Fortnightly
High Voltage: Affiliate Rules Shock Utility Markets
January 15, 1999
By Joseph F. Schuler, Jr.
Subsidiaries grapple with codes of conduct. Did regulators overreact?
PG&E Corp. has threatened to appeal - all the way to the U.S. Supreme Court if need be - a $1.68 million California Public Utilities Commission fine, slapped on it for violating affiliate rules.
The fine marked the loudest shot to date in what appears to be part two in the electric and gas restructuring wars:
The Affiliate Rules Wars.
These skirmishes promise to pit independent power marketers and out-of-state utility affiliates against the affiliates of incumbents. For commissions, refereeing the fights won't be easy. Ratepayer advocates and independent marketers, for instance, wouldn't have minded if the PG&E fine - levied for an illegible advertising disclaimer about the affiliate-parent relationship - were 10 times higher.
In Pennsylvania, where 1.8 million consumers began participating in the state's competitive choice program on Jan. 1, PECO Energy Co., PP&L Resources Inc. and other utilities face their own brand of wrangling over rules governing corporate affiliates.
PECO and PP&L were accused of advertising provider of last resort, or PLR, services in a way that encourages customers not to consider alternative energy suppliers. A little over a month after the Mid-Atlantic Power Supply Association filed that complaint, Pennsylvania's utility commission handed incumbents and their affiliates stricter interim guidelines addressing PLR functions (OCT-98-L-104, Docket No. M-00960890F0017, Nov. 19, 1998).
"Messages which discourage consumers from exploring their opportunities [in] the competitive marketplace will be considered deceptive or misleading and will not be tolerated," wrote Nora Mead Brownell, Pennsylvania commissioner, in a statement issued with the guidelines.
The Georgia commission, too, has had its share of affiliate problems. It almost was taken to court by Atlanta Gas Light Services over a dispute about the affiliate's name and logo. Its use of the name and logo, a blue flame also used by sister company Atlanta Gas Light Co., was seen as giving the utility's 1.4 million customers the impression they could continue service with the same gas distribution company - not an outcome intended by state legislators deregulating the natural gas market.
Ultimately, the affiliate settled the lawsuit, agreeing to change its name to Georgia Natural Gas Services. However, it will keep the trademark blue flame. The affiliate will have to use a disclaimer saying that customers will get no special treatment because of ties to Atlanta Gas Light Co. (Order No. 2442, Docket 9156-U).
Regulators have wrestled for decades with transactions between utilities and their corporate affiliates (see "Utility Marketing Affiliates: A Survey of Standards on Brand Leveraging and Codes of Conduct," by Douglas N. Jones, Public Utilities Fortnightly, Nov. 15, 1998, p. 40).
But Jim Durham, PECO's senior vice president and chief general counsel, says politics have entered the affiliate rules game. He says his utility and its two affiliates can "probably live with" the new PLR guidelines in Pennsylvania. But Durham insists that were it not for the regulatory process in the competitive world, such things as PLR guidelines and affiliate codes wouldn't be necessary.
"There are existing laws with respect to the Federal Trade Commission's requirements on advertising," he says. "And through the political process, those who are entering the markets we have traditionally been in have been somewhat successful in arguing they need a hand up the ladder in order to be able to compete with us, which translates into: The utilities should be prohibited from doing what other businesses would do."
From interviews with Durham, utility executives, independent power suppliers and consumer advocates, and from a few cases involving affiliate rules, it becomes obvious this area is ripe for disagreement. And in some cases, the subject sparks real rancor.
Who will win the fight? Will commissioners find themselves in the middle, ultimately blocked out via jurisdictional claims? Who will politicize the process - utilities and their affiliates? Or independent power marketers and their advocacy organizations? Ultimately, will consumers be the ones to benefit? Or will they be left bloody and monopoly bound?
Disclaimers: Tripped by Small Type
In California, an advertising campaign dubbed "High Voltage" shorted out for PG&E Energy Services and parent company PG&E Corp. in the spring of 1998, about the time the state opened its electricity market to retail competition.
