the assumption that the benefits of market competition would outweigh the forgone benefits of scope or scale inherent in the integrated utilities. It argues that it is essential that we maintain our commitment to creating an efficient competitive marketplace and accept that some near-term scope and scale economies may be forgone to achieve this end.
We agree with the CEC. We also note that it is not clear that the near-term savings that result, for example, from joint utility and affiliate procurement, would actually translate into lower prices for consumers or ratepayers. The interaction of supply and consumer demand in the competitive market will determine the prices of the goods sold by the affiliates and their competitors. However, the assumption that competition would require a single firm to pass along cost savings must assume the corollary that most competing firms obtain comparable cost savings. A firm which has a singular competitive advantage, for whatever reason, may retain extraordinary profits for some period rather than pass them through in the form of lower prices. Or, if an affiliate's costs are lower than other market participants or potential entrants, it could use this cost difference to undercut bids to drive out incumbents or to prevent other potential competitors' entry. Also, we question whether the ratepayers would benefit from the utility's joint purchases with affiliates until after the rate freeze is lifted. Even then, the utilities have significant market power by themselves; it is unclear to what degree ratepayers would benefit further from joint utility/affiliate purchases.
The consumer interests we seek to protect go hand in hand with promoting competition. For example, we wish to prevent cross-subsidization, so that a utility's customers will not subsidize the affiliate's operation. This is especially important in our transition to a competitive market, since such leveraging, together with a utility's market power, could inefficiently skew the market to the detriment of other potential entrants. As product promotion and advertising become more intense, we also believe it important to craft rules which prevent consumer confusion, such as the representation or implication that the affiliate assumes all the attributes of the Commission-regulated utility, merely because of its corporate connection. We also recognize that customer-specific information can become quite valuable to businesses in a competitive environment, and we wish to protect the utility's release of customer-specific information, except where the customer has consented in writing to the disclosure.
Finally, we note that several parties, primarily the Joint Utility Respondents and EEI, urge us to consider that the utilities' primary competitors will be large corporations that may be subject to few or no affiliate transaction guidelines. These parties warn that we should adopt rules which will provide a level playing field so the utilities can effectively compete against such large corporations that have few guidelines from regulators, if any.
Other parties responding to the OIR/OII indicate that competition in a variety of areas where the utility affiliates plan to compete should include more than the Joint Utility Respondents and a few large corporations. More importantly, it is this Commission's duty to adopt rules it deems necessary to protect the public interest in California, and not to abdicate that duty because it is alleged that several potential competitors are not subject to the same rules. Also, many of the large potential competitors do not own or are not affiliated with monopoly facilities. Our role is not to promote a monopoly's competitive operations but to protect a monopoly's customers.
Significantly, the Joint Utility Respondents recognize our role in their arguments on another issue. In opposition to PacifiCorp et al.'s motion for exemption from these rules, Respondents recognize that other states' standards cannot protect California consumers because other states cannot enforce compliance in California and other states' standards may not reflect what this Commission deems necessary to protect the public interest in California.
On June 2, 1997, the Joint Petitioners Coalition filed a Petition for Modification. The petition requests that the Commission modify the OIR/OII so that the rules adopted in this proceeding cover not only utility transactions with affiliates engaged in energy-related businesses, but also utility transactions with affiliates engaged in businesses unrelated to energy.
The Joint Petitioners Coalition states that similar risks of cross-subsidization and anticompetitive transactions arise in all utility-affiliate transactions, including those involving affiliates that engage in businesses unrelated to energy. As an example, the Coalition states that a utility may allow an affiliated telemarketing company to use its phone center, and not charge the affiliate for that use. Or, a utility may insert marketing materials of an affiliated appliance repair company in the utility's customer bill, while refusing to provide the same service to the affiliate's competitors. The Coalition further argues that it is difficult to draw a clear line separating energy-related and non-energy-related services. The Joint Petitioners Coalition lists several activities which it believes fall within the definition: the manufacturing of earthquake shut-off valves, providing internet and computer repair services, heating, ventilation and air conditioning (HVAC) maintenance and installation, power quality, energy management, energy auditing, and in-home security systems. The CAPHCC echoes these concerns. Finally, the Coalition argues that since at least two sets of joint parties propose rules that are intended to apply to utility relations with all unregulated affiliates, the Commission can best economize its resources by considering and adopting rules that govern all utility-affiliate transactions.
In its June 2 proposal, the Joint Utility Respondents proposed rules that would apply to transactions between the utilities and their affiliates, regardless of the goods and services that those affiliates provide.
In their July 31 response to the petition for modification, Respondents support the concept of expanding the scope of the rulemaking and investigation, but not for the reasons advocated by the Petitioners. Rather, they believe that the scope of the rules should be expanded if the Commission adopts their proposal, which they believe is fair and balanced. However, the scope should not be expanded if the Commission adopts what Respondents describe as Petitioners' unnecessarily restrictive rules. The CEC and DGS/UC/CSU recommend that the Commission grant the Petition for the reasons set forth in the Petition. The CAPHCC concurs because of the difficulties in articulating a working definition of affiliates providing energy-related services.
The EEI maintains that the adopted rules should apply to activities involving the sale of power to jurisdictional retail customers and should not apply to other services or market segments unless the Commission affirmatively finds that market power significantly prevents entry or results in higher prices for consumers. Similarly, PacifiCorp does not support broadening the proceeding's scope.
We originally narrowed the scope of the proceeding, in part, so we could adopt rules by December 31, 1997. We wanted to address the types of affiliate transactions over which we have the most concern in the near term. We did not indicate whether or not another proceeding would follow to address utility transactions with affiliates who provide services other than energy or energy-related services. Furthermore, the current rules regarding affiliate transactions remain in place for the other types of transactions. Because the comments in this proceeding primarily discuss the market power concerns with a utility marketing energy and broadly defined energy-related services, we continue to limit the applicability of the rules we adopt. Although no party has defined energy or energy-related services, our adopted rules do so. Our definition is broad in scope, given the incumbent's general advantage and because we want to ensure that there is robust and fair competition in the affected markets.
For purposes of a combined gas and electric utility, these rules apply to all utility transactions with affiliates engaging in the provision of a product that uses gas or electricity or the provision of services that relate to the use of gas or electricity, unless otherwise specifically exempted in these rules. In the case of an electric utility, these rules apply to all utility transactions with affiliates engaging in the provision of a product that uses electricity or the provision of services that relate to the use of electricity, unless otherwise specified in these rules. For a gas utility, these rules apply to all utility transactions with affiliates engaging in the provision of a product that uses gas or the provision of services that relate to the use of gas, unless otherwise specified by these rules. As we stated, we intend this definition to be interpreted broadly, and to include, for example, the services delineated in the OIR/OII as well as the selling and repair of appliances, home repair services involving electricity or gas, etc. In light of this discussion, the Joint Petitioners Coalition's petition to modify the OIR/OII is denied. In the discussion below addressing the definition of "affiliate," we address other issues bearing on the scope of the rules.
On June 2, TURN filed a motion requesting a provisional ban on marketing by the affiliate of a gas or electric utility distribution company (UDC) within the utility's service territory. TURN recommends that after two years, the Commission should review whether sufficient competition has developed to justify lifting the ban. Although TURN joins the Joint Petitioners Coalition's proposal, TURN believes those proposed rules are the second-best alternative to its requested provisional ban. TURN believes that the potential harms of anticompetitive self-dealing, information sharing, cross-subsidization and other abuses in the increasingly competitive energy services markets are manifest, and far outweigh the potential benefits of one more competitor in what it believes will be a highly competitive market. Moreover, TURN believes specific rules, as opposed to a ban, will be much more difficult for the Commission to enforce. TURN believes that the Commission has the jurisdiction to institute this provisional ban under, inter alia, Public Utilities (PU) Code § 701.
On June 2, ORA also filed a motion for adoption of its proposed rules. ORA proposes that the Commission adopt one rule: Effective immediately, for the next three years during the implementation of the Commission's direct access plan outlined in D.97-05-040, customers of the natural gas local distribution companies and electric utility distribution companies shall not receive products or services from unregulated affiliates of the gas and electric utilities from which they receive distribution services.5 ORA believes that market power concerns are much too great at this time to allow the marketing affiliate of the local utility access to the customer to offer energy or energy-related services. ORA believes its proposed rule would foster competition by encouraging new entrants, and would also be fair to the utilities, since their affiliates could do business in other service territories within or outside the state. ORA also believes that its proposal is more enforceable than specific detailed rules. ORA supports the Joint Petitioners Coalition's proposal as the best alternative to its proposed rules. ORA also supports TURN's proposal, which is similar to ORA's.
The Joint Utility Respondents oppose both TURN's and ORA's motion. They argue that the Commission considered and rejected these recommendations in D.97-05-040, slip op. at pp. 66 and 89-90, Conclusions of Law 62 and 64, and furthermore, that the Commission does not have the requisite jurisdiction to adopt such a ban. The utilities also believe they would be disadvantaged by either of these two proposals, which would adversely affect customer choice. PG&E ES also opposes TURN's and ORA's motions for largely the same reasons as those of Respondents.
In D.97-05-040, issued this past May in our Electric Industry Restructuring Proceeding (Rulemaking (R.) 94-04-031/Investigation (I.) 94-04-032), we stated:
"We will not prohibit affiliated marketers of a UDC, or other retailers, from competing in a UDC's service area. While such a prohibition would prevent the affiliated marketer of the UDC from leveraging the market power of the UDC to its advantage, the fact that we are not adopting a phase-in of direct access will limit to some extent the market power of the UDC. By permitting all customers the ability to choose direct access, all competitors can offer their services to these customers. Allowing full implementation makes it less likely that the affiliated marketer, together with the UDC, can dominate the market." (Id., slip op. at p. 66.)
Given that we recently addressed and resolved the issue raised by TURN and ORA in the context of developing policies and rules for the new competitive energy marketplace, we do not at this time revisit our conclusions in D.97-05-040 on this issue. In D.97-05-040, in lieu of adopting the proposal now advocated by TURN and ORA, we adopted 11 interim affiliate transaction guidelines that required much greater separation of utility and affiliate operations than had occurred in the past, to address our market power concerns. We deny TURN's and ORA's motions here with the understanding that we choose at this time to facilitate open and fair competition by appropriate affiliate transaction rules.
On June 2, PacifiCorp et al. and SCWC moved that they be exempted from the adopted utility/affiliate rules. PacifiCorp et al. argue that the moving utilities' presence in California is not of such magnitude as to permit them to exercise sufficient market power to influence the supply, demand, or price of electricity in California. They do not believe that their small customer base raises cross-subsidization issues, and they assert that their customers (and indeed all utility customers) are protected from cross-subsidization by existing provisions of the PU Code addressing affiliate transactions. Moreover, they stress that other Commissions that regulate these utilities have established procedures to avoid cross-subsidies from wholesale business operations. They therefore request exemption from the adopted rules in this proceeding, and propose modified standards for multi-jurisdictional utilities serving fewer than 50,000 customers. These brief, modified standards concern the sharing of information and separate accounting for marketing and sales expense associated with seeking direct access customers outside their distribution service territory.
SCWC also requests an exemption, arguing that it does not plan to market energy or energy-related products through an affiliate, and that it is primarily a water serving utility deriving only 8% of its revenues from sales of electricity. It believes compliance with these rules would pose an administrative burden, and compliance would not provide benefits of the type the Commission intends as a result of the new rules.
ORA and the Joint Utility Respondents oppose these motions. ORA believes that such motions are unnecessary. If a utility serving California does not have an affiliate governed by Commission rules, the rules would not affect the utility; however, if the utility has an affiliate engaged in activities covered by the rules, then the rules should apply, regardless of the size of the utility, affiliate, or the parent company.
Respondents do not believe that the Commission should adopt a de minimis standard for any jurisdictional energy utility, which in effect would compromise the protections that are owed to the customers of the utilities seeking the exemption because of their small number. They also believe that the goal of protection against cross-subsidization is furthered by a uniform application of the adopted rules, notwithstanding the size of the utility. Respondents state that standards other states may have adopted cannot protect California consumers because other states cannot enforce compliance in California, and the other states' standards may not reflect what this Commission deems necessary to protect the public interest in California.
However, the Respondents state that if the Commission limits the scope of the proceeding to affiliates providing energy and energy-related services, then SCWC would not be bound by the rules, since its affiliate provides water services. In that instance, Respondents recommend that the Commission provide a utility that does not have an affiliate addressed by the rules an opportunity to seek exemption from the application of the rules. The utility would file a motion for exemption with the Commission within 30 days after the effective date of the order adopting the rules attesting that (1) no affiliate of the utility provides energy or energy-related services within California and (2) if an affiliate is subsequently created which provides such services, then the utility would so notify the Commission and abide by the rules in their entirety. SCWC agrees to Respondents' recommendation.
General exemptions are not appropriate for the moving utilities. We are not only concerned about market power and its effect on competition, but also about the opportunity for cross-subsidization, and how that cross-subsidization might affect monopoly customers' rates and competition. We also wish to achieve uniformity in application of these rules. We therefore deny these requests for general exemptions from our rules.
As we state elsewhere in this decision, we are regulating the California utility here, not the affiliate. However, we recognize that in the case of a California utility which is also a multi-state utility and subject to the jurisdiction of other state commissions, the corporate structure of the utility may not be such that utility activities conducted wholly outside of California are separated into a separate corporate entity. Therefore, we provide that such a multi-state utility that is covered by these rules may file an application, served on all parties to this proceeding, requesting a limited exemption from these rules or a part thereof, for transactions between the utility solely in its capacity serving its jurisdictional areas wholly outside of California, and its affiliates. The applicant has the burden of proof. We stress that this is an opportunity for a limited, not wholesale, exemption to these rules.
To the extent that a utility does not have an affiliate as defined by these rules, the rules do not apply to that utility.6 We also adopt the Joint Utility Respondents' proposal regarding a request for exemption from application of these rules if a utility believes one or more of its affiliates is not covered by the rules. (See Rule II G.) However, the filing will be by advice letter instead of by motion in this docket. All advice letters should be served on the service list of this proceeding.
On September 3, 1997, ORA filed a motion to consider in this proceeding an ORA audit of PG&E which is being conducted in Phase 2 of PG&E's holding company case, A.95-10-024. ORA argues that the report will provide the Commission with real and practical information about affiliate transactions with utilities, and will be available in early October. We appreciate ORA alerting us to this recent development, but we articulated our desire to issue a decision in this proceeding by the end of the year. Consideration of the audit would require, at the least, another round of comments from the parties and could delay the issuance of this decision. Therefore, we deny the motion without prejudice to raise it at a later time if conditions warrant. We also note that nothing in this proceeding prevents us from issuing other utility-specific rules in this area in another proceeding if we believe it is necessary. (See Rule II E.)
Under similar rationale, we also strike on our own motion a survey appended as Attachment 1 to EEI's November 17, 1997 comments, as well as all references to the survey in the comments. EEI seeks to introduce this California Electric Deregulation Survey for the first time in comments to which other parties have not had the opportunity to reply, and after the record has been developed. The procedural fairness concerns which underlie our decision to deny ORA's motion also lead us to strike this survey, since the schedule in this case does not afford other parties an opportunity to reply.
We address SDG&E's and SoCalGas' August 14 motion below.
The parties have agreed on many of the definitions used in the rules. These definitions are fairly straightforward and do not require further comment. The main points of dispute regarding definitions are the definitions of "affiliate" and "utility services."
The first half of the Joint Petitioners Coalition's proposed definition of "affiliate" follows the definition adopted by the Commission in D.93-02-019, 48 CPUC2d 163, 173, Appendix A, paragraph G(e). The second half, describing the meaning of "control," tracks the FERC Standards of Conduct for Interstate Pipelines with Marketing Affiliates set forth at 18 CFR § 162.(a) and (b). This definition includes transactions between Commission-regulated utilities and utilities, such as gas pipelines, that are independently regulated by FERC. It also includes qualifying facilities (QFs), if the QF otherwise meets the definition of affiliate.
The Joint Utility Respondents' definition changes the percentage of control set forth in D.93-02-019's "affiliate" definition from 5% to 10% without explanation. We do not adopt Respondents' change in this respect.
Respondents disagree among themselves whether FERC-regulated entities or two Commission-regulated utilities should be included within the scope of "affiliate." SDG&E, SoCalGas, and PG&E believe that both items should be excluded from the purview of these rules. They argue that the Commission is addressing issues regarding the interaction of two regulated utilities in the Pacific Enterprises/Enova merger proceeding, while Edison and the Petitioners argue that transactions between two regulated utilities potentially raise the same concerns that justify Commission regulation here: cross-subsidization and anticompetitive conduct.
We agree, and include transactions between a Commission-regulated utility and another affiliate utility within the ambit of the rules. In the context of reviewing a merger application, the Commission has the authority to make specific modifications to the application of these rules, or to apply additional rules as appropriate.
SDG&E, SoCalGas and PG&E argue that we should also exempt FERC-regulated affiliates from the ambit of these rules. These parties state that FERC has established standards of conduct for these affiliates, and further regulation is unnecessary. PG&E also notes that the Commission currently is conducting Phase 2 of its holding company application, and any further concerns would be addressed in that proceeding. Finally, the parties are concerned that the information disclosure standards adopted in this proceeding would interfere with the flow of information to the pipeline necessary to transport natural gas.
We do not adopt the exemption for FERC-regulated affiliates. First, we make clear that the standards of conduct we adopt today apply to the Commission-regulated utility, not to the FERC-regulated pipelines. Second, we adopt an exemption to allow the utility to exchange certain operating information with these affiliates without the necessity of disclosure. (See Rule II D.) Furthermore, SDG&E's and SoCalGas' August 14 motion requesting an early determination of the definition of "affiliate" is denied.
Similarly, we do not adopt a QF exclusion, as advocated by the CAC. We are not regulating QFs by adopting these rules. Rather, the rules we adopt today apply to the regulated utility
Our adopted definition of "affiliate" largely tracks the definition set forth in D.93-02-019 with Petitioners' clarification regarding control. The Joint Utility Respondents propose that these rules should not apply to transactions between a utility and its holding company unless the parent engages in marketing activities and then only to transactions pertaining to such marketing activities. The Joint Petitioners Coalition and DGS/UC/CSU believe that this exemption could create a loophole since it is unclear what types of transactions would be covered by "marketing activities." Although Petitioners' comments and other proposed rules assume utility holding companies are covered by the proposed rules, their proposed definition of "affiliate" does not include a utility's holding company.
