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<title>Stringent Affiliate Rules Adopted in California</title>
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<td width="25%" valign="top" align="center"><!--webbot bot="ImageMap" rectangle="(14,297) (97, 322) http://www.powermarketers.com/adrates.html" rectangle="(11,230) (95, 257) http://www.powermarketers.com/pmajobs.htm" rectangle="(12,163) (96, 189) http://www.powermarketers.com/main.htm##_parent" rectangle="(12,95) (96, 121) http://www.powermarketers.com/power2.htm##_blank" rectangle="(11,29) (96, 54) ../pmamag.htm" src="../images/magmenu.gif" alt="PMA OnLine Magazine Menu" border="0" align="center" startspan --><MAP NAME="FrontPageMap"><AREA SHAPE="RECT" COORDS="14, 297, 97, 322" HREF="http://www.powermarketers.com/adrates.html"><AREA SHAPE="RECT" COORDS="11, 230, 95, 257" HREF="http://www.powermarketers.com/pmajobs.htm"><AREA SHAPE="RECT" COORDS="12, 163, 96, 189" HREF="http://www.powermarketers.com/main.htm" TARGET="_parent"><AREA SHAPE="RECT" COORDS="12, 95, 96, 121" HREF="http://www.powermarketers.com/power2.htm" TARGET="_blank"><AREA SHAPE="RECT" COORDS="11, 29, 96, 54" HREF="../pmamag.htm"></MAP><a href="../_vti_bin/shtml.dll/calview/9806dd.htm/map"><img src="../images/magmenu.gif" alt="PMA OnLine Magazine Menu" border="0" align="center" ismap width="110" height="350" usemap="#FrontPageMap"></a><!--webbot bot="ImageMap" endspan i-checksum="46718" --><p><a href="../searchpma.htm"><img src="../images/archives.gif" alt="Archives Search" border="0" align="center" WIDTH="70" HEIGHT="40"></a></p>
<p align="left"><font face="Arial"><strong><small>About The Author:</small></strong></font></p>
<font SIZE="2"><p align="left"></font><font size="1">Daniel W. Douglass is a partner in
the Los Angeles office of Arter & Hadden, a full-service law firm with a national
practice in the energy, deregulation and telecommunications areas, as well as related
transactional, corporate, real estate and environmental issues. He can be reached at (213)
629-9343 or e-mailed at <a href="mailto:[email protected]">[email protected]</a></font></p>
<p align="left"><font size="1">Founded in 1843 in Cleveland, Ohio, <strong><a href="http://www.arterhadden.com/" target="_blank">Arter & Hadden</a></strong> is a
national law firm with offices in <a href="http://www.arterhadden.com/cleveland.htm">Cleveland</a>
and <a href="http://www.arterhadden.com/columbus.htm">Columbus</a>, Ohio: <a href="http://www.arterhadden.com/austin.htm">Austin</a>,<a href="http://www.arterhadden.com/dallas.htm"> Dallas</a> and <a href="http://www.arterhadden.com/sanantonio.htm">San Antonio</a>, Texas; <a href="http://www.arterhadden.com/washdc.htm">Washington</a>, D.C.; and <a href="http://www.arterhadden.com/irvine.htm">Irvine</a>, <a href="http://www.arterhadden.com/la.htm">Los Angeles</a>, <a href="http://www.arterhadden.com/sanfran.htm">San Francisco</a>, <a href="http://www.arterhadden.com/sandiego.htm">San Diego</a> and <a href="http://www.arterhadden.com/whills.htm">Woodland Hills</a>, California. The Firm is
comprised of approximately 350 Attorneys and 50 Legal Assistants.</font></p>
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<td width="75%" valign="top"><img src="../images/douglass.gif" alt="California Viewpoint by Daniel Douglass" border="0" WIDTH="375" HEIGHT="75"><p><b><u>June 1998</u><br>
</b></p>
<p><font size="6"><strong>Stringent Affiliate Rules Adopted in California</strong></font></p>
<p><strong>by Daniel Douglass -- Arter & Hadden. L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
06/98</em>)</font></p>
<p> </p>
<p ALIGN="JUSTIFY"><font face="Arial">In April of 1997, the California Public Utilities
Commission ("Commission") issued a proposed rulemaking to adopt rules governing
the relationships between utilities and their non-regulated affiliates. The Commission
directed all interested parties to work together to draft a single set of rules which
would govern this touchy subject. This soon became an exercise in wishful thinking as
acrimonious meetings were held and battle lines drawn. In one corner were all of the
state’s gas and electric utilities; in the other…the rest of the known universe.
