CLARKP I> c
HILL
A T T O R N E Y S
A T
I A
W
Lansing,
Michigan Office:
2455 Wodlake Circle
Okemos,
Michigan 48864-5941
Tel. (517) 381-9191 I Fax (517) 381-0268
www.clarkhill.com
Haran C. Rashes
Direct Dial: (517) 381-2132
E-Mail: [email protected]
August 3 I,2000
Ms. Dorothy Wideman
Executive Secretary
Michigan Public Service Commission
6545 Mercantile Way
P.O. Box 30221
Lansing, MI 48909
Re:
MPSC Case No. U-12134
Dear Ms. Wideman:
Enclosed for filing please find the original and 4 copies of the Request for Immediate
Consideration of and Appeal of ALJ’s Ruling Striking the Testimony and Exhibits of Michigan
Alliance for Fair Competition’s witness, Anthony M. Ponticelli, in the above-entitled matter. This
appeal was also filed electronically pursuant to the Commission’s Pilot Electronic Filing’s Program.
Proof of Service upon the parties of record is also enclosed.
Very truly yours,
CLARK HILL P.L.C.
karan C. Rashes
HCIUkag
Enclosures
cc:
Parties of Record
Anthony M. Ponticelli
Lynn Briggs
3061021.1
135401081722
Detroit,
Michigan
I
Birmingham,
Michigan
I
Lansing,
Michigan
STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
*****
In the matter of the approval of a
code of conduct for CONSUMERS
ENERGY COMPANY and THE
DETROIT EDISON COMPANY.
)
)
)
)
>
Case No. U-12134
REQUEST FOR IMMEDIATE CONSIDERATION OF
AND APPEAL OF AL J’S RULING STRIKING THE TESTIMONY AND EXHIBITS
OF MICHIGAN ALLIANCE FOR FAIR COMPETITION’S
WITNESS ANTHONY M. PONTICELLI
The Michigan Alliance for Fair Competition (“MAFC”), by and through its attorneys, Clark
Hill P.L.C., and pursuant to Rule 337 of the Michigan Public Service Commission’s (“Commission”
or “MPSC”) Rules of Practice and Procedure, 1992 AACS, R 460.17337, hereby applies for Leave
to Appeal to the Commission from the August 22,200O
ruling of Administrative Law Judge George
Schankler (“A,“), striking the Testimony and Exhibits of MAFC’s witness Anthony M. Ponticelli
in their entirety.
MAFC also requests immediate consideration of this Application by the
Commission. In support of its Application, MAFC states as follows:
1.
Once again, in a proceeding to curtail anti-competitive conduct of monopoly public
utilities in Michigan, the monopolies have attempted to silence one of the only parties actively
competing with the monopoly utilities the Commission seeks to regulate through this proceeding
2.
On September 14, 1999, nearly a year ago, the Commission initiated this proceeding
to consider modifications to the provisional codes of conduct approved for Consumers Energy
Company and The Detroit Edison Company in the context of the restructuring of the electric utility
industry.
3.
On June 5,2000, Public Act 141 of 2000 (the “Act”) took effect. Section 10a(4) of
the Act provides:
Within 180 days after the effective date of the amendatory act that
added this section, the commission shall establish a code of conduct
that shall apply to all electric utilities. The code of conduct shall
include, but is not limited to, measures to prevent cross-subsidization,
information sharing, and preferential treatment, between a utility’s
regulated and unregulated services, whether those services are
provided by the utility or the utility’s affiliated entities. The code of
conduct established under this subsection shall also be applicable to
electric utilities and alternative electric suppliers consistent with
section 10, this section, and sections lob through 10bb. MCL
460.10a(4); MSA 22.13(10a)(4).
4.
In light of this legislation, on June 19,200O the Commission remanded this proceeding
back to the ALJ with instructions to “schedule further proceedings to comply with subsection lOa(4)”
of the Act.
5.
On July 12, 2000, the ALJ invited parties to file additional testimony in this
proceeding, instructing the parties that:
care should be taken that it should not be legal argument, which
should be reserved for briefs, and it also should not be matters that
could have been and should have been placed in the testimony in the
initial proceeding under this docket. 10 TR 728.
6.
On July 27,200O
MAFC timely filed the Direct Testimony and Exhibits of Anthony
M. Ponticelli.
7.
Mr. Ponticelli’s testimony would provide this Commission with a nationwide
perspective on legislative and commission activity regarding codes of conduct. A perspective needed
3060997.1
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2
by this commission if it is to follow the directive of PA 141 and establish a code of conduct that will
“include but not be limited to measures to prevent cross subsidization, information sharing, and
preferential treatment between a utility’s regulated and unregulated services.”
8.
On August 14,200O
Wisconsin Public Service Corporation, Upper Peninsula Power
Company, Northern States Power Company-Wisconsin, Wisconsin Electric Power Company,
Consumers Energy Company and the Detroit Edison Company (collectively, the “monopoly utilities”)
filed motions to strike the direct testimony and exhibits of Mr. Ponticelli.
The monopoly utilities
allege that Mr. Ponticelli’s testimony was duplicative of testimony previously filed in this proceeding,
is hearsay, and should have been placed in testimony in the initial phase of this proceeding.
9.
On August 22, 2000 the ALJ granted the monopoly utilities’ motion to strike Mr.
Ponticelli’s testimony and exhibits in their entirety. The ALJ granted the motion, because in his
opinion, the testimony “is the exact type of testimony that could have been presented initially in this
case,” the testimony is legal argument, and an official staff report of the FTC and a letter from various
Senators to this Commission constituted hearsay. 11 TR 766-767.
10.
Mr. Ponticelli, though he is admitted to practice law in the District of Columbia was
not presented as lawyer to argue the law. Mr. Ponticelli was presented as the “Executive Director
of the National Alliance for Fair Competition, a coalition of 8 national trade associations, representing
over 25,000 small business firms, with an interest in legislative and regulatory matters pertaining to
deregulation and restructuring.” As such, he has a unique perspective on the national state of codes
of conduct and, as the ALJ noted, “responds generally to concerns involving the electric utilities in
the state of Michigan.” 11 TR 766. Without this national perspective, the Commission will be forced
to re-invent the wheel, so to speak, as it attempts to “establish a code of conduct that shall apply to
3060997.1
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3
all electric utilities. The code of conduct shall include, but is not limited to, measures to prevent
cross-subsidization, information sharing, and preferential treatment between a utility’s regulated and
unregulated services, whether those services are provided by the utility or the utility’s affiliated
entities.”
As other states have considered these exact issues in developing their own codes of
conduct, this Commission, faced with the tight deadline imposed upon it by the Act, would benefit
considerably from the national perspective that Mr. Ponticelli brings to this proceeding.
11.
The ALJ ruled that Mr. Ponticelli’s testimony could have been presented in the first
phase of this proceeding. However, such a ruling ignores a plain and simple fact, there was no code
o f .
P
T h e
A rc t
t o o k
e if f e c t
o n
Jo u n e
5,200O.
r
to that time, this was, arguably, a proceeding to consider the “voluntary” codes of conduct of only
Consumers Energy Company and The Detroit Edison Company, as it applied to their experimental
retail wheeling programs. A national perspective on legislative activities in other states would not
only have been inappropriate in such a narrow proceeding, but would have been premature, as
Michigan did not yet have any legislation regarding codes of conduct. Further, much of the
information Mr. Ponticelli relied on and the exhibits he sought to introduce did not even exist during
the first phase of this proceeding.
12.
In ruling that Mr. Ponticelli’s exhibits, specifically a report of the Federal Trade
Commission Staff regarding Competition and Consumer Protection Perspectives on Electric Power
Regulatory Reform, were inadmissable hearsay, the ALJ ignored consideration of this report under
several exceptions to the hearsay rule. MRE 803(8)
provides an exception to the hearsay rule
regarding “records, reports, statements or data compilations in any form of public officers or agencies
setting forth matters observed pursuant to duty imposed by law as to which matters there was a duty
3060997.1
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4
to report.” As an official Staff report of the Federal Trade Commission, the exhibit is not hearsay.
Further, MRE 803( 17) provides an exception for “other published compilations generally used and
relied upon by the public or by persons in particular occupations,” MRE 803 (17) closely matches
Commission Rule 325 which states that “the commission may admit and give probative effect to
evidence of a type commonly relied upon by reasonably prudent persons in the conduct of their
affairs.” Mr. Ponticelli’s exhibit is such a document that would be commonly relied upon by a
reasonably prudent person in interpreting national perspectives on competition and consumer
protection with regard to electric deregulation.
13.
The ALJ also ruled that Mr. Ponticelli’s exhibit consisting of a letter written by the
majority of the members of the Senate Technology andEnergy Committee, Chairman Mat Dunaskiss,
and Committee Members Senators Bill Schuette, Ken Sikkema, and Mike Rogers, and filed with the
Commission, indicating that “it was our intent in committee deliberations and through final passage
of PA141 of 2000 that the code of conduct was meant to apply to all electric utilities and ad of their
unregulated services whether those services are provided by the utility or the utilities’ affiliated
entities” was inadmissable. However, the ALJ while noting that the letter is part of the docket file
in this proceeding, failed to note that it is appropriate for a party to file testimony with regard to a
document that has been made a part of this public record. Although this letter was written on July
20 and thereafter made a part of this record, no party has made a motion to strike the letter or
otherwise remove it from the record in this case. Again, it is therefore appropriate that MAFC be
able to comment upon this letter.
14.
The ALJ, in granting the monopoly utilities’s Motion has limited the scope of a
contested case proceeding to exclude any national perspective on codes of conduct in a case of first
3060997.1
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5
impression on the statutory construction of the code of conduct language. If the ALJ’s ruling is not
overturned, this Commission will be forced to“establish a code of conduct that shall apply to all
electric utilities” in a vacuum absent the benefit of the collective knowledge of other states who have
gone before it. For example the Maryland Code of Conduct, which Mr. Ponticelli offers as an exhibit
to his testimony addresses many of the same issues now before this Commission.
15.
As this commission noted in its April 14, 2000 Opinion and Order overturning a
previous ruling granting the monopoly utilities’ attempt to limit the scope of this proceeding:
The Commission concludes that testimony about utility conduct in
other settings may have some use in determining what modifications,
if any, should be made to those codes of conduct.... Because the
testimony and exhibits have some relevance to the issues in this case,
the Commission concludes that the ALJ should not have granted the
motions in their entirety. Rather, the parties should deal with
questions about how the testimony relates to the scope of this
proceeding and the weight to be given to the testimony through
cross-examination and briefing.
For the same reasons, Mr. Ponticelli’s testimony and exhibits should remain part of the evidentiary
record in this proceeding and the parties should be invited to deal with questions about how the
testimony relates to the scope of this proceeding and the weight to be given to the testimony through
cross-examination and briefing.
16.
The Commission should expeditiously issue a decision reversing the ALJ’s ruling
concerning the testimony of Mr. Ponticelli and clarify the scope of this proceeding in such a way that
what should be part of the record in this proceeding will be evident and will be a proper evidentiary
record on which the Commission can “establish a code of conduct that shall apply to all electric
utilities” pursuant to legislative directive.
3060997.1
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6
17.
An expeditious Commission decision reversing the ALJ’s ruling will materially
advance a timely resolution of the proceedings in accordance with Rule 337(2)(a) because by
overruling the ALJ, the only national perspective regarding codes of conduct can be made part of the
record in this proceeding. This will allow the Commission to “establish a code of conduct that shall
apply to all electric utilities” based upon a complete evidentiary record in this proceeding.
18.
An expeditious Commission decision on the ALJ’s ruling will prevent substantial harm
to the members of the MAFC in accordance with Rule 337(2)(b) because the members of the MAFC
who must continue to compete with the monopoly incumbent regulated utilities without the benefit
of “fair competition and a level playing field.”
19.
An expeditious Commission decision on the ALJ’s ruling will prevent substantial harm
to the public-at-large in accordance with Rule 337(2)(b) because the public-at-large will be forced
to endure electric competition without the benefit of acommission
developed code of conduct based
on evidence that would allow the Commission to impose “fair competition and a level playing field”
through the establishment of “a code of conduct that shall apply to all electric utilities.”
3060997.1
13540/081722
7
WHEREFORE, the Michigan Alliance for Fair Competition respectfully requests, for all the
reasons stated herein, that the Commission, at its next regularly scheduled meeting, or at a special
meeting if necessary, reverse the ruling of the ALJ granting the Motion to Strike the Direct Testimony
and Exhibits of Anthony M. Ponticelli and remand this proceeding for the purpose of taking all such
evidence immediately.
Respectfully
submitted,
zIr:
Haran C. Rashes (P54883)
2455 Woodlake Circle
Okemos, Michigan 48864-5941
(517) 381-9193
(517) 381-0268 Fax
Attorneys for Michigan Alliance for Fair Competition
Date: August 31, 2000
3060997.1
13540/081722
STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
* * * * *
In the matter of the approval of a code of
)
conduct for CONSUMERS ENERGY COMPANY )
AND THE DETROIT EDISON COMPANY
)
)
Case No. U-12134
DIRECT TESTIMONY OF
ANTHONY M. PONTICELLI
ON BEHALF OF THE
MICHIGAN ALLIANCE FOR FAIR COMPETITION
1
Q.
Please state your name and business address for the record.
2
A.
My name is Anthony M. Ponticelli. My business address is 305 4th Street, NW, Washington,
3
D.C., 20002.
4
5
Q.
Please state your employers name and your responsibilities.
6
A.
I am self-employed. I have been admitted to the practice of law in the District of Columbia and
7
represent clients on a range of matters concerning the deregulation of electric power, as well as
8
other unrelated issues.
9
10
Q.
11
12
13
Please describe your professional experience with respect to the matters in this
proceeding.
A.
On behalf of my clients, I have had occasion to research federal and state legislation and codes of
conduct related to the restructuring and deregulation of the electric power industry. I have testified
Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 2 of 26
1
before Congress and several state regulatory commissions, as well as participating in proceedings
2
before those bodies. I have drafted legislative language at both the federal and state level and have
3
counseled clients as to codes of conduct relating to dockets similar to this one. I have participated,
4
in various capacities, in deregulation matters in California, New York, New Jersey, Iowa, and
5
West Virginia. In addition, I serve as the Executive Director of the National Alliance for Fair
6
Competition (NAFC), a coalition of 8 national trade associations, representing over 25,000 small
7
business firms, with an interest in legislative and regulatory matters pertaining to deregulation and
8
restructuring.
9
10
Q.
Have you previously testified before the Michigan Public Service Commission?
11
A.
Yes, in connection with adoption of new standards proposed in sections 111 and 115 of the
12
Energy Policy Act of 1992 dealing with Demand Side Management and the potential impact on
13
small business.
14
15
Q.
On whose behalf are you testifying today.
16
A.
I am testifying on behalf of the Michigan Alliance for Fair Competition (“MAFC”).
Q.
Are you sponsoring any exhibits?
17
18
3054316.3
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Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 3 of 26
1
A.
Yes, I am sponsoring three exhibits. AMP-1 (I-___) consists of a copy of the Federal Trade
2
Commission’s most recent Staff report entitled Competition and Consumer Protection
3
Perspectives on Electric Power Regulatory Reform which was issued in July, 2000. AMP-2
4
(I-___) consists of a copy of a recent Maryland Public Service Commission Order, Re: the
5
Investigation into Affiliated Activities, Promotional Practices and Codes of Conduct Of Regulated
6
Gas and Electric Companies, Md. Pub. Serv. Comm’n Order No. 76292, Case No. 8820, July
7
1, 2000, which addresses fact situations similar to those presented here by MAFC. AMP-3 (I-
8
___) consists of a July 20, 2000 letter, provided to me by counsel, from the majority of the
9
members of The Senate Technology and Energy Committee to Dorothy Wideman, the
10
Commission’s Executive Secretary regarding the Committee’s intent in passing the code of conduct
11
provisions of the Act.
12
13
Q.
What is the purpose of your testimony today?
14
A.
On June 5, 2000, Public Act 141 of 2000, the Customer Choice and Electricity Reliability Act (the
15
“Act”) took effect. Subsection 10a(4) of the Act provides:
16
17
18
19
20
21
Within 180 days after the effective date of the amendatory act that added
this section, the commission shall establish a code of conduct that shall
apply to all electric utilities. The code of conduct shall include, but is not
limited to, measures to prevent cross-subsidization, information sharing,
and preferential treatment, between a utility's regulated and unregulated
services, whether those services are provided by the utility or the utility's
3054316.3
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Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 4 of 26
1
2
3
affiliated entities. The code of conduct established under this subsection
shall also be applicable to electric utilities and alternative electric suppliers
consistent with section 10, this section, and sections 10b through 10bb.
