Date : July 25, 1996

DRA

Issue: Should non-regulated affiliates of the incumbent utility be allowed to compete for customers in the utility's existing service area?

Pro: An additional provider of electric service.

Con: Allowing non-regulated affiliates to compete for customers in the utility's service area would substantially jeopardize the Commission's goal of an effectively competitive market for electricity. A critical condition for a competitive market is that all providers are on a level playing field. This criterion is unlikely to be fulfilled when unregulated affiliates are cross-subsidized by the utility. While there is always the potential for cross-subsidization between regulated and unregulated enterprises, the likelihood of such actions are significantly increased when the utility and the non-regulated affiliates are providers in the same market. Under such a scenario, it is easier for cross-subsidization to occur and more difficult to detect.

The opportunity to cross-subsidize is also facilitated by a holding company structure. All three IOUs either are under or have applied for a holding company structure. The holding company has a fiduciary responsibility to its shareholders to provide the highest possible returns for a given risk level. Thus, the holding company which controls the utility has available to it market information which is it can pass on to its regulated affiliates whose returns are unregulated.

Although there are conditions imposed on the holding company and/or utility which are designed to protect against affiliate transaction abuses, these conditions and guidelines have not been effective in preventing cross-subsidization. The Commission also recognized the serious potential for self-dealing despite existing affiliate transaction rules and consequently has prohibited any contracts between the distribution utility and its affiliated generating companies. (Policy Decision, p. 71) Consistent with its policy of preventing affiliate abuses and its goal of nurturing an electricity market in its infancy to a fully competitive market, unregulated affiliates of the utility should not be permitted to compete in the utility's service area during the transition period.

Issue: Should non-regulated affiliates of the incumbent utility be allowed to compete for customers outside of the utility's existing service area?

Pro: Yes, non-regulated affiliates should be allowed to provide service to customers outside of their utility's service area. There is little potential for market abuses since it is unlikely that the non-regulated affiliate will have access to proprietary information of an outside utility. The non-regulated affiliate would provide customers with more choices and enhance competition.

Con: None apparent.