We include a holding company within the definition of "affiliate" only to the extent the holding company is engaged in the provision of products and services as set out in Rule II B. However, for holding companies and other utility affiliates not covered by these rules, the utility shall demonstrate in its compliance plan both the specific mechanism and procedures that the utility and holding company have in place to assure that the utility is not utilizing the holding company or any of its affiliates not covered by these rules as a conduit to circumvent any of these rules. Examples include but are not limited to specific mechanisms and procedures to assure the Commission that the utility will not use the holding company or another utility affiliate not covered by these rules as a vehicle to (1) disseminate information transferred to them by the utility to an affiliate covered by these rules in contravention of these rules, (2) provide services to its affiliates covered by these rules in contravention of these rules or (3) to transfer employees to its affiliates covered by these rules in contravention of these rules. In the compliance plan, a corporate officer from the utility and holding company shall verify the adequacy of these specific mechanisms and procedures to ensure that the utility is not utilizing the holding company or any of its affiliates not covered by these rules as a conduit to circumvent any of these rules.
Respondents propose to exclude Commission-regulated subsidiaries from the ambit of these rules. This exclusion is consistent with our Affiliate Transaction Reporting Decision, D.93-02-019, 48 CPUC2d 163, 165, and we adopt it. However, we modify Respondents' definition of regulated subsidiary to be consistent with our prior definition. Also, all interactions a regulated subsidiary has with other affiliated entities are covered by these rules.
While the parties have agreed on a limited definition of "utility services," the Joint Petitioners Coalition believes that this term should include other services provided by the utility which do not fall under the definition. We address this issue in our discussion on nondiscrimination standards below. Since we adopt Petitioners' broader definition, it is not necessary to include a definition of "utility services" in these Rules.
We addressed the types of affiliates covered by our standards of conduct in our discussion above on the Petition for Modification and Exemptions, and in the discussion of the definition of affiliate.
We realize that we cannot anticipate every circumstance to which these rules may be applicable, and these rules will need to be applied to these unanticipated circumstances as they arise. It is our intent that these rules be interpreted broadly, to effectuate our stated objectives of fostering competition and protecting consumer interests. Furthermore, if any provision of these rules, or the application thereof to any person, company, or circumstance, is held invalid, the remainder of the rules, or the application of such provision to other persons, companies, or circumstances, shall not be affected thereby. (See Rule II I.)
The parties agree that the adopted rules should not preclude or stay any form of civil relief, or rights or defenses thereto, that may be available under state or federal law. This rule is reasonable and we adopt it. By adopting these rules, we do not wish to preclude the application of certain state or federal laws (i.e., California Business and Professions Code § 17500 et seq.) designed to promote and protect fair competition. For that reason, nothing in these rules should be construed to confer immunity from state and federal Antitrust Laws or to detract from the Attorney General's prosecution of antitrust violations.
The OIR/OII stated that the new rules should contain nondiscrimination standards: the rules should provide that preference should not be accorded to customers of affiliates, or requests for service from affiliates, relative to nonaffiliated suppliers and their customers.
The Joint Utility Respondents and Joint Petitioners Coalition generally agree on a number of rules in this category. The main disputes center on rules concerning the offering of discounts, and whether a discount rule (if adopted) and the other consensus nondiscrimination rules should only apply to what Respondents define as "utility services," as opposed to all services offered by a utility.7
Except for certain defined transactions allowed to realize scale economies, shared corporate support, or the utility provision of new products, the Joint Petitioners Coalition proposes that all utility transactions with affiliates be limited to tariffed products and services, or that the utility offer the same goods or services to all market participants through an open, competitive bidding process. Petitioners propose that a utility should offer access to information, services, unused capacity or supply, and discounts on the same terms to all market participants, including affiliates.
Petitioners argue their proposal is consistent with the Commission's interim rules adopted in the electric industry restructuring proceeding.8 However, rather than limiting utility-affiliate transactions solely to tariffed items, this provision allows for non-tariffed transactions to occur if the items subject to such transactions are available to all competitors under competitive bidding. Petitioners believe that the rules making access to utility information and supply available to the affiliate only if available to all market participants are consistent with and extend the Commission's Rules for Gas Utility Procurement.9
Finally, Petitioners believe that this rule should apply to all services a utility offers, not only "utility services." Petitioners list a number of services that do not meet the utilities' definition of "utility services," such as appliance sales and repair, home warranties, security services, and HVAC installation or repair. Petitioners describe the providers of these services as small family-owned businesses, which are not equal to the utilities with respect to assets, financial strength, or marketing acumen. Petitioners are concerned that, given this advantage, the utilities will grant their affiliates preferential treatment which would allow their affiliates to link "utility services" with activities outside the narrow definition of utility services. As an example, they state that Pacific Enterprises and Enova recently announced a proposal to provide air conditioning service to the Los Angeles Unified School District if the school district would sign a long-term energy purchase contract with these companies. Pacific Enterprises and Enova dispute this, saying that the preliminary electricity proposal was not submitted by these affiliates or by their affiliated utilities, but by the Los Angeles Department of Water and Power, and there was no linkage, i.e., the customer was free to negotiate one deal without agreeing to the other.
Although the Joint Utility Respondents originally proposed a rule providing that the utility should make any discounts regarding "utility services offered to its affiliate available to similarly situated, non affiliated suppliers," their final rules are silent with respect to discounts. Respondents presumably believe that such a rule is not necessary. However, Respondents also maintain that utilities should be required to offer discounts and other benefits provided to affiliates to the non-affiliated competitors only when the competitors are "similarly situated." They believe that this restriction is supported by past Commission and FERC decisions. They also argue that the underlying costs of providing service vary for different customers, making differential discounts appropriate and economically efficient.
The Joint Utility Respondents also propose limiting these rules (and all of the rules adopted to prevent non-discrimination) to "utility services" provided to affiliates. If these standards are applied to all services performed by a utility, the utility would be at a serious competitive disadvantage with respect to other large companies, such as Enron, that have affiliated interstate pipeline companies. They argue that rules governing the pipelines do not address discounts utilities might give their affiliates for items that are not related to their tariffed services. Respondents make the additional argument that it is a difficult practical problem to determine the actual amount of a discount if the price is not a published tariff, as there may not be a standard price with which to compare. They state that existing transfer pricing guidelines governing services utilities provide for affiliates will prevent abuse.
PG&E ES states that proposals should be adopted to require a utility to duplicate its preferential treatment to an affiliate only to all "similarly situated" competitors, which it believes is generally consistent with Commission and FERC standards. EEI states that "similarly situated" customers should face the same prices, terms, and conditions for distribution service.
In D.97-05-040, we limited transactions between the regulated utility distribution company and the unregulated affiliate provider to the purchase of tariffed items generally available to other similarly situated electric service providers. Here, we agree with Petitioners to expand the scope of the interim rule to permit nontariffed transactions between utility and affiliates, provided the same goods or services are offered to all competitors under competitive bidding. (Rule III B.) However, we modify Petitioners' proposal to provide that if a utility provides supply, capacity, services or information to an affiliate, it should do so to all other similarly situated market participants on the same terms. (See discussion below.) This approach is consistent with D.97-05-040, which utilizes "similarly situated" language.
Petitioners propose a rule limiting the provision of discounts and other services to particular situations, where Respondents do not propose any rules other than to prevent any potential abuse through the use of transfer pricing guidelines. We do not agree that transfer pricing rules are adequate to prevent potential abuse in this area, because such rules attempt only to eliminate cross-subsidization, and do not address market power concerns.
We adopt a specific rule on discounts. (Rule III B 2.) We believe that Respondents', PG&E ES', and EEI's argument that discounts should reflect cost differentials is a good one in theory, if they do so in fact. For example, one competitor might be located in a city and another in a rural area, where service or commodity delivery costs might be very different. Requiring equal treatment of these two competitors may discourage discounts, and to the extent these discounts reflect actual cost differentials, this would encourage inefficient behavior. The difficulty from our point of view is discerning if these special treatments, discounts, or terms are actually cost-based, or if they are being used to give affiliates cost advantages in their competitive markets. Therefore, although we modify Petitioners' proposal to include "similarly situated" language, we also require the utility to document the cost differential underlying the discount in the affiliate discount report. Respondents' argument that it is difficult to know what the discount is, or even if there is one, if the good or service is not tariffed conflicts with a joint consensus rule regarding affiliate discount reports, in which the utility agrees to report certain discount information on an electronic bulletin board. We caution that the utilities should not use the "similarly situated" qualification to create such a unique discount arrangement with their affiliates such that no competitor could be considered similarly situated. All competitors serving the same market as the utility's affiliates should be offered the same discount as the discount received by the affiliates.
Finally, we apply this rule to all services provided by the utility. Respondents' definition of "utility services" is too narrow, and does not address all of the interactions between the utility and its affiliates that are covered by these rules. Furthermore, Respondents have not stated which type of services are appropriate to discount only to their affiliates (or which non-utility services are appropriate to tie to the provision of utility services, since they propose to limit the rule prohibiting tying in the same fashion.) Respondents state that they would be competitively disadvantaged with respect to large corporations such as Enron that have interstate pipeline company affiliates, since FERC rules regulating interstate pipeline companies do not address discounts provided to an affiliate that are unrelated to the pipeline's tariffed gas transportation service. However, we are regulating the utilities, not the affiliates, here. Moreover, Respondents do not address the anticompetitive concerns raised by Petitioners with respect to small businesses and their perceived market disadvantage if the utilities were able to provide discounts for some services only to their affiliates.
As stated above, the Joint Utility Respondents and Joint Petitioners Coalition generally agree on a number of nondiscrimination rules. The major difference is that Respondents believe the rules should be limited to "utility services," whereas Petitioners believe that the rules should embrace all services provided by a utility. For the reasons set forth above, we apply these rules to all services provided by a utility, unless otherwise stated. With that clarification, the following consensus rules are reasonable and we adopt them: Rule III A: No preferential treatment regarding services provided by a utility; Rule III B 3: Tariff discretion; Rule III B 4: No tariff discretion; Rule III B 5: Processing requests for services provided by the utility; Rule 3 C: Tying of services provided by the utility prohibited; Rule 3 D: No assignment of customers; and Rule III F: Affiliate discount reports.
The OIR/OII states that the rules should prohibit the disclosure of utility and utility customer information with the exception of customer-specific information where the customer has consented to the disclosure. The OIR/OII also provides that the rules should address whether the utilities should be prohibited from providing leads to marketing affiliates, and whether there should be a prohibition on affiliates trading upon, promoting, or advertising their affiliation with utilities. (OIR/OII, slip op. at p. 5.)
The Joint Utility Respondents and Joint Petitioners Coalition initially proposed similar rules regarding customer information. These parties now agree to a rule which specifies that a utility must obtain the customer's affirmative consent before releasing customer information to an affiliate, and that information shall be provided to affiliates and non-affiliated parties on a strictly nondiscriminatory basis.
NAESCO and EEI propose variations of this rule. NAESCO recommends making available certain marketing and operating information through a centralized clearinghouse. NAESCO further recommends that to the extent any affiliate requests customer-specific information at the behest of the customer, the utility can share that information with the requesting affiliate on an exclusive basis. EEI believes that customer-specific information should be disclosed only to those whom the customers has so designated. CAPHC believes that a utility should not provide an affiliate customer-specific information. The consensus rule is reasonable and we adopt it, subject to the following modification and discussion. (See Rule IV A.)
Our adopted rule provides that a utility must receive the customers' affirmative written consent before releasing this information. We interpret this phrase to mean the customers' written affirmative informed consent, freely given. For example, we would not view affirmative customer consent to mean a "default" mechanism of consent, so that customers are deemed to have consented to the release of such information unless they state otherwise.
Petitioners also propose a rule that a utility shall not request authorization from its customers to pass on customer information to its affiliate. Respondents believe that the consensus rule regarding customer information addresses the matter and that no additional rule is required.
We see merit to Petitioners rule, provided that it is amended to prevent the utility from requesting customer authorization to pass on customer information exclusively to its affiliate. If a utility were allowed to do so, it could circumvent the intent of the consensus customer information rule. However, we do not have the same concerns if a utility solicits customer consent to pass on information to its affiliates and non-affiliates alike, in a nondiscriminatory manner, provided that customer consent is written, affirmative, informed and freely given. We therefore adopt Petitioners' proposed rules as modified. (See Rule III E 5.)
The Joint Utility Respondents' rules prohibit disclosure of marketing or operating information to affiliates on an exclusive basis, but expressly allow transfer of proprietary information on an exclusive basis if the utility is properly compensated. The proposed rules further state that a utility should not provide information to its holding company for ultimate transfer to its affiliates in contravention of the rules.10 Respondents' rules do not impose restrictions on transfers of non-confidential information exclusively to an affiliate. Respondents argue that the utility acquires operating and marketing data as a result of its monopoly function, so dissemination of this information may properly be restricted. However, they do not believe there is justification to prevent the utility from sharing non-confidential information freely with its affiliates on an exclusive basis.
Respondents also believe that providing proprietary information to affiliates, with proper compensation, does not confer an unfair competitive advantage on the utility's affiliates, but rather reflects the benefits of affiliation with a diversified enterprise. The utilities cite past Commission holding company decisions and allude generally to certain FERC rules which place no restriction on the transfer of proprietary information, provided that appropriate compensation is paid.
The Joint Petitioners Coalition finds Respondents' proposal flawed primarily because the defined terms of operating and marketing information are too narrow, and may create loopholes regarding items that are not specifically listed. To avoid this problem, Petitioners propose a broader rule encompassing all non-customer-specific information. They give illustrative, but not inclusive, examples of what may be included within the ambit of the rule (i.e., information about a utility's natural gas or electricity purchases, sales, or operations or about the utility's gas or electric-related goods or services or other utility-related goods or services.) This proposed rule further provides that the utility can make the information available to its affiliate only if the utility makes it available contemporaneously to other service providers and keeps the information open to public inspection. SCUPP/IID propose a rule similar to that of petitioners, with which the CAPHCC concurs. NAESCO proposes that the utility should publish marketing or operating information which it shares with its affiliate through a centralized information clearinghouse.
The Petitioners oppose the Joint Utility Respondents' proposed rule allowing exclusive exchange of proprietary information between a utility and its affiliate. They believe that this rule permits utilities to offer a competitive advantage to their affiliates at ratepayer expense. Under this proposal, since copyrights are relatively easy to obtain, the utilities would be allowed to share certain computer software programs developed at ratepayer expense with their affiliates on an exclusive basis. Petitioners argue that this rule would permit the very type of activity this rulemaking was designed to prevent. DGS/UC/CSU also oppose this rule, but add that if the Commission does permit such transfers, the transfers should be limited to circumstances in which the utility can demonstrate that the proprietary information was developed exclusively from shareholder resources and providing the information does not give rise to competitive concerns. NAESCO believes that sharing of proprietary information related to strategic planning or retail markets for energy services should not be permitted. Only sharing of proprietary information developed exclusively at shareholder expense should be permitted.
We adopt a modified version of the Joint Petitioners Coalition's recommended rule, since Petitioners' recommendation better assures us that the OIR/OII's goal that the rules should "prohibit disclosure of utility...information" is met. (OIR/OII, slip op. at p. 5.) However, we agree with Respondents that Petitioners' proposal is too broad in that it seems to address all non-customer information, including publicly available information. We therefore limit the application of this rule to non-public information. Based on some utilities' concerns that the rule will interfere with the flow of information necessary to transport natural gas on the gas pipeline, we also note an exception to this rule to permit the exchange of certain operational information between a utility and its FERC-regulated affiliate, to the extent the affiliate operates an interstate natural gas pipeline. (See Rule II D and discussion at Section II F 1 above.) We also permit the exchange of proprietary information on an exclusive basis, provided the utility follows all Commission-adopted pricing and reporting guidelines for such transactions, and it is necessary to exchange this information to provide the types of corporate support services permitted in Rule V E. We also permit the exchange of information pursuant to D.97-10-031.
We do not adopt Respondents' broad proposed rule permitting an exchange of all proprietary information with appropriate compensation. It is certainly not clear on this record that all, or any, proprietary information was supported exclusively from shareholder resources. Even if that were the case, there are competitive concerns raised by a blanket approval to share proprietary information with affiliates, for instance, to the extent that the opportunity for development of the information arises from the provision of monopoly regulated utility services. The Joint Utility Respondents' definition of proprietary information is that which the utility has acquired or developed in the course of providing utility services. By definition, Respondents' proposal would afford affiliates an unfair competitive advantage because it would give them exclusive access to information developed by the utility in the provision of its monopoly services. For example, other competitors not affiliated with a regulated utility would not have the opportunity to benefit from information that can be developed only by an entity providing regulated monopoly services.
The Joint Utility Respondents' proposed rule prohibits utilities from providing leads to their affiliates. They define a lead as customer information provided without the customer's consent. However, under the category of referrals, Respondents' proposal would permit the utilities to inform customers who inquire about non-utility services that their affiliates offer such services, provided that the utility first informs the customer that similar services are available from non-affiliated suppliers, and that the provision of utility services is not contingent upon or tied to the customer's taking the affiliate's goods or services. Respondents' proposal also requires that, unless the customer declines, the utility will also provide that customer with a then-current list of energy marketing providers when it makes the referral to its affiliate. Respondents argue that their proposals facilitate customer choice, and that customers will be aware that their choice of a competitor will not adversely affect the utility's provision of regulated service. They argue that proposed rules that prohibit utilities from providing this information are anticonsumer. Moreover, Respondents state that Commission precedent in the telecommunications area permits local exchange companies to advise customers of the availability of competitive enhanced services from their affiliates. Respondents further believe that there is no justification to prohibit referrals to affiliates that offer services other than direct access (i.e., internet access and home security) where competition is already robust. EEI supports Respondents and believes Respondents' proposed rule facilitates customers' choice.