4
In light of the enactment of the Act, and specifically the code of conduct provisions contained
5
therein, I am testifying to provide a national perspective on how other states have implemented
6
similar code of conduct provisions to the new law enacted in Michigan. How other states have
7
addressed, either through legislation or rule making, the concerns of non-affiliated competitors
8
similar to those of MAFC, is relevant to the Commission’s deliberations regarding the same issues
9
which have been raised elsewhere. In particular, I will show that adequate precedents exist, and
10
more importantly why it is necessary to extend and apply the code of conduct required under
11
subsection 10a(4) of the Act to utility affiliates engaged in operations other than in the retail
12
provision of electric power, to prevent cross-subsidization, information sharing, and preferential
13
treatment, between a utility's regulated and unregulated services. To accomplish its legislative
14
goals, such a code of conduct must require structural or operational separation and establishing
15
transfer pricing rules based upon market value.
16
17
Q.
Are you familiar with the provisional codes of conduct and those proposed by Consumers
18
Energy Company, The Detroit Edison Company, and the Michigan Public Service
19
Commission Staff?
3054316.3
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Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 5 of 26
1
A.
Yes.
3
Q.
In your opinion, do those codes of conduct comply with subsection 10a(4) of the Act?
4
A.
No. Consumers and Edison’s provisional codes of conduct, in particular, fall short of what the
2
5
code of conduct provisions of the Act require. The Act is clear that “[t]he code of conduct shall
6
include, but is not limited to, measures to prevent cross-subsidization, information sharing, and
7
preferential treatment, between a utility's regulated and unregulated services, whether those services
8
are provided by the utility or the utility's affiliated entities.” Consumers and Edison’s provisional
9
codes limit any applicability to those affiliates who participate in the retail open access program,
10
and as to divisions or departments within Consumers or Edison or wholly owned subsidiaries
11
thereof, the provisional codes of conduct would not apply as long as the price of power supply is
12
regulated by the Commission. Consumers and Edison’s provisional codes of conduct do not
13
contain specific measures to prevent market power abuses, cross-subsidization, unfair pricing of
14
services provided to or by an affiliate, structural or operational separation between regulated utility
15
and unregulated non-utility operations. Further, Consumers and Edison’s provisional codes of
16
conduct conditions many provisions with language such as “undue discrimination,” “to the extent
17
practicable” and “undue preference”, a deviation from its natural gas code. this language weakens
18
the code and opens the door to abuses. Staff’s proposed code, goes much further in implementing
3054316.3
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Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 6 of 26
1
what I believe was the legislature’s intent in enacting subsection 10a(4) of the Act, however, I feel
2
that based on the measures other states have taken, Staff’s proposed code of conduct could be
3
further strengthened.
4
5
Q.
You mentioned that a code of conduct must require structural or operational separation,
6
with respect to separation, are you aware of any other states which have acted to go
7
beyond purely functional separation of regulated utility and unregulated non-utility
8
operations?
9
A.
Yes. Although the means, terminology, and methods may vary, several states, including some which
10
have yet to deregulate, have directed their regulated utilities to go beyond purely functional
11
separation in order to establish and preserve competition and prevent potential cross-subsidization
12
and cost shifting. For example, among those states which have acted through their state regulatory
13
commissions, Arizona, California, Illinois, Maine, Nevada, and Texas appear to have gone beyond
14
purely functional separation the affected utility and, at a minimum, those affiliates engaging in
15
competitive services.
16
Q.
Could you give some specific examples?
17
A.
Yes. Arizona’s Code states that a utility, or utility distribution company, and its affiliates shall
18
operate as separate corporate entities. Books and records shall be kept separate and shall be open
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Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 7 of 26
1
for examination by the Commission and its staff. In addition, a utility, or utility distribution
2
company, shall not share office space, equipment, services, and systems with its competitive
3
electric affiliates, nor access any computer or information systems of one another, except to the
4
extent appropriate to perform shared corporate support functions.
5
California requires, in its standards of conduct, that a utility and its affiliates shall be
6
separate corporate entities; keep separate books and records; not share office space, office
7
equipment, services, and systems, nor permit the sharing of computer information between the
8
utility and its affiliates. California terms this “physical separation”.
9
The state of Maine, in its code, requires that a utility must establish a separate corporate
10
entity from which to provide non-core services, non-core services being all those other than
11
generation, transmission, or distribution of electricity or gas.
12
In its code, Nevada prohibits a distribution company from providing any “potentially
13
competitive or discretionary electric” or gas service except from an affiliate which is a separate
14
corporate entity which operates independently from the distribution company. In addition to
15
keeping separate books, accounts and records, an affiliate shall not have officers, directors, or
16
employees in common with the distribution company, nor have any member on its board of
17
directors who is also an employee or office of the distribution company. Affiliates may not use
3054316.3
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Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 8 of 26
1
office space, office equipment or office services provided by the distribution company unless it
2
does so through a contract approved by the commission.
3
The Illinois commission rules require that, except in relation to corporate support and
4
emergency support, electric utilities and competitive affiliated interests shall function independently
5
of each other and shall not share services or facilities or have employees in common.
6
The Texas standards require that a utility shall be a separate, independent entity from any
7
competitive affiliate, a competitive affiliate being one which provides services or sells products in
8
a competitive energy-related market in that state, including telecommunications services, to the
9
extent those services are energy-related.
10
11
Q.
12
13
In addition to standards created by commission rules, are there other examples of where
states have acted to require more than mere functional separation?
A.
Yes. Some state legislatures, including a few which have yet to deregulate, have enacted statutory
14
provisions directing separation. The New Mexico legislation requires separate corporate entities
15
for regulated non-competitive companies and unregulated, competitive affiliates. The state of
16
Missouri has passed a statute requiring separation for some utility functions even though neither
17
state has passed a general deregulation statute. Missouri House Bill 1038, enacted in July of 1998,
18
prohibits a utility from offering HVAC services except through a separate affiliate. In addition, a
3054316.3
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Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 9 of 26
1
utility may not engage in or assist any affiliate engaging in HVAC services in a manner which
2
subsidizes the activities of such affiliate.
3
4
Q.
Have any states elected to use the terms “undue preference”, “undue discrimination”,
5
or the like when addressing the question of favoritism in dealings between a utility and its
6
affiliates?
7
A.
Yes. However, it appears that only two states to date have adopted this approach, The state of
8
Kentucky, which has yet to deregulate, recently passed a statute addressing cross-subsidization
9
issues and uses the phrase “no undue preferential treatment” and the state of New Mexico uses the
10
term “undue discrimination”. The great majority of states, when addressing this question do not
11
modify the word preference or discrimination, it is my understanding that this is the approach Staff
12
took in both its June 4, 1999 Staff Report on Code of Conduct Meetings (Exhibit S-13) and in
13
its proposed code of conduct (Exhibit S-16).
14
15
Q.
16
17
Can you provide some specific examples where the terms “undue preference”, “undue
discrimination” have been rejected?
A.
18
Yes. Arizona provides, in its code, that an affected utility, utility distribution company, or their
affiliates shall not provide their affiliates, or customers of their affiliates, any preference over non-
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Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 10 of 26
1
affiliated competitors. This includes providing leads to affiliates, soliciting business on behalf of
2
affiliates, acquiring and/or providing information to affiliates.
3
Arkansas has a code section entitled “Preferential Treatment Prohibited” which, among
4
other things, provides that a utility shall not provide any preference to its competitive affiliates or
5
customers of those affiliates.
6
California, in its code section on nondiscrimination states that there shall be no preferential
7
treatment regarding services provided by the utility and that the utility shall not provide its affiliates
8
or their customers with any preference over non-affiliated suppliers.
9
Texas has several distinct provisions in its code. A utility’s products and services are to be
10
made available on a “non-discriminatory basis”, the same holds for discounts, rebates, fee waivers,
11
or alternative tariff terms and conditions, there is to be nondiscriminatory availability of aggregate
12
customer information, as well as no preferential access to transmission and distribution information.
13
14
In its code section entitled “Preferences Forbidden”, Maine provides that a utility may not
15
act in preference to its affiliate or affiliates in providing access to utility facilities or services or in
16
influencing utility customers to use the services of its affiliates.
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Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 11 of 26
1
Illinois provides that there shall be no preferential treatment or advantage and that a utility
2
shall not discriminate; Connecticut states that there shall be ”no preferential treatment” and Nevada
3
provides that utilities “shall not discriminate.”
4
5
Q.
6
7
Why should the Michigan Commission reject the use of terms such as “undue discrimination” or
“undue preference”?
A.
Use of terms such as “undue discrimination” or “undue preference” would create more confusion
8
and result in additional burdens for the commission. The Act instructs the Commission to establish
9
a code of conduct to prevent cross-subsidization, information sharing, and preferential treatment.
10
Language such as “undue” implies that some level of preference or discrimination is to be tolerated.
11
However, there is no clear way of determining what level of discrimination would be acceptable or
12
unacceptable. This would seem to engender a continuing argument over each act which might convey
13
some level of advantage and would not necessarily prevent all cross-subsidization, information
14
sharing, and preferential treatment, between a utility’s regulated and unregulated services. The
15
commission would be called upon numerous times to first determine if an act was discriminatory and
16
then whether the level of discriminatory conduct amounted to something which was “undue.” In any
17
event, matters will have to be settled on a case-by-case basis. Thus, it would not appear that the
18
commission would be in any worse position if it did not use the term “undue” and may actually reduce
19
its oversight burden if it simply prohibited discriminatory conduct.
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
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1
2
Q.
The new law in Michigan requires the code of conduct to contain “measures to prevent
3
cross-subsidization.” Have other states sought to address the issue of cross-subsidization
4
through their codes of conduct ?
5
A.
6
Yes. Most states contain provisions which prohibit cross-subsidization and cost shifting between
regulated and unregulated operations.
7
8
Q.
Can you give some specific examples?
9
A.
Yes. States such as Arizona, Illinois, and Texas contain specific prohibitions in their codes while
10
states such as Maine, Virginia, New Mexico, Kentucy, and Missouri have specific prohibitions
11
contained in statutory language.
12
13
Q.
One of the purposes of the Act, as a whole, was to deregulate aspects of the provision of
14
electric supply in Michigan. What concerns would small businesses, such as those of
15
MAFC’s members face with respect to deregulation of electricity?
16
A.
Businesses which compete against utilities and their affiliates are concerned with the issues
17
surrounding cross-subsidization and discriminatory practices or self-dealing between the utility and
18
its affiliates. This is exactly why the legislature included subsection 10a(4) in the Act. Without a
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 13 of 26
1
code of conduct, the market power of incumbent monopolies can be used in unregulated markets,
2
even those markets unrelated to the supply of electricity, to drive out competitors, especially small
3
businesses, which compete against them and their affiliates in unregulated markets and raise barriers
4
to new entrants.
5
6
Q.
Are codes of conduct sufficient in an of themselves to prevent market power abuses?
7
A.
I believe that both structural and behavioral safeguards are need to preserve competition in affected
8
markets. This view is shared by the Federal Trade Commission and is reflected in the actions of
9
many states in their establishment of codes and standards which contain both methodologies.
10
11
Q.
How have the states addressed the issue of cross-subsidization?
12
A.
The approaches vary to some degree. However, states generally prohibit cross-subsidization either
13
through explicit statutory or regulatory prohibitions, such as in states like Texas or Illinois or by
14
placing provisions in their codes which have the effect of reducing or precluding such cross-
15
subsidization. One general approach is to establish rules regarding transfer pricing for goods or
16
services in transactions between utilities and their affiliates. These rules establish a price or range
17
of prices to be used for such transactions.
18
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 14 of 26
1
Q.
2
3
With respect to the concerns of the members of MAFC, what should such a transfer
pricing rule require?
A.
A code of conduct should contain provisions to address the provision of goods and services, as
4
well as asset transfers both from the utility to the affiliate and from the affiliate to the utility.
5
Competitors are generally more concerned with a situation where goods, services or assets are
6
provided by the utility to its affiliate. In such cases, the rule should require transactions to be priced
7
at the higher of market value or, in the event that market value cannot be ascertained, the fully
8
distributed, or fully allocated cost. This approach as been suggested by the National Association
9
of Regulatory Utility Commissioners (“NARUC”) and has been adopted in states such as Maine,
10
Arizona, Nevada, California, as well as some states, such as Colorado, which has not yet
11
deregulated.
12
13
Q.
Do you have any other comments with respect to such an approach?
14
A.
Yes. From the standpoint of both ratepayers and competitors, the use of the market value, as
15
opposed to some lesser value such as the incremental price or book value, would appear to more
16
effective in preventing cross-subsidization and maintaining competition in affected markets. Use
17
of market value, with respect to the flow of goods, services and assets from the utility to the
18
affiliate, would serve to capture revenues which might otherwise be foregone. The state of Maine
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 15 of 26
1
specifically considered whether a utility should be able to use incremental pricing or book value and
2
rejected those approaches with respect to utility assets, services, equipment, facilities and personnel
3
provided by the utilities in that state to their affiliates. It was the Commission’s view that they
4
should neither encourage nor discourage transactions between a utility and its affiliates. Further,
5
they saw no reason why a utility should be permitted to provide an asset or service to an affiliate
6
for a price less than what it would get should it provide such assets or services to an unaffiliated
7
entity. Under such a rule requiring the use of market price to value such transactions, both the
8
utility and its ratepayers would be provided with no less revenue than if the transaction were
9
conducted with non-affiliated entities. It would appear that the only reason for using a lesser value
10
would be to convey a competitive advantage to those entities affiliated with a utility as they compete
11
with non-affiliated firms in competitive markets.
12
13
Q.
14
15
But wouldn’t consumers benefit where utilities were permitted to use a price less than
market value?
A.
Not necessarily. Although each situation needs to be analyzed on its own because of differing
16
circumstances, it would appear that it is far more likely that the affiliated entity and the utility will
17
reap the benefits. First, it is unclear that any economies of scope or scale would necessarily
18
translate into benefits for ratepayers and consumers or, if so, when such benefits might be passed
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 16 of 26
1
on in the form of lower prices. They may well be retained by the utility or its affiliate indefinitely.
2
Secondly, the best gauge of what value to place on assets, goods or services provided by the utility
3
to its affiliate is the market. Use of other methods, such as fully distributed cost, invariably requires
4
a range of judgements, sometimes arbitrary, in order to assign cost allocation factors to such goods
5
or services in order capture some portion of indirect costs associated with the things provided.
6
Inevitably, the need for continuing oversight will arise because both regulated and unregulated
7
services will be provided utilizing common facilities, equipment and personnel. Thus, use of the
8
market price reduces the regulatory burden on commissions and, just as some states, such as
9
Massachusetts, have determined that the market is the best gauge by which to determine the value
10
of generating assets in a stranded cost assessment, a state commission could better utilize use actual
11
market values, for the provision of other services and assets. Finally, while it may be argued that
12
using valuation methods which permit utilities to provide services or assets to their affiliates at a
13
level lower than market will result in those affiliated operations being able to return some profits to
14
the utility so as to benefit ratepayers, any such returns depend on the success of the unregulated
15
affiliate and are speculative. In contrast, using the market price for transfers produces and
16
immediate and definite return for ratepayers.
17
18
Q.
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Are there other problems in this area?
Direct Testimony of Anthony M. Ponticelli
Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 17 of 26
1
A.
Yes. Detection of cross-subsidization and unfair competition can be extremely difficult where
2
common inputs, such as vehicles, tools, equipment, and even personnel, are used by both the
3
regulated and unregulated entity. Such common inputs could also be considered preferential
4
treatment between the regulated and unregulated entity, something subsection 10a(4) specifically
5
mentions as a provision of the code of conduct. In such situations, it would difficult at best to
6
determine if a utility was over-investing in such assets on the regulated side in order to build up its
7
unregulated ventures and passing a disproportionate share of the costs on to ratepayers. This
8
biased assignment of costs, which is often difficult for regulators to detect and remedy, distorts
9
competition and produces inefficiencies in the unregulated business as well. The risk of failing to
10
detect unfair competitive conduct and cross-subsidization is heightened if the regulated parent firm
11
can improve its affiliate’s position by incurring costs of the type that regulators would traditionally
12
include in the rate base of the regulated firm. When these factors are present, a regulated
13
incumbent will have an incentive to overinvest in assets such as vehicles and equipment because
14
it can expect to incorporate a greater share of these investments into its rate base than if the assets
15
were not shared with the affiliate. Moreover, the affiliate would realize additional profits from its
16
increased competitive position in the unregulated market. The principal obstacle to deterring this
17
conduct is that it may be extraordinarily difficult to distinguish competitive from anti-competitive
18
levels of investment. Harm to competition and consumers may result from such overinvestment and
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 18 of 26
1
subsequent cross-subsidization. Harm to competition may occur because the unregulated affiliate's
2
access to the assets or services of its regulated parent gives it an artificial cost advantage through
3
potential cross-subsidization that otherwise equally efficient competitors cannot match. As the
4
Federal Trade Commission has pointed out, most recently in its July 2000 Staff Report entitled
5
Competition and Consumer Protection Perspectives on Electric Power Reform (Exhibit
6
AMP-1 (I-___)), the anti-competitive results may include (1) higher-than-necessary average
7
operating costs for the industry and higher prices for consumers due to the continued operation of
8
the affiliate, which can survive with higher-than-necessary costs due to the cross-subsidization; (2)
9
greater market concentration and less competition than would occur absent the cross-subsidization;
10
and (3) discouragement of potential entry that likely would have occurred absent the
11
cross-subsidization, including entry involving innovative products and production processes.