Parties such as gas and power marketers, state and municipal government agencies, large
and small customer and consumer groups and even plumbing, heating and cooling contractors
banded together to form the Joint Petitioner’s Coalition ("JPC") to push
for stringent rules.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The settlement discussions quickly descended into
being a contest of "dueling rules" as the utilities and the JPC each filed their
proposed rules in the late summer. Oral argument in the affiliate rulemaking was on
September 4. Parties in attendance ranged from utility representatives to consumer groups
to power marketers to regulators. The meeting commenced with remarks by Commissioner
Richard Bilas and Commission President Gregory Conlon. Both stressed the importance of
adopting rules which would facilitate competition and eliminate preferential treatment for
utility affiliates. A positive early sign for the JPC supporters was the request by
Commissioner Bilas that the utility representatives not present arguments in support of
their own rules. Instead, he asked that they devote their remarks to explaining what was
unreasonable about the Joint Petitioner Coalition ("JPC") rules. This seemed to
suggest that he was predisposed in the JPC’s direction and wanted to hear arguments
as to why he should not support its proposed rules.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The JPC presentation focused on the need for rules
which eliminate cross-subsidization and prevent utilities from abusing the market power
which has accrued to them over the years due to their monopoly status. The JPC also
employed some "visual aids" in the form of large charts which displayed damaging
quotes from utility memos, marketing brochures and radio advertisements. They also showed
that in other states where utility affiliates have been able to use the utility name, they
have garnered a disproportionate share of the market.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The utility response did not, as Commissioner Bilas
had requested, focus on what was wrong with the JPC proposal. It was a defense of the
utility rules which, curiously, stressed that the their rules were better for consumers
because they encouraged competition, rather than limiting it by "putting
handcuffs" on the utility affiliates. Their speakers also suggested that this was
really a situation where out of state, extremely large companies, like Enron, simply
wanted to restrict their competition from the utility affiliates, "who live and work
in California." </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In rebuttal, the JPC suggested that the best way to
determine which set of rules were consumer friendly was to look and see where consumer
organizations had placed their support. It was pointed out that consumer groups like TURN
and UCAN, the CPUC’s Office of Ratepayer Advocates, the California Department of
General Services, the University of California, the California State University system,
the School Project for Utility Rate Reduction and the Regional Energy Management Coalition
all supported the JPC rules. To the contrary, not a single consumer organization or
utility customer expressed support for the utility rules. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">After a few months of consideration, Administrative
Law Judge Janet Econome issued her draft decision on October 31. The anguished shrieks
heard that day did not belong to early trick or treaters. Instead, it was the cries of
utility executives who read the proposed decision which adopted the vast majority of the
rules proposed by the utility opponents and in some cases proposed rules even more
stringent than those which were supported by the JPC. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Even more troubling to the utility executives was
that Commissioners Jesse Knight and Richard Bilas issued alternate pages to the Econome
decision that: (1) proposed the imposition of a two year ban on affiliate participation in
the electricity direct access market within the service territory of the affiliated
utility; and (2) adopted the PC position that the affiliate should <b>not</b> be allowed
to use the name and logo of the utility.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The Knight/Bilas alternative quickly gathered a
great deal of attention from all interested parties. In fact, there was some speculation
that the issuance of their proposed alternative was a deliberately crafted political step
to have the parties focus on their proposal, as opposed to targeting an attack on the
ALJ’s proposed decision. The speculation was that this was because Knight and Bilas
wanted the judge’s decision to be approved and felt that offering a more radical
proposal would make her decision look more moderate and acceptable by comparison. It is by
no means clear that this was an accurate analysis. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">However, if in fact this was their strategy, it was
effective. In December, 1997, the Commission adopted Decision 97-12-088. Although the
decision rejected the Knight/Bilas alternative provisions, it still contained the most
rigorous affiliate rules adopted either at the state or federal level. Stringent rules
were adopted which prevented cross-subsidization of affiliate operations by utility
ratepayers, banned common employment and restricted employee transfers, prevented
discriminatory treatment of non-affiliates and required separation of offices, computer