The Joint Petitioners Coalition proposes three separate rules. Petitioners' proposal prohibits the utility from giving any leads to an affiliate. Petitioners state that a lead includes all sharing of customers' information with an affiliate, whether or not the customer provides consent or whether or not the utility solicited the consent. This proposed rule would also prohibit a utility from (1) soliciting business on behalf of its affiliate; (2) acquiring or providing information to its affiliate; (3) sharing certain marketing information with its affiliate; (4) requesting customer authorization to pass on customer information to its affiliate; (5) giving any appearance that the utility speaks for the affiliate or that the customer will receive preferential treatment from the utility if it conducts business with the affiliate; and (6) giving any appearance that the affiliate speaks for the utility. Petitioners argue that this detailed enumeration of prohibitions is necessary to ensure that affiliates compete with other market participants on an equal basis, without special assistance being provided, either directly or indirectly, from the utility.
When the customer asks the utility about alternative suppliers, Petitioners would require the utility to give the customer a Commission-approved list of all providers of the particular goods or services at issue. If maintaining this list would be a burden due to the number of service providers, the utility could refer customers to a generally available listing of service providers, such as the Yellow Pages. Petitioners believe that if the Commission adopts Respondents' proposal, Respondents will interpret their proposal to permit a utility to solicit customer consent for a referral.
The Joint Petitioners Coalition's proposal also would restrict the utilities from providing advice or assistance to consumers regarding its affiliates and other service providers. Petitioners believe that this rule is necessary to prevent discrimination and promote fair competition. For example, this rule would prevent "consulting" types of services which tend to promote the affiliate over other service providers. CAPHCC concurs with Petitioners' proposals. Respondents do not believe this rule is necessary.
DGS/UC/CSU support a prohibition against providing leads to utility affiliates. NAESCO believes that to the extent that an affiliate requests such information from a utility at a customer's behest and in conjunction with a marketing effort initiated by the affiliate and directed to that customer, the utility is not required to make that information public to other providers. However, to the extent the utility receives such a request from a non-affiliated provider, the utility should not share with its affiliate the fact that it has received such a request.
PG&E ES believes that the Petitioners' recommendation overreaches in that it would prevent a utility from acknowledging its affiliate. The requirement that utilities provide the customer with a list of service providers for electricity and gas is a useful way of dealing with referrals in a nondiscriminatory manner. However, PG&E ES believes that Petitioners' rule would prevent even casual conversation between customers and a utility representative, for example, when a utility answers a customer's inquiry about to which affiliate a utility employee has been transferred. However, the Respondents' proposal is too lenient, and permits unlimited referrals as long as there is a disclaimer and the referral is accompanied with a list of all service providers. The list would in all likelihood be faxed or mailed after the initial referral is made. PG&E ES notes that this practice is too permissive: once the referral to an affiliate is made, any list becomes irrelevant. This practice would give the utility affiliate an unfair advantage which it would find hard to overcome in other states. PG&E ES does not offer its own suggested language changes to the proposals.
With respect to rules on leads, all parties agreed with the general concept that a utility should not provide leads to its affiliates. However, the Joint Petitioners Coalition's proposed language more thoroughly enumerates the specific situations in which a utility should not favor its affiliate. We find the detailed language preferable at this stage of electric industry restructuring and adopt it, subject to our discussion in Section II 5 a above. (See Rule III E.)
With respect to referrals, we agree that permitting the utility to act as its affiliate's referral service would give affiliates an unfair advantage which is hard to overcome. Once the utility has made the referral to its affiliate, any subsequently provided list is irrelevant. This rationale applies equally to all affiliates covered under these rules. We adopt Petitioners' proposal as modified to provide that the Commission will authorize a list of service providers, or approve an alternate procedure for referrals, in response to the utilities' advice letter filings. (See Rule IV C.)
While we recognize PG&E ES' concern that the rule might prevent casual conversation about a utility and its affiliate, it is more important to adopt a rule addressing all the problems we perceive, rather than to create loopholes to exempt an isolated instance from the rule's coverage. We note that PG&E ES did not propose any alternative language.
Respondents argue that their proposal is consistent with our treatment of referrals in the telecommunications area. However, many of the cases they cite deal with the proper amount of a referral fee to impose upon the utility. Moreover, referrals are more tightly restricted in some areas of telecommunications. (See e.g., 47 U.S.C. § 274 (c) (1) and (2), which permits only inbound referral services between a Bell operating company and its affiliate providing electronic publishing, provided that such services are available to all electronic publishers on nondiscriminatory terms.)
The Joint Petitioners Coalition also requests a rule requiring approval by this Commission of any material distributed by a utility as part of its consumer education program. The utilities are preparing consumer education materials as a part of our electric industry restructuring, and we will address issues concerning the content of that information in the restructuring proceeding.
The Joint Petitioners Coalition propose a rule requiring the utility to maintain contemporaneous records documenting all tariffed and non-tariffed transactions with its affiliates, such as waivers of tariff or contract provisions, and all discounts. Such records should be maintained for three years and made available to third parties upon 24 hours' notice.
Respondents believe that the Commission's existing reporting requirements for affiliate transactions are adequate, and that Petitioners proposed rule is unnecessary and burdensome. For example, Respondents believe that 24 hours is too short of a time to have a full accurate record of a transaction prepared, given the lag time in recording and the possible delay in determining the transfer price. Respondents are also concerned with providing possibly competitively sensitive information to any third party, without knowing why they want the information. Respondents also object to the rule including tariffed services. They argue, without specific reference, that existing mechanisms are sufficient to police the provision of service in a manner in variance with an effective tariff.
Respondents do not point to an existing rule that requires detailed, contemporaneous documentation of affiliate transactions. Our Affiliate Transaction Reporting Requirement Decision, D.93-02-019, 48 CPUC2d 163, provides that certain annual reports be filed with the Commission detailing a utility's interaction with its affiliates and these requirements are not superseded by our adoption of this rule. We agree with Petitioners that detailed recordkeeping and reporting rules are necessary to reasonably enforce these rules. Although the requirements of the Affiliate Transaction Reporting Requirement Decision and the annual audit adopted in this decision are monitoring tools to ensure compliance, these mechanisms will not ensure effective compliance because they are generated on an annual basis. We therefore adopt Petitioners' proposal, with the following modifications. (See Rule IV F.)
We provide that the information should be made available for third party review upon 72 hours', instead of 24 hours', notice, or at a time mutually agreeable to the utility and third party. This is a compromise between utility personnel restraints and our desire for effective monitoring in a timely fashion. Respondents also state that they should have the prerogative to assert, subject to Commission oversight, that certain information is competitively sensitive and private, without giving any examples of what types of transactions should be kept confidential. Petitioners give one example. They state that D.97-06-110 adopted certain rules in compliance with PU Code § 489.1, which exempts from public inspection certain contracts negotiated by a gas corporation. Petitioners note that D.97-06-110 deferred the affiliate issue to this proceeding, and argue that disclosure of all utility-affiliate contracts is necessary to help discipline the utility-affiliate relationship.
We do not modify D.97-06-110 in this decision. Moreover, since that decision sets forth a detailed method for a utility to seek to exempt certain contracts from public disclosure, the utility should follow the procedure set forth in D.97-06-110 if applicable. However, the utility should serve the third party making the request in a manner that ensures the third party receives the utility's D.97-06-110 request for confidentiality within 24 hours.
The Joint Utility Respondents and Joint Petitioners Coalition agree to a rule that permits release of non-public information from suppliers to affiliates or non-affiliated entities only if authorized by the supplier. The Petitioners initially did not propose such a rule, but agreed on it for this proceeding. CAPHCC believes that if a supplier does not seek to provide information to third parties, the utility may not provide that information to the affiliate only. This rule provides some protection of supplier-provided information in that such information would be released only upon the supplier's consent. Furthermore, it permits information to be released to non-affiliated parties with the supplier's consent, and permits the supplier to designate to whom the information should be released. However, a utility should not actively solicit the release of such information to its own affiliate in an effort to keep such information from other non-affiliated entities. The supplier's consent should be affirmative and written. We adopt the rule as so clarified. (See Rule IV D.)
Respondents and Petitioners agree to a rule that requires a utility to maintain affiliate contract and bid information for at least three years. This is a compromise from Petitioners' original proposal, which required disclosure. We find this rule reasonable and adopt it with the following modification. The utilities should maintain this information for no less than three years, and longer, if this Commission or another government agency so requires. (See Rule IV G.) This is consistent with a consensus rule, which we adopt as Rule IV H. This rule provides that to the extent that FERC requires more detailed information or more expeditious reporting than the rules adopted in this proceeding, nothing in our rules should be construed to modify the FERC rules.
The OIR/OII also requires the rules to address separation standards. We stated that the rules should provide for the utility's and the affiliate's operations to be separate to prevent cross-subsidization of the marketing affiliate by the utility customers. The proposed rules should require the utility and affiliate to maintain separate books of accounts and records. (OIR/OII, slip op. at p. 5.) We also recognized that interested parties may differ on how extensively each of these standards should be applied, and urged the parties to attempt to craft joint rules. This area proved to be the most contentious among the parties, and they were unable to reach agreement on a number of key issues.
The CEC described the tensions between the benefits of economies of scope and scale and market competition that we face on all separation issues.
"In determining an appropriate separation between competitive firms or activities and a regulated monopoly, the Commission must consider the inevitable tension between allowing benefits of affiliation (economies of scope) and market competition. Electric industry restructuring was undertaken on the assumption that the benefits of market competition would outweigh the foregone benefits of scale and scope that were inherent in the integrated utilities. It is absolutely essential that the Commission maintain its commitment to creating an efficient competitive marketplace and accept the fact that some near-term scale and scope economies may need to be foregone in order to achieve this end. Consequently, limitations on utility and affiliate transactions are necessary to create a level playing field that produces greater market efficiencies. The question facing the Commission is the extent of the structural separation of the utility and its affiliate." (CEC July 31 Comments at p. 8, footnote omitted.)
We adopt rules in this area to protect against cross-subsidization and to promote competition. Also, as stated in Section II A above, it is not clear that the near-term savings that some parties state would result from scope or scale economies would actually translate into lower prices for the benefit of consumers or ratepayers. The adopted rules strike an appropriate balance and will prevent cross-subsidization and promote future competition.
This issue sharply divides the parties. Joint Utility Respondents' proposed rule states that there are no restrictions on the ability of affiliates to use, trade upon, promote, and advertise their affiliation with a utility, or to use the utility or corporate brand, name and logo. EEI and PG&E ES generally agree with Respondents. The parties advocating no restrictions on the affiliate's ability to use the utility's name and logo make the following arguments: (1) the Commission does not have the authority to regulate the utility name and logo because they are shareholder, not ratepayer, assets; (2) prohibiting the affiliate's use of the utility's name and logo would violate the utility's First Amendment right to commercial speech; (3) consumers benefit, in the form of lower costs, more product innovations, and higher service quality, from permitting affiliates to use the utility's logo; and (4) there are other, less onerous ways to resolve and mitigate market power issues.
PG&E ES states that to the extent that those opposing an affiliate's use of the utility's name and logo base their concerns on customer confusion, it is amenable to suggested rules avoiding such confusion. Although it supports Respondents' rule, PG&E ES believes that utilities should require their affiliates to clearly state that they are not regulated by the Commission and that the affiliates' products and services are completely separate from those of the local utility. Neither the utility nor the affiliate should indicate that dealing with the affiliate will provide any advantage with the utility.
The Joint Petitioners Coalition propose a rule which prohibits: (1) a utility's name, logo, trademark or other form of corporate identification to resemble that of the affiliate; (2) the utility's and affiliate's logo, trademark, or other form of corporate identification to appear on documents, property, or merchandise sold by the other; (3) the utility from trading upon its affiliate's affiliation with the utility and using the utility's name in material circulated by the affiliates; and (4) the utility from representing that the affiliate will receive any different treatment than other service providers as a result of the affiliate's affiliation with the utility. CAPHCC supports Petitioners' proposal. Parties advocating that use of the utility's name and logo be prohibited or strictly limited make the following arguments: (1) The issue of whether the utility name and logo is a shareholder or ratepayer asset should be reassessed in a competitive environment; (2) PU Code § 701 gives the Commission broad authority to restrict the use of a utility's assets, regardless of the outcome of the ownership issue; (3) past experiences with an affiliate's use of a utility's name and logo demonstrate that the utility "name brand" resulted in an affiliate's unfair competitive advantage, and created in customer's minds an implied warranty either that the utility is standing behind the affiliate's products and services or that an affiliate's products and services are regulated and are therefore more reliable; and (4) market power concerns require strict limitations on the affiliate's use of the name and logo.
DGS/UC/CSU are concerned that unlimited affiliate usage of the utility's name and logo could create an improper implication that the provision of regulated services will be related to taking of competitive services from the affiliate. NAESCO believes that unlimited usage by an affiliate of a regulated utility name and reputation raises the same concerns it believes exist with joint marketing: customer confusion, opportunities for subtle forms of tying, and difficulties in enforcing prohibitions against tying. Both DGS/UC/CSU and NAESCO believe that at a minimum affiliates making use of the regulated utility name and reputation must be required to indicate clearly that the provision of regulated services is in no way related to accepting services from the unregulated affiliate.
We agree with Petitioners that the issues surrounding the affiliate's use of the utility's logo in this case do not revolve around ownership, and do not revisit that issue here. Nor do we believe that the First Amendment precludes us from prohibiting the affiliate's use of the utility's name and logo, if we believed that course of action to be appropriate to further our interest in a competitive market. (See e.g., Friedman et al. v. Rogers, 440 U.S. 1 (1979).
We are concerned about competition, and must determine whether permitting the affiliate to use the name and logo of the utility is anticompetitive by virtue of its name brand recognition and by causing customers to be confused or misled. We articulated our general concerns regarding market power in this situation in SoCalGas' Performance-based Ratemaking Decision, D. 97-07-054, slip op. at 63:
"By the very nature of SoCal's monopoly position in the energy and energy services market, its access to comprehensive customers records, its access to an established billing system and its `name brand' recognition, it may be that SoCal enjoys significant market power with respect to any new product or service in the energy field."
Petitioners point to several affiliate marketing campaigns as examples of why we should not permit utilities to share their name and logo with affiliates. One case involves Pacific Enterprises Energy Services, a unit of SoCalGas' parent company. In that instance, despite SoCalGas' representations to this Commission that it would no longer sell earthquake shut-off valves, the SoCalGas logo appeared prominently in advertising for the shut-off valves, and on the shut-off valves themselves, even though the valves are manufactured by an unregulated affiliate. For instance, a brochure for these valves states that the valves are "brought to you by Pacific Enterprises, the people who bring you The Gas Company." (Petitioners' 7/31 Comments, Exhibit E.) As a result, Petitioners state that Pacific Enterprises Energy Services captured 83% of the shut-off valve market. In Exhibit F to Petitioners' Comments, an article notes that Pacific Enterprises Energy responded to accusations of unfair competition by noting that their competitors did not actively market their valve, while competitors argued that it was futile to go up against a manufacturer that has the imprimatur of the gas company.
Petitioners also point to a brochure for Edison On Call, an Edison affiliate which provides home appliance repair service which uses the Edison logo liberally. At the bottom of the last page of a multipage brochure, under the title of "what our lawyers make us say," the brochure states that Edison On Call is offered by Select Home Warranty Company, a subsidiary of Edison International. However, the main body of the brochure assures prospective customers that the bill will be on their Southern California Edison electric bills. (Petitioners 7/31 Comments, Exhibit I.)
Finally, Exhibit H of Petitioners' comments contains a brochure from PG&E ES, where PG&E ES states that it is a strong national company backed by the depth, experience and resources of PG&E Corporation. The PG&E logo is used throughout the brochure. On the next page is a statement that "more than 21,000 men and women of PG&E provide natural gas and electric services ..." Although there may be 21,000 PG&E employees, the implication from this advertisement is that 21,000 people work for PG&E ES, or that the utility somehow stands behind PG&E ES. (When asked about this advertisement at oral argument, PG&E's representative agreed he was not comfortable with it, and noted that PG&E has taken steps to remedy this type of presentation in its current marketing materials.) (See Transcript of 9/4/97 oral argument, pp. 139-141.)
Based on these concerns, Petitioners believe that a prohibition of the affiliates' use of the utilities' name and logo is the only effective means to ensure that the utility does not gain an unfair advantage by virtue of its affiliation with a monopoly utility. We agree that given these examples, and the incentive for all affiliates to mount aggressive advertising campaigns as competition develops, these rules must address the terms and conditions of a utility's and affiliate's shared use of name and logo.
Although it is a very close question, we are not firmly convinced at this time that it is an appropriate remedy to prohibit the utility from sharing its name and logo with its affiliate. Our other rules mandate separation between most of a utility's and affiliate's activities, and we prefer to address our competitive concerns on the name and logo issue at this time through appropriate disclaimers, to provide the customer with more information, not less. This is consistent with our statement in D.97-05-040, slip op. at p. 67, where we recognized that "the shared use of a utility's name is but one example of the need for the utilities and their unregulated affiliates to demonstrate that the operations of the affiliate is sufficiently and genuinely separate from that of the utility to prevent the use of utility resources and its attendant market advantages." Again, we emphasize that prohibiting the shared use of the name and logo is one means to achieve this separation, which we may have adopted if our other rules addressing separation were different.
However, Respondents do not assist us in developing appropriate rules, but merely assert that shared use of the name and logo should not be a concern. EEI believes that regulating the use of brand names by utility affiliates should be guided by what is best for consumers. The use of brand names generally permits companies to diversify into new or related market segments at a lower cost (resulting in lower consumer prices), engage in aggressive product development and innovation, reduce transaction costs, and offer a certain level of reliability. However, the EEI has not effectively explained why there are no market power concerns.
Respondents contend that the affiliate's right to use the utility's name promotes consumers' interests because the corporate family, particularly the utility, will have an incentive to maintain high standards for all services. However, it is unreasonable to assert that the corporate family has no incentive to maintain high-quality services if there were no common name or logo, or that consumers would not realize the corporate relationship without a common name and logo. Also, the Commission has required the high service level for the regulated utility. Respondents then point to their proposed Rule 5.O as adequate customer disclosure. Proposed Rule 5.O, however, addresses only coordinated responses to customer requests, and not what disclosures generally should be required. Customers should not be required to ask questions to clarify a confusing or possibly misleading promotion. They should not be confused or misled to begin with.