12
13
Q.
Would such a situation include the use of name and logo?
14
A.
Yes. Affiliate use of the utility brand creates a form of cross subsidy because the brand confers
15
information about product quality and is generally associated with goodwill, thereby lowering costs
16
and increasing sales versus competitors. Additionally, it creates an entry barrier if the affiliate is not
17
required to pay for the brand . For numerous reasons, a ban on the use of name and logo by a utility’s
18
affiliates may be the cleanest and least burdensome method to addressing concerns in this area.
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 19 of 26
1
In lieu of a ban, the FTC has suggested, as an alternative approach to eliminate over-
2
investing in reputation by the utility and to preserve competition, that the affiliate pay the parent for
3
the right to use the logo. Because the logo is an asset, use of the logo by other firms, including
4
affiliates, represents an asset transfer from the parent firm, and a state commission may wish to treat
5
it like other asset transfers in order to avoid cross-subsidization. Some states, such as Maine have
6
adopted such an approach and the commission in New York applied such a rule with respect to
7
some telecommunications activity. In addition, despite the fact that a utility may own its name,
8
ratepayers have served to build the value of name recognition over the years in which the utility was
9
a monopoly. Thus, it seems only equitable that they should receive something in return for an asset
10
which, in a competitive market can be of considerable worth and which could serve to lower rates.
11
This issue points to certain questions which may be unique in this context of deregulation. Namely,
12
to what extent, and at what price, should a regulated entity which developed its name and
13
reputation, economies of scale and scope, and expertise solely from its existence as a state
14
sanctioned monopoly franchise be permitted to retain those advantages in the new deregulated
15
environment or to transfer those advantages to unregulated affiliates which now seek to operate
16
in a competitive market against other non-affiliated competitors. The issue of ownership of certain
17
assets or whether they were previously included in the rate base may not be as important, from
18
either a ratepayer or competition standpoint, than the value such assets have accrued as a result
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 20 of 26
1
of their existing in a monopoly setting. If such regulated monopolies were created in order to
2
benefit ratepayers, it would seem consistent to require at least some return to ratepayers of that
3
value by which assets were enhanced due to the existence of the monopoly regardless of whether
4
such assets were or were not preciously included in the rate base. It should be clear that goodwill
5
is a utility asset, after all and it should be treated no differently than other utility property. It should
6
be noted that utilities generally take the position that ratepayers have an interest in the generating
7
plants which the utilities’ claim are liabilities with respect to determining stranded costs. It would not
8
seem consistent to permit utilities to assert a contrary position with respect to assets such as goodwill.
9
It is only fair that the ratepayers have an interest in intangible assets, such as name and logo, which
10
have increased in value during the same regulatory period as generating assets.
11
12
Q.
Have any other states considered such an approach?
13
A.
Yes. Most recently the state of Maryland’s commission issued an order, Re: the Investigation into
14
Affiliated Activities, Promotional Practices and Codes of Conduct Of Regulated Gas and Electric
15
Companies, Md. Pub. Serv. Comm’n Order No. 76292, Case No. 8820, July 1, 2000, attached
16
hereto as Exhibit AMP-2 (I-___), revising its rules to require the imposition of a royalty based on the
17
gross revenues of the affiliates using the name and logo of the utility. It should be noted that some
18
of the facts in that case were almost identical to those in this instance. In Maryland, unregulated
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
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1
affiliates were continuing to use the utility’s logo and customer service number on their trucks
2
performing HVAC services.
3
4
Q.
5
6
Is the use of disclaimer, such as that proposed by Staff, sufficient to solve the problems
associated with name and logo?
A.
No. Disclaimers address the problem of consumer confusion and potentially deceptive sales
7
practices. Use of disclaimer does not address cross-subsidization issues or return to rate payers
8
any value in connection with the use of name recognition. In reality, no amount of disclosure can
9
overcome the mis-impression given to consumers by an affiliate’s use of its parent utility’s name
10
or logo in its advertising and promotional materials. Since regulated utilities should operate
11
separately from affiliates, the utility’s reputation for reliability, experience and quality of service has
12
no relevance to the operation of the affiliate. When an affiliate uses the utility brand it does so to
13
create the impression that its relationship with the parent utility is a relevant fact for consumers to
14
consider when selecting a gas or electric supplier. If the relationship is not relevant, then it would
15
appear misleading to consumers to refer to it in advertising and promotional materials. It is unclear
16
that any amount of
17
customer education or disclaimers can undo the security that many customers will associate
18
with continuation with a name brand they recognize and from which they have received
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 22 of 26
1
reasonable service from over the years. Details of separate corporate relationships cannot
2
be explained succinctly and effectively in disclaimers, especially by the utility and affiliate
3
in whose interest it is to continue to give the impression that a relationship persists. Even
4
with the strictest disclaimer requirements, there is bound to be some customer confusion
5
about the relationship between a similarly named affiliate and the utility that has been
6
providing that customer’s service for years. Indeed, regardless of intent, a similarity of
7
business names between the affiliate and the utility will tend to create the false impression
8
that the affiliate has all of the attributes of the regulated utility merely by virtue of its
9
corporate affiliation. This is why a ban might be preferable.
10
11
Q.
12
13
Can cross-subsidization issues be addressed solely through the use of transfer pricing
methods?
A.
No. If you examine the wording of subsection 10a(4), you will see that the legislature specifically
14
stated that the code of conduct developed pursuant to the Act “shall include, but is not limited to,
15
measures to prevent cross-subsidization, information sharing, and preferential treatment, between
16
a utility's regulated and unregulated services. States need to combine both structural and behavioral
17
approaches in order to prevent such abuses and preserve competition. Furthermore, transfer
18
pricing rules do not address market power issues, as the California Commission noted in its rule
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 23 of 26
1
making decision. To that extent, codes of conduct beyond transfer pricing rules need to be applied
2
to all affiliates which operate in affected markets and such markets include those in which
3
businesses such as those of MAFC’s members operate.
4
5
Q.
Can you comment further?
6
A.
Yes. First, clearly cross-subsidization can occur with respect to transactions between a utility and
7
any of its affiliates. One more than one occasion the FTC has stated its concerns about the
8
effectiveness of rules designed to prevent cross-subsidization and the need to apply them equally
9
to energy related and non-energy related affiliates. The agency has suggested that an arms-length
10
approach might be best suited for transactions between a utility and its affiliates in both settings.
11
Secondly, code provisions apply prospectively and seek to deter anti-competitive conduct before
12
it happens. Competitors of unregulated affiliates need such proscriptive coverage because there
13
may be no adequate way of rectifying the damage they may suffer as a result of unfair competitive
14
conduct. If cross-subsidization is subsequently discovered, ratepayers may be compensated by
15
denying future rate increases but a competitor which has lost business or an employee who lost a
16
job as a result of unfair competition will find little relief in lower rates or take much solace in seeing
17
the offending party forced to pay a penalty. The lack of an effective compensatory remedy
18
necessitates that opportunities for unfair competition be addresses before the fact rather than after
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 24 of 26
1
the fact. This also holds with respect to those seeking to enter affected markets and who might be
2
permanently deterred by unfair competition in the present.
3
4
Q.
Should the code of conduct developed in this proceeding be extended to a utility or its
5
affiliates which compete against business such as those in which MAFC’s members are
6
engaged?
7
A.
Yes. The statutory language is clear that “the code of conduct established under this subsection
8
shall also be applicable to electric utilities and alternative electric suppliers.” By using the term
9
“also,” the legislature left no doubt that the code of conduct should apply to all electric utilities and
10
all of their unregulated service offerings. I have attached as Exhibit AMP-3 (I-___), a letter,
11
provided to me by counsel, from the majority of the members of The Senate Technology and
12
Energy Committee to Dorothy Wideman, the Commission’s Executive Secretary. This letter
13
emphasizes that any code of conduct developed in this proceeding should be extended to a utilities
14
and their affiliates which compete against business such as those in which MAFC’s members are
15
engaged.
16
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 25 of 26
1
Q.
What provisions in a code of conduct do you believe should be extended to a utility’s
2
affiliates which compete against business such as those in which MAFC’s members are
3
engaged?
4
A.
Some of the areas which should be addressed, beyond transfer pricing, name and logo, and
5
separation, would include protection of customer site information, coverage of services performed
6
by the utility for the benefit of, or on behalf of, its affiliates, discounts and rebates, steering of
7
customers, and the provision of customer information and data.
8
9
Q.
Can you comment further?
10
A.
Generally speaking, the typical language developed by state commissions in their codes is adequate
11
to address the basic concerns in most of these areas. What is needed, beyond the language, is the
12
extension of coverage to those affiliates beyond merely those engaged directly in the provision of
13
energy commodities, such as electric power or gas. Such coverage has been extended in states
14
such as California and Maine and to lesser extent in states such as Arizona and Nevada.
15
There are some concerns regarding code provisions respecting employee transfers which
16
should be addressed. These concerns arise in connection with services performed by a utility on
17
behalf of its unregulated affiliates. There are instances where a utility may not transfer personnel but
18
employ them to perform work on behalf of its unregulated entities. In such cases, the utility is
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Michigan Alliance for Fair Competition
MSPC Case No. U-12134
Page 26 of 26
1
providing a service for its affiliate. The same holds thru with respect to certain assets which may
2
be employed on behalf of the affiliate to perform work, such as HVAC or electrical installations
3
and servicing, which the affiliate may have obtained in a competitive market. In such situations, it
4
should be clear that code coverage is extended to such activities, either because use of employees
5
is to be treated as a transfer of an intangible asset or addressed under employee transfers. As
6
suggested by the FTC, any arrangements of this type which may be permitted, should be
7
conducted at arms length and should reflect the market value for such services, at a minimum. In
8
addition, contracts for such services should be filed with the commission prior to their execution
9
to permit review.
10
11
Q.
Does this conclude your testimony?
12
A.
Yes.
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MPSC Case No. U-12134-Exhibit
AMP-l (I-2
Paee 1 of 69
UNITED STATES
FEDERAL TRADE COMMISSION
Staff Report: Competition and Consumer Protection Perspectives on
Electric Power Regulatory Reform
July 2000
Contributors to this Report
Bureau of Economics, Bureau of Consumer Protection, Bureau of Competition, and Policy
Planning, Federal Trade Commission
This Report represents the views of the staff of the Federal Trade Commission. It does not necessarily
represent the views of the Federal Trade Commission or any individual Commissioner.
Inquiries regarding this report should be directed to:
Michael S. Wroblewski, (202) 326-2155 (Policy Planning),
John C. Hilke, (303) 844-3565 (Bureau of Economics),
Mary K. Engle, (202) 326-3 16 1 (Bureau of Consumer Protection), or
David A. Balto, (202) 326-2881 (Bureau of Competition).
Table of Contents
Executive
Summary
Foreword
Chapter I: Introduction
A. Underlvina Technological Chances
B. Underlying Regulatory Changes
Chapter II: Existing Market Power In Generation Services
A. Both Horizontal Market Power and Discriminatorv
in the Electric Power Industrv
Access to Transmission Mav Be of Concern
B. If lthe State Commission1 Determines That It Faces Likelv Market Power Problems in
Generation. Addressing Them Through Structural Remedies Mav Be Preferable to Relving
Exclusively on Market Power Monitoring and Mitigation
I
1
MPSC
Direct Testimony of Anthony M. Ponticelli
Case No. U-12134-Exhibit AMP-l (I-)
Page 2 of 69
C. ISOs Are Potentiallv Attractive Institutions for Addressing Many Market Power Issues in the
Electric Power Industrv
D. Entry
Considerations
1. Context of Entrv Considerations
2. Additional Consideration of the Evolution in Electric Industry Entry Conditions
E. [A State1 Mav Wish to Use Comuuter Simulation Models to Hem It Assess Horizontal Market
Power and Structural Remedies for Market Power
Chapter IIX Vertical Discrimination In Transmission Access
A. Operational Unbundling Offers Sinnificant
Unbundling Approach
Advantages Over FERC’s
Proposed Functional
1. Preventing Discrimination of Cost Shiftirm by a Regulated Monopolist is Difficult
2. Operational Unbundlinf is Likelv to be More Effective And Less Costly Than Functional
Unbundling in this Industry
B.
Independence
Minimum
Characteristic
C. Distributed Generation and Competition in Electric Distribution Service in California
Chapter Iv: Affiliate Transactions
A. Initial Assessment of Vertical Efficiencies
B. Application to Transactions between Public Utilities and Their Unregulated Affiliates
C. Limits on Transactions Between Regulated Utilities and Their Unregulated Affiliates
D. Benefits and Costs of Allowinn Unrenulated
Firm’s Logo
Affiliates to Use the Parent, Redated Distribution
Chapter V: Horizontal Mergers
A. Introduction and Summary
B. Expanded Data Requirements for Merger Analvsis
C. Alignment with the Horizontal Merger Guidelines Framework of Analysis
D. Analvsis of Alternative Scenarios
I
2
Direct Testimony of Anthony M. Ponticelli
Chapter VI: Vertical And Convereence
Mergers
1. Raising Rivals’ Costs
2. Abuse of Proprietary Information
Chapter VII: Particular Retail Competition Entrv Considerations
A. A Possible Unintended Conseouence:
to Deter Entry
Stranded Cost Recovery Mav Create Artificial Incentives
B. Whv Vertically Integrated Incumbents Mav Wish to Deter Entrv
C. Possible Remedies to Prevent Consumer Harm If Stranded Cost Recovery is Allowed
D. Potential Inefficiencies
and Distortions from Stranded Cost and Benefit Recovery
Chapter VIIk Consumer Protection
A. Advertisine;
Claims
1. Voluntary Advertising Claims
a. Interpretation of Advertising Claims
b. Affiliate Use of Parent Name or LOEO
2.
Substantiation
a. Tracking of Electricity
b. Disclosures for Claims Substantiated Under a Tagging System
c. Claimed Versus Actual Production
B. Uniform Labelins Recmirements
Suppliers
Are Likelv to Assist Consumer Choice of Electric Power
C. Unfair or Deceptive Business Practices
EXECUTIVE SUMMARY
Electric power is the latest -- and largest -- industry in which advances in technology have
made extensive regulation obsolete. In particular, it is now possible for customers (e.g.,
residential consumers and businesses) to select their own electric power supplier,-while the
3
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-l (I-)
Paee 4 of 69
transmission and distribution functions of electric power continue to be regulated
Restructuring the electric power industry raises many competition and consumer protection
issues concerning how to obtain lower prices, cost efficiencies, and innovations of a
competitive market without creating new inefficiencies or penalizing incumbent utilities.
Indeed, the benefits of deregulating the electric power industry may be deferred -- or may
not materialize at all -- if existing monopoly utilities are left unchecked to exercise market
power in a deregulated marketplace.
The Federal Trade Commission has articulated four principles for effective restructuring of
electric power markets to ensure that the benefits of competition flow to consumers.
Briefly, these principles include: (1) unburdening markets from substantial and durable
horizontal market power; (2) removing incentives for vertically integrated firms to engage
in undue discrimination and cross-subsidization; (3) fostering accurate, non-deceptive
information disclosure to customers about price and service offerings; and (4) promoting
uniform disclosure of the prices and other relevant attributes of offers to customers. flil This
Commission staff report, which stems from the Commission’s unique role of studying
competition and working with the business community to detect new market trends,
suggests an analytical framework that federal and state policymakers may wish to employ
to ensure that consumers and businesses benefit from electric power industry restructuring.