Earlier, the state public utilities commission had set rules governing energy utility affiliates. (See Decision 97-12-088, Dec. 16, 1997, 183 PUR4th 503.) But on March 23, as the market was about to open, an ad ran in the San Francisco Chronicle. The ad, immediately brought to the commission's attention, apparently violated CPUC rule V.F.1., which mandates "plain legible" language to distinguish utilities from their affiliates. In this case, PG&E had used a disclaimer to distinguish its affiliate from the parent corporation, but the disclaimer was made illegible by the background behind the 6.5-point type. By comparison, typical newspaper classifieds are printed in 4-point type. The disclaimer also was printed vertically on the page. The disclaimer read:
"PG&E Energy Services is not the same company as Pacific Gas and Electric Company, the utility. PG&E Energy Services is not regulated by the California Public Utilities Commission; and customers do not have to buy PG&E Energy Services' products in order to continue to receive quality regulated services from Pacific Gas and Electric Company, the utility."
PG&E admitted in filings made to the commission that the ad "regrettably does not feature the disclaimer prominently as should be expected." But while the 57-word disclaimer was barely legible, injury to prospective customers wasn't possible, PG&E claimed, because when customers inquired about the affiliate, both its web site and toll-free number repeated the disclaimer.
PG&E also said that as soon as the ad hit the streets, the company established a pre-clearance policy for future ads. All future ads, the company said, would require a type size of at least 8 points. (An April 9 commission order required all disclaimers to be three-fourths the size of the company name in any ad).
The initial advertisement ran in about 10 other publications, including the Wall Street Journal, Money and Business Week, on about 15 occasions. Because the publications had already been printed, the ads could not be pulled.
State commission administrative law Judge Janet Econome was not swayed by the company's arguments and proposed a $336,000 fine. The commission rejected that fine, and voted 3-2 to levy a $1.68 million penalty on PG&E Corp. shareholders.
The fine prompted an immediate response from PG&E. It promised to appeal. PG&E, a company with $18 billion in annual revenues, apparently plans to make legal precedent, because a court fight could easily cost more than the fine, especially if the case rises up the judicial ladder.
According to Greg Pruett, PG&E spokesman, a state appellate court would likely be the first stop for review of the CPUC's affiliate rules, which were modified slightly in August in Decision 98-08-035. (See "News Digest," Public Utilities Fortnightly, Nov. 1, 1998, p. 21).
Pruett says the company hopes the court will "see this is really an action by the public utilities commission that is beyond the scope of its jurisdiction. If the worst-case scenario happens and they do not see that, we're prepared to go as far as we have to go, including all the way to the United States Supreme Court.
"In this instance, we just really think the commission is wrong," he adds. "It has erred in assigning itself powers which it does not possess under the state constitution."
Pruett says the commission could have levied a fine of "several hundred thousand dollars," which would have been within its jurisdiction. The matter becomes a jurisdictional issue once it reaches a certain threshold of dollars fined, the company believes. "In our mind, that is correct," Pruett says of that position.
The utility has had a five-member affiliate rules compliance department since PG&E Corp. was created as a holding company Jan. 1, 1997, but the department did not review the "High Voltage" ad.
"That's one of the things that occurred; that was an error that we readily acknowledged right up front," Pruett says. "They should have reviewed these ads. They did not. Had they reviewed them, we would have recognized immediately that the type size in the disclaimer should have been larger and the placement of the disclaimer should have been a little more clear.
"It truly was an innocent oversight that led to this whole thing."
Independents:
Crying Out Loud
PG&E Corp.'s competitors and market observers say innocent or not, the fine was deserved - and could have been higher.
Craig G. Goodman, president of the National Energy Marketers Association, which has proposed a model set of affiliate rules (see sidebar), says the rules have to be effective and enforced so that violation doesn't become standard operating procedure.
"If a company with a lot of resources can violate the rules with impunity or with delayed justice or ineffective penalty, then there's a tendency to make the violation of the rules just a cost of doing business," Goodman says. "And that's one thing that cannot happen if we're going to have an effective marketplace."
"I think [PG&E] ought to be fined 10 times that, to tell you the truth," says Frederick M. Bloom, president of Commonwealth Energy Corp., a PG&E Energy Services competitor in California. "It's a foregone conclusion that the utilities are using every angle they can and seeking every cover they can and that's to be expected in the early goings of the deregulated market where the incumbents do not want to give up market share.
"If the regulators had really been visionaries and leaders, they would not have allowed them to use the name to begin with, so to tell them it's OK to use the names as long as you use the disclaimer - who reads the disclaimer, for crying out loud?"