Therefore, we require that a utility shall not trade upon, promote, or advertise its affiliate's affiliation with the utility, nor allow the utility name or logo to be used by the affiliate or in any material circulated by the affiliate, unless it discloses in plain legible or audible language, on the first page or at the first point where the utility name or logo appears that:
· the affiliate "is not the same company as [i.e., PG&E, Edison, the Gas Company, etc.] the utility;
· the affiliate is not regulated by the California Public Utilities Commission; and
· "you do not have to buy [the affiliate's] products to continue to receive quality regulated services from the utility." (See Rule V F.)
The application of the name/logo disclaimer is limited to the use of the name or logo in California.
This means that the disclaimer must appear clearly and legibly the first time in an advertisement that the name or logo appears, even if the logo is used alone (i.e., stamped on a particular good.) If the disclaimer is not clearly legible, then the promotion should not be used.
Furthermore, we adopt the rule that the utility, through its actions or words, should not represent that its affiliates will receive any different treatment than other service providers as a result of the affiliates' relation to the utility.
Parties' Positions
The issue of joint marketing, similar to the logo issue, sharply divides the parties. The Joint Utility Respondents believe that, under certain conditions, a utility and its affiliates may coordinate their respective service offerings to the same customers. Such coordination includes joint responses to requests for proposals, joint trade show booths, and "the like." Respondents' proposed conditions include requirements that: (1) utility representatives must inform the customer that they work for the utility, not the affiliate; (2) utility representatives must inform customers that the affiliate offers competitive services and about the customers' ability to receive utility services without taking the affiliates' services; (3) utility and affiliate offerings must be separately priced so that a customer may select one without the other; and (4) the utility and affiliate may not participate in unsolicited sales calls to customers in the utility's service territory.
Respondents argue that utility affiliates would be disadvantaged if the utility can attend meetings between the customers and non-affiliated service providers but cannot attend such meetings between the affiliate and the customer, especially when many customers have questions regarding direct access and how utilities and energy service providers interact in the new competitive market. They also believe that customers should be able to request a joint proposal. Respondents believe that their proposed rules protect customers because of the required disclosures regarding the separation of the entities. They also briefly state that restricting a utility's ability to engage in coordinated responses would violate the utility's First Amendment rights.
Edison believes that the use of space in the billing envelope is a legitimate way of informing customers of the connection between the utility and its unregulated affiliates. Nonutility affiliates can reach customers through their own direct mailing campaigns. Edison maintains that the First Amendment prevents the Commission from imposing undue restrictions on its ability to engage in truthful commercial speech that promotes its affiliates' offerings. Edison also argues that conditioning a utility's right to engage in speech relating to affiliates on its agreement to carry similar promotional materials developed by nonaffiliate competitors is inappropriate, since the state cannot force a utility to associate itself with speech that it considers repugnant. EEI also supports Respondents' proposal, arguing that Petitioners' proposed rules are overbroad.
The Joint Petitioners Coalition's proposes that the utility shall not (1) provide its affiliates advertising space in the utility billing envelopes or in any other form of utility communication and (2) participate in joint advertising or marketing with its affiliate. The proposed rule enumerates but does not limit prohibited activities, including joint sales calls and joint requests for proposals, any joint activity (such as trade shows, conferences, or other marketing events held in California or contiguous states), and joint correspondence, communications, and meetings with any existing or potential customer. Petitioners propose that at a customer's unsolicited request, the utility may participate on a nondiscriminatory basis with its affiliate to discuss technical or operational subjects regarding the utility's provision of service to the customer.
Petitioners believe that permitting the utilities to promote their affiliates in a bill insert contravenes the principle that utilities should not subsidize affiliates' activities. They believe that a rule prohibiting joint advertising or marketing is appropriate and consistent with D.97-05-040, slip op. at p. 68, "Joint marketing of electrical services shall be prohibited." Petitioners also believe that it is inappropriate for a utility and its affiliate to make a joint sales call or to negotiate with the same customer at the same time. They support the provision permitting the utility to meet jointly with the affiliate regarding operational matters, since these are the types of meetings that the utility would have routinely with other entities. Petitioners believe that this provision meets PG&E ES' concerns on this issue. However, they believe that the joint activities proposed by Respondents are unreasonable and that the proposed disclaimer language will not avoid customer confusion.
DGS/UC/CSU are concerned about joint offerings by the utility and its affiliates in light of the potential for consumer confusion and improper subtle suggestions that the provision of regulated services will be related to taking service from the utility's affiliate. DGS/UC/CSU believe that joint marketing significantly hampers enforcement of anti-tying requirements and creates a need for much more ongoing Commission vigilance in enforcing the rules. NAESCO opposes proposals for the utilities to make joint offerings and to jointly market for the same reasons as DGS/UC/CSU. Additionally, NAESCO believes that such joint actions could have the effect of making competitive information that should be equally available to all energy service providers, available only to utility affiliates. ORA opposes Respondents' proposal, arguing that it would give the affiliate an unfair advantage compared to non-utility service providers, since the non-utility service providers would not have access to the utility's transmission and distribution staff. The CAPHCC believes that the rules should not permit utilities to jointly market with affiliates, including through the billing envelope.
PG&E ES believes both proposals are flawed. Petitioners' original proposal does not distinguish between solicited and unsolicited meetings with customers. PG&E ES also argues that Petitioners' proposal stigmatizes the affiliate and makes it the only entity with which a utility cannot appear in a joint meeting. Although not proposing specific language, PG&E ES believes that the utility should be available to meet with customers at the customer's request regardless of whether the marketer attending the meeting is an affiliate or an affiliate's competitor, provided that the utility treats all in a nondiscriminatory fashion. However, PG&E ES believes that utilities and affiliates should be able to jointly market in trade shows, so long as it is clear which entity is which, and customers are told there will not be a benefit from the utility for taking the affiliate's competitive services. PG&E ES believes this exception is appropriate, since trade shows present all competitive options at the same time and target more sophisticated large corporate customers.
Discussion
In light of our determination on the issues of joint use of name and logo, we believe that Petitioners' rule, as modified, strikes an appropriate balance by allowing the utilities to respond to customer inquiries without allowing the utilities to provide preferential treatment to their affiliates. Petitioners have addressed one of PG&E ES' concerns by proposing that a utility may participate in joint meetings with its affiliate on a nondiscriminatory basis, in non-sales meetings to discuss technical or operational subjects regarding the utility's provision of transportation service to the customer. Because the utility's attendance at these types of joint meetings would be nondiscriminatory, it would be fair to affiliates and unaffiliated competitors alike.
Joint marketing by a utility and affiliate creates opportunities for cross-subsidization, and also has the strong potential to mislead the consumer, for example, by implying that taking affiliate services is somehow related to the provision of the monopoly utility service. Joint marketing opportunities, especially when coupled with the joint use of a name and logo, will promote customer confusion by allowing affiliates to capitalize on the public perception that their products are closely associated with the regulated utility's. For example, the utility advertisements set forth in our discussion on the use of name and logo, above, demonstrate that juxtaposing discussions about the affiliates and utility's services, even if factually correct, inappropriately blurs the separation between the affiliate and utility.
Especially since we permit joint use of the name and logo, we believe that our adopted rule is narrowly tailored to protect against cross-subsidization and to promote competition. The few disclaimers proposed by the utilities at worst are inadequate, and at best are extremely difficult to enforce. For example, as stated above, in Edison's On Call electrical repair service brochure, Edison imparted requisite disclaimers and other types of customer information in a column whose title reads "What the Lawyers Make Us Say." (See Exhibit I to Petitioners' July 31 Comments.) Oral joint marketing would be virtually immune from effective oversight and regulation. For example, it would be quite difficult to monitor whether joint calls were solicited or not, or whether effective oral disclaimers were made. One of our goals is to adopt rules that are clear and easy to monitor. Petitioners' proposal, not Respondents', meets this criteria. However, we modify Petitioners' proposed rule to limit joint utility/affiliate participation in trade shows, conferences, and other marketing events to those joint marketing events which occur in California. We believe that Petitioners' proposal here is too broad, since it includes all of California and its contiguous states within its purview. (See Rule V F 4.)
We also agree with DGS/UC/CSU that the adoption of Respondents' proposal, which would permit the utility and affiliate an almost unrestricted ability to make unsolicited joint presentations to customers in requests for proposals, trade shows, billing envelopes and "the like" (subject to certain disclaimers), would make our adopted rules against tying, with which both Respondents and Petitioners agreed, very difficult to enforce. Personnel making joint marketing presentations are likely to focus on the products' benefits to the consumer, not the niceties of disclaimers they are required to provide by regulators.
In addition to our other concerns set forth above, permitting the utility to grant its affiliate exclusive access to the utility's billing envelope to promote the affiliate's services would violate the basic concept underlying the nondiscrimination rules -- that a utility should not grant its affiliates a preference vis a vis other unaffiliated competitors. Granting a utility's affiliate exclusive access to the billing envelope also conflicts with the rule prohibiting a utility from exclusively providing its affiliate with customer information, since the utility would be supplying the affiliate (either directly or indirectly) with the exclusive use of its customer lists.
However, we modify Petitioners' proposal to provide that utility affiliates may have access to the billing envelopes if other competitors are offered the same access on the same terms and conditions. (See Rule V F 3.)
We note that our rule is not a blanket prohibition against affiliate advertising. A utility's affiliate is free to use the billing envelopes to advertise under the conditions we impose. This is similar to provisions in the Telecommunications Act of 1996, which permit a Bell Operating Company to offer certain services to its affiliate provided that such services are made available to other providers under the same terms and conditions. (See, e.g., 47 U.S.C. §272 (e).) Also, rather than obtaining an exclusive advantage based on its affiliation with a monopoly service provider, in order to compete effectively, the utilities' affiliates can also conduct direct mailing campaigns, like other competitors.
Parties' Positions
Over the course of negotiations, the Joint Petitioners Coalition and Joint Utility Respondents agreed that the rules should permit the utilities to share certain cost savings derived from scale economies with their affiliates. However, other parties disagree with this proposal.
One of the principles which the Joint Utility Respondents advocate is that utility affiliates should be allowed to take advantage of corporate synergies and economies of scale. They say this is consistent with the statement in the OIR/OII that affiliates should not be disadvantaged relative to other competitors. Respondents' proposed rule would allow capture and sharing of economies of scale in joint purchases of goods and services, excluding the purchase of natural gas and electric supplies intended for resale, provided that the purchases are priced in a way that permits clear identification of the utility and affiliate portion. They stress that the benefits of joint procurement derive from the combined entities' size, and that joint procurement would benefit ratepayers by allowing the utility to negotiate lower prices due to the additional volume resulting from the affiliate's purchases. They state that these volumes are available not only to any large company, but also to members of large trade associations such as CAPHCC.
EEI supports Respondents, stressing that the Commission rules should not deny utilities and their affiliates the opportunity to achieve economies that would lower costs and thereby benefit consumers. EEI suggests that such restrictions could hurt the economy, leading to job losses. Capturing scale or scope economies through sharing resources and jointly purchasing intermediate goods and services is a legitimate function which the Commission should encourage. PG&E ES agrees, saying that the rules should permit the combined entities to purchase everything from paper clips to computers or trucks, adding that this type of purchasing is available to large corporations. PG&E ES would, however, extend Respondents' restriction on purchase of gas and electricity to upstream pipeline capacity.
The Joint Petitioners Coalition is willing to accept the general concept of capturing scale economies, but would further restrict Respondents' proposed rule by excluding those economies associated with the traditional utility merchant functions, such as gas transportation and storage capacity and electric transmission capacity. Respondents find these further restrictions reasonable.
The CEC believes that Commission should weigh the benefits of short-term scope economies against the long-term goal of fostering a robust and competitive marketplace. The CEC generally argues that allowing joint purchasing, employee sharing, corporate support and offerings of services produces the possibility of cross-subsidization or transfer pricing which the CEC points out could be anti-consumer and anticompetitive. Nevertheless, the CEC points out that forgone economies of scope could lead to substantial cost and price increases to customers. It argues, however, that it is possible that the synergies of market competition will encourage larger economies of scope in the long term compared to the economies offered by the utility-affiliate relationship in the short term. If the Commission decides to allow the utilities and their affiliates to capture these scope economies, the CEC believes that the ratepayers should share in these savings. Additionally, the CEC argues that this issue should be revisited four years from now at the expiration of the rate freeze imposed by AB 1890, when the desired competitive market may be more fully developed.
The CAPHCC argues for complete separation. Since the utilities' scale economies were built up during a period of monopoly operation, paid for by the ratepayer, the CAPHCC argues that that no economies of scale related to the utility or affiliate function may be shared by a utility with an affiliate. NAESCO echoes the concerns of CAPHCC by stressing the potential for cross-subsidy and thus the abuse of market power retained by the utilities. NAESCO advocates that if joint purchases are permitted, the Commission should impose a dollar limit, although it does not propose a specific dollar amount. DGS/UC/CSU also believe that joint utility/affiliate purchases to capture economies of scale are inappropriate. They believe that ongoing joint purchases just extend and exacerbate the need for monitoring and enforcement.
Discussion
Increased competition in the energy markets is one of our primary goals. The presence of any particular cost advantage for the affiliates, if derived from their association with the utility and not from their own internal efficiencies, engenders market power and entry barrier concerns. We do not want the utility to use its market power to impede competition by giving its affiliate a clear cost advantage not available to competitors. This would occur if the utility were able to depress the price it pays for goods and services due to the utility's status as a monopoly, and in turn pass that price advantage to the affiliate. Both the Respondents and Petitioners believe it is inappropriate for the utilities and affiliates to exploit this market power in areas related to the utilities' traditional merchant functions. However, they believe joint purchases are appropriate in such areas as purchasing office supplies and telephone service.
While Respondents argue that all other purchasers in the market are either large firms or would have access to lower prices for the services and goods in question through their trade associations, the record is unclear that this is the case. Although there might be other large firms in some markets in which the affiliates compete who can exercise monopsony power in their purchase of products and services, the record is unclear on whether sufficient firms in the market will have access to such power. For example, individual firms would not have this advantage. Those firms belonging to a trade association do not automatically have this power and would, at a minimum, have to form a purchasing cooperative to take advantage of their combined size, if possible. This represents an additional transaction cost not borne by the utilities and their affiliates.
Nonetheless, given most parties' agreement on this issue, and the fact that, if enough competitors are able to leverage their combined size in such purchases, they may be able to secure lower prices in the competitive market, we will adopt Petitioners' proposal, to which Respondents agree. (See Rule V D.) We are also persuaded by the fact that these purchases are limited to general office supplies and support, and are not associated with the traditional utility merchant functions, where the affiliate would gain a clear price advantage not available to competitors. We also expect that when the utility accounts for the costs between the utility and the affiliate, the utility will properly account for all costs including but not limited to the time an employee spends in procuring the supplies, carrying costs (warehousing, finance charges, etc.), as well as all transactional costs.
Parties' Positions
The Joint Utility Respondents propose permitting a utility and its affiliates to use joint corporate support on an exclusive basis, as long as it is priced and reported according to the Separation and Information Standards proposed elsewhere in the rules. Examples of such services include payroll, taxes, engineering, legal, insurance, financial reporting or shareholder services. Respondents propose to permit either the utility or the parent holding company to provide these corporate support services.
Respondents argue that joint corporate support permits the utilities and their affiliates to increase efficiency and reduce costs by sharing corporate functions, and these reductions will translate into lower prices for the affiliates' goods and services in the marketplace. Also, Respondents argue that since other large firms have the incentive and ability to share corporate support functions among their various business lines, Respondents should not be competitively disadvantaged vis a vis these other large firms. They argue that the distinctions set forth in Petitioners' rules as to what types of corporate support are appropriate to share are arbitrary. Petitioners point out, for example, that umbrella insurance policies that cover all entities in a corporate family for risks are less expensive than purchasing separate coverage for each entity. Consolidation of financial reporting is necessary to comply with legal requirements to prepare consolidated financial information such as annual reports. They also argue that diversified enterprises commonly share legal and engineering services. Respondents point out that FERC has approved the shared use of computer systems by interstate pipelines and their gas marketing affiliates, as long as confidential information is protected from disclosure through the use of passwords or identification codes.
Respondents also object to Petitioners' proposal because it would require that the holding company, not the utility, provide the shared corporate services. Respondents do not see the difference between the same employees providing the same types of services, whether they are employees of the holding company or the utility.
PG&E ES agrees with Respondents, as does Washington Water Power Company. NAESCO believes that utilities and affiliates may share administrative or support services (i.e., for accounting or legal services) where the utility allocates the costs of such staff time to the affiliate.
The Joint Petitioners Coalition proposes that as a general principle, a utility and its affiliate may use joint corporate support provided by the parent or holding company, or by a separate affiliate created to perform shared corporate services. They agree with Respondents that the shared support should be properly accounted for pursuant to other provisions of the proposed rules. Petitioners also provide a detailed list of the types of support services that can and cannot be shared.11
Petitioners argue that their detailed rule is preferable, because it not only provides a list of what services are permissible, but what services are not. They believe that their compromise proposal which permits, for example, the shared use of corporate legal services unrelated to marketing or regulatory issues while prohibiting shared legal service relating to marketing and legal affairs, is appropriate to protect and prevent the exchange of market-sensitive and regulatory strategy information that could significantly benefit a utility affiliate while disadvantaging its competitors. The other categories listed include instances where the sharing of corporate support could provide a means to transfer confidential information, create the opportunity for preferential treatment, lead to customer confusion or create significant opportunities for cross-subsidization of affiliates. They argue that D.97-05-040, slip at p. 68, paragraph 7, provided that the affiliated entity should have, among other things, separate computer systems.
Discussion
It is unclear that permitting the utilities and affiliates to share corporate support will actually translate into a competitive market. However, such sharing of centralized functions generates scope economies and as such can increase production efficiency. As pointed out by the CEC in the previous section, we must weigh the benefits of short-term scope economies against the long-term goal of fostering a robust and competitive marketplace. We believe that the correct balance is captured by the Petitioners' proposal, which places clear limitations on corporate support in areas where this would give the affiliate an unfair competitive advantage, as modified to better ensure adequate corporate governance and oversight.