systems and financial and legal services. In addition, the utility affiliates were ordered
to utilize a "Miranda warning" in all of their advertising which clearly stated
that the affiliate was not the same company as the utility and that customers did not need
to do business with the affiliate in order to continue to receive reliable service from
the utility.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The utilities were instructed to draft compliance
plans which were filed earlier this year. They were met with strong protests by the JPC
who contended that the utilities were continuing to seek every possible means of avoiding
the clear intent of the utility rules. The Commission has taken these protests under
consideration and a decision has not yet been issued as to whether the compliance plans
are acceptable.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Interestingly, the affiliate rules have already
received their first significant test when Pacific Gas & Electric commenced a
nationwide advertising which did not contain the "Miranda warning" in some cases
and printed it in eye-straining 6 and 7 point fonts with a dark background in other
versions. After a quick complaint was filed by the consumer group TURN and the
Commission’s Office of Ratepayer Advocates, the Commission displayed its anger by
ruling with dispatch in Decision 98-04-029 that the utility had violated the affiliate
rules and inviting comment as to an appropriate penalty.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The JPC filed comments in early May which stated
that, "The Commission must make it expressly clear to PG&E and other utilities
that violations of the rules will be met with swift and significant penalties. Any other
action will lead the utilities to conclude that this is merely an economic game to be
played. <b>The fine that the Commission imposes cannot merely be a modest cost of doing
business for PG&E.</b> It must be strong enough to send a message to PG&E and the
other utilities that the Commission will not stand for violation of the affiliate
rules."</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">PG&E argued that no penalty should be imposed
or, at most, that the violation was a single "instance," or perhaps that each
act of publication was an "instance," and thus any penalty imposed under
California Public Utilities Code section 2107 could not be greater than $500 to $20,000.00
per "instance." On this point, the JPC responded that each "instance"
was the dissemination of the advertisement to an individual subscriber of the publications
carrying the advertisements. Therefore, using PG&E’s own numbers, over 3 million
readers had access to the advertisements that were in violation, and thus there were thus
at least 3 million "instances."</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">At $500.00 per "instance," the penalty
imposed for the violations could be astronomical. The JPC and other observers do not
expect the Commission to put PG&E or its affiliates out of business. Thus, the JPC did
not seek the imposition of a $500.00 penalty per "instance" times 3 million
violations. Rather, it recommended a penalty which falls somewhere between $3.00 and
$10.00 per "instance" or nine to thirty million dollars. The JPC urged the
Commission to sanction PG&E with a severe penalty for its admitted and repeated
violation of the affiliate transaction rules, saying that the fine cannot be a mere
"slap on the wrist" and must send a clear message to all utilities that such
violations cannot be excused by a simple apology.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">At this point, the Commission has not yet ruled as
to what penalty should be imposed and the parties are still engaged in drafting various
reply briefs. However, their decision in this significant test case will send a message to
both PG&E and other California utilities as to whether the Commission intends to put
teeth into its enforcement of the new affiliate transaction rules. It will also be closely
watched by both regulators and utilities in other states as, for better or worse,
California continues to set new precedent in utility regulatory issues.</font></p>
<hr color="#FFFF00">
<blockquote>
<p align="left"><font face="Arial">You may address e-mail to Dan Douglass at </font><a href="mailto:[email protected]">[email protected]</a></p>
<p align="left">Founded in 1843 in Cleveland, Ohio, <strong><a href="http://www.arterhadden.com/" target="_blank">Arter & Hadden</a></strong> is a
national law firm with offices in <a href="http://www.arterhadden.com/cleveland.htm">Cleveland</a>
and <a href="http://www.arterhadden.com/columbus.htm">Columbus</a>, Ohio: <a href="http://www.arterhadden.com/austin.htm">Austin</a>,<a href="http://www.arterhadden.com/dallas.htm"> Dallas</a> and <a href="http://www.arterhadden.com/sanantonio.htm">San Antonio</a>, Texas; <a href="http://www.arterhadden.com/washdc.htm">Washington</a>, D.C.; and <a href="http://www.arterhadden.com/irvine.htm">Irvine</a>, <a href="http://www.arterhadden.com/la.htm">Los Angeles</a>, <a href="http://www.arterhadden.com/sanfran.htm">San Francisco</a>, <a href="http://www.arterhadden.com/sandiego.htm">San Diego</a> and <a href="http://www.arterhadden.com/whills.htm">Woodland Hills</a>, California. The Firm is
comprised of approximately 350 Attorneys and 50 Legal Assistants.</p>
</blockquote>
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