After describing briefly the technical advances in the electric power industry that have
made restructuring possible (Chapter I), the report discusses how high concentrations in
the ownership of existing generation assets (which remain from an era of regulated
monopolies) may allow the exercise of market power, to the detriment of consumer
welfare (Chapter II). The electric power industry’s history of common control of
generation assets and transmission lines may impede wholesale competition, largely
because of a utility’s ability to discriminate against competing generation sources in
providing access to its wholesale transmission assets (Chapter III). A lack of wholesale
competition is likely to harm retail competition as well. A utility’s incentives and ability to
discriminate and to cross-subsidize unregulated activities also arise in transactions between
the regulated parent utility and its unregulated business units offering generation or other
services at the retail level (Chapter IV). Moreover, the use of behavioral rules to control
these incentives may be ineffective; remedies separating ownership of different assets may
be more effective and less costly to enforce.
As the electric power industry is deregulated, the number of mergers is expected to
increase as firms respond differently to new competitive opportunities. The staff report
analyzes issues involved in, and presents an analytical approach to, horizontal and
vertical/convergence mergers in the electric industry. This analysis may be useful to state
regulators as they evaluate mergers in the energy industry, including mergers that involve
other sectors of the industry (Chapters V and VI).
Whether and how consumers participate in competitive retail electric power markets will
determine whether electric power industry restructuring is successful. The provision and
pricing of “default service” (for consumers who fail to choose a new supplier) are likely to
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be critical determinants of whether consumers will participate in these markets (Chapter
VII). Consumers in electric power markets are likely to be better able to promote their
interests when a substantial portion of them can readily switch among several suppliers
offering a variety of products and services and when they can easily compare prices and
terms of competing offers. Consumers’ ability to choose among newly offered options is
likely to be enhanced if non-deceptive advertising claims are supplemented by uniform
disclosures of terms of service, prices, and relevant attributes of electric power. In
addition, vigilant enforcement against unfair or deceptive business practices, which may
crop up in a newly deregulated electric power market, is critical to ensure that consumers
obtain the benefits of competition (Chapter VIII).
FOREWORDa
Electric power is the latest and largest industry in which extensive regulation has been
outmoded by technology. In particular, scale economies in generation have diminished,
enabling entry of efficient small-scale generation sources so that electric utilities can meet
demand through, and trade excess electric power in, more competitive wholesale markets.
The Federal Energy Regulatory Commission (FERC) has initiated competition at the
wholesale level, and nearly one-half of the States are implementing retail competition that
allows customers to choose their electric power supplier, while the transmission and
distribution functions of electric power continue to be regulated.
The stakes are high in the shift to a competitive environment for the electric power
industry. Total industry revenues are estimated at $200 billion a year. Regulation has
receded in industries such as airlines, telecommunications, railroads, trucking, banking and
financial services, and the production and transmission of natural gas (which shares many
of the same structural characteristics as the electric power industry). Extensive research on
the actual effects of regulatory reform has revealed a pattern of substantial benefits,
including cost savings, technological advancements, and increased variety of products and
services.B
If the levels of cost savings and technological improvements in this industry approach those
attained in previously deregulated industries, consumers will be substantially better off in
terms of lower prices and increased choices .& The gains typically take several years to be
realized and may be thwarted if incumbent monopolists are permitted to exercise market
power to the detriment of a competitive market. Ensuring the benefits of competition will
require vigorous antitrust and consumer protection law enforcement. If private market
power is unleashed or accumulated following the withdrawal of regulatory constraints,
consumers will likely lose potential benefits of regulatory reform and restructuring.
The starting point for thinking about regulatory reform of the electric power industry is not
the level playing field characteristic of a newly developing market. Instead, vertically
integrated, regulated monopolies have controlled the generation, transmission, and
distribution of electric power in state-authorized geographic territories. In this context, as
regulation is reduced and competition is encouraged, there is a significant potential that
these utilities will use their existing market power in generation, transmission and
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MPSC Case No. U-12134-Exhibit
AMP-l (I-2
distribution services to deter competition that could benefit consumers. In addition,
consumers have not previously had choices of electric power suppliers, and thus consumer
protection issues need particular attention.
The Commission has developed four principles that apply to the analysis of competition
and consumer protection policies in a deregulated electric power industry. We have used
these principles when asked to evaluate state and FERC proposals. The principles also
have guided us when we have been requested to review federal restructuring legislation.
Principle 1: Assessing Horizontal Market Power: Traditional antitrust analysis
recognizes that the benefits of competition are most likely to accrue to consumers when
markets operate unburdened by substantial and durable market power. Outside the merger
context, concerns with horizontal market power focus on the possibility that one or a few
generating firms might obtain and be able to exploit market dominance in areas of the
country where transmission congestion occasionally creates restricted geographic markets
for electric energy (load pockets).
Current antitrust laws are not designed to address the mere possession of market power or
the legitimate acquisition of or increase in market power through lawful regulatory
processes. Instead, the antitrust laws are designed to address increases in market power
brought about by mergers or unfair methods of competition, such as predation,
discrimination, and raising rivals’ costs. In light of this possible situation, tools to identify
and remedy horizontal market power in generation are critical to increased competition in
electric power markets.
Principle 2: Independence of the Transmission Grid: Market power at the transmission
level is likely to give a vertically integrated firm the incentive to discriminate against its
competitors. Vertically integrated utilities, even after functionally unbundling their
generation assets from their transmission assets, have a continuing opportunity to engage
in undue discrimination in providing access to their transmission facilities and thus to
impede competitive markets. Vertically integrated firms also may exercise their market
power through cross-subsidization in favor of their unregulated affiliates.
Both forms of behavior will likely reduce the degree of competition facing the integrated
firm’s generation assets. These two forms of anticompetitive behavior, plus the costs of
regulation, may be significant enough in some circumstances that separating the operation
(and/or ownership) of the transmission grid from the ownership of affiliated power
marketing interests should be the preferred solution to address horizontal market power at
the transmission level.
Principle 3: Non-Deceptive Advertising: The benefits to consumers of a competitive
electricity market will be substantially reduced unless the information presented to
consumers through advertising and other means is accurate and non-deceptive. In
determining whether an advertising representation is deceptive, the Commission relies on
the principle that if at least a substantial minority of consumers takes a particular message
from an advertisement, and if that message is likely to mislead consumers to their
detriment, then the advertisement is deceptive. Moreover, consumer confidence in any
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competitive market is based on informed choices. The information provided to consumers
also must be substantiated using a reasonable basis, and the substantiation must be
verifiable by third parties, including the government. As a practical matter, consumers
cannot verify for themselves the attributes of the electric power they purchase (e.g., they
cannot verify that the electricity they are purchasing is generated through wind power).
Principle 4: Uniform Disclosures: Uniform disclosure of terms, prices and relevant
attributes of electric power also will help ensure that consumers are able to make wellinformed choices and thereby reap the benefits of competition. Consumers have had no
prior experience in choosing an electric service provider. A uniform disclosure containing
standardized information that electric service providers would use to inform consumers in
their advertising -- similar to what has been done with nutrition labeling on food or energy
efficiency labels on appliances -- will help ensure that consumers are not misled or
confused. It also would facilitate national marketing of electric power.
ORGANIZATION OF THE REPORT
This report summarizes various competition and consumer protection principles that are
involved with regulatory reform and restructuring of the electric power industry.
Discussions of these principles are excerpted from FTC stti comments to state regulatory
commissions and to FERC. The staf?‘comments are supplemented and updated with
insights gained from the FTC’s Public Workshop: Market Power and Consumer Protection
Issues Involved with Encouraging Competition in the U.S. Electric Industry (Sept. 13-14,
1999) (Electricity Public Workshop). The intent is to provide policy makers and industry
with analytical tools and supporting information on a wide range of competition and
consumer protection issues to advance the emergence of effective competition in the
electric power industry for the benefit of consumers.
The report is organized in the following manner:
l
Chapter I reviews briefly the technical advances in the electric power industry and
the regulatory reforms in other industries or in the electric power industry abroad
that precipitated consideration of competition in generation of electric power in the
U.S.
l
Chapter II discusses existing horizontal market power issues in electric power
generation. This issue has gained importance as dominant generating firms (or
concentrated ownership of generation assets) remain in some areas despite open
access to wholesale transmission services. High concentrations of generation
ownership may allow the exercise of market power even after competition is
introduced in wholesale and retail markets.
Chapter III discusses how common control of power generation and transmission
services holds risks for wholesale competition. Nondiscriminatory access to a utility’s
transmission facilities facilitates competition among wholesale electric power
suppliers because transmission facilities are likely to remain regulated monopolies.
Incumbent, vertically integrated firms have an incentive to exercise their market
power at the transmission level by (1) discriminating against competing electric
l
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l
power suppliers in providing transmission facility access, and (2) engaging in crosssubsidization in favor of their unregulated power marketing affiliates.
Chapter IV reviews various forms of vertical discrimination and cross-subsidization
that can occur in transactions between regulated utilities and their unregulated
affiliates at the retail level. As states implement retail competition (i.e., allowing
customers to choose their electric power supplier), cost shifting and discrimination
concerns have arisen concerning activities of a regulated utility that maintains a
monopoly over local distribution lines and its unregulated affiliates engaging in
competitive lines of business. The FTC staff has been skeptical of the effectiveness
of an ongoing behavioral or regulatory approach to resolving these issues.
l
Chapters V and VI analyze issues involved in, and present an analytical approach to,
horizontal mergers and vertical/convergence mergers, respectively. With regulatory
reform in both wholesale and retail electric markets, incentives to restructure the
industry have arisen that may include mergers that threaten to create or perpetuate
market power and, thereby, frustrate competition.
l
Chapter VII analyzes particular issues that may affect entry into retail electric power
markets, including the pricing of default service. In particular, the chapter discusses
how to avoid forms of stranded cost recovery in retail electricity rates that will
subsidize or penalize either incumbents or entrants and, thus, discourage entry.
l
Chapter VIII identifies and discusses consumer protection issues that have arisen as
retail competition is initiated in several states. The benefits of a competitive
electricity market will be substantially reduced unless the information presented to
consumers through advertising and other means is accurate and non-deceptive.
FTC INVOLVEMENT
The FTC’s involvement with electric power industry regulatory reform, like its involvement
in earlier regulatory reform efforts in several industries, stems from its missions to promote
competition and consumer protection through law enforcement and advocacy activities.
1. Antitrust Enforcement The FTC has had substantial involvement in the electric power
industry through the PacifiCorp/Peabody convergence mergerf% and in evaluating the
competitive aspects of mergers between natural gas and electric power utilities. fQ The
United States Department of Justice (DOJ) has taken the lead on most mergers that solely
involve electric utilitiesaIn addition to merger matters, the Commission has responsibility
to prevent unfair methods of competition, which may be especially acute as the electric
power industry moves toward competition.
2. Consumer Protection With the sharp rise in interest in retail competition in the electric
power industry, consumer protection issues have risen to prominence on state and federal
agendas. The Commission’s law enforcement powers in advertising and over unfair
business practices are applicable to a restructured and less regulated electric power
industry. In addition, several pending legislative bills would provide federal agencies with
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the authority to require disclosure of prices and environmental characteristics to
consumers; certain proposed legislation designates the FTC as the enforcement agency for
these disclosure requirements.
3. Competition Advocacy Staff of the FTC has provided comments to FERC and to
various states on competition and consumer protection issues raised as the electric power
industry experiences restructuring and regulatory reform. f@ In addition, the Commission
has analyzed pending federal restructuring legislation and provided testimony to relevant
Congressional committees.
4. Electricity Public Workshop The FTC conducted a workshop on market power and
consumer protection considerations in the electric power industry to further assist states in
examining these important issues. Workshop presenters emphasized many of the same
issues addressed in FTC staff comments and highlighted two areas where policy
discussions have focused most recently. These policy areas include state policies that may
enhance or thwart (1) a vertically integrated utility’s advantages with respect to default
service obligations, consumer shopping credits, and its affiliate’s use of the utility’s name or
logo, and (2) consumer awareness of and information about retail competition.
I. INTRODUCTION
The evolution of the technology of the electric power industry has motivated
reconsideration of the organization and regulation of the industry. In particular, scale
economies in generation have diminished, leading to interest in opening generation and
sales of electricity to competition. Although regulatory reform of the electric power
industry started abroad, interest in reform has spread across much of the U.S. as
regulators and customers focus on the prospects for lower rates and more options in
electric service through increased competition.
A. Underlying Technological Changes
The electric power industry consists of three stages of production: generation,
transmission, and distribution. f% Generation, at its most basic, entails rotating coils of
copper wire through a magnetic field. Electricity suppliers typically utilize heat from
combustion of coal, oil, or natural gas (or from a nuclear reactor) to create steam.
Pressurized steam forces the blades attached to the turbine shaft to rotate. The rotation of
the turbine shaft drives the generator to produce electric power. Alternatively, the turbine
blades may be rotated directly by falling water or by wind. Transmission from the generator
to local distribution is carried over high voltage transmission lines stretched between the
familiar large towers that dot the countryside. The distribution stage occurs once the highvoltage electricity arrives close to the load centers. It begins when transformers step down
the voltage to useable levels. The electricity then flows through the local, low-voltage
distribution system to individual customers.
There are four aspects of electricity and its supply technology that give rise to unique
characteristics of the electric power industry and, therefore, deserve special attention. First,
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electricity cannot be economically stored in large quantities. Consequently, demand and
supply must be balanced continuously and instantaneously to maintain service reliability.
(10) Second, generating costs, for an area’s electric system as a whole, are generally
minimized during low demand periods by operating a few generating plants near capacity
while leaving others idle. Generating plants with a wide variety of marginal costs may
coexist in serving customers in a given area. As a result, generating costs for an area’s
electrical system can vary a great deal across different times of the day and seasons of the
year. Third, electricity follows the path of least resistance and does not generally follow the
shortest route between two points, much less the assumed contract pathm for the
transmission, Hence, it can be difficult to accurately compensate transmission owners for
transmission services and congestion effects (loop flowsa) using conventional
transmission rates. Fourth, all generators within an interconnected transmission network
must be synchronized with respect to the alternating current cycle they produce.
Generators not in synchrony will disrupt reliability and reduce net generation available to
the system. Only relatively limited ties (or interconnected lines) are available between areas
that are not synchronized.m
Two other important technological aspects of the industry have been economies of scale
and economies of vertical integration. Until the 198Os, both scale economies and
economies of vertical integration were seen as endemic to the entire industry. They were
viewed as a sufficient justification for treating the whole industry as a natural monopoly.
(14) Recent technological advances, however, have undermined this consensus, particularly
with respect to generation. The most important of these developments has been the
combined-cycle gas turbine. This technology can be competitive with coal and traditional
natural gas generating plants, but at a much smaller scale. Efficient-scale, combined-cycle
gas plants may be less than one quarter the size of efficient-scale coal or nuclear plants.
Indeed, micro-generators, reflecting additional declines in minimum efficient scale
generators, are now entering the marketplace and may open the option of onsite generation
to a far broader proportion of customers than prior technologies allowed. Deregulation of
natural gas and the resulting decline in natural gas prices relative to other fuels underlined
the importance of this new technology. At the same time, new institutional arrangements,
particularly regional transmission organizations (RTOs), are expected to be able to capture
many of the benefits of vertical integration without many of the costs. (15)
B. Underlying Regulatory Changes
Until very recently, the electric power industry in the U.S. was treated as a series of local,
vertically integrated natural monopolies subject to rate of return and quality of service
regulation. States controlled retail rates while FERC controlled interstate transmission
rates. Private utility firms accounted for about three quarters of industry capacity with the
rest coming from various government-owned suppliers or cooperatives. (16) From the
beginning of the century through the 1970s the electric industry provided power at ever
lower real prices by exploiting increasing economies of scale in both generation and
transmission, and by incorporating other technological advances.
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Several policy shocks hit the industry during the 1970s and 1980s. These shocks both
motivated and facilitated the restructuring of the industry that is now taking place. The
litany of disruptions is as familiar as “yesterday’s” headlines: the OPEC energy crisis,
nuclear safety, acid rain, blackouts and brownouts, and deregulation of natural gas prices.
Despite the shocks, new technologies, and disparities in prices between states, the U.S.
regulatory system remained largely unchanged until the 1990s. In many ways, the U.S.
electric power industry followed the restructuring developments in the United Kingdom.
(17) In 1989- 1990, the United Kingdom moved from a nationalized, vertically integrated
monopoly to a privatized and vertically unbundled industry committed to gradually opening
up competition even at the retail level for both businesses and consumers.