We also provide for the utility to demonstrate in its compliance plan the adequacy of specific mechanisms and procedures in place to ensure the utility follows the mandates of the rule and does not use joint corporate support services as a conduit to circumvent these rules.
The Joint Utility Respondents propose that to the extent practicable, affiliates should acquire, operate, and maintain their own facilities and equipment. Respondents' proposal provides that facilities should not be shared if the sharing would enable the affiliates to access information that the utility could not otherwise provide to the affiliates under the rules. However, the rule does not prevent sharing for economies or efficiencies.
Respondents argue that its proposed rule is appropriate since the Commission should restrict the sharing of facilities only where there is a tangible risk of compromising another principle underlying affiliate transaction rules. They believe that Petitioners' proposal is too broad in that it precludes an affiliate from taking advantage of economies of scale when there is no risk of information sharing. Respondents prohibiting sharing to the extent practicable is intended to address unusual situations where sharing is needed as practical matter. Respondents also argue that shared computer systems is appropriate provided the appropriate password protections and firewalls are in place. They point to FERC's rule governing the sharing of computer systems by natural gas pipelines and their marketing affiliates.
EEI agrees that shared facilities represent potential sources of economies that the Commission should permit, provided there is appropriate cost allocation.
Petitioners object to Respondents' proposal because the requirement to maintain separate facilities and equipment "to the extent practicable" creates an enormous loophole in the rules. They urge adoption of a rule which prohibits a utility and affiliate from sharing office space, equipment, or access to computer or information systems. Petitioners' proposal states a preference for physical separation of offices, but permits shared office space if the entities use separate elevator banks or security controlled access. The proposal states that it does not preclude a utility from realizing certain economies of scale or sharing certain corporate support provided by the holding company, discussed in other sections.
Petitioners argue that sharing office space and equipment creates a potential for the unauthorized transfer of information between a utility and affiliate which could be used to unfairly advantage a utility's affiliate in a competitive market. They state that Edison's and PG&E's energy marketing affiliates are located in separate buildings, so that the proposed building /office separation requirement should not be problematic. They also point out that sharing of computer systems (which the Commission prohibited in D.97-05-040) raises the additional concern of sharing billing services. The affiliate's ability to use the utility's billing services creates the perceived threat that if those services are not also paid for by the due date, utility service would be discontinued. Petitioners argue that this would result in a lower bad debt rate for affiliates, which is a key advantage in a competitive market. Also, it would permit the affiliate to charge less for these services than its competitors. Petitioners argue that if joint billing is permitted, it should be permitted as a non-discriminatory unbundled tariff service available for all market participants.
PG&E ES believes Petitioners' prohibition on sharing computer systems is overbroad with respect to accounting, reporting, and other corporate services. However, it believes that Respondents' proposal permitting sharing for economies and efficiencies is an exception that would swallow the rule since services would not be shared unless that was the most economic way of providing them.
Petitioners' proposal better guarantees that the affiliates should acquire, operate and maintain their own facilities and equipment. The language in Respondents' rule requiring separation "to the extent practicable," combined with the language permitting "resource sharing for economies and efficiencies" could indeed swallow the general rule requiring separation.
However, we modify Petitioners' proposal in light of our rule regarding corporate support. We permit the utility, the holding company, or a separate affiliate created solely to perform corporate support services, to provide such support. We view this exception as narrow, and it does not encompass services related to marketing, such as a utility offering joint billing services exclusively to an affiliate. However, the utility can still offer joint billing services pursuant to D.97-05-039, where we permitted the distribution company to bill for the energy service provider, provided that this service is available to all energy service providers. This exception is in keeping with the general spirit of this rule, because it does not permit the utility to leverage its monopoly status in the distribution area solely for the benefit of its affiliate. (See Rule V C.)
The rules addressing employee issues elicited much comment. In addition to the Joint Utility Respondents and Joint Petitioners Coalition, a number of parties including the CEC, DGS/UC/CSU, NAESCO, Washington Water Power, PG&E ES, CAPHCC, Texaco, and ORA commented on the area of employee movement, and in particular, proposals addressing the temporary sharing of employees between the utility and its affiliates. The main issues in this category are the (1) separation and use; (2) transfer; (3) tracking; and (4) transfer periods of employees.
Separation and use of employees
Respondents and Petitioners differ with respect to the class of employees these rules should apply to. In a rule on the separation of employees, Respondents propose that a utility employee may not concurrently be the employee of the affiliate. Respondents exclude the board of directors from this rule. However, in a rule on the use of employees, Respondents propose that utilities can "temporarily" share an employee's time with an affiliate for less than one year continuously, or for less than 50% of an employee's time intermittently, with certain documentation requirements.
Respondents argue that a prohibition on shared directors of a utility and affiliate constitutes an unwarranted intrusion on corporate governance. Directors would be bound by rules restricting the transfer of utility information. Respondents also support their proposal for temporary or intermittent employee assignments as mutually beneficial to a utility and its affiliate in allowing each to obtain specialized expertise for a limited period, and allowing the utility and affiliate to more fully use their personnel. Such temporary assignments also allow employees to gain a variety of employment experiences. Respondents argue that possible ratepayer harm is ameliorated by the compensation provisions of their proposed rule, by the loaned employee's agreement not to transfer information, by not using marketing employees in a similar fashion, and by requiring a temporarily assigned employee to execute a nondisclosure agreement. Respondents also believe that Edison's holding company decision is consistent with its proposal.
Petitioners believe allowing joint utility/affiliate board members invites the potential for improper information sharing and other problems that restrictions on employee sharing are designed to prevent. They also believe that the proposed conditions for temporary or intermittent assignment of employees are unenforceable, vague and difficult to monitor. Petitioners point out that their proposal, which does not permit a utility to make temporary or intermittent assignments or rotations to its affiliates, is clear, enforceable, and consistent with D.97-05-040, slip op. at 67, which prohibits shared employees and is similar to the rules the Commission adopted for gas utility procurement in D.91-02-022, 39 CPUC2d 321, 332, Appendix A, para. 2.12
PG&E ES believes that Petitioners' proposal is too harsh on employees and would deny them promotional opportunities. However, PG&E ES also finds Respondents' rule "troubling" because it allows for the constant movement of employees from utility to affiliate. NAESCO believes that utility employees concerned with marketing or the provision of energy services should not be shared with an affiliate in the business the utility is conducting in the utility's service territory. DGS/UC/CSU and CAPHCC reject the concept of shared employees. ORA is concerned that no safeguards exist to prevent a utility employee performing vital utility work to be diverted to work for the affiliate. The CEC comments that allowing a utility employee to spend a little less than half a year working for an affiliate is hardly a "temporary" assignment. They also note that ratepayer funds would pay for the employee costs, and believe that allowing these assignments would create a ratepayer subsidy of the utility affiliate.
We want our adopted rules to be clear and enforceable. Respondents' proposal defines "temporary" with a broad brush, and essentially nullifies their rule prohibiting shared employees. We agree with the CEC that allowing an employee to work for an affiliate a little under a year at one time, or intermittently for a little under 50% of an employee's time, is hardly a temporary assignment. Moreover, our adopted rules, particularly regarding nondisclosure and separation, will be almost impossible to monitor with this provision. For example, our adopted rule regarding separate facilities would prove to be meaningless if many employees could intermingle between the utility and affiliate. As another example, Respondents' proposal would not permit a utility marketing employee with access to customer information to be used in a similar capacity by an affiliate within a utility's service territory. But that utility employee could still be used by the affiliate in another capacity that has contact with marketing employees of an affiliate. Such a situation would make enforcement of this rule problematic. Moreover, the incentive underlying Respondents' proposal could also work against the best interest of the ratepayer. There is little incentive under Respondents' proposed rule to keep an employee who is vital to the operations of the utility from being loaned to the affiliate at a time when that employee is needed by both companies.
We sympathize with the concept that employees would want the widest promotional opportunities available to them. However, our adopted rule (see Rule V G) provides the best balance between this concern and our concerns regarding cross-subsidization, competition, and inappropriate transfer of information. If an employee wants a varied employment history, that employee has the opportunity to permanently transfer to the affiliate pursuant to our adopted rules.
Edison's holding company decision does not support Respondents' position. In that decision, the Commission permitted the sharing of utility personnel with the holding company in performing certain corporate functions, and the sharing of certain support personnel in instances where it is not practical for the subsidiary to have its own administrative staff. (D.88-01-063, 27 CPUC2d 347, 387, Appendix C, II-D.) D.88-01-063 does not stand for the broad proposition that all employees should be shared, or "temporarily" loaned, to the utilities' affiliates. Moreover, the Commission issued this decision in 1988, well before we determined to open the electric industry to competition. Petitioners' proposal, which we adopt, permits the sharing of employees to the extent permitted in the rule on shared corporate support.
We also adopt Petitioners' recommendation, as modified, prohibiting joint utility/affiliate board members and also extend it to joint corporate officers. Our concern with information sharing underlies this area as well. Although both officers and board members would undoubtedly do their professional best to abide by any nondisclosure rules and nondisclosure agreements, it is difficult to monitor against inadvertent information sharing. In instances when this rule is applicable to holding companies, we will allow any board member or corporate officer to serve on the holding company and with either the utility or affiliate (but not both). In cases where the utility is a multi-state utility, is not a member of a holding company structure, and assumes the corporate governance functions for the affiliates, the prohibition against any board member or corporate officer of the utility also serving as a board member or corporate officer of an affiliate shall only apply to affiliates that operate within California. This exemption is needed to allow for the holding company board, or in the case of multi-state utilities, the utility board, and its officers to ensure adequate governance and oversight. In the case of shared directors and officers, a corporate officer from the utility and holding company shall verify in the utility's compliance plan the adequacy of the specific mechanisms and procedures in place to ensure that the utility is not utilizing shared officers and directors as a conduit to circumvent any of these rules.
Transfer of Employees
The Joint Utility Respondents propose that the utility may transfer employees from the utility to the affiliate if it pays a transfer fee of 25% of the employees' utility base annual salary, unless the utility can demonstrate that some lesser percentage (equal to at least 15%) is appropriate for the class of employee. Respondents propose this fee should not apply to (a) non-management employees; (b) employees hired by an affiliate because the utility function they perform has been eliminated or substantially curtailed as a result of electric industry restructuring; or (c) employees moved to the parent holding company or an affiliate that provides only corporate support services. They propose that the transaction be reported consistent with Commission reporting requirements. Respondents believe that these requirements are in large part consistent with their past holding company decisions, are reasonable, and are designed to remove unwarranted and perverse incentives that could result in the utilities terminating employees because of the imposition of uneconomic fees. They also believe that as services are unbundled and discontinued or moved to affiliates, utility employees should have the flexibility to move to an affiliate without triggering a transfer fee. They believe that if the transfer involves nonmanagement personnel, no "headhunter" cost is involved, so there is no additional ratepayer expense.
The Joint Petitioners Coalition would assess a 25% transfer fee for all utility employees transferred to the affiliate except for employees transferred to the parent holding company to provide corporate support services, if these services are solely provided by the parent. The transfer fee should apply to the employees' base annual compensation, instead of base annual salary as proposed by Respondents. Petitioners believe the 25% transfer fee is appropriate for all employees, including clerical employees or those whose function is eliminated due to restructuring. They note that the transfer of non-managerial employees, including secretaries, to the affiliate can result in enormous advantages to the affiliate for which the ratepayers should be compensated. Petitioners argue that Respondents' exceptions to the rule make it more complex and difficult to enforce.
In PG&E's holding company decision, we adopted a transfer fee provision similar to that adopted in SDG&E's holding company decision, D.95-12-018, slip op. at 45, Ordering Paragraph 8. This condition recognizes the ratepayers' costs expended in hiring and training employees and in losing talented utility personnel to the holding company or the affiliates. (See D.96-11-017, slip op. at 38.) It provides for a 25% transfer fee of the employees' base annual compensation for all nonclerical personnel, unless the utility can demonstrate that some lesser percentage (up to 15%) is more appropriate for the class of employee.
Even in light of electric industry restructuring, it is still necessary to ensure that ratepayers are reimbursed for the costs incurred in hiring and training personnel. The transfer of these personnel can result in enormous advantages for the affiliate. The rule adopted in the holding company cases gives the utility an opportunity to demonstrate that a lesser percentage than 25% is appropriate in individual circumstances. We continue this flexibility in light of the personnel changes likely to occur as a result of restructuring. We also continue to exempt clerical personnel from this rule. We also exempt personnel transferred to a holding company or a separate affiliate performing corporate support functions, provided that that transfer is made in the initial implementation period of these rules or pursuant to a § 851 application or other Commission proceeding. The rule will apply to subsequent transfers of all covered employees at a later time. Finally, not only should the utilities report these transactions consistent with Commission reporting requirements, they should credit ratepayers in appropriate accounts to ensure that they receive the fees.
Tracking of Employees
The Joint Utility Respondents and Joint Petitioners Coalition agree regarding the tracking of employee movement. The rule requires a utility to track and report all employee movement between a utility and an affiliate. We interpret this rule to mean that utility should track this movement according to all existing Commission requirements. (See e.g., the Affiliate Transaction Reporting Decision, D.93-02-016, 48 CPUC2d 163, 171-172 and 180 [Appendix A, Section I and Section II H].) This rule is reasonable and we adopt it.
Transfer Periods of Employees
The Joint Petitioners Coalition proposes a rule requiring an employee transferred from the utility to the affiliate cannot return to the utility for two years. If that employee does return, the employee cannot transfer to the affiliate for three years. Petitioners state that one of the methods of transferring valuable and competitively advantageous information and experience between a utility and affiliate is through the repeated transfer of employees back and forth. Placing specific time limitations on transfers or rotating employment would prevent repeated or short-term transfers or hiring and re-hiring of certain personnel between the utility and affiliate.
Respondents oppose such a rule, and do not believe an additional rule is required in this area. The CEC believes that Petitioners' rule protects against utility employees moving back and forth between utility and affiliate, and providing critical market information to the affiliate. The CEC is concerned that Petitioners' proposal could cause potential hardship for an employee who might want to transfer back to the utility if the affiliate goes out of business during the restricted period, and suggests relaxing the provision if the affiliate goes out of business.
Respondents have not demonstrated how our adopted rules can address the "revolving door" concerns raised by Petitioners and CEC without some rule in this area. However, we modify Petitioners' proposal so that an employee who is transferred from the utility to the affiliate cannot return to the utility for one year, and that if that employee does return to the utility, the employee cannot then transfer to the affiliate for two years. We also agree with the CEC that the rules should accommodate the transfer of employees whose affiliate has gone out of business. We therefore modify Petitioners' proposal to provide that the rule should not apply if the affiliate that the employee transfers to goes out of business within the one -year period. We also adopt the clarification suggested by the CEC that employees transferred from the utility to the affiliate are expressly prohibited from using information gained from the utility in a discriminatory or exclusive fashion, to the benefit of the affiliate or to the detriment of its competitors.
Taking of Information
The Joint Petitioners Coalition propose a rule which prevents a utility employee hired by an affiliate from removing or otherwise providing the affiliate with proprietary property or information. Petitioners propose that to the extent that an affiliate possesses information or documents which an affiliate would otherwise be precluded from having pursuant to these rules, a rebuttable presumption should exist that the transferred employee improperly provided such information to the affiliate. Respondents do not believe this additional rule is required.
Even though the other rules appear to preclude such a transfer, we think it is useful to emphasize that a utility employee hired by the affiliate shall not remove any information or documents to the affiliate which the affiliate would be precluded from having according to these rules. However, we do not see a need to establish rebuttable presumptions at this time. Therefore, we adopt Petitioners' proposed rule as modified.
Petitioners propose that a utility shall not share or subsidize costs with its affiliates associated with research, development and demonstration (RD&D) activities. Petitioners argue that this prohibition is necessary to prevent ratepayer subsidization of affiliate activities. Respondents do not believe this rule is necessary. They argue that the Commission has removed most of the RD&D funding from utility control, and has transferred such funds to the CEC for administration and control. Remaining funding from ratepayer sources is modest and limited in scope. Respondents argue that if utilities decide to pursue corporate RD&D programs using discretionary funding, they should be able to do so in a cost-effective manner, which may include joint programs with affiliates. Respondents believe that their proposed rules regarding pricing and information sharing address this issue. Respondents also argue that this proposed rule cannot be reconciled with the Commission's recent decision adopting a Technology Commercialization Incentive Procedure for Edison in Resolution E-3484.
Petitioners' proposed rule addresses ratepayer funding of joint RD&D projects with an affiliate, to prevent ratepayer subsidization of affiliate activities. Petitioners' rule is more consistent with our preference for separating utility and affiliate functions, rather than merely tracking them through pricing mechanisms. Petitioners' rule is also more consistent with our adopted rule preventing the sharing of proprietary information except in limited circumstances. We do not see inconsistencies with Resolution E-3484, since that resolution did not address or permit joint funding of RD&D activities between a utility and its affiliate. We therefore adopt Petitioners' proposal. (See Rule V F 5.)
Petitioners propose a rule which limits a utility's performance of audits of its affiliates to only the extent required to assure proper payment for or receipt of goods, products, or services consistent with these rules. Any other audits should be performed by independent auditors. Respondents believe this rule is inappropriate and unnecessary.
We do not adopt an additional rule here. Our adopted rule on corporate support provides for situations where a utility and affiliate can share joint corporate support activities. To the extent that audits fall within this rule, they are permitted. However, audits performed to ensure compliance with these rules should be performed by an independent auditor. (See compliance discussion below.)
Petitioners and Respondents agreed on a proposed rule regarding the pricing provisions of the transfer of goods and services. The consensus rule provides for transfers from the utility to affiliates at fair market value when the goods or services are produced for sale (using the regulated prices as fair market value where applicable) and otherwise at fully loaded cost plus a five percent adder to labor costs.13 Respondents explain that this rule prevents cross-subsidization, since the affiliate will compensate a utility for its fully loaded costs, except where a utility offers the service generally. In that instance, affiliates will pay the same market price that unaffiliated parties pay.
Respondents also state that the proposed rule prevents cross-subsidization where the affiliate provides goods or services to the utility. If ratepayers receive the goods or services at market price, there is no affiliate cross-subsidization; the utility is not paying more for an affiliate's service than it is worth. If the affiliate does not offer the goods or services generally, respondents believe that no objective market price is available, and the utility will instead be charged cost.
