CONTACT: Dianne Dienstein December 16, 1997 CPUC - 126
415-703-2423 (R.97-04-011, I97-04-012)

CPUC SETS RULES FOR UTILITY/AFFILIATE RELATIONSHIPS IN COMPETITIVE ELECTRICITY MARKET

The California Public Utilities Commission (CPUC) today adopted standards to govern relationships between electric and natural gas utility distribution companies and their affiliates. The objectives of the rules are to

foster competition and protect consumer interests.

The rules are effective today and apply to Pacific Gas & Electric, Southern California Edison, San Diego Gas & Electric, PacifiCorp, Washington Water Power, Sierra Pacific Power, Kirkwood Gas & Electric, Southern California Gas, Southwest Gas, and Southern California Water - all are regulated by the Commission. The Commission does not regulate utility affiliates.

The rules address nondiscrimination, disclosure and information, and separation standards, and the extent to which a utility may have its nonregulated or potentially competitive activities conducted by its affiliate.

A utility and its affiliates are to be separate corporate entities, and keep separate books and records which the CPUC may examine at any time. Except for certain corporate support functions, they may not share office space, computer or information systems, or employees. However, a utility may transfer employees to its affiliate under certain conditions; and a board

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CPUC SETS RULES FOR UTILITY/AFFILIATE RELATIONSHIPS - 2

member or corporate officer may serve on a holding company with either a utility or its (California) affiliate, but not both.

Utilities and their affiliates may not jointly purchase some goods, such as

electricity or gas purchasing or services, but may share general office supplies and support, and payroll, tax or analysis services.

A utility may not participate in joint marketing with its affiliates(s). A utility may not provide advertising space in billing envelopes to its affiliates, unless it offers the same to competing energy service providers.

If an investor-owned utility's affiliates were to target the same customers currently served by the utility, or offer services the utility does not offer to its customers, the presence of a utility's affiliate(s) in its service area raises concern that the utility, through its affiliate(s), will continue to dominate or maintain advantage in the market. The rules are intended to prevent this, as well as to prevent utility ratepayers from subsidizing an affiliate's operation. The rules are also intended to prevent consumer confusion which could occur

if an affiliate's marketing and presence is virtually the same as the utility, and

to assure that customer information the utility has will be released, even to a utility's affiliate, only if the customer has been informed and has freely

authorized, in writing, release of the information.

Another way the Commission is 'leveling the playing field' is to require that all energy service providers serving the same market as a utility's affiliates be offered the same discount on a fee or charge as a utility offers its affiliate.

The Commission's solution to the issue of name brand recognition and the market advantage it could present is to forbid a utility to advertise its affiliate's affiliation with the utility, or allow the utility name or logo to be used in any material circulated by the affiliate unless the affiliate discloses clearly audibly and/or legibly on the first page or at the first point where the utility

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CPUC SETS RULES FOR UTILITY/AFFILIATE RELATIONSHIPS - 3 name or logo appears that (1) the affiliate is not the same company as the utility, (2) the affiliate is not regulated by the CPUC, and (3) "you do not have to buy [the affiliate's] products to continue to receive quality regulated services from the utility." This name/logo disclaimer is limited to use of the name or logo in California.

A utility cannot offer customers a service or rebate conditioned on their doing business with its affiliate. A utility cannot solicit business on behalf of its affiliate, provide proprietary information to, pass customer information on to, or give the appearance it speaks on behalf of its affiliate(s), or that any affiliate speaks on behalf of the utility. If a customer asks a utility what other companies it can buy electricity from, the utility must provide customers with a list of other energy service providers, and may include its affiliates on the list.

An affiliate is any company 5 percent or more of which is owned, controlled or held by a utility or any of its subsidiaries. Neither the affiliate nor the affiliate's customers will receive preferential treatment from a utility. A

utility must provide access to information, services, and unused capacity or

supply to competing companies on the same basis as it supplies it to its affiliate(s). A holding company is considered an affiliate only in certain limited circumstances. However, a utility cannot use a holding company to (1) disseminate information transferred to them by the utility to an affiliate covered by the rules, (2) provide services to its affiliates covered by these rules, or (3) transfer employees to its affiliates covered by these rules when doing so in any of these three cases would violate the rules.

A California utility serving customers in other states, and under the jurisdiction of other state public utilities commissions may seek a limited exemption from these rules for its transactions with its affiliates in other states.

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By December 31, utilities must file with the CPUC their plan to implement these rules. Annually thereafter, they will have to submit to the CPUC an audit of their compliance with the rules, prepared by an independent auditor and funded by shareholders.

In April of this year, the Commission opened this rulemaking to determine whether existing rules governing utility/affiliate relationships were adequate to ensure that utilities would avoid self-dealing and cross subsidization as they, for the first time, face competition in providing electric service beginning January 1998, and also face competition within the next few years in providing natural gas. Utilities, new energy service providers, and consumer groups helped craft the rules.

The rules adopted today also apply to a utility and an affiliated utility, and in the context of any merger application it may be asked to act on, the Commission may modify the rules or apply additional rules as appropriate.

The Commission stated it will open a new proceeding to determine specific penalties for violations of the rules adopted today, noting that it intends to adopt penalties 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 a penalty as a cost of doing business. The Commission suggested that it may consider penalties such as not allowing a utility affiliate to switch customers to it for a specified period of time, and revocation of an affiliate's registration.

The Commission will review the rules within the next three years, or sooner if warranted, to ensure they are appropriate to changing market conditions. To facilitate this review, utilities are to report monthly on the total volume of kilowatt-hours provided under Direct Access contracts, as well as the volume of kilowatt-hours provided under affiliate Direct Access contracts.