The new U.K. system featured 1) several independent local distribution firms that would
serve businesses and consumers, 2) a regional transmission organization (a Gridcoo in
this instance to control the transmission grid and manage the dispatch of generation
capacity to meet demand, and 3) independent generating firms. A tiered schedule was
established for offering retail customers an opportunity to “shop” for their own electricity
generator or power merchant (retail wheeling).0 The results for the U.K. of this
revolutionary change were generally positive. Prices fell for both large and small customers
as efficiencies were realized in generation, transmission, and distribution. Reliability was
maintained. New generating investments were attracted. Soon, talk of the successes of the
U.K. model spread to the U.S.0
The main economic drawback in the U.K.‘s new system proved to be a market power
problem in generation. Initially, generation assets remained highly concentrated. This
resulted in the exercise of market power at the generation level. Subsequently, the problem
was addressed by requiring that the leading generating firms divest some of their facilities,
and by new entry.m
The first major move toward regulatory reform and restructuring of the U.S. electric
power industry was passage of the 1992 Energy Policy Act. It gave FERC authority to
order open access to transmission lines and to encourage independent operation of the
transmission grid. Shortly thereafter, California became the first state to contemplate retail
wheeling. To date, states representing over 50% of the U.S. population have established
target dates for-initiating retail competition. Most recently, Congress and the Clinton
administration have developed legislative proposals on electric power industry regulatory
reform and restructuring.
II. EXISTING MARKET POWER IN GENERATION SERVICES
Concentrations of electric power generation may be high in some areas, in part because
state andfederal regulators assumed that rate and service regulation would remain in
place indefinitely and thus may have assumed that there was no needfor antitrust scrutiny
to restrain prior growth of horizontal market power. As a result, one or a few generating
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firms might have obtained, and now be able to exploit, market dominance in areas of the
country where transmission congestion creates restricted geographic markets for electric
energy (loadpockets). As regulations are relaxed to allow for retail trades of electricity,
however, existing market power in generation may prevent consumersfiom realizing the
full benefits of competition.
Current antitrust laws are not designed to address the mere possession of market power or
the legitimate acquisition of or increase in market power through lawfiLl regulatory
processes. Instead, the antitrust laws are designed to address increases in market power
brought about by mergers or unfair methods of competition, such as predation,
discrimination, and raising rivals’ costs.
Although individual states may be able to address these issues, the success of these efforts
may be limited by the difficulty of identrfiing market power problems, distinguishing
between predatory and vigorous competitive conduct, and tracing the effects of that
conduct. This is especially true in markets where market power, conduct, and effects all
tend to be interstate (regional) in nature. In addition, a state acting alone may not be able
to implement the most effective remedies, which are likely to be regiona1.a
The DOJ/FTC Horizontal Merger Guidelines contain analytical principles that are
appropriate to analyze existing market power. To the extent that market power already
exists, state regulators and FERC have a variety of remedies from which to choose:
implementation of regional transmission organizations (RTOs), easing of entry conditions
for generation and transmission, facilitating new generation technologies, and divestiture
to multiple parties of the generation assets of vertically integrated monopolies. Finally,
the technological complexities of transmission flows and the non-storability of electricity
make analysis of electricity market power potentially very difficult. Computer simulation
modeling is a potentially attractive approach.
Sections A through C are excerptedfrom the January I999 FTC Staff Comment to the
Alabama Public Service Commission. These sections discuss how market power can be
exercised and suggest using the framework in the DOJ/FTC Horizontal Merger
Guidelines to assess existing market power. Section D, excerptedfrom the May I998 FTC
Staff Comment on the Maine Attorney General’s ‘interim Report on Market Power in
Electricity, ‘I discusses the importance of unimpeded entry into electric power markets.
Section E, which also is excerptedfrom the 1999 FTC Staff Comment to the Alabama
Public Service Commission, discusses the potential for computer modeling in assessing
existing market power.
A. Both Horizontal Market Power and Discriminatory Access to Transmission May
Be of Concern in the Electric Power Industry
Market power is typically defined as the ability of a firm (or a coordinated group of firms)
to profitably price above the competitive level for an extended period of time. There are
two expressions of market power . . . : horizontal market power and discriminatory access
to transmission. Horizontal market power in this context refers to the ability of one or
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more electric generating firms to raise prices above competitive levels for an extended
period of time. Horizontal market power results in higher prices, inefficient allocations of
scarce resources, and distortions of consumer choices. Concerns about horizontal market
power in generation during deregulation have been heightened by the pioneering British
deregulatory experience. Following the implementation of electric power industry
restructuring in the United Kingdom, in 1989 and 1990, researchers determined that the
two private generating firms that dominated the industry were exercising market power.
These findings prompted subsequent orders for divestiture of generation capacity. In
addition to horizontal market power, [state regulators] may want to examine closely the
incentives and ability of a vertically integrated transmission monopolist, whose rate of
return is regulated, to evade the regulatory constraint in order to earn a higher profit. Its
participation in an unregulated market may give it the means to do so, either by
discriminating against its competitors in the unregulated market or by shifting costs
between the regulated and unregulated markets.0
Consistent with economic theory regarding potential competition concerns of this nature,
numerous independent producers and large industrial users have alleged discriminatory
conduct in the operation of transmission facilities. (24) Likewise, this behavior is consistent
with the evidence from the Supreme Court’s Otter Tail Power decision. (25)
B. If [the State Commission] Determines That It Faces Likely Market Power
Problems in Generation, Addressing Them through Structural Remedies May Be
Preferable to Relying Exclusively on Market Power Monitoring and Mitigation
Determining how to address an existing market power problem is potentially difficult.
Opting to impose new. rules and regulations to curtail market power is one potential
solution. For reasons articulated in our February 1998 comment to FERC on market power
monitoring and mitigation proposals from the New England Power Pool (NEPOOL),@@ [a
state] may wish to avoid relying exclusively on such behavioral rules. We summarize the
drawbacks to relying exclusively on a behavioral approach in four points: First, it is likely
to be difficult to detect and document the exercise of market power in many instances
(NEPOOL Comment at 5). The need to balance supply and demand in electricity markets
continuously and precisely makes electricity trades vulnerable to subtle and short-lived
anticompetitive actions that are likely to go undetected because monitoring is complex and
costly. Second, behavioral rules for market power mitigation will not eliminate incentives
to exercise market power (id. at 6). Third, market power monitoring and mitigation rules
create a risk that competitive behavior will be misidentified as anticompetitive behavior,
thus chilling competition and increasing administrative and litigation costs (id at 5).
Fourth, focusing on behavioral remedies may divert attention from structural remedies that
have the potential to address market power with greater certainty and lower costs to
consumers (id. at 6).
C. ISOs Are Potentially Attractive Institutions for Addressing Many Market Power
Issues in the Electric Power Industry
Both horizontal market power and transmission discrimination concerns can be addressed
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by ISOs.(27’ ISOs can be organized to reduce potential horizontal market power by
including a broad geographic area with many separate generation firms. By eliminating
pancaked transmission ratesfZQ and embracing an enlarged geographic area, ISOs can
broaden the effective geographic market and thereby reduce market concentration in
generation and consequently the likelihood of generation market power. A broader
geographic market will not necessarily solve all the generation market power problems, but
it can provide a major step in that direction.
If it is truly independent in its governance and operations, the IS0 also eliminates
transmission discrimination incentives by removing control of transmission assets from the
hands of firms that own generation facilities. In addition, the IS0 may have stronger
incentives than traditional vertically integrated utilities to address generation market power
in load pockets(29) that arise during periods of transmission congesti0n.m
If [a state] becomes involved in the formation of an ISO, it may wish to consider four
danger signs warning of risks to competition in the IS0 formation process@ (1) the IS0
is too small; (2) there is no plan for generation restructuring; (3) the IS0 is not sufficiently
independent; and (4) the IS0 plan does not effectively deal with transmission congestion.
D. Entry Considerations
1. Context of Entry Considerations
The implications of high market concentration may be affected by entry conditions. For
example, the Department of Justice/Federal Trade Commission Horizontal Merger
Guidelines (DOJ/FTC Merger Guidelines) describe these effects in the context of mergers.
fXQ In circumstances where entry is timely, likely, and sufficient to deter or counteract
efforts to exercise market power, market concentration may not have adverse implications
for consumers.0 In our merger and competition advocacy work, we have found that full
treatment of entry conditions, both present and future, is an important aspect of
competition analysis.
2. Additional Consideration of the Evolution in Electric Industry Entry
Conditions
Technological and regulatory changes over the past decade have tended to ease entry
obstacles in the electric power industry and may continue to do so. [There are two]
possible forms of entry in the electric power industry.
The first form of entry is new or expanded generating capacity within the existing product
and geographic market. The second form of entry is enhanced access to existing, but
distant or isolated, generating capacity by virtue of new or expanded transmission capacity
Effective entry into an electricity generation market in some circumstances may be
accomplished by increased transmission capacity even if new generation capacity is not
installed. Entry through increased transmission capacity frequently broadens the relevant
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geographic market. Because a broader geographic market is likely to include more
suppliers, increased transmission capacity may also reduce market concentration.
Both forms of entry have been affected by technological advances in the past few years.
First, new combined-cycle, gas-turbine technology, in conjunction with deregulation of
natural gas prices, has significantly reduced scale economies in electric generation and
made such facilities far more competitive with coal-based generating p1ants.w Because
the new natural gas generating facilities can be economical at a smaller scale, combinedcycle, natural-gas generating facilities take less time.to design and build, have less lumpy
effects on supply conditions, and involve fewer sunk costs. In short, the advances in
generation fueled by natural gas may make entry more timely and likely. . .
Second, improved electric transmission technology makes expanded transmission capacity
a more viable and better understood substitute for new generating capa4ty.m Improved
understanding of the origins of and remedies for transmission congestion may aid in
making transmission a more effective constraint on market power in electricity markets.0
Further, eased health concerns about high voltage transmission lines may help make
expansions of the transmission grid more acceptable to those living and working near these
facilities.‘37’
E. [A State] May Wish to Use Computer Simulation Models to Help It Assess
Horizontal Market Power and Structural Remedies for Market Power
Recently, computer simulation models of generation and transmission that may facilitate
analysis of market power issues have become more widely recognized and tractable.0
Our experience in evaluating the PacifiCorpLPeabody merger evidences the potential
usefulness of computer simulation models for the analysis of market power and potential
structural remedies0 For example, by simulating various price increases and their effect
on pricing in the relevant market(s), computer models can be used to determine relevant
geographic markets in a merger analysis or to ascertain whether an entity is engaging in
anticompetitive behavior. Various state regulatory agencies and reliability councils also
incorporate computer simulation models in their long-range planning efforts. [A state] may
wish to consider making use of such computer simulation models, if it has not already done
so, to help it assess existing generation market power and potential structural remedies for
such market power.
HI. VERTICAL DISCRIMINATION IN TRANSMISSION ACCESS
FERC recently promulgated rules encouraging the voluntary formation of regional
transmission organizations (RTOs) across the Nation. In ‘doing so, FERC noted that its
current behavioral rules for open transmission access (??ERC Order Nos. 888 and 889)
have not solved the vertical transmission discrimination problem in the electric power
industry. Even under open access, vertically-integratedjirms have a continuing
opportunity to engage in undue discrimination in providing access to their transmission
facilities and thus to impede competitive markets. (40) Without nondiscriminatory access to
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transmission, competition among generation suppliers is unlikely to be effective at the
wholesale or retail level.
In comments to FERCprior to adoption of Orders 888 and 889, the FTC staff expressed
concern that behavioral rules alone are unlikely to work very well in this industry because
(I) they leave anticompetitive incentives to discriminate in place and (2) enforcement of
antidiscrimination rules is likely to be particularly problematic. Since then, the FTC has
recognized that vertically integratedfirms have an incentive to exercise their market
power at the transmission level both by discriminating against electric power suppliers in
providing transmission facility access and by engaging in cross-subsidization in favor of
their unregulatedpower marketing affiliates. These two forms of anticompetitive
behavior, plus the cost of regulation, may be significant enough in some circumstances
that separating the operation (and/or ownership) of the transmission gridfrom the
ownership of af$liatedpower marketing interests should be the preferred solution to
address market power at the transmission level. The text in Section A, presenting this
argument, is adaptedfrom the August I995 FTC Staff Comment to FERC.
At the Electricity Public Workshop, presenters from several states and organizations
emphasized why wholesale and retail levels of competition among generation suppliers
should be considered together. In particular, presenters were concerned that retail
competition would be less robust without effective wholesale competition. Presenters
argued that unless open access policies are applied to a traditional utility’s captive retail
customers (i.e., its “native load” requirements), the utility will continue to have the
incentive and ability to discriminate in providing access to its monopoly transmission and
distribution assets.0
Other participants noted that the effectiveness of wholesale and retail competition
depends on the physical transmission capacity serving the area and that expansion of
wholesale transmission facilities may be a prerequisite for moving toward retail
competition. These Workshop presentations underscored the importance of the maximumgeographic-scope element and the grid-expansion element in formation of RTOs.
Effective RTOs can help broaden the geographic market (increase the number of
generators) serving a state that implements retail competition. At the same time, it is
important that customers be provided with price signals that accurately reflect
transmission constraints and generation costs in peak and off-peak periods In particular,
the average pricing faced by many customers in peak periods understates the costs
involved and conversely, average pricing overstates the costs involved to supply and
deliver electric power during off-peak periods: Accurate price signals not only will
increase the elasticity of demand at the wholesale level, but they can potentially curtail
market power and reduce average costs facing all customers.
Section B, which is excerptedfrom the August I999 Staff Comment to FERC on Regional
Transmission Organizations, discusses the importance of ensuring that an RTO is
independent from owners of electric power suppliers.@
Recent technological developments favoring the commercial viability of very small-scale
16
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-l (1-A
Paee 17 of 69 t
generation units (microturbines and&e1 cells), termed ‘distributed generation” or ‘DG, ”
have added to concerns about discrimination in transmission access and have extended
the policy discussion to distribution as well as transmission. DG may represent an
emerging close substitute for transmission and distribution services because, as a form of
generation, it can be located at, or very close to, load centers. If so, owners of
transmission, distribution, and existing (but more distant) generation are likely to have
incentives to impede the entry and spread of DG. DG is likely to be most economically
viable, at least initially, as a methodfor customers to reduce peak-load demand on the
power grid and improve reliability while continuing to be connected to the grid
Consequently, the most likely avenue for impeding the spread of this new technology is
discrimination in connecting DG units to the transmission and distribution system. To the
extent that DG connections to the grid are denied delayed, or made more costly,
incumbent transmission, distribution, and generation owners may realize greater profits
while consumers may face higher prices and lower reliability. Section C, discussing DG,
is adaptedfrom the March 1999 FTC Staff Comment to the Calzfornia Public Utilities
Commission.
A. Operational Unbundling Offers Significant Advantages Over FERC’s Proposed
Functional Unbundling Approach.
1. Preventing Discrimination or Cost Shifting by a Regulated Monopolist Is
Diffkult.
A monopolist whose rate of return is regulated has an incentive to evade the regulatory
constraint in order to earn a higher profit. Its participation in an unregulated market may
give it the means to do so, either by discriminating against its competitors in the
unregulated market or by shifting costs between the regulated and unregulated markets.0
The discrimination strategy involves complementary products. The monopolist controls
others’ access to its regulated product in ways that permit it to earn supra competitive
returns in its own operations involving the unregulated complement. Discrimination could
appear as a subtle reduction in quality of service, whose effects would be more difficult to
identify and measure than outright denial of access. An integrated transmission monopolist
might afford other generation sources access to its transmission services only on terms that
raise others’ costs and permit the monopolist to make supra competitive profits in the
generation market.
The cross subsidization or cost shifting strategy involves inputs used for both regulated and
unregulated products. Costs of the shared inputs, which in the electric power industry
might include scheduling and general overhead, are assigned to the regulated business to
justify higher cost-based rates there. This shifting distorts competition and produces
inefficiencies in the unregulated business as well. Controlling the discrimination and costshifting strategies with monitoring and regulation is difficult. They can be defeated most
effectively by preventing the regulated monopolist from entering the unregulated business,
thus eliminating its ability to distort competition in the unregulated market.
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Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-l (1-A
Pace 18 of 69
2. Operational Unbundling Is Likely to be More Effective And Less Costly
Than Functional Unbundling in this Industry.
[Flunctional unbundling . . stops short of structural separation and thus leaves in place the
anticompetitive opportunities and the monitoring and enforcement difficulties that are
inherent in vertical integration between regulated and unregulated markets. Electric utilities
that own or control transmission facilities would be required to offer an open-access tariff
to other parties and to take transmission services for their own wholesale purchases or
sales under that same tariff. Thus, the rules would require the utility to charge itself the
same price, under the same terms, that it charges others for the same transmission service.