This consensus rule is reasonable, but we add minor modifications to more fully prevent ratepayer subsidization and to add clarification. We clarify that a utility or affiliate may price at fair market value when it offers those goods and services on a nondiscriminatory basis. We also modify the proposed rules to provide that transfers from an affiliate to a utility of goods and services that the affiliate does not generally offer should be priced at the lower of fair market value or fully loaded cost. We intend this modification to address the situation in which a good or service may be offered on the open market and have a fair market value, but the affiliate does not offer such service generally. In that instance, to prevent cross-subsidization, the ratepayer should only pay the lower of the fair market value or fully loaded cost.
We also address PacifiCorp et al.'s concern that the proposed consensus rule is too narrow by providing that, for goods and services for which the price is regulated by the Commission or FERC, that regulated price should be deemed to be the fair market value. These parties believe that the rule should be modified to read "for goods or services for which the price is regulated by a state or federal regulatory agency" to reflect the fact that the price might be regulated by another state commission, FERC or the Federal Communications Commission. We adopt these parties' modifications, except to note that if more than one state commission regulates the price of goods or services, this Commission's pricing governs. (See Rule V H.)
Respondents propose that transfers of assets or the right to use assets between a utility and its affiliate should be priced at fair market value, provided that transfers of assets valued at $250,000 or less may, at the transferor's option, be priced at net book value. Respondents argue that this proposal essentially restates existing Commission pricing policy, except that it increases the de minimus exclusion from $100,000 to $250,000. Respondents state that this higher monetary figure is appropriate in that it not only reflects today's higher costs, but also recognizes that hiring appraisers is expensive.
Petitioners do not believe this rule is necessary. They object to the increase from $100,000 to $250,000 as unjustified and unfair to ratepayers. Also, several holding company decisions require, the utility proposing such a transfer to provide 30 days' notice to the Commission. They believe this is a reasonable requirement which should be maintained. Finally, Petitioners argue that the existing rules recognize that in some instances, royalty payments from an affiliate may be required to adequately compensate ratepayers. DGS/UC/CSU do not support the rule, arguing that all transfers should be at fair market value.
Respondents' proposed rule adopts portions, but not all, of existing holding company rules in this area. We find Respondents' selective proposal in this area more difficult to enforce than abiding by the existing rules, and therefore do not adopt their proposed rule. Nor do we find it necessary to increase the de minimus exclusion from $100,000 to $250,000.
Petitioners and Respondents agree to a consensus rule that the utility and its affiliates should be separate corporate entities. PacifiCorp et al. believe this rule is ambiguous or surplus to the definition of affiliate. They also state that the Commission should not prohibit utilities from directly marketing energy and energy-related products and services. We do not believe this rule is surplus; rather, it is in keeping with our desire to ensure separate operations to the extent practicable. We therefore adopt this consensus rule. (See Rule V A.)
Petitioners and Respondents agree that a utility and affiliate should keep separate books and records, and that utility books and records should be kept in accordance with the applicable FERC Uniform System of Accounts (USOA) and Generally Accepted Accounting Procedures. We adopt the consensus rule, but note that its silence as to how affiliates should maintain their books does not supersede the directives of the utilities' individual holding company decisions.
The consensus rule also provides that the books and records of affiliates shall be open for examination by the Commission and its staff consistent with the provisions of PU Code § 314. This proposed rule restates and summarizes the provisions of § 314. By adopting this condition, we remind the utilities that we will interpret § 314 broadly, in a manner not necessarily limited by the principle of relevance to an open proceeding, since the Commission's inspection rights under § 314 are not limited to particular proceedings. (See D.96-07-059, slip op. at p. 23.) We also note that various Commission decisions addressing a particular utility's formation of a holding company address presumptions of validity of any Commission request for books and records under § 314. These particular rules remain in force since they are more detailed in scope and do not conflict with the rule we adopt today. (See Rule V B.)
We also note that under the Public Utility Holding Company Act, 15 U.S.C. § 79 et seq., in order to obtain an exemption from the Act, a utility's foreign affiliates rely on the Commission's certification to the Securities and Exchange Commission that we have the authority and resources to protect ratepayers subject to our jurisdiction. We therefore intend this rule and § 314 to apply to the books and records of a utility's foreign affiliates, which books and records should be made available at the utility's headquarters for our review upon request. Moreover, we note our authority under § 313 to require a public utility to produce within the state books, accounts, papers, or records kept by the public utility outside the state.
Petitioners and Respondents propose a consensus rule that existing Commission rules for each utility and its parent holding company should continue to apply except to the extent they conflict with these rules. In cases of a conflict, the rules adopted today shall supersede prior rules and guidelines. However, nothing shall preclude a utility or its parent holding company from adopting other utility-specific guidelines, with advance Commission approval.
This rule is reasonable and we adopt it (see Rules II E), with the proviso that when existing utility-specific holding company rules are more detailed but harmonious with the rules we adopt today, the utility should abide by both rules. (See, for example, our discussion on the availability of a utility's and an affiliate's books and records to Commission staff under PU Code § 314, above.) We adopt the consensus rule, but do not supersede existing utility-specific rules which presume validity of Commission requests under § 314. (See Rule V B.) We also note that nothing in this rule prevents the Commission from adopting other utility-specific rules if appropriate. For example, Phase 2 of PG&E's holding company application is still in progress, and the Commission might deem it necessary to adopt other conditions in response to, inter alia, the ORA audit.
Petitioners and Respondents propose a consensus rule that affiliate officers and employees shall be made available to testify before the Commission as necessary or required, consistent with the provisions of PU Code § 314. We agree this rule is reasonable, but clarify that it applies to utility holding company officers and employees, as well as affiliate officers and employees. This is consistent with the language of § 314, and the individual utility's holding company decisions. (See Rule VI D.)
Petitioners propose a rule stating that the utility should demonstrate to the Commission that there are adequate procedures in place that will prevent the sharing of information with its affiliate that is precluded by these rules. Petitioners propose that the utility should file a compliance plan within 30 days after the adoption of the rules and annually thereafter. Petitioners also propose that upon the creation of a new affiliate, a utility shall immediately notify the Commission and interested parties of the creation of the affiliate and file within 60 days a report to the Commission describing how the utility will implement these rules with respect to the new entity.
Respondents believe that the Commission order will require the filing of a compliance plan, and therefore no additional rule is necessary.
No later than December 31, 1997, the utilities should file a compliance plan demonstrating to the Commission that there are adequate procedures in place implementing the rules we adopt today. The utilities shall file these compliance plans as an advice letter with the Commission's Energy Division and serve them on the service list of this proceeding. The utilities' compliance plans will be in effect between their filing and a Commission decision on the advice letter. A utility shall file a compliance plan annually thereafter using the same advice letter process when there is some change in the compliance plan (i.e., a new affiliate has been created, or the utility has changed the compliance plan for any other reason). (See Rule VI A.) Moreover, utilities should immediately notify the Commission of the creation of a new affiliate which is covered by these rules. No later than 60 days after the creation of this affiliate, the utility shall file an advice letter with the Energy Division of the Commission, and serve it on the parties to this proceeding. The advice letter should demonstrate how the utility will implement these rules with respect to the new entity. (See Rule VI B.)
Petitioners recommend that the utility should have annual audits prepared by an independent auditor to verify compliance with these rules. Respondents oppose this rule as both unnecessary and burdensome. We find merit to this proposal to verify compliance with these rules, and believe that the requirement for the utilities to have annual independent audits is appropriate. We are in a transition period to a competitive marketplace, and the utility's business will be undergoing changes in rapid fashion. An annual audit, at least in the first three or four initial transition years, is critical to ensure compliance with these rules. Once the utility's independent auditor performs the initial annual audit, subsequent annual audits should not be burdensome. These audits should be at shareholder expense. (See D.95-12-018, SDG&E Holding Company Decision, slip op. at p. 43, ordering paragraph 4.)
We therefore direct that no later than December 31, 1998, and each year thereafter, the utility should file with this Commission an audit prepared by an independent auditor which verifies compliance with the rules set forth herein. The auditors should have the same access to information as an auditor performing the review under, inter alia, PU Code §§ 313, 314 and 797. The utilities should file this audit with the Energy Division of the Commission and should serve it on all parties to this proceeding. The Commission and its staff should review this audit. By adopting this rule, we do not preclude the Commission from undertaking an independent audit pursuant to, inter alia, PU Code § 797. Nor do we preclude previously ordered audits in individual utility holding company decisions from proceeding as we have directed. (See Rule VI C.)
Respondents propose that the Commission's existing general and utility-specific reporting requirements on Affiliate Transactions shall remain in force, except as modified in this decision. Petitioners state that the record keeping and compliance rules they propose elsewhere in their rules are necessary.
We address Petitioners' other proposals in this area elsewhere in this decision. Respondents' proposed rule here is consistent with the consensus rule that existing Commission rules should remain in effect except to the extent they conflict with these rules. We therefore adopt Respondents' recommended rule, with the explanation that the utility should comply with any other Commission reporting requirements that may appear in a decision or rule other than the Affiliate Transaction Decision, 48 CPUC2d 163, except to the extent that they are modified by this order. (See Rule II E.)
The OIR/OII recognizes that all energy utilities and their affiliates should be on an equal footing with regard to entry into the unregulated market for energy products and services. The OIR/OII notes that SoCalGas had proposed flexibility in introducing new products and services in its performance-based ratemaking (PBR) application, A.95-06-002. The question of whether energy utilities, generically, should be required to conduct unregulated or potentially competitive activities, like the marketing of new products and services discussed in SoCalGas' proposal, through affiliate companies and if so, under what rules and criteria, should be addressed by the parties as they discuss utility/affiliate standards of conduct. Many parties addressed this issue, while only several made a specific proposal. We address the specific proposals below. Before so doing, it is helpful to summarize our directives in the SoCalGas' PBR decision (D.97-07-054, slip op. at 60-64) to put the parties' positions and our determination in this docket in better context.
SoCalGas PBR
In SoCalGas' PBR application, SoCalGas sought authorization to offer on a competitive and unregulated basis products and services that it has not previously offered. SoCalGas also sought authorization to provide support to its unregulated affiliates for their offering of new products and services. SoCalGas stated that these new products and services would be provided entirely at shareholder risk, and would not be funded by the rates charged for utility service. It asked us to agree that the prices, terms and conditions for new products and services would not be regulated; that the profits or losses should flow entirely to shareholders; and that existing products and services offered on an unbundled basis in the future would be treated the same as new utility-related products and services.
We declined to adopt SoCalGas' proposal on an interim basis, but did so without prejudice to SoCalGas renewing it or another proposal in this docket. We delineated a number of questions arising from the proposal that may need further consideration. This delineation provides guidance for our further deliberations in this docket.
First, SoCalGas did not clearly specify the types of products and services which it sought to offer on an unregulated basis. We noted that other parties raised legitimate concerns about the types of services SoCalGas would offer, particularly concerning the unbundling of traditional services.
Second, SoCalGas did not offer explicit criteria to define the relevant markets in which SoCalGas sought entry on an unregulated basis, i.e., the criteria and process the Commission should use to determine the relevant market, the degree of competition or the extent of SoCalGas' market power.
Third, SoCalGas did not propose the regulatory tools which would be used to prevent cross-subsidization between the services SoCalGas would continue to provide on a monopoly basis and those it would provide as competitive services.
When we permitted SoCalGas to renew its request in this proceeding, we also stated that the level of detail that we would expect of a proposal to offer new products and services is equivalent to that set forth when we adopted the three categories of services for telecommunication products and accompanying safeguards. (See D.89-10-031.) Finally, we recognized that if SoCalGas expands its current service offerings or gains approval for new products and services, it may be able to increase its net revenues. We viewed this as a type of productivity improvement consistent with the goals of PBR. We stated that under the PBR we adopted in D.97-07-054, returns above the target arising from either cost decreases or revenue increases will be shared between ratepayers and shareholders.
SoCalGas' and SDG&E's Proposal in this Proceeding
The Joint Utility Respondents did not submit an initial proposal on this issue, although they stated that they hoped to in the future. SoCalGas and SDG&E proposed separate rules on this subject. These rules allow utilities to provide both tariffed and nontariffed services. Descriptions of nontariffed services include non-energy, business to business, ancillary services and experimental technologies. The proposal provides that shareholders should fund the incremental cost of the nontariffed products and services, and should receive all of the revenues.
Edison stated its intent to develop rules in this area. Since that time, Edison filed A.97-06-021, a proposal for the treatment of revenues from new products and services offered by the utility. PG&E believes that there has not been sufficient time for the parties to explore this proposal, and recommends that the Commission defer ruling on this issue to another phase of this proceeding to commence as soon as possible after reply comments are filed.
SoCalGas' and SDG&E's proposal fails to address key issues set forth in the SoCalGas PBR decision. Although the proposal delineates four categories of potential products and services, they are broadly defined and do not set a meaningful limitation on the types of unregulated activities a utility can provide.
The proposal also does not offer specific criteria to define the relevant markets into which SoCalGas and SDG&E seek entry on an unregulated basis. For example, it does not answer the Commission's question as to what criteria and process the Commission should use to determine the relevant market, the degree of competition or the extent of the utility's market power. This proposal does not offer a way for the Commission to protect against cross-subsidization or anticompetitive effects. It is also contrary to our statement in the SoCalGas PBR decision that ratepayers as well as shareholders should share the revenues, since this proposal provides that shareholders should receive all the revenues from new products and services.
We have deferred resolution of this issue once in the SoCalGas PBR and will not do so again. The Assigned Commissioners' ruling and scoping memo did not provide for separate phases, and we do not alter that procedural schedule. We do not adopt this proposal because it does not address the points we set out in the SoCalGas PBR decision, and does not contain the level of detail set forth when we adopted the three categories of services for telecommunications products and accompanying accounting safeguards in D.89-10-031, 33 CPUC2d 43.
DGS/UC/CSU and NAESCO Proposals
DGS/UC/CSU and NAESCO recommend similar proposals. DGS/UC/CSU believe that allowing regulated utilities to offer competitive services raises issues of cross-subsidization, unfair competition, increased costs for ratepayers, and deteriorating services. DGS/UC/CSU are concerned that utilities might give priority to competitive services vis a vis regulated services for the use of assets. They also believe that utilities might be encouraged to acquire marginally necessary assets at the expense of ratepayers in order to have the ability to provide competitive services. Finally, even if shareholders fund these competitive services, DGS/UC/CSU are concerned that ratepayers might accrue the risks. Therefore, DGS/UC/CSU propose that utilities should not be allowed to provide a competitive service unless they can demonstrate that (1) such provision will not result in cross-subsidization or unfair competition, (2) there are clear benefits to ratepayers that substantially outweigh any potential decreases in service and increase in risks, and (3) the service could not be provided more appropriately by the utility's competitive affiliate. NAESCO believes that there should be a strong presumption against provision of competitive services by the utility and that competitive services should be transferred to an unregulated affiliate. It offers essentially the same proposal as DGS/UC/CSU.
Although both the DGS/UC/CSU and NAESCO raise serious and legitimate concerns, their proposal does not offer the utility specific procedural guidance regarding seeking permission to offer new products and services, nor does it meet the detailed criteria of the SoCalGas PBR. Moreover, it would be difficult to verify points 1 and 2 of their criteria, so point 3 would probably be the outcome in most cases.
Joint Petitioners Coalition Proposals and October 23 Joint Motion
In their June comments, Petitioners proposed that utilities should not provide unregulated or potentially competitive activities, but that affiliates should offer these activities. All products and services a utility offers to the public should be offered according to the terms and conditions set forth in Commission-approved tariffs or through an open, competitive bidding process. They reason that utility provision of unregulated or potentially competitive activities would result in improper ratepayer cross-subsidization and market power abuse. Examples of such an advantage are the preferential access to ratepayer-funded assets and the ability to charge for the new service on utility bills.
The Joint Utility Respondents opposed this initial proposal. They state that energy utilities have been engaged in the activities in question for decades. In an effort to enhance the use of utility assets and infrastructure, the utilities historically have sought uses for temporarily available capacity (e.g., space in utility fiberoptic cables) and compatible secondary uses (e.g., leasing land under transmission lines to nurseries). They state that this practice has generated substantial additional revenue, without referencing the amount or percentage of revenues. These additional revenues have reduced ratepayers' costs for utility service and have furthered efficient use of resources.
In their July comments, the Joint Petitioners Coalition proposed a new rule which modifies Petitioners' June filing. This proposal recognizes the potential benefits to ratepayers and shareholders from using excess utility capacity to provide new products and services on an untariffed basis and permits those benefits to be realized. Petitioners state this rule also recognizes the potential harm to both ratepayers and competitive markets if monopoly utilities have unfettered discretion to pursue unregulated activities.
Petitioners' proposed rule provides that a utility may offer for sale (1) tariffed products and services currently offered by the utility; (2) unbundled versions of currently-offered utility products and services on a tariffed basis; (3) new products and services offered on a tariffed basis; and (4) products and services offered on a nontariffed basis which use a portion of a utility asset, provided that use of that asset does not affect the quality of the tariffed product or service. Petitioners' proposal specifically prohibits a utility from offering natural gas or electricity commodity service on an untariffed basis. Their list of what products a utility may offer is flexible, but includes products and services which a utility can market with minimal or no incremental capital, business risk, and management control. Petitioners' rule lists the following examples: third parties' use of utility land for nurseries or mini-storage, lease of "dark" fiberoptic capacity, rental of available office space, third-party use of technical employees on an "as available" basis, or licensing of existing software or a patented product or process.
Petitioners' proposal also provides for advice letter approval of a nontariffed product and service and for Commission adoption and utility establishment of the following items before the utility could offer such services: (1) a mechanism for equitable sharing of benefits between ratepayers and shareholders; (2) accounting standards to prevent cross-subsidization; (3) periodic reporting and auditing requirements; and (4) a complaint resolution mechanism.
SCUPP/IID's proposal is similar to Petitioners', except that it would permit the utility to offer products and services for which it may require additional capital, and may incur additional business risk. Examples include land development, development of commercial applications for utility-developed software, third-party billing and phone services, equipment testing, meter repair, and calibration and consulting services. A utility would have to file an advice letter only to seek Commission approval to offer products and services that might require additional capital or incur additional business risk.