Scott Logan, a regulatory analyst for the California Office of Ratepayer Advocates, says the PG&E decision was a good one. "Our filing had recommended a $10 million fine," he says. "But this level of fine is satisfactory, in the sense it is a fine significant enough to send a message to PG&E that it was a serious violation."
James W. Tarnaghan of Goodin, MacBride of San Francisco, an attorney for Enron Corp., says the fine does send a message.
"It sends a good message from those of us who had supported the affiliate rules last year," he says. "And the message would be that the commission is still standing behind the rules that they adopted last December and they do intend to maintain those rules and to vigorously enforce violations.
"I'd like to think other states looking to California will see that California meant what it did last year. There has been an effort to portray California as backing away from its rules and ¼ I think and I hope this will send the message that California is serious and will remain serious about this."
Did PECO, PP&L Misstep?
California isn't the only state serious about its affiliate rules or codes of conduct. Pennsylvania, at the end of 1998, was operating under a panoply of interim rules, drafted prior to electric pilots and during electric restructuring proceedings. The Pennsylvania commission also had proposed a rulemaking (Docket No. L-980132) that will result in adoption of "Competitive Safeguards." At press time, the commission was reviewing comments filed in response to the proposed rulemaking.
Also at press time, the commission issued interim guidelines addressing electric distribution companies' provider of last resort functions.
The Nov. 19 interim PLR guidelines looked like a shot to the chin of PECO and PP&L, who just over a month earlier, on Oct. 6, had been targets of a petition for an emergency order and complaint filed by the Mid-Atlantic Power Supply Association (R-00993953). According to its filing, MAPSA claimed that the two companies were engaging in anti-competitive practices by advertising provider of last resort services in ways that would cause consumers not to participate in the competitive electricity market.
MAPSA noted that in its mailings to customers, PECO used customer account numbers and information, promoted its PLR service and denigrated electric generation suppliers' options. According to the marketers' association, PECO's deceptive and misleading statements in newspaper ads implied customers might need special meters if they used competitive suppliers, that there may be a fee to switch, that there might be a chance an unlicensed supplier would sell electricity, that savings might apply only during certain hours, and that the changeover process may be complicated. TV ads implied electric generation suppliers aren't truthful, that they wouldn't keep promises and that PECO was superior due to its unique link to the monopoly.
MAPSA did not win immediate relief, but the commission's interim guidelines clearly are a partial answer, spelling out regulators' future roadmap and emphasizing the distinction between informing and marketing.
The commission reiterated its position in its order adopted Feb. 26 at Docket No. M-00981036, cautioning that " 'funds ¼ earmarked for consumer education may not be used for other business purposes such as marketing, lobbying and product advertising.'
"It is not disputed that the EDC's duty to inform and educate consumers ¼ includes the responsibility to inform and educate customers about the availability of PLR service."
The commission, citing case law, said based on the Supreme Court's holding, it's clear that false or misleading advertising by EDCs of their PLR function enjoys no First Amendment protection. As federal courts have recognized, even literally true statements can be deceptive or have implications that are deceptive, the commission wrote. "To rise to the level of deceptive advertising, an advertising practice need only have a tendency to deceive the consumer. (Pekular v. Eich, 513 a.2d 427, Pa. Super. 1986.) Therefore it is entirely appropriate for the Commission to impose guidelines restricting EDCs from engaging in misleading, as well as false, advertising with respect to their PLR function."
Turning Tables:
Utilities Cite Aggressive Marketing
Prior to the PLR interim guidelines being issued, Durham, the PECO attorney, insisted that in theory, affiliate rules shouldn't be needed.
"I don't believe they are needed," he says. "Politically, the decision has been made otherwise.
"Deregulation doesn't really reflect much deregulation yet," he says. "It's more accurately described as a re-regulation, not only of the existing utility business that will remain regulated, but also the competitive arenas."
Durham says competition should be just that, competition. "Get out of our way if you want competition and let us go out there and the best folks will win," he says, adding that what concerns him is the mindset that suggests "unless people switch, choice hasn't been effective. [T]he real issue is, 'When people have choice, what's wrong if they choose the utility?'"
"Ultimately, that's the right answer," says Irwin A. "Sonny" Popowsky, Pennsylvania's consumer advocate, of Durham's "let the best folks win" philosophy. "But that's not the right answer in the transition when you're part of an electric distribution company that starts off with 100 percent market share."
"One of your choices is to stay where you are and that's fine, there's nothing wrong with that," he adds. "But that ought to be a conscious choice."