[R]etaining integrated ownership and control of transmission and generation services . .
could leave the integrated utilities with the incentive and opportunity to find ways to evade
regulatory constraints. One way could be to manipulate the sensitivity of short-run
transmission services to the risk of delay and uncertainty, which is inherent for this nonstorable product. A transmission owner may be able to favor its own generating plants
materially with subtle delays or complications in the transmission approval process.
Rules mandating open access and comparable treatment would be particularly difficult to
monitor and enforce in this industry, because, to succeed, the rules must constrain
transmission owners to ignore their economic interests. Ensuring that the services and
prices the integrated utility provides to and charges its competitors are equivalent to what
it provides to and charges itself could require virtually transaction-by-transaction
regulatory oversight. Monitoring and enforcing compliance with regulations against
discrimination may be particularly difficult when quality of service is time sensitive, as it is
in electric power. Because power is sold on an hourly basis, market dynamics -- and thus
the incentive and ability to exploit market power -- can shift over the course of each day,
making it virtually impossible to intervene before conditions have changed. Hemming in
transmission owners’ behavior, although perhaps possible in theory, will be difficult to
maintain in practice. SuccessfUlly containing their behavior at one time and place may
provide little assurance of containing it later or elsewhere.
Complete divestiture would resolve the competition problem better than regulation of
behavior. Complete separation of both ownership and control can provide the best
assurance against the anticompetitive incentives and capabilities of combined operations.
Divestiture also avoids the expense and intrusiveness -- and perhaps futility -- of
monitoring and-controlling a firm’s day-to-day behavior.
On the other hand, complete divestiture, curtailing vertical integration to prevent
anticompetitive behavior, may sacrifice economies of scope between the regulated and
unregulated markets. A regulated monopolist’s participation in the unregulated market
might be desirable if it would realize scope economies that outweigh the anticompetitive
distortions.(44) In the electric power industry, there may be economies of scope in
coordination between output and transmission and in planning, or in lower average
inventory, personnel, or reserve requirements. (45)
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Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-l (I--)
Page 19 of 69
In antitrust enforcement, divestiture is the remedy most commonly sought for
anticompetitive mergers or monopolization. In some cases, remedies short of full
divestiture have been applied, to preserve the efficiency benefits of a combination while
addressing its competitive problems. A constant concern in devising orders short of full
divestiture is how to monitor compliance to prevent competitive abuse. The only
compliance oversight required for divestiture is ensuring that the divestiture takes place.
By contrast, continued monitoring is required to assure compliance with behavioral or
intra-firm structural orders. Ordering a firm to afford access is Wile if the price it charges
or the cost of monitoring its compliance are too high. .
Because functional unbundling alone may not be effective, and both it and complete
divestiture may be more costly to implement, a middle-way “operational unbundling”
approach should be favorably considered. By operational unbundling, we mean structural
institutional arrangements, short of divestiture, that would separate operation of the
transmission grid and access to it from economic interests in generati0n.m The pm-pose
would be to prevent the regulated transmission monopolist from influencing the potentially
competitive wholesale generation market. Separating ownership of generating facilities
from control of transmission would reduce the incentives and ability to exercise
transmission market power.0 By separating ownership from control, operational
unbundling captures a primary advantage of divestiture by affording a high level of
assurance -- at least as high as functional unbundling, if not higher -- that
nondiscriminatory practices and rates will prevail. (48) Operational unbundling would not
incur the costs of enforcing behavioral rules, because the firms would have less incentive
and ability to discriminate. It should be at least as effective as functional unbundling in
ensuring against discrimination, and it would be much less costly to implement than
divestiture, because only operation, not ownership, would be structurally separated.m
B. Independence Minimum Characteristic
The basic issue underlying why transmission should be independent of generation in a
qualified RTO is the threat of vertical discrimination in access to transmission services.
Vertical discrimination in transmission is a serious concern because transmission
technology continues to exhibit major economies of scale that often preclude effective
competition in providing alternative transmission services between generation sources and
loads.0 The perceived threat of vertical discrimination in transmission raises the risks
associated with investments in both generation and obtaining electricity trading skills
(training and experience) in order to compete with generation assets owned by the
operators of transmission assets. This perceived risk discourages entry by generating firms
and traders, making effective competition in generation less likely. Reduced supply (less
generation entry) and thinner markets (less trading) are likely to result in higher prices for
consumers than would exist absent such potential transmission discrimination.
Concerns about vertical discrimination in transmission access are not limited to existing
transmission and generation assets, but rather apply to expansions of generation and
transmission as well. Transmission owners could discriminate in providing grid connections
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MPSC Case No. U-12134-Exhibit AMP-l (I-)
Page 20 of 69
to new generators and in selecting transmission expansion projects. Discrimination or
uncertainty about the terms and conditions for obtaining connections to the grid will raise
the risk of new generation investments with respect to their commercial viability and
timing. Discrimination in the selection of future grid expansion projects may disrupt such
project[s] by similarly increasing uncertainty about future revenues of entrants (for
example, discriminatory positioning of a new transmission line may disproportionately
reduce demand for power from the entrant). By eliminating or delaying generation entry, or
deflecting it to a different site, a transmission owner may reduce the competitive pressure
on its own generation assets, particularly if the prospective entrant’s assets are likely to be
more efficient.O As a result of such discrimination, consumers are likely to face higher
electricity prices because more efficient generators fail to enter to displace less efficient
generators.
In addition, we concur with the assessment in the Notice that affiliated transmission
companies . . may not be trusted by market participants even with elaborate protections.
We believe that market participants are likely to suspect that the safeguards will be
gamed. This, in turn, could affect investment behavior. In particular, market participants
may be reluctant to make needed investments in generation or marketing of electricity if
they believe that the RTO is likely to give favored treatment to its affiliates.~
We also agree that behavioral codes of conduct are unlikely to solve this problem because
of enforcement costs and uncertainties.0..
In order for an RTO to be independent, [it may be necessary] to distinguish between voting
interests and passive investment interests . . . To the extent a non-voting, passive
investment interest insulates this type of investor from the RTO’s decisions regarding
operations, planning, and expansions, a non-voting interest is less likely to undermine the
independence minimum characteristic. Although we are reluctant to advocate an inflexible
prohibition on voting rights for owners of generation assets located within the RTO, we
note that exceptions to any rule may grow into a serious breach over time. (54) In order to
provide . . a benchmark for [the] independence criteria, we provide here a brief review of
such criteria in the antitrust enforcement context. We do not view this as definitive with
respect to FERC’s consideration of an appropriate de minimis standard, but merely as
informational.
The loss of independent decision-making - whether sacrificed in a collusive arrangement or
destroyed by the anticompetitive unilateral exercise of market power - is an overarching
concern of antitrust enforcement. Two areas in which antitrust law attempts to guard
against this loss of independence may offer FERC useful perspectives.
First, Section 8 of the Clayton Actm prohibits interlocking directorates among competing
firms. No person may serve as a director or officer of competing corporations if each firm
has an aggregate total of capital, surplus and undivided profits exceeding $10,000,000.~
Although FERC’s Notice incorporates a similar provision based on share of control, FERC
may also find it useful to consider whether common directorships in third parties may be
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Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-l (1-L
Page 2 1 of 69
used to circumvent the basic prohibition.
Second, the FTC sometimes permits firms to merge provisionally, subject to a “hold
separate” agreement that maintains each firm’s structural and operational independence
while the FTC completes its review of the transaction. Such temporary hold separate
agreements frequently prohibit the merger partners from mingling the firms’ assets or
operations; having common directors, officers or employees; exercising voting rights in
each other (other than a de minimis exercise that may be necessary for tax purposes);
attempting to influence each other’s voting shareholders; and communicating with each
0ther.m Prohibitions such as these may be adapted to the electricity market to secure
both the complete independence, and the appearance of independence, of RTOs and
market participants.
Even if FERC adopts a specific de minimis standard, it must be alert for potential coalitions
of common interest -- for example, a group of generation owners with similar incentives
and RTO ownership interests that could undermine the independence of an RTO. With an
ownership de minimis standard applied only against individual ownership interests, such a
coalition could make possible the type of vertical discrimination of concern in electric
power markets.0
In addition, even with a low de minimis standard, we alert FERC to possible conduct that
antitrust enforcers confront. Although operational unbundling or divestiture minimizes the
likelihood of discriminatory access to transmission, there are less direct ways in which
anticompetitive influence can be used to foster discrimination. Important antitrust cases
have been decided where indirect pressure or influence has been applied to advance
common ownership interests against structurally independent firms,~ We invite FERC to
be alert to this type of anticompetitive behavior as well.
C. Distributed Generation and Competition in Electric Distribution Service in
California
Over the past several decades, generation has been highly centralized in large generation
facilities. Customers are served primarily by utility distribution companies (UDCs) that
have connections to large generation facilities using high voltage transmission lines and
connections to customers through their lower voltage distribution lines. This grid system is
referred to as the transmission and distribution (T&D) system. In an electrical system with
DG, smaller, widely-dispersed generation units would supply electric power in additional
to (or instead of) centralized facilities. .
In general, advances in DG technology offer substantial potential benefits to consumers,
but the rate and extent of DG implementation have yet to be determined and there are
some potential costs of DG use as well. DG also faces potential discrimination in
connecting to the grid from vertically integrated, incumbent suppliers in light of DG’s
potential to increase competition in generation, transmission, and distribution. Realizing
these potential benefits may depend upon [a state] affording DG units a fair market test. A
fair market test requires technical interconnection rules allowing DG units to connect to
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Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-l (I-3
Page 22 of 69
the T&D system without undue discrimination and unnecessary technical requirements left
to the discretion of incumbent generation and T&D suppliers. [A state] is likely to benefit
consumers by first addressing the conditions necessary for a fair market test of DG and
then addressing the broader, longer-term questions of distribution competition. The results
of a fair market test in terms of DG’s market acceptance might provide additional guidance
to [a state commission] as it examines the issue implicated by increased competition in
generation, transmission, and distribution.
IV. AFFILIATE TRANSACTIONS
The risk of vertical discrimination in transactions between regulated utilities and their
unregulated affiliates (which may be engaged in supply of generation or metering and
billing services, etc.) arises in many contexts as states allow consumers to choose their
electric power supplier. In Chapter III, vertical discrimination regarding access to
transmission was discussed. The concern in that discussion was that incumbent
transmission owners may raise the costs of actual andpotential generation and marketing
for compe titers by charging higher prices, providing inferior service, or denying access to
important transmission facilities. In doing so they would advantage their own afJiates
engaging in the same unregulated businesses.
The chief concerns in the context of af$liate transactions in retail competition typically
include discrimination as well as cross-subsidization or cost-shifting that favors the
unregulated affiliate relative to its competitors. Consumers are harmed because
discrimination and cross-subsidization may displace more efficient and innovative
competitors and shift production to less efficient suppliers.
Most states have rules or codes of conduct against cost shafts and cross-subsidization
already in place because of the traditional concern about burdening ratepayers with
unrelated c0sts.m Retail competition and the associated unbundling of services,
however, have raised the importance of these rules. Participants in the FTC Electrici~
Public Workshop confirmed that these issues continue to be difficult and contentious for
state regulators. For example, some participants noted that traditional utilities control the
cost of inputs of their retail competitors because the utility has fill access to customer
consumption or load profile information (which is necessary for a utility’s competitors to
prepare price offers to potential customers) as a result of the utility’s continued monopoly
control over distribution services. As a result, the utility has the incentive to discriminate
in providing access to this information to increase its competitors’ costs to serve retail
customers.
The FTC staff has addressed both the general question of the effectiveness of codes of
conduct that govern the relationship between a utility and its unregulated afJiliate(s) and
the specific question of what types of provisions should be included in a code of conduct.
The staff also has suggested that states periodically reexamine the effectiveness of their
code(s) of conduct to determine whether a structural approach, rather than a behavioral
approach, would be more effective in promoting effective competition. Sections A and C
are excerptedfrom the January 1999 FTC Staff C omment to the Alabama Public Service
22
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Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit
AMP-l (I-_)
Pace 23 of 69
Commission regarding codes of conduct. Section A examines alternative ways of
structuring affiliate rules in the context of a cost/benefit framework in which the state has
alreaLty determined that there are substantial, but not overwhelming, economies of
vertical integration. Section B is adaptedffom the December 1999 Comment to the New
Mexico Public Regulation Commission and describes how concepts from antitrust
analysis can be used to assess efficiencies of vertical integration. Section C discusses why
codes of conduct that include market-like mechanisms, which govern transactions between
a regulatedparent and an unregulated af$liate, are likely to reduce the ability of the
regulatedparent to favor its unregulated affiliate in an anticompetitive manner.
During the FTC Electricity Public Workshop, presenters discussed another difficult issue
regarding the relationship between the incumbent and its affiliates, namely, incumbency
advantages -- such as name recognition and customer inertia --that accrue to unregulated
affi1iates.m Because the growth of competition in telecommunications has been reported
to be slow, some participants expressed the view that steps need to be taken to speed the
transition to competition in the electric power industry. Others expressed concern that
steps to speed the transition to competition might unfairly favor entrants over incumbents,
with a resulting loss of effl’ciencies. The excerpt in Section Dfrom the January I999 FTC
Staff Comment to the Alabama Public Service Commission describes a cost/benefit
approach that state utility commissions may want to use to assess these incumbency
advantages.
Because the costs and benefits of alternative approaches to this issue are unlikely to be
untform across jurisdictions or across specific policy options, a case-by-case cost/benefit
analysis appears to be the best approach. In such an assessment, it is important to
distinguish incumbency advantages based on accurate consumer perceptions from those
that may be based on misperceptions. For example, in developing default service policies,
some consumers may elect not to choose because they believe that they will maintain the
status quo by not choosing. However, the state’s decision to implement retail competition
arguably means that the status quo no longer exists as an option. Similar issues of
consumer perception are featured in the section below on use of the regulated distribution
firm’s name and logo by its unregulated affiliates. Indeed evidence presented during the
FTC Electricity Public Workshop indicated that consumers may be confused when an
affiliate uses a name or logo similar to that of its completely separate parent.a
A. Initial Assessment of Vertical Effkiencies
[A state commission] may wish to assess whether significant existing or prospective
economies of vertical integration will be lost if it allows incumbent utilities to establish
affiliates to offer unregulated services. Such an assessment could alleviate some uncertainty
about the costs and benefits of different policy options. If economies of vertical integration
are minimal, divestiture at the outset of regulatory reform may be more appropriate than
the proposed behavioral rules. Conversely, if economies of vertical integration are
substantial, [a state commission] may wish to consider whether any type of separation of a
utility from its affiliates is likely to yield net benefits. Recent empirical evidence suggests
that economies of vertical integration in the electric power industry may be material, but
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Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit
AMP-l (I--)
Page 24 of 69
that they vary considerably in different circumstances and may be realized through
alternative organizational arrangements. 0 Given this evidence, it seems reasonable to
assume initially that vertical integration produces at least modest economies.
An initial assessment of the relative magnitudes of likely costs and benefits is often an
appropriate step in policy analysis because it allows the inquiry to be terminated or focused
on critical issues at an early stage before extensive resources and time have been consumed
on detailed investigation of facts that are unlikely to materially address the balance of costs
and benefits.
B. Application to Transactions between Public Utilities and Their Unregulated
Affiliates
The most difficult application of an affiliate code of conduct is likely to occur when a
proposed transaction between the regulated utility and its unregulated affiliate substantially
increases the likelihood of both anticompetitive effects and of efficiency gains. A similar
policy balance of competitive concerns and efficiency opportunities lies at the core of
antitrust policy toward mergers and joint ventures. [A state commission] may be able to
benefit consumers by applying the insights from antitrust policy regarding these potentially
offsetting effects to the context of the proposed affiliate code of conduct.
Within antitrust analysis, only efficiencies that are specific to a proposed transaction are
relevant to the competition/efficiency policy assessment. Other efficiencies may be obtained
without an accompanying threat of diminished competition. For example, economies of
scale may be realized when a regulated utility and one of its unregulated affiliates jointly
operate a single billing organization. Such economies are not, however, specific to this
transaction; if similar economies practically can be realized by the regulated utility and the
unregulated affiliate if they partner instead through a joint production venture with one or
more unaffiliated firms, or by contracting for the service through an independent provider.
In the merger context, the antitrust agencies have adopted guidelines that explain how the
agencies consider efficiencies when considering the competitive impact of a merger. 0 In
particular, the agencies only consider those merger-specific efficiencies that offset
competitive concerns. Although the following excerpt from the Horizontal Merger
Guidelines discusses horizontal mergers, the same analysis is appropriate to evaluate
efficiency claims when examining the competitive effects of vertical transactions, because
significant competitive problems can arise in either context.