Respondents find the language of the proposals "generally acceptable," except for: (1) the limitation of nontariffed offerings to those that require no incremental investment, liability, or management control, since shareholders bear these costs and investments; (2) Commission preapproval, which could be time consuming and expensive, and require the release of competitively sensitive information; and (3) tariffing all unbundled services, which should be dealt with on a case-by-case basis. Respondents would not oppose a provision requiring advance Commission notification before a new category of nontariffed product or service (e.g., land licenses on transmission rights of way) is offered. In their comments and at oral argument, the parties stated that they were still negotiating this issue.
On October 23, 1997, ORA, TURN, SCUPP/IID, SDG&E, Edison, and SoCalGas (moving parties) filed a joint motion for adoption of a rule governing utility products and services. The ALJ permitted parties to respond to the joint motion no later than November 17. CAPHCC, Enron, and UC/CSU oppose the moving parties' proposal. The moving parties permit the utilities to offer products and services similar to those delineated in SCUPP/IID's proposal, except delineated by category instead of individual offering. The moving parties also provide for some other procedural proposal and reporting safeguards.
The SoCalGas PBR required any new proposal regarding a utility offering products and services to provide the level of detail and accounting safeguards set forth in D.89-10-031. In D.89-10-031, 33 CPUC2d 43 at 125-126, the Commission adopted three detailed categories of services for telecommunications products based on how competitive the services were, and categorized of numerous existing services.
All three proposals are more general in their category delineation. Also, none of the proposals include specific accounting safeguards. In D.89-10-031, the Commission required the telephone utilities to utilize a detailed cost methodology based on the Federal Communications Commission's cost allocation methods at 47 CFR § 64. (Id. at pp. 148-149.) Here, the proposals merely require the Commission to provide for and the utility to establish a mechanism or accounting standard for allocating costs to prevent cross-subsidization. The proposals are also not as detailed as D.89-10-031 with respect to delineating the degree of competition of various services.
Although we are not presented with any proposal that fully meets the criteria set forth in the SoCalGas PBR decision, we adopt the rule proposed by the moving parties in part, with modifications. We adopt the moving parties' proposed rule permitting a utility to offer existing or new products and services offered pursuant to tariff. We also note that while this rule does not grant the utility authority to offer a tariffed service outside of its service territory, it is not a limitation either.
With respect to nontariffed products and services, we modify the moving parties' proposal for the reasons set forth below.
In this proceeding, the Commission and the parties are spending a great deal of time and resources developing rules to prevent cross-subsidization and market power abuse between a utility and its affiliate. The specific concerns underlying the rulemaking and the rules adopted today are set forth in detail throughout this decision. As a result of the rules adopted in this decision, in combination with existing affiliate transaction rules, we have developed a body of regulation to prevent such abuses.
We do not wish to adopt a mechanism by which the utility can circumvent these rules by offering the products or services itself instead of through an affiliate, especially when the utility's offering is for a competitive or potentially competitive service and might interfere with the development of a competitive market. Significantly, we recognized in the SoCalGas PBR decision the utility's market power:
"We also note SoCal's argument that the Commission should presume that if SoCal does not currently offer a service, it cannot have market power with respect to it, and it is therefore a competitive service. By the very nature of SoCal's monopoly position in the energy and energy services market, its access to comprehensive customer records, its access to an established billing system, and its `name brand' recognition, it may be that SoCal enjoys significant market power with respect to any new product or service in the energy field." (Id. at p. 63.)
We recognize that in some limited instances it may be appropriate for a utility to offer new nontariffed products and services in lieu of requiring all such services to be offered by the affiliate. However, since we are not presented with a proposal that fully meets the criteria set forth in the SoCalGas PBR decision, we prefer to adopt a narrow rather than a broad rule regarding nontariffed products and services.
The utilities argue that they should be able to offer nontariffed products and services to use utility assets to their fullest. The rule we adopt permits a utility to offer new products and services on an untariffed basis provided the utility's offering is restricted to less than 1% of its customer base. This would address the circumstances which the utilities delineate, such as excess land. Although the utilities should still address the competitive market power issues in their advice letter filing, the rule we adopt should minimize competitive and market power concerns since the new product or service would not be offered to a large portion of the customer base. That in turn should minimize dispute and expedite advice letter approval. Additionally, in its advice letter filing, the utility should demonstrate that it has not received recovery in the Transition Cost Proceeding, A.96-08-001, or other applicable Commission proceeding, for the portion of the utility assets dedicated to the non-utility venture.
As stated above, no party adequately addressed the appropriate cost allocation methodology. However, we adopt the moving parties' proposal here, as it requires the Commission to approve and the utility to establish an appropriate cost allocation methodology before the utility can offer certain new products and services.
The rule we adopt incorporates the moving parties' proposal to delineate products and services by category instead of individual offering. We also adopt the moving parties' proposal permitting the utilities to offer tariffed or nontariffed products or services offered as of the effective date of this decision, but only for a limited time. The utilities must apply to the Commission by advice letter for continuing authorization in compliance with the criteria set forth in Rule VII. We also adopt, as modified, many of the moving parties' procedural proposals and reporting safeguards.
We do not adopt the moving parties' recommendation for the utility to establish a separate complaint resolution mechanism. However, we reject this portion of the proposal without prejudice to it being raised in a subsequent rulemaking on enforcement. (See Section 10 below.)
Finally, the moving parties' proposal provides that, before the utilities offer such products and services, the Commission should adopt a mechanism for equitable sharing of the benefits and revenues derived from offering such products and services between ratepayers and shareholders. As Respondents recognize, utilities historically have sought uses for temporarily available capacity and compatible secondary uses (e.g., leasing land under transmission lines to nurseries). The additional revenues have reduced the cost of utility revenues. Therefore, before the utility offers such products or services, the utility should demonstrate that the Commission has approved and the utility has established a reasonable mechanism for treatment of revenues derived from offering such products and services. Nothing in our actions approving this rule predetermines the disposition of these revenues. We also note that the Commission has adopted a PBR scheme for several of the utilities covered by these rules. To the extent those utilities seek to establish a different sharing mechanism than that provided for in their PBR, they should petition to modify their PBR decisions, where all risks and rewards of the PBR mechanism can be examined, not just specific portion the utility wants to change, or clearly justify why this procedure is inappropriate. This is consistent with our statement in the SoCalGas PBR decision:
"If SoCal expands its current service offerings and/or gains approval for new products or services, SoCal may be able to increase net revenues. We see this as a type of productivity improvement that would be consistent with the goals of PBR. Under the PBR we adopt in this order, returns above the target arising from either cost decreases or revenue increases will be shared between ratepayers and shareholders." (D.97-07-054, slip op. at p. 64.)
In their July 31 comments, as opposed to their June filing setting forth proposed rules, Petitioners propose a new rule addressing the utility merchant function. Petitioners state that to the extent that a utility is engaged in the marketing of the commodity of electricity or natural gas to customers, as opposed to the marketing of transmission and distribution services, it shall be deemed, for purposes of the proposed rules, to be engaged in merchant functions. Petitioners propose rules to provide that the utility customers are placed in a position where no advantage or disadvantage is imposed on them based on whether they purchase their commodity services from the utility merchant function or from third parties, and to provide for fair competition. Respondents oppose this proposed rule since it involves intrautility relationships, not utility-to-affiliate relationships, and is therefore outside the scope of this proceeding.
We agree that Petitioners' proposal presents important issues. However, Petitioners made their initial proposal July 31, almost two months after the OIR/OII required the proposed rules to be filed. Moreover, this issue is not within the scope of the OIR/OII. We therefore decline to address Petitioners' proposal here, but do so without prejudice to Petitioners' or other parties' ability to raise this issue in another appropriate forum. We also note that one aspect of FERC's approval of market-based rate authority for the electric utilities is mitigation of market power and a monitoring plan. We anticipate that FERC's decision will provide further guidance on this issue on the electric side. Also, the Commission is about to issue a gas strategy plan on local distribution companies' market power that may provide guidance on this issue.
In their May 1 scoping memo, the Assigned Commissioners stated that it was important to have rules that can be enforced. However, as also noted by the scoping memo, D.97-04-041, issued with the OIR/OII, addressed the issue of whether the Commission should by this proceeding establish special penalties for violations of the rules. D.97-04-041 also addressed the issue of whether this proceeding should include special complaint procedures. In both instances, the Commission declined to include these issues within the ambit of this proceeding.
With respect to special complaint procedures, the Commission stated:
"At this juncture, we are not convinced that a separate complaint procedure is needed for purposes of addressing marketing affiliate issues. Our present complaint procedure requires the utility to answer a complaint expeditiously (in 30 days) and formally. With the recent establishment of the Consumers Services Division, however, we emphasize that `[t]he Commission must ...be prepared to address both the new commercial relationships and the fair-dealing issues which are likely to arise with the continued movement toward greater competition in various markets.' (1997 Business Plan, pp. XIV-1-2.) Competitor complaints regarding utility-affiliate relations and transactions fall into this area of the Consumer Services Division's responsibilities.
"New approaches for addressing informal complaints, outlined in our Business Plan, are available to all complainants. The proposal advanced by Petitioners suggests the complainant and the utility attempt to resolve the complaint informally prior to availing themselves of the Consumer Services Division's new approaches to informal resolution and the Commission's formal process. Nothing in our rules prohibits a complainant and utility from attempting to resolve a complaint informally. Absent a successful conclusion to such an attempt, our new approaches for addressing informal complaints provide sufficient Commission oversight of informal complaints to complainants who wish to take advantage of our resolution services." (D.97-04-041, slip op. at pp. 10-11.)
With respect to the issue of special penalties, we stated that since we have penalty authority in place and we want standards of conduct ready for implementation no later than January 1, 1998, we will not include penalty provisions specific to violations of the standards of conduct in this proceeding. (Id. at pp. 11-12.) In the May 1 scoping memo, the Assigned Commissioners elaborated that in their view, this statement does not preclude further inquiry into penalties at a later time, in the appropriate forum, if this inquiry is necessary. The scoping memo repeated this view.
Nonetheless, Petitioners propose special complaint procedures and remedies in this proceeding. We deny those proposals without prejudice.
We further instruct Commission staff to prepare for our consideration an OIR or combined OIR/OII on both of these issues so that we may consider it no later than April 15, 1998. No later than January 30, 1998, interested persons may send a letter to the Chief Administrative Law Judge outlining their suggested rules on both of these issues. Parties who have proposed rules herein may suggest the same or modified rules in their letters.
In this new proceeding, any specific penalties for violations of the rules adopted in this proceeding should be strong enough to prevent violations from occurring in the first place, rather than present utilities and their affiliates with any incentive to violate the rules and simply accept the penalty. In other words, utilities and their affiliates should not perceive potential penalties as simply a cost of doing business. To this end, we may consider such penalties as not allowing a utility affiliate to switch any new customers to it for a specified period of time, or we may consider penalties for severe or recurring violations such as revocation of an affiliate's registration.
As we move toward increasing competition in the electric and gas industries, we anticipate the market will be changing over time. As such, we believe it necessary to ensure that the Commission reviews these rules within a reasonable period of time to ensure that they are appropriate given the state of the marketplace. Therefore, we direct the Commission staff to prepare an OIR or combined OIR/OII, or other appropriate procedural vehicle, to review the rules adopted by this decision. This document should be prepared for our consideration no later than within three years, or by December 31, 2000, and sooner if conditions warrant.
We also believe that the utilities should report to the Commission additional information which could be useful in this review. Beginning with the January 1998 monthly report which the utility distribution company (UDC) is required to file pursuant to D.97-05-040, slip op. at p. 93, Ordering Paragraph 5(e)(5) and p. 30, the UDC shall also provide the Commission the following information in the report, separated into the customer classes already set forth in the report pursuant to item 5 at D.97-04-050, at p. 30:
(1) The total volume of kilowatt-hours provided under Direct Access contracts for that period; and
(2) The volume of kilowatt-hours provided under Direct Access contracts obtained by affiliates of the UDC.
(3) In the January report, the UDC should provide the above information for the November and December 1997 reporting periods as well.
Even though not required by the Commission's Rules of Practice and Procedure because the ALJ's draft decision is not a § 311 proposed decision, the draft decision of ALJ Econome and alternate pages of Commissioners Knight and Bilas were published on October 31, 1997, with parties' comments due no later than November 17, 1997. The alternate pages of Commissioner Conlon were issued on November 25, 1997 for comment although not required by the Commission's rules. We received comments from CAPHCC, California Large Energy Consumers Association, California Manufacturers Association, California Retailers Association, California Small Business Association, CAC, DGS, EEI, Edison International, Edison Source, Electric Clearinghouse and Natural Gas Clearinghouse, Enron Capital and Trade Resources, Joint Petitioners Coalition, Joint Utility Respondents, ORA, NAESCO, PacifiCorp, PG&E, PG&E Corporation, PG&E ES, PGT, Edison, SCUPP/IID, SDG&E and SoCalGas, jointly, Sierra Pacific, Southwest Gas Corporation, TURN, UC/CSU, and Washington Water Power Company.
In response to the parties' comments, we have made changes to the draft decision set forth below. We have also made other changes to the draft decision to improve the discussion, add references to the record, and correct typographical errors.
· We limit the application of the rules to holding companies engaged in the provision of products and services as set out in Rule II B, provided that the utility demonstrates in the compliance plan both the specific mechanism and procedures that the utility has in place to assure that the utility is not utilizing the holding company or any of its affiliates not covered by these rules as a conduit to circumvent any of these rules. In the compliance plan, a corporate officer from the utility and holding company shall verify the adequacy of these specific mechanisms and procedures. (See Section II F 1.)
· We provide that a California utility which is also a multi-state utility and subject to the jurisdiction of other state regulatory commissions, may file an application requesting a limited exemption from these rules or a part thereof, for transactions between the utility solely in its capacity serving its jurisdictional areas wholly outside of California, and its affiliates. (See Section II D.)
· We include transactions between a Commission-regulated utility and an affiliated utility within the scope of the rules, and provide that in the context of reviewing a merger application, the Commission can make specific modifications to the application of these rules, or apply additional rules as appropriate. (See Section II F 1.)
· We limit the application of the name/logo disclaimer to the use of the name or logo in California. (See Section II F 6 a.)
· We permit certain joint purchases. (See Section II F 6 c.)
· We modify our rule on corporate support to better ensure adequate corporate governance and oversight. (See Section II F 6 d.)
· We permit some shared joint utility/affiliate board members and corporate officers. (See Section II F 6 f.)
· We modify the employee transfer rule so that an employee who is transferred from the utility to the affiliate cannot return to the utility for one year, and that if the employee does return to the utility, the employee cannot then transfer to the affiliate for two years. This modification is instead of the two and three year limitations respectively in the draft decision. (Section II F 6 f.)
· We adopt additional clarification language regarding our intent in adopting these rules. (See Section II F 2.)
· We clarify that the utility can transfer information as previously authorized by the Commission in D.97-10-031. (See Section II F 5 b.)
· We modify the recordkeeping requirements. (See Section II F 5 d.)
· We modify our discussion and rule on new products and services primarily to address moving parties' October 23 motion. (See Section II F 8.)
· We strike an attachment from EEI's comments since it was offered too late in this proceeding to afford other parties a meaningful opportunity to reply. (See Section II E.)
· We modify the service requirement for New Affiliate Compliance Plans to permit that the utility's initial notification to be on the utility's electronic bulletin board. (See Rule VI.)
· We provide for a time certain for the Commission staff to prepare an OIR or joint OIR/OII addressing special complaint procedures and remedies needed to enforce our adopted rules. (See Section II F 10.)
· We provide for an automatic review of these rules not later than in three years, and sooner if conditions warrant. We also require the utilities to provide us with additional information in their monthly reports required by D.97-05-040. (See Section II F 10.)
1. On April 11, 1997, this Commission issued an OIR/OII to establish standards of conduct governing relationships between California's natural gas local distribution companies and electric utilities and their affiliated, unregulated entities providing energy and energy-related services, and to determine whether the utilities should be required to have their nonregulated or potentially competitive activities conducted by their affiliate companies.
2. We identified the rulemaking and investigation as candidate proceedings to be processed under the Commission's Resolution ALJ-170, which sets forth an experimental implementation of procedures that will become mandatory for our proceedings effective January 1, 1998, pursuant to Senate Bill 960.
3. The Assigned Commissioners' scoping memo categorized the rulemaking as "quasi-legislative" and the investigation as "ratesetting" as those terms are defined in the experimental rules set forth in Resolution ALJ-170.
4. The OIR/OII set forth two objectives which guide our formation of the appropriate rules: (1) to foster competition and (2) to protect consumers' interests.
5. Given the current and past structure of the electric and gas industries and the obvious advantage of the incumbent utility as we move toward increasing competition, there is a clear need for these rules to promote a level playing field which is vital for competition to flourish.
6. Rules that rely more on separation, and less on cost accounting solely, can minimize the likelihood of abuses. At the same time, rules that rely on separation are easier to monitor than rules that primarily rely on a multitude of reporting requirements.
7. It is not clear that the near-term savings that result, for example, from joint utility and affiliate procurement would actually translate into lower prices for consumers or ratepayers.
8. It is this Commission's duty to adopt rules it deems necessary to protect the public interest in California, and not to abdicate that duty because it is alleged that several potential competitors are not subject to the same rules.
9. We originally narrowed the scope of the this proceeding, in part, so we could adopt rules by December 31, 1997. We wanted to address the types of affiliate transactions over which we have the most concern in the near term. Because the comments in this proceeding primarily discuss the market power concerns with a utility marketing energy and broadly defined energy-related services, we continue to limit the applicability of the rules we adopt.
10. Although no party has defined energy or energy-related services in its proposal, our adopted rules do so. Our definition is broad in scope, given the incumbent's general advantage and because we want to ensure robust and fair competition in the affected markets.