Popowsky says what concerns him is that of the 1.8 million residential customers who said they would consider switching, not many have been shopping for an electric supplier.
Two other affiliate rule skirmishes in Pennsylvania worth noting also involve PECO - one as the organization filing the complaint and one as the target of a complaint, again by MAPSA. This time, the emergency order was granted by the Pennsylvania commission (Docket Nos. R-00973953, P-00971265). The June 26 order required PECO to stop maintaining a link from its Internet web site to Exelon Corp., its affiliated electric supplier. The "complained of conduct causes irreparable harm to Pennsylvania consumers by promoting the PECO affiliate through the [electric distribution company's] web site, by failing to include required disclaimers, and by effectively channeling customers away from competitors," according to the decision.
Michael Wood, a PECO spokesman, says the company has not filed an appeal on the web site issue, but "we intend to." The web site link has been eliminated. The matter will next be reviewed by an administrative law judge, Wood says.
"People still are upset that the existing distribution company is competing for customers," Durham says. "The only people I think that are really upset are the competitors. If they thought we were just going to stand by and not compete for our own customers, they were smoking something different from what is probably legal. It's a competitive world and we're going to fight like the devil to keep our customers."
Durham says PECO also will fight limitations on advertising. "We want to be just as free to compete in the marketplace as anybody else is," he says.
PECO On The Offensive
As of late November, nothing had become of PECO's complaint against electric generation supplier Total Gas and Electricity (Pa.) Inc. of Fort Lauderdale, Fla.
PECO's Thomas P. Hill Jr., vice president of regulatory and external affairs, alerted the PUC to complaints his company heard from customers who said that the company's representatives were misleading customers, giving them the impression they were from PECO Energy and that documents they signed meant they would stay with PECO as an energy provider. PECO also issued a press release saying it had filed the complaint with the PUC.
Phil Baratz, president of Total Gas and Electricity, says he was surprised to learn of the complaint, especially through a competitor's press release.
"Look, we're going to make $40 a year on these customers," he says. "It's not as if we'll sign up 1,000 customers and retire. You've got to get into this for the long haul. So this is the approach: We're real honest, real straightforward business people and if there's something about our approach you don't like, tell me and I'll fix it. Or I'll choose to leave the market."
He adds: "We are, without a doubt, more aggressive than a typical marketer in that we're not putting up billboards, we're literally going door to door with a canned sales pitch and we have a whole bunch of sales reps.
"Aggressive marketing tactics - I have yet to see anyone tell me you're not allowed to do that.
"We wear uniforms that are either beige or green. They say on the back in big letters 'Total Gas and Electricity.' We wear a baseball cap that says Total Gas and Electricity. We wear a badge that says Total Gas and Electricity.
"We knocked on 15,000 doors. The fact that four people were confused and, I'll take it a step further, were misunderstood and maybe even, let me grant this even - maybe a salesman out of having 30 guys knocking on doors and speaking to 15,000 people, maybe indeed a salesman did mislead them."
But there's no reason to deceive customers because the company's cost of electricity is cheaper than PECO's, Baratz says.
Q: Has he ever taken action against his salespeople?
"Ever? Sure."
Q: And as the result of this incident?
"As it so happens, the salesman that was specified ¼ worked for us about a week and left."
Q: Is it possible that just one salesman misled people?
"I don't think so. But anything's possible."
And anything's possible in the utility affiliate-independent power supplier wars.
Malcolm M. McCay, director of market evaluation for Sempra Energy Solutions and chair of NEMA, says the final solution to the utility affiliate issue is to simply take utilities out of competitive functions. "So if one agrees that the purchase and resale of gas at retail is a competitive business, utilities shouldn't be in that business," he says. "We have no problem with forming a separate affiliate that competes with other market players on the same terms and conditions. But as long as the utility monopoly and competitive functions are bundling together, there's going to be serious competitive issues."
"That's nonsense," counters Durham. "I mean it's basically saying they want a protected market, they don't want to compete against us.
"They want to take competition that they're really scared of off the field. And if I was in their position, perhaps I could make that argument with a straight face also. I don't think I could."
Joseph F. Schuler is senior associate editor at Public Utilities Fortnightly.
Affiliate Rules: Excerpts
National Energy Marketers Association (Suggested Rules)
Uniform Code of Conduct for Regulated and Unregulated Suppliers of Energy and Related Services and Technologies
Cross subsidies ¼ are prohibited. A utility's operating employees and those of its unregulated affiliate shall function independently ¼
Under no circumstances may a regulated entity sell ¼ commodities ¼ included in regulated rates at less than market value.