The Agency will consider only those efficiencies likely to be accomplished with the
proposed merger and unlikely to be accomplished in the absence of either the proposed
merger or another means having comparable anticompetitive effects. These are termed
‘merger-specific efficiencies.’ Only alternatives that are practical in the business situation
faced by the merging firms will be considered in making this determination; the Agency will
not insist upon a less restrictive alternative that is merely theoretical.
Efficiencies are difficult to verify and quantify, in part because much of the information
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Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12!34-Exhibit AM?-1 (I-2
Page 25 of 69
relating to efficiencies is uniquely in the possession of the merging firms. Moreover,
efficiencies projected reasonably and in good faith by merging firms may not be realized.
Therefore, the merging firms must substantiate efficiency claims so that the Agency can
verify by reasonable means the likelihood and magnitude of each asserted efficiency, how
and when each would be achieved (and any costs of doing so), how each would enhance
the merged firm’s ability and incentive to compete, and why each would be merger-specific.
Efficiency claims will not be considered if they are vague or speculative or otherwise
cannot be verified by reasonable means.
‘Cognizable efficiencies’ are merger-specific efficiencies that have been verified and do not
arise from anticompetitive reductions in output or service. Cognizable efficiencies are
assessed net of costs produced by the merger or incurred in achieving those efficiencies.
The Agency will not challenge a merger if cognizable efficiencies are of a character and
magnitude such that the merger is not likely to be anticompetitive in any relevant market.
To make the requisite determination, the Agency considers whether cognizable efficiencies
likely would be sufficient to reverse the merger’s potential to harm consumers in the
relevant market, e.g., by preventing price increases in that market...0
[A state commission] may wish to use this efficiency analysis analytical framework in
making the preliminary assessment of whether to require vertical separation between a
public utility and its unregulated affiliates.
In addition, the framework may be applicable as well in assessing the efficiency benefits of
a particular joint activity between the public utility and its unregulated affiliate(s).m Given
widespread evidence of continued vertical discrimination concerns in the operation of the
transmission grid (67) and similar incentives that regulated utilities have to favor their
unregulated affiliates in other aspects of their operations, [a state commission] may wish to
take into account the strong likelihood that certain joint activities or substantial
transactions@@ between a regulated utility and one of its unregulated affiliates, other than
an arms-length purchase in an open market, represent a potential threat to competition. If
so, [a state commission] may wish to consider requiring that the regulated utility
demonstrate strong cognizable efficiencies sufficient to offset potential anticompetitive
effects before the regulated utility engages in a particular joint activity or consummates a
substantial transaction with one of its unregulated affiliates.0
C. Limits on Transactions Between Regulated Utilities and Their Unregulated
Affiliates
As discussed above, we have significant reservations about the effectiveness of relying
exclusively on behavioral rules [to discourage discrimination in transactions between
regulated utilities and their unregulated affiliates]. If the scale, scope, or vertical integration
economies of affiliation are substantial and can be realized even in the presence of
functional unbundling, [a state commission] may wish to strengthen its approach by
requiring the affiliates to operate independently, on a bid-based, arm’s-length basis. For
example, [a state commission] may wish to require that the bulk of regulated utility
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Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-l (I-)
Page 26 of 69
purchases from unregulated affiliates be restricted to contracts won through an objective
bidding process in which a third party evaluates the bids.
A critical element of workable bidding systems is the perceived and actual objectivity of the
bid evaluation process. The system must be perceived as objective in order to attract
bidders. Potential bidders, other than affiliates, may be unwilling to incur the costs of
making a bid if the system is perceived as biased in favor of affiliates. The system must also
be objective in fact in order to avoid raising costs for customers of the regulated utility.
The use of third-party evaluations of the bids is one.technique for achieving such
0bjectivity.m
In addition, [a state commission] may wish to consider restrictions on asset transfers from
the parent distribution utility to an affiliate. Some states are considering making such
transfers subject to particular price bounds to assure that ratepayers do not unfairly
subsidize the activities of the affiliate.fXQ This proposal raises issues similar to determining
the value of assets in assessing stranded costs. Just as some states, such as Massachusetts,
have determined that the market is the best gauge of value to determine the value of
generating assets in a stranded cost assessment, 0 [a state commission] may wish to use
actual market values, rather than a band of prices, for asset transfers. The arm’s-length bid
process discussed above is an example of a method to establish actual market values.
D. Benefits and Costs of Allowing Unregulated Affiliates to Use the Parent,
Regulated Distribution Firm’s Logo
[A state commission] may wish to compare the benefits and costs of allowing affiliates of
regulated distribution firms to use the corporate logo of the distribution firm.0 One
benefit of such use may be to reduce prices in the competitive markets served by affiliates.
With access to the parent company’s logo, the affiliate is likely to have lower marketing
costs that may be passed along to consumers in a competitive market.0 The lower prices
of the affiliate may encourage other firms serving this market to charge lower prices as
well, resulting in lower prices for the market as a whole. fZ2 If consumers’ perceptions of
the implications of an affiliate’s use of the parent utility’s logo are accurate,m a second
prospective benefit may be reduced search costs for consumers.
On the cost side, we have identified two potential concerns about the use of logos by
affiliates: deception of consumers and cross-subsidization.
(1) Potential Deception: [This is discussed in Chapter VIII.]
(2) Potential Cross-subsidization and the Use of the Parent Utility’s Logo: Although some
forms of cross-subsidization may be effectively addressed by transfer pricing rules,m
other forms may be more difficult to assess. Cross-subsidization could take the form of
cost-shifting among inputs used for both regulated and unregulated products, such as the
use of a corporate logo in marketing the affiliate’s products and services as well as the
regulated parent utility’s products and services. Costs of shared inputs could be assigned in
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MPSC Case No. U-12134 - Exhibit AMP-l (I-_)
Page 27 of 69
a biased manner (i.e., with additional costs assigned to the regulated side of the business)
so that the regulated entity can justify higher rates. This biased assignment of costs, which
is often difficult for regulators to detect and remedy, distorts competition and produces
inefficiencies in the unregulated business as well.
The risk of failing to detect anticompetitive cross-subsidization is heightened if (1) the
reputation of the regulated parent utility is effectively embodied or represented by its logo;
(2) the regulated parent firm can improve its reputation by incurring costs of the type that
regulators would traditionally include in the rate base of the regulated firm; and (3) the
unregulated affiliate can enhance its own reputation among consumers by using the logo of
the regulated parent firm, even if elements of the regulated firm’s reputation do not apply
to the affiliate. When these factors are present, a regulated incumbent will have a
heightened incentive to overinvest in reputation-building because it can expect to
incorporate a greater share of these investments into its rate base than if the assets were
not shared with the affiliate. Moreover, the affiliate would realize additional profits from its
increased sales in the unregulated market. The principal obstacle to deterring this conduct
is that it may be extraordinarily difficult to distinguish competitive from anticompetitive
levels of investment in reputation-building. Harm to competition and consumers may result
from such overinvestment and subsequent cross-subsidization.
Harm to competition may occur because the unregulated afliliate’s access to the logo of its
regulated parent gives it a cost advantage through potential cross-subsidization that
otherwise equally efficient competitors cannot match. The anticompetitive results may
include (1) higher-than-necessary average operating (i.e., non-logo-related) costs for the
industry and higher prices for consumers due to the continued operation of the affiliate,
which can survive with higher-than-necessary costs due to the cross-subsidization; (2)
greater market concentration and less competition than would occur absent the crosssubsidization;m and (3) discouragement of potential entry that likely would have
occurred absent the cross-subsidization, including entry involving innovative products and
production processes.
If [a state commission] upon more detailed study determines that there are substantial
economies of vertical integration that cannot be realized without allowing affiliates to use
the logos of their respective regulated parent utilities, [a state commission] may wish to
consider two policy alternatives that are designed to obtain some of the potential benefits
of affiliate use of the parent distribution firm’s logo without incurring the costs. First, some
states are considering allowing the use of the logo by affiliates, contingent upon use of a
disclaimer that avoids consumer deception. [A state commission] may wish to evaluate this
alternative by examining the impression that consumers are likely to have with the use of
the logo accompanied by a disclaimer, and whether that impression would be accurate.0
Consumer research designed to investigate the effects of several alternative policies on
consumers may be the most effective approach. (80) A disclaimer that suffices to avoid
consumer deception also may suffice to discourage cross-subsidization in the form of
excessive investment in reliability.
Another alternative for transfer of the rights to use the parent firm’s logo is to require that
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the affiliate (and any other firms granted the right to use the logo) pay the parent for the
right to use the logo.f&Q Because the logo is an asset, use of the logo by other firms,
including affiliates, represents an asset transfer from the parent firm, and [a state
commission] may wish to treat it like other asset transfers. Q32 In order to avoid crosssubsidization in such a transaction, the use of the parent logo must be fairly evaluated.0
V. HORIZONTAL MERGERS
Competition reviews of horizontal mergers in the electric power industry are conducted by
FERC, the FTC, and the United States Department of Justice (DOJ) using the framework
of the Horizontal Merger Guidelines. The Horizontal Merger Guidelines were developed
by DOJ and FTC and subsequently adopted by FERC as the conceptual framework for its
merger reviews. FTC staff has commented to FERC on the evidentiary dtfficulties of
conducting an effective merger review in the electric power industry. The same concerns
about access to information and appropriate methods for assessing market definition,
market structure, competitive effects, entry conditions, and failing assets are likely to
apply to state reviews of retail competition in the electric power industry. Because of the
large number of relevant scenarios for assessing the effects of mergers in the electric
power industry and because of the technical complexities of this industry (e.g., loop flows
and hourly markets), the FTC staff has recommended that both FERC and the states
consider using computer simulation modeling to aid the analysis of the market power
effects of mergers in the electric power industry. The text below is excerptedfrom the
September 1998 FTC Staff Comment to FERC in a proceeding designed to determine
whether to revise the information filing requirements that electric utilities must provide to
FERC with their merger approval application. These same recommendations are
applicable to state reviews of electric utility mergers as well.
A. Introduction and Summary
The primary theme of our comment is that an analysis of market share information is often
the ramp that leads antitrust agencies to a more sophisticated merger analysis. In light of
this, FERC, where appropriate, may wish to expand its merger analysis beyond its current
strong emphasis on market share information. Such an expansion has implications both for
the information FERC collects and for the analysis it conducts. As part of an expanded
analysis, computer simulation modeling may be a particularly promising development that
may make it more feasible for FERC to consider alternative scenarios about future
technical, economic, and regulatory conditions in its electricity industry merger reviews.
We recognize that expanding FERC’s merger analysis may entail significant costs to the
agency, to the merging parties, and to interested third parties. Such costs, however, may be
a necessary prerequisite to a complete and more accurate assessment of the likely
competitive effects of proposed mergers.
B. Expanded Data Requirements for Merger Analysis
Merger analysis under the Horizontal Merger Guidelines is by its nature an informationintensive task once a preliminary analysis reveals a potential for anticompetitive effects.
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Many important questions about the competitive effects of mergers are best answered with
documents, interviews, and data from many sources. 0 The evolution of our Horizontal
Merger Guidelines reflects an expanded consideration of facts and approaches. FERC may
be better able to protect the public interest as it reviews proposed mergers in the rapidly
changing electric power industry by revising its information-gathering process to more
closely match the information requirements of the Horizontal Merger Guidelines and to
improve understanding of vertical competition issues.
To analyze prospective competitive effects of a proposed merger beyond reviewing market
share statistics submitted by the merging parties, as well as to assure the accuracy of
market share statistics, we have found various sources of data to be important in our
merger investigations. Although only some of these sources are likely to be relevant in any
individual investigation, FERC may wish to obtain each where appropriate and costeffective. Sources used in our merger investigations often include, for example, the
following:
l
internal documents of the merging parties (including, for example, planning and
marketing documents; merger assessments; evaluations of current and projected
technology; cost, quality, and reliability comparisons of firms and their individual
production facilities; and joint venture documentation);
l
third-party documents, including documents from industry trade associations;
l
depositions of party and third-party executives and consultants;
l
history of previous antitrust cases (including collusion cases involving the same
companies or the same industry);
0 financial analysts’ reports;
l
employee notes concerning contacts with competitors;
l
consultants’ reports on competitive conditions in the industry;
l
documents and interviews with executives of failed entrants, prospective entrants,
and fringe firms;
l
filings about competitive conditions made with other government agencies;
l
documents and interviews with suppliers; and
l
documents and interviews with a variety of customers. . . .
C. Alignment with the Horizontal Merger Guidelines Framework of Analysis
We have identified seven aspects of electricity merger analysis covered by the Notice that
29
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FERC may wish to consider from this perspective. On the basis of our experience, each of
these aspects may be significant in determining the prospective effects of a merger on
competition and consumers. Accordingly, FERC may wish to revise both its informationgathering procedures and the types of information it gathers in screening mergers to
enhance its merger analysis.
(1) Hypothetical Price Increases in the Presence of Elevated Pre-Merger Pricesm -- A
key element in merger reviews is determining the economic arena in which the competitive
effects of a merger are likely to take place. The economic arena is defined geographically
as well as with respect to the product or service likely to be affected. Both product and
geographic market assessments under the Horizontal Merger Guidelines are carried out by
asking whether a hypothetical monopolist would profitably impose a small but significant
and nontransitory price increase.0 Typically, the price increase is applied to pre-merger
prices to conduct the analysis. Thus, in defining the market, the Horizontal Merger
Guidelines generally focus on the possibility of incremental market power due to a merger.
This approach may not be appropriate in a newly deregulating industry, such as the electric
power industry, where pre-merger market power may have been created or protected by
regulations that are no longer in place or are likely to be relaxed. The Horizontal Merger
Guidelines recognize this possibility in Section 1.11, where they specify that “the Agency
may use likely future prices, absent the merger, when changes in the prevailing prices can
be predicted with reasonable reliability.” Changes in price may be predicted on the basis of,
for example, changes in regulation which affect price either directly or indirectly by
affecting costs or demand.(87) FERC may wish to recognize explicitly that this alternative
definition of price may be particularly relevant in the electric power industry, where past
restrictions on entry, regulatory limitations on the variety of services offered, and reduced
incentives to operate efficiently and competitively (associated with rate-of-return
regulation) may have elevated prices above competitive levels.
(2) Duration of Anticompetitive Effects @-!4 -- FERC asks how long a binding transmission
constraint must persist to be deemed significant. This problem commonly arises in
electricity markets where peak demand periods, with binding transmission constraints, are
likely to be limited to certain hours of the day during certain seasons of the year. A typical
example would be weekday afternoons during the summer months. Because electricity
cannot be economically stored in large quantities,fSQ electricity supply and demand must
be continuously balanced. Consequently, supply and demand conditions within short time
intervals may be independent of each other in most respects. This may require defining
electricity sales during, for example, individual hours as separate product markets, each of
which may have a different geographic market associated with it. The relevant geographic
market during peak demand periods is likely to be smaller than during off-peak periods
because transmission congestion during peak periods may reduce or eliminate the ability of
distant generators to compete. In examining the importance of a transmission constraint of
short duration, FERC may wish to consider that although a transmission constraint may be
of short duration, it may have large price effectsm in a large area.m Such conditions
(and effects) are likely to recur.
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The likelihood that product markets may be defined on an hourly basis in the electric
power industry raises another potential complication in analyzing mergers in this industry.
During some hourly periods (product markets), a proposed merger may increase the
likelihood of higher prices or other competitive harm. For example, during peak load
periods when transmission is constrained, the proposed merger might give rise to market
power in the generation of electricity. During other hourly periods (product markets), the
same proposed merger may provide merger-specific, cognizable efficiencies. For example,
the merger might provide merger-specific generation efficiencies through reduced reserve
requirements that allow plants with lower marginal costs to be used for reserves. 0 In
such circumstances, FERC may be faced with the necessity of balancing anticompetitive
effects in some product markets against efficiencies in other product markets that are
served by the same assets, and that have substantially overlapping relevant geographic
markets.
Under the Horizontal Merger Guidelines, such tradeoffs may be considered only where
efficiencies in different markets are inextricably linked to the relevant market, as they are
likely to be in the example above.(93) FERC may thus wish to consider techniques for
examining the degree of linkage between efficiencies in different electricity product
markets (e.g., electricity sold on an hourly basis), and whether to seek remedies that affect
the same generation assets differently in different time periods.
(3) Potential Competition Concerns f5% -- Because competition may be harmed by mergers
that stifle potential competition as well as by those that harm actual competition, antitrust
agencies examine mergers for effects on potential competition, even if they appear to
present little threat to existing competition. Potential competition issues may be important
in formerly regulated industries where restraints on potential entrants may have been in
place. The FTC’s recent Questar/Kern River case presented such an issue in the natural gas
pipeline industry. f2% Similar situations may arise in the electric power industry.
FERC may wish to acknowledge that its analysis of electric power industry mergers under
the Horizontal Merger Guidelines will cover potential competition effects and that FERC
will incorporate this concern into its analysis generally.@@ Accordingly, FERC may wish
to remove or restrict its proposed de minimis exception to the filing requirements for
geographically discontiguous operations. This would allow FERC to take into account the
possibility that mergers of geographically discontiguous operationsm may nonetheless
involve potential competition issues.
(4) Rate Cap Effects Compared to Competitive Markets0 -- FERC may find situations in
which behavioral remedies, such as rate caps, are appropriate, although structural remedies
are generally more effective and less costly to enforce. A rate cap is often intended to
replicate the constraint on prices that competition would impose. OAen a rate cap takes the
specific form of a freeze on current rates. Like competition, a rate freeze operates to
prevent prices from going higher due to market power; unlike competition, however, it
does not take into consideration the downward pressure on prices in competitive markets
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from technological advances in production techniques and product design.@) Thus, a rate
cap that does not include consideration of technological advances may allow suppliers to
exercise market power by charging higher prices than they would under competition. To
help ensure that a rate cap effectively reduces the exercise of market power, FERC may
wish to consider requiring adjustments in such rate caps over time to reflect anticipated
changes in costs due to technological and organizational advances. (100) We note that the
rate caps adopted in the electricity reforms in the U.K. included a downward adjustment to
account for technical progress.0 As an alternative, FERC may wish to establish a lower
fixed rate cap initially, to create an expected stream of income equivalent to the
technological adjustment approach.
(5) Entry and Efficiency Considerations in Merger Screening Analysisw -- The
Horizontal Merger Guidelines include consideration of entry conditions and efficiencies,
fl!J% and such factors sometimes reveal that market share concentration statistics overstate
the degree of competitive concern associated with a proposed merger. For example,
consideration of entry conditions may become more important in markets for electric
power as costs for smaller-scale generation facilities, with shorter construction periods and
fewer siting problems, fall relative to those of large-scale generation facilities. We have in
some instances extended our merger screening analysis to include evidence of likely,
timely, and sufficient entry and substantial, verifiable, merger-specific, and cognizable
efficiencies. FERC may wish to consider explicitly allowing its merger screening process to
include these elements as well.
(6) Product Differentiation -- Although electricity is homogeneous in a physical sense, it is
subject to differentiation as a product or service. Such differentiation is likely to increase
over time as suppliers pursue incentives to respond to variations in customers’ demands for
electricity.m For example, as retail competition is introduced in various states,
consumers will be able to express a preference for power from different fuel sources. Firms
also could be differentiated by different brand names or levels of service quality. Statutory
requirements also may differentiate suppliers. 0 FERC may wish to acknowledge that
differentiation may alter the degree of substitutability between electricity from different
sources and may thereby affect the assessment of product markets, geographic markets,
and competitive effects.0
Information on differentiation is critical in the evaluation of competitive effects under a
unilateral market power theory. “A merger between firms in a market for differentiated
products may diminish competition by enabling the merged firm to profit by unilaterally
raising the price of one or both products above the premerger level. Some of the sales loss
due to the price rise merely will be diverted to the product of the merger partner and,
depending on relative margins, capturing such sales loss through merger may make the
price increase profitable even though it would not have been profitable premerger.“m
Accordingly, FERC may wish to amend its filing requirements to include information
sufficient to examine this possibility, including marketing plans, analysis of generation
capacity, and quality of service assessments.
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(7) Economic Performance Measures fJ!ZQ -- FERC states that its concerns in reviewing
mergers are price increases and output decreases. These economic performance measures
are employed by the antitrust agencies as well, but merger analysis under the Horizontal
Merger Guidelines also refers to the effects of mergers on quality, innovation, and
customer choice among product designs. fl@-) Given ongoing regulatory and institutional
changes in the North American Electric Reliability Council, FERC may wish to indicate
that it will consider effects on reliability (quality) in analyzing electricity industry mergers
(because quality decreases are equivalent to price increases). More generally, FERC may
wish to acknowledge that its merger analysis and merger screening will consider effects on
these additional forms of economic performance that are likely to affect consumers.
D. Analysis of Alternative Scenarios
FERC may wish to take advantage of advances in computer simulation modeling
techniques to examine more alternative scenarios about future technical, economic, and
regulatory conditions in its merger evaluations. FERC’s merger analysis is likely to
confront numerous technical and factual issues that can significantly influence the
conclusions reached. Analysis of alternative scenarios is likely to be particularly useful with
respect to defining relevant product and geographic markets and estimating market
concentration. Broadly speaking, analysis of alternative scenarios allows FERC to consider
various conditions that are critical in assessing the likely competitive effects of a proposed
merger. We identify four areas for analysis of alternative scenarios that FERC may wish to
consider.
(1) Variations in Underlying Parameters for Geographic Market Analysis -- The Notice
recognizes that applicants may face choices among sources and methods for calculating
pre-merger prices in the destination markets that are relevant to FERC’s proposed
horizontal and vertical merger screens. 0 This discretion can affect the values of the
parties’ pre-merger price estimates. In turn, these estimates can affect whether the
applicants will be required to file a horizontal or vertical competitive analysis and whether
the merger will ultimately be set for hearing.m
Under FERC’s proposed filing requirements, merger applicants would be asked to make
their best efforts to provide or estimate data that they may not possess. As a result,
important data might well contain errors. When there is uncertainty about the data, parties
also would have incentives to bias the data in favor of the acquisition. Analysis using
different scenarios about the nature and extent of errors could reveal the degree to which
results would be robust against errors or bias in data or in any surrogate data submitted by
applicants.
(2) Native Load -- The Notice raises questions regarding the treatment of native load in
merger analysis. In simple terms, native load encompasses certain contractual and
regulatory obligations of electric utilities to serve existing customers. These obligations
may dissipate over time because of, for example, retail deregulation or the expiration of
contracts. For instance, if most of the capacities of the merging parties are committed
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under current state regulations to serve native load customers, a merger might have little
effect on concentration and competition in wholesale electricity markets in the near term.
In the longer term, however, when retail competition is introduced and native load
obligations are relaxed in one or more states, the same merger might have a significant
effect on concentration in wholesale electricity sales.
FERC may wish to examine two scenarios: (1) relevant suppliers constrained by
obligations to serve present native load and (2) relevant suppliers unconstrained by such
obligations. The former assumption often would describe competition over the near term,
with no expiration of contracts and no retail (or other) deregulation. The latter assumption
often would describe longer-run competition that might occur as contractual obligations
expire or as retail competition is implemented by individual states. It may be appropriate to
challenge the acquisition if threats to competition are found under either scenario.
(3) Transmission Pricing Regimes -- Transmission pricing regimes can strongly affect the
scope of geographic markets. In addition, transmission pricing regimes may be subject to
changes in regulation and in the scope and nature of regional transmission agreements. For
these reasons, analyses of different scenarios can usefully identify to what degree merger
evaluations depend upon the transmission pricing regime(s). Differences in transmission
pricing regimes may affect suppliers’ access to customers within the relevant geographic
markets (due, for example, to the pancaking of transmission tariffs, the availability of
discounted tariff rates, and the presence of tariff regimes such as Independent System
Operators (ISOs)). FERC may wish to include in its analysis a separate scenario for each
reasonably foreseeable and substantial change in transmission pricing regime.
(4) ISOs and Other Potential Mitigation Measures -- Analysis of alternative scenarios can
provide a useful means of evaluating the likely effects of potential measures to mitigate
market power. FERC may wish to use computer simulation modeling with alternative
scenarios to evaluate the likely effects of ISOs, structural divestitures, and other potential
mitigation measures. For example, a structural divestiture of generation capacity by
applicants would most directly affect market concentration, and an IS0 would most
directly affect the transmission prices (or access) that potential suppliers must face.
VI. VERTICAL AND CONVERGENCE MERGERS
Just as vertical discrimination in transmission access and cross-subsidization concerns
arise from the traditional vertical integration in the electric power indusv, so too do
these concerns arise from mergers that create vertical integration. Ofparticular interest
are convergence mergers in which electric generating companies seek to acquirefiel
suppliers that serve the acquiringfirm’s current or future competitors. In such cases, the
concern arises that the acquirer will raise the costs of its competitors, thereby raising
electricity prices, which will in turn increase the profits of the acquirer’s generation
assets. In the PacifiCorplPeabody merger case, in which PacifiCorp sought to acquire
Peabo+ Coal Company, the FTCpublished an analysis of a proposed settlement that
highlighted how these competitive concerns can fit into a particular fact situati0n.u
The text in Sections A and B is adaptedfrom the Februav 1998 Analysis of Proposed
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Consent Order to Aid Public Comment in that case.
A. Raising Rivals’ Costs
Navajo Generating Station (Navajo) is a 2,250-megawatt coal-fired power plant located in
the north-central section of Arizona. Navajo is supplied exclusively from Peabody’s
Kayenta mine via an 80-mile dedicated rail line. Mohave Generating Station (Mohave) is a
1,580- megawatt coal-fired power plant located in southern Nevada. Mohave is supplied
exclusively from Peabody’s Black Mesa Mine through a 275mile coal slurry pipeline.
Long-term contracts govern the terms on which Peabody supplies Navajo and Mohave.
Navajo and Mohave are absolutely dependent upon the Kayenta and Black Mesa coal
mines for their fuel supply because of their extreme isolation relative to rail lines and other
coal mines. There are no other economic sources of fuel, coal or otherwise, for these two
large power plants.
PacifiCorp owns roughly 9,000 megawatts of generating capacity in the Western Systems
Coordinating Council (WSCC), an organization of electric utilities and power marketers
organized to improve the reliability of power transmission and delivery in the western
United States and parts of southwestern Canada and northwestern Mexico. The WSCC
represents a geographic market since transmission constraints severely limit imports. Subregions within the WSCC may also represent geographic markets, at certain times, given
that the transmission capacity connecting subregions is limited and may be inadequate to
balance supply and demand across the subregions.
A firm can sell its product at a higher price if its rivals charge higher prices. Thus, a firm
can profitably increase its own price if it can take actions at low cost to itself that raise the
costs, and subsequently the price, of its rivals. By vertically integrating with suppliers of a
large share of some key input, a firm may be able to increase its rivals’ costs. Given this,
PacifiCorp’s acquisition of Peabody, which is the exclusive supplier of coal to certain
power plants that compete with PacifiCorp’s own power plants, raises antitrust concern.
Specifically, PacifiCorp would have an incentive to increase fuel costs at Navajo and
Mohave in order to drive up the market price of electricity in the western United States. In
the near term, PacifiCorp would be able to realize this higher price on its net wholesale
electricity sales. In the long-term, assuming deregulation, PacifiCorp might also be able to
realize this higher price on some of its retail electricity sales.
The extent of the anticompetitive harm caused by PacifiCorp’s acquisition of Peabody
depends on two factors: First, how much discretion does the mine owner have to affect the
fuel costs at Navajo and Mohave given the long-term contracts between Peabody and the
plant owners? Second, over what periods, if any, and to what extent will changing the
costs of Navajo and Mohave affect the market price of electricity?
The long-term contracts that govern the supply of coal to Navajo and Mohave have a
modified cost-plus format that makes them vulnerable to cost manipulation. A long history
of cost disputes between the parties underlines the supplier’s discretion to determine cost
levels at the power plants. Consequently, post-merger, PacifiCorp could increase Navajo
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and Mohave’s costs. Alternatively, an independent, profit-maximizing Peabody might find it
in its interests to grant the power plants a discount on coal pricing. A merged
PacifiCorp/Peabody, however, might decline to grant such discounts because increased
output at Navajo and Mohave might decrease wholesale electricity prices in the WSCC and
cause PacifiCorp/Peabody to earn less on its electricity sales. In this context, failure to
grant a price concession amounts to a price increase.
Peabody documents reveal that price concessions in the near future for both Navajo and
Mohave are a real possibility. Peabody documents show that the company has considered
granting Navajo price discounts, because the plant has been underutilized during off-peak
hours in the recent past. Moreover, Peabody documents also reveal that it expects the
coming deregulation of the electricity industry will intensify competitive pressures on both
coal-fired power plants and their coal suppliers. Peabody documents also reveal that
Mohave will face a costly decision in the next several years on whether to install scrubbers
to comply with environmental regulations and will implicitly be looking to its coal supplier
for cost relief.
PacifiCorp’s roughly 9,000 megawatts of generating capacity, Navajo’s 2,250 megawatts of
generating capacity, and Mohave’s 1,5 80 megawatts of generating capacity represent a
comparatively small share of the 138,000 megawatts of generating capacity in the WSCC.
In a market with numerous competitors such as electricity generation in the WSCC, one
might assume if coal costs at two plants such as Navajo and Mohave were to increase and
their generation consequently declined, other plants would simply increase output and there
would be no effect on the market-clearing price. However, there is substantial evidence
that manipulating fuel cost at Navajo could have a significant effect on the market price for
wholesale electricity.
A Peabody document recognizes that if Navajo were to go to full capacity utilization
during off- peak hours, it would produce 1,200 megawatts of additional power, depressing
electricity prices. Also, computer modeling using programs well-accepted in the industry
shows that manipulating prices at Navajo would have an effect on wholesale electricity
prices in the WSCC.(“3)
How can participation of suppliers comprising only a small fraction of capacity affect the
market price for electric power? The answer lies in the way in which power plants are
dispatched. Power plants tend to have very flat cost functions until they reach their
capacity. Thus, power plants tend to operate at maximum capacity if they can economically
do so at the prevailing price. Otherwise, they tend to be idled. Consequently, most of the
power plants generating electricity, at any particular time period, have almost no ability to
expand output and offset anticompetitive behavior. Given these circumstances, the power
plants that could defeat anticompetitive behavior here would be those power plants with
excess capacity that could produce and deliver to the areas served by Navajo and Mohave
electricity at the same cost (or slightly above) Navajo’s or Mohave’s. The evidence
indicates that there are no such power plants here.
During periods of low electricity demand in the WSCC (e.g., nighttime hours during the
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spring), electricity demand is met using some hydroelectric capacity, nuclear power plants,
and some coal-fired power plants. Gas-fired power plants tend to be idled during these
periods. Since coal-fired power plants are the last plants to be dispatched during these time
periods, the market price of electricity during these periods is determined by the price at
which the last-dispatched coal-fired power plant supplies electricity. Since periods of low
electricity demand represent a substantial portion of the year and since fuel costs at Navajo
and Mohave affect market price during these times, higher fuel prices at Navajo and
Mohave can cause significant harm to consumers. Indeed, to give a rough sense of how
this acquisition could increase concentration in markets for wholesale electricity during offpeak hours, a hypothetical merger of PacifiCorp’s electric plants with Mohave and Navajo
would make the market for coal-fired electricity in the WSCC highly concentrated and give
PacifiCorp a 35% share, a level at which, under the Merger Guidelines, could lead to
unilateral anticompetitive effects.
Cost manipulation at Navajo and Mohave could affect electricity prices in the WSCC not
only during those off-peak hours when Navajo and Mohave are the marginal, price-setting
plants, but also during a broader period of time. As noted above, power plants are
dispatched in large part based on their variable cost, which in turn is largely determined by
their fuel costs. This dispatch order can be thought of as a supply curve for electricity.
Given this supply curve, if the fuel price at one power plant increases, then this power plant
is removed from its current position in the supply curve and placed in a position further
along the supply curve. This reorders the supply curve as higher priced plants are
dispatched earlier along the affected section of the supply curve. This leads to higher prices
every time electricity demand in a particular period intersects the affected section of the
supply curve. Higher fuel prices at Navajo and Mohave could have a significant effect on
price along a significant portion of the supply curve. If either plant were forced to close
down, its removal would affect price at all points above the plant on the supply curve.
B. Abuse of Proprietary Information
Power plant operators currently compete to supply electricity in informal wholesale
markets characterized by bilateral contracts. In some states (e.g., California), power plant
operators will soon compete in formal auctions to supply electricity. In all of these
situations, power plant operators buy and sell both directly and through “power marketing”
affiliates that have been expressly created to compete in the deregulating wholesale market
for electric power.
Competition in the wholesale electricity market could be adversely affected by this
acquisition throughout the United States because PacifiCorp may gain access, through
Peabody’s coal contracts and coal supply relationships, to highly sensitive data on
competitors’ costs and to real-time information relating to operating conditions of
competing generators of electrical power.
A coal supplier is able to obtain competitively-sensitive information about the day-to-day
operation of the power plant it supplies, including when the plant is experiencing downtime
and when it is facing transmission