11. For purposes of a combined gas and electric utility, these rules apply to all utility transactions with affiliates engaging in the provision of a product that uses gas or electricity or the provision of services that relate to the use of gas or electricity, unless otherwise specifically exempted in these rules. In the case of an electric utility, these rules apply to all utility transactions with affiliates engaging in the provision of a product that uses electricity or the provision of services that relate to the use of electricity, unless otherwise specified in these rules. In the case of a gas utility, these rules apply to all utility transactions with affiliates engaging in the provision of a product that uses gas or the provision of services that relate to the use of gas, unless otherwise specified in these rules.
12. We recently addressed and resolved the issue raised by TURN and ORA in their June 2 motions in the context of developing policies and rules for the new competitive marketplace.
13. To the extent that a utility does not have an affiliate as defined by these rules, the rules do not apply to that utility.
14. Nothing in this proceeding prevents us from issuing other utility-specific affiliate transaction rules in another proceeding if we believe it is necessary.
15. The rules we adopt today apply to the regulated utility, not the affiliate.
16. We caution that the utilities should not use the "similarly situated" qualification set forth in our nondiscrimination rules to create such a unique discount arrangement with their affiliates such that no competitor could be considered similarly situated. All competitors serving the same market as the utility's affiliates should be offered the same discount as the discount received by the affiliates.
17. Transfer pricing rules are not adequate to prevent potential abuse in the provision of discounts and other services, because such rules only attempt to eliminate cross-subsidization, and do not address market power concerns.
18. The argument that discounts should reflect cost differentials is a good one in theory, if they do so in fact. The difficulty from our point of view is discerning if these discounts or other special terms are actually cost-based, or if they are being used to give affiliates cost advantages in their competitive markets.
19. Respondents' definition of "utility services" is too narrow, and does not address all of the interactions between the utility and its affiliates that are covered by these rules.
20. We interpret the phrase "customer's affirmative written consent" to mean the customer's written affirmative informed consent, freely given.
21. There are competitive concerns related to a blanket approval for a utility to share proprietary information with affiliates, for instance, to the extent that the opportunity for development of the information arises from the provision of monopoly regulated utility services.
22. Permitting the utility to act as its affiliates' referral service would give affiliates an unfair advantage which is hard to overcome.
23. Detailed and timely recordkeeping and reporting rules are necessary to reasonably enforce these rules.
24. We prefer to address our competitive concerns on the name and logo issue at this time through appropriate disclaimers, to provide the customer with more information, not less.
25. Joint marketing between a utility and an affiliate creates opportunities for cross-subsidization, and also has the strong potential to mislead the consumer, for example, by implying that taking affiliate services is somehow related to the provision of monopoly utility service. Joint marketing opportunities, especially when coupled with the joint use of a name and logo, will promote customer confusion by allowing affiliates to capitalize on the public perception that their products are closely associated with the regulated utility's.
26. Oral joint marketing would be virtually immune to effective oversight and regulation.
27. Permitting the utility to grant its affiliate exclusive access to the utility's billing envelope to promote its services would also violate the basic concept underlying the nondiscrimination rules -- that a utility should not grant its affiliates preference vis a vis other non-affiliated competitors.
28. A utility's affiliate is free to use the billing envelopes to advertise under the conditions we impose.
29. Increased competition in the energy markets is one of our primary goals. The presence of any particular cost advantage for the affiliates, if derived from their association with the utility and not from their own internal efficiencies, engenders market power and entry barrier concerns.
30. Petitioners' proposal regarding corporate support, which places clear limitations on corporate support in areas where joint corporate support would more likely give the utility and affiliate an unfair competitive advantage, is appropriate with modifications.
31. The language in Respondents' separation rule requiring separation "to the extent practicable," combined with the language permitting "resource sharing for economies and efficiencies," could indeed swallow the general rule requiring separation.
32. Respondents' proposed rule regarding employees defines "temporary" with a broad brush, and essentially nullifies their proposed rules prohibiting shared employees. Allowing an employee to work for an affiliate a little under a year at one time, or intermittently for a little under 50% of an employee's time, is hardly a temporary assignment.
33. It is necessary to ensure that ratepayers are reimbursed for the costs incurred in hiring and training personnel. The transfer of these personnel can result in an enormous advantage for the affiliate.
34. Placing specific time limitations on transfers or rotating employment would prevent repeated or short-term transfers or hiring and re-hiring of certain personnel between the utility and affiliate. However, our rules should accommodate the transfer of employees whose affiliate has gone out of business.
35. We adopt the consensus rule regarding the application of existing affiliate transaction rules, with the proviso that when existing utility-specific holding company rules are more detailed but harmonious with the rules we adopt today, the utility should abide by both rules. Nothing in the adopted rules prevents the Commission from adopting other utility-specific rules if appropriate.
36. The requirement for the utilities to have an independent auditor prepare an annual audit to verify compliance with these rules is reasonable. We are in a transition period to a competitive marketplace, and the utility's business will be undergoing changes in rapid fashion. An annual audit, at least in the first three or four initial transition years, is critical to ensure compliance with these rules. The audit should be at shareholder expense.
37. Petitioners' proposal discussed in Section II F 9 regarding the utility merchant function presents important issues but is not within the scope of this proceeding.
38. This OIR/OII determined that since we have penalty authority in place and we want standards of conduct ready for implementation no later than January 1, 1998, we will not include penalty provisions specific to violations of the standards of conduct in this proceeding. The scoping memo stated that the Commission is not precluded from further inquiry into penalties at a later time, in the appropriate forum, if this inquiry is necessary.
39. The SoCalGas PBR decision required that any new proposal provide the level of detail and accounting safeguards set forth in D.89-10-031, when we adopted the three categories of services for telecommunication products and requisite accounting safeguards.
40. We do not wish to adopt a mechanism by which the utility can circumvent the rules we adopt today by offering the products or services itself instead of through an affiliate, especially when the utility's offering is for a competitive or potentially competitive service and might interfere with the development of a competitive market.
1. The affiliate transaction rules, attached to this order as Appendix A, are reasonable and should be adopted.
2. No later than December 31, 1997, the utilities should file a compliance plan demonstrating to the Commission that there are adequate procedures in place implementing the rules we adopt today. A utility should file a compliance plan annually thereafter using the same advice letter process when there is some change in the compliance plan (i.e., a new affiliate has been created, or the utility has changed the compliance plan for any other reason). No later than 60 days after the creation of a new affiliate, the utility should file an advice letter demonstrating how the utility will implement these rules with respect to the new entity.
3. Edison's June 2 motion to accept its June 2 supplemental comments one day out of time, SCWC's August 20 motion to accept its reply comments out of time, and PacifiCorp's August 14 motion to accept its reply comments out of time should be granted.
4. The Joint Petitioners Coalition's June 2, 1997 Petition for Modification of the OIR/OII should be denied.
5. TURN's June 2, 1997 motion requesting a provisional ban on marketing by the affiliate of gas or electric distribution company within the utility's service territory and ORA's June 2, 1997 motion proposing that customers of the natural gas local distribution companies and electric utility distribution companies shall not receive products or services from unregulated affiliates of the gas and electric utilities from which they receive distribution services should be denied.
6. PacifiCorp, Washington Water Power Company and Sierra Pacific Power Company's joint motion and SCWC's motion to be exempted from the adopted utility/affiliate rules should be denied. The Joint Utility Respondents' proposal regarding a request for exemption from application of these rules if a utility believes one or more of its affiliates is not covered by the rules should be granted as more fully set forth in the adopted rules.
7. ORA's September 3, 1997 motion to consider in this rulemaking an upcoming ORA audit of PG&E which is being conducted in Phase 2 of PG&E's holding company application is denied without prejudice to raise it at a later time if conditions warrant. The California Electric Deregulation Survey, attached as Attachment 1 to Edison Electric Institute's November 17, 1997 comments to the draft decision and alternate, as well as all references to the survey in the comments, are stricken from the record.
8. SDG&E's and SoCalGas' August 14, 1997 motion requesting an early determination of our definition of affiliate in this proceeding should be denied.
9. The Commission staff should prepare for our consideration an OIR or combined OIR/OII on the special complaint procedures and remedies needed to enforce our adopted rules so that we may consider it no later than April 15, 1998. No later than January 30, 1998, interested persons may send a letter to the Chief Administrative Law Judge outlining their suggested rules on both of these issues.
10. The Commission staff should prepare for our consideration an OIR or combined OIR/OII or other appropriate procedural vehicle, to review the rules adopted by this decision. This document should be prepared for our consideration no later than within three years, or by December 31, 2000, and sooner if conditions warrant.
11. Beginning with the January 1998 monthly report which the utility distribution company (UDC) is required to file pursuant to D.97-05-040, slip op. at p. 93, Ordering Paragraph 5(e)(5) and p. 30, the UDC shall also provide the Commission the following information in the report, separated into the customer classes already set forth in the report pursuant to item 5 at D.97-04-050, at p. 30:
(12) The total volume of kilowatt-hours provided under Direct Access contracts for that period; and
(2) The volume of kilowatt-hours provided under Direct Access contracts obtained by affiliates of the UDC.
(3) In the January report, the UDC shall provide the above information for the November and December 1997 reporting periods as well.
12. Because these rules should be implemented on January 1, 1998, this order should be effective immediately.
1. Because this order meets the objectives of the OIR/OII, this proceeding should be closed.
IT IS ORDERED that:
1. The affiliate transaction rules, attached to this order as Appendix A, are adopted.
2. No later than December 31, 1997, Respondent utilities Kirkwood Gas and Electric Company, PacifiCorp, Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), Sierra Pacific Company, Southern California Edison Company (Edison), Southern California Gas Company (SoCalGas), Southern California Water Company (SCWC), Southwest Gas Company, and Washington Water and Power Company shall file a compliance plan demonstrating to the Commission that there are adequate procedures in place implementing the rules we adopt today. The utilities shall file these compliance plans as an advice letter with the Commission's Energy Division and serve them on the service list of this proceeding. The utilities' compliance plans will be in effect between their filing and a Commission decision on the advice letter. A utility shall file a compliance plan annually thereafter using the same advice letter process when there is some change in the compliance plan (i.e., a new affiliate has been created, or the utility has changed the compliance plan for any other reason). Also, no later than 60 days after the creation of a new affiliate, the utility shall file an advice letter with the Energy Division of the Commission, which should also be served on the parties to this proceeding. The advice letter shall demonstrate how the utility will implement these rules with respect to the new entity. Any Respondent utility which applies for an exemption under Rule 2G does not have to comply with this Ordering Paragraph unless further ordered by the Commission or required by Rule 2G.
3. Edison's June 2, 1997 motion to accept its June 2 supplemental comments one day out of time, Southern California Water Company's August 20, 1997 motion to accept its reply comments out of time, and PacifiCorp's August 14, 1997 motion to accept its reply comments out of time are granted.
4. The Joint Petitioners Coalition's June 2, 1997 Petition for Modification of Order Instituting Rulemaking 97-04-011 and Order Instituting Rulemaking 97-04-012 is denied.
5. The Utility Reform Network's June 2, 1997 motion requesting a provisional ban on marketing by the affiliate of a gas or electric distribution company within the utility's service territory, and the Office of Ratepayer Advocates' (ORA) June 2, 1997 motion proposing that customers of the natural gas local distribution companies and electric utility distribution companies shall not receive products or services from unregulated affiliates of the gas and electric utilities from which they receive distribution services are denied.
6. PacifiCorp, Washington Water Power Company and Sierra Pacific Power Company's joint motion, and SCWC's June 2, 1997 motion to be exempted from the adopted utility/affiliate rules are denied.
7. ORA's September 3, 1997 motion to consider in this rulemaking an upcoming ORA audit of PG&E which is being conducted in Phase 2 of PG&E's holding company application, is denied without prejudice to raise it at a later time if conditions warrant. The California Electric Deregulation Survey, attached as Attachment 1 to Edison Electric Institute's November 17, 1997 comments to the draft decision and alternate, as well as all references to the survey in the comments, are stricken from the record.
8. Enova Corporation, Pacific Enterprises, SDG&E, and SoCalGas' joint August 14, 1997 motion for clarifying order is denied.
9. The Commission staff shall prepare for our consideration an Order Instituting Rulemaking (OIR) or combined OIR/Order Instituting Investigation (OII) on the special complaint procedures and remedies needed to enforce our adopted rules so that we may consider it no later than April 15, 1998. No later than January 30, 1998, interested persons may send a letter to the Chief Administrative Law Judge outlining their suggested rules on both of these issues.
10. The Commission staff shall prepare for our consideration an OIR or combined OIR/OII or other appropriate procedural vehicle, to review the rules adopted by this decision. This document should be prepared for our consideration no later than within three years, or by December 31, 2000, and sooner if conditions warrant.
11. Beginning with the January 1998 monthly report which the utility distribution company (UDC) is required to file pursuant to Decision (D.) 97-05-040, slip opinion at page 93, Ordering Paragraph 5(e)(5) and page 30, the UDC shall also provide the Commission the following information in the report, separated into the customer classes already set forth in the report pursuant to item 5 at D.97-04-050, at page 30:
(1) The total volume of kilowatt-hours provided under Direct Access contracts for that period; and
(2) The volume of kilowatt-hours provided under Direct Access contracts obtained by affiliates of the UDC.
(3) In the January report, the UDC shall provide the above information for the November and December 1997 reporting periods as well.
12. Because this order meets the objectives of the Orders Instituting this proceeding, this proceeding is closed.
This order is effective today.
Dated December 16, 1997, at San Francisco, California.
JESSIE J. KNIGHT, JR.
HENRY M. DUQUE
JOSIAH L. NEEPER
RICHARD A. BILAS
Commissioners
I will file a concurring opinion.
/s/ JESSIE J. KNIGHT, JR.
Commissioner
I will file a written dissent.
/s/ P. GREGORY CONLON
President
TABLE OF CONTENTS
OPINION ADOPTING STANDARDS OF CONDUCT
GOVERNING RELATIONSHIPS BETWEEN UTILITIES
AND THEIR AFFILIATES 2
Summary 2
I. Background 2
A. Procedural Background 2
B. The OIR/OII 6
C. The Rules 9
II. Discussion 9
A. Overview 9
B. Petition for Modification 13
C. TURN's and ORA's Motions 15
D. Motions for Exemptions to the Adopted Rules 17
E. Other Motions 20
F. Proposed Rules 21
1. Definitions 21
a) "Affiliate" 21
b) Utility Services 24
2. Applicability 24
3. Civil Relief 24
4. Nondiscrimination Standards 25
a) Offering of Discounts 25
b) Other Nondiscrimination Consensus Rules 29
5. Disclosure and Information Standards 29
a) Customer Information 30
b) Operating, Marketing, and Proprietary Information 31
c) Customer Referrals 34
d) Recordkeeping 37
e) Other Consensus Rules 39
6. Separation Standards 40
a) Name and Logo 41
b) Joint Marketing 47
c) Joint Purchases 52
d) Corporate Support 55
e) Plant, Facilities and Office Equipment 58
f) Employees 60
g) Research and Development 67
h) Affiliate Audit 68
i) Transfer of Goods and Services 68
j) Transfer of Assets 70
k) Separate Entities 70
l) Separate Books and Records 71
7. Regulatory Oversight 72
a) Existing Rules 72
b) Witness Availability 72
c) Compliance Plans 73
d) Annual Affiliate Audit 73
e) Reporting 74
8. Utility Products and Services 75
9. Utility Merchant Function 84
10. Enforcement 85
11. Review of Rules 87
12. Comments to the Draft Decision and Alternate Pages 87
Findings of Fact 90
Conclusions of Law 95
ORDER 97
APPENDIX A
APPENDIX B
Please see PC 11367 for Appendix A and see Formal Files for Appendix B.
5 Alternatively, ORA suggests that the customers not be able to receive products or services from unregulated affiliates of the gas or electric utility until each utility files revised Affiliate Policies and Guidelines which the Commission finds comply with D.97-05-040.
6 This ruling is consistent with the August 8, 1997 Assigned Commissioners' Ruling (ACR) addressing Kirkwood Gas & Electric Company's (Kirkwood's) motion to be exempted from participating in this proceeding. There, the ACR granted Kirkwood's motion provided that Kirkwood recognized that the failure to participate was at its own risk, and that it may be bound by the adopted rules if the rules apply to Kirkwood's situation.
7 The Joint Utility Respondents define "utility services" as "regulated gas and electric energy sales, transportation, generation, transmission, distribution or delivery, and other related services, including but not limited to: administration of Demand Side Management, scheduling, balancing, metering, billing, gas storage, standby service, hookups and changeovers of service to other suppliers."
8 See D.97-05-040, slip op. at 67, paragraph 2: "Transactions between the regulated UDC and the unregulated affiliated provider shall be limited to the purchase of tariffed items generally available to other similarly situated electric service providers."
9 D.91-02-022, 39 CPUC2d 321, 332, Appendix A: "Employees of the gas utilities shall not perform any functions for utility affiliates except those services which they offer to others on an equal basis, and utilities shall not share employees with marketing affiliates."
10 Respondents define "operating information" as "Gas Utility Operating Information consisting of non-public information and data concerning daily deliveries, storage inventory levels, injection/withdrawal information, and receipts. Electric Utility Operating Information consists of that information and data specified by FERC Order No. 889."
Respondents define "marketing information" as "Non-public information and data concerning Customer-segment-specific market assessments, analyses, and marketing studies which the Utility has acquired or developed in the course of its provision of utility services."
Respondents define proprietary information as "patents, trade secrets (as defined in California Civil Code, Section 3426.1(d)), copyrights, other marketable technologies and the like, which the Utility has acquired or developed in the course of its provision of Utility Services."
11 For example, sharing payroll, taxes, shareholder services, insurance, financial reporting, corporate accounting and security, human resources (compensation, benefits, employment policies) employee records, corporate legal unrelated to marketing or regulatory issues (such as labor, civil litigation and general corporate areas) and pension management is appropriate; sharing state and federal regulatory affairs, regulatory legal and lobbying, employee recruiting, other financial planning and analysis, hedging and financial derivatives and arbitrage services, gas and electric purchasing for resale, purchasing of gas transportation and storage capacity, purchasing of electric transmission, system operations, and marketing is not.
12 "Employees of the gas utilities shall not perform any functions for utility affiliates except those services which they offer to others on an equal basis, and utilities shall not share employees with marketing affiliates."
13 The parties also agree to define fully loaded cost as the direct cost of goods or service plus all applicable indirect charges and overheads.