Offers of rebates, discounts, waivers of contracts or fees in connection with tariff provisions of regulated utilities
should be made by utilities in an equal, non-discriminatory manner ¼
A utility shall not speak on behalf of its unregulated
affiliate ¼
Each utility will establish enforceable complaint procedures to detect alleged abuse of the relationship with its unregulated affiliates ¼
Procedures for implementing compliance with these rules must be neutral and swift, and the penalties for non-compliance should adequately discourage repeated violations.
Source: NEMA, 3254 O Street, N.W., Washington, D.C. 20007, www.energymarketers.com.
California Public Utilities Commission
Affiliate Transaction Rules
III. E. Business Development and Customer Relations
Except as otherwise provided ¼ a utility shall not ¼
provide leads to its affiliates
solicit business on behalf of its affiliates
acquire information on behalf of or to provide to its affiliates
give the appearance that the utility speaks on behalf of its affiliate or that the customer will receive preferential treatment as a consequence of conducting business with the affiliates
give any appearance that the affiliate speaks on behalf of the utility.
V. F. 1. Corporation Identification and Advertising
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:
a. the affiliate "is not the same company as [i.e., PG&E, Edison, the Gas Company, etc.] the utility;"
b. the affiliate is not regulated by the California Public Utilities Commission; and
c . "You do not have to buy [the affiliate's] products in order to continue to receive quality regulated services from the utility."
Source: Decision 97-12-088, Dec. 16, 1997, 183 PUR4th 503 (Cal.P.U.C.).
Pennsylvania Public Utility Commission
Subchapter E. Competitive Safeguards (as proposed).
d. An electric distribution company shall, in cooperation with all stakeholders, establish and file with the Commission dispute resolution procedures to address alleged violations of this Code of Conduct.
i. In the event that an electric distribution company customer requests information about electric generation suppliers, the electric distribution company shall provide the latest list as compiled by the Public Utility Commission to the customer over the telephone, or in written form ¼
j. An electric distribution company or its affiliate or division shall not state or imply that any delivery services provided to an affiliate ¼ are inherently superior, solely on the basis of their affiliation with the electric distribution company ¼
Source: Docket No. L-980132.
Pennsylvania's Interim Guidelines Addressing Electric Distribution Companies' Activities Relating to Their Provider of Last Resort Obligations
4. EDCs shall not engage in false, deceptive or misleading advertising to consumers, with respect to the retail supply of electricity in the Commonwealth ¼
5. EDCs may not use their customer mailing list for the purpose of direct advertising of their [provider of last resort] service, unless the EDC provides all [electric generation suppliers] with comparable access to the same list at a reasonable fee approved by the Commission.
6. In any lawful advertisement that promotes the advantages of the PLR option, EDCs may not disparage the electric service of competing EGS by false facts or misleading statements.
Source: Docket No. M-00960890F0017, Nov. 19, 1998.
Illinois Commerce Commission
Non-Discrimination in Affiliate Transactions for Electric Utilities
Section 450.20, Non-Discrimination
a. Electric utilities shall not provide affiliated interests or customers of affiliated interests preferential treatment or advantages relative to unaffiliated entities or their customers in connection with services provided under tariffs on file ¼ This provision applies broadly to all aspects of service, including, but not limited to, responsiveness to requests for service, the availability of firm versus interruptible services, the imposition of special metering requirements, and all terms and conditions and charges specified in the tariff.
d. A utility shall process requests for similar services provided by the utility in the same manner and within the same time period for its affiliated interests in competition with alternative retail electric suppliers and for all similarly situated unaffiliated alternative retail electric suppliers and their respective customers.
e. If discretion is permitted in application of a tariff provision, electric utilities shall maintain a log detailing each instance in which it exercised discretion ¼
Section 450.25 Marketing and Advertising
a. An electric utility shall neither jointly advertise nor jointly market its services or products with those of an affiliated interest in competition with [an alternative retail electric supplier, or ARES].
b. Nothing in subsection (a) shall be construed as prohibiting an affiliated interest in competition with ARES from using the corporate name or logo of an electric utility or electric utility holding company.
Source: Docket Nos. 98-0013, 98-0035, Nov. 5, 1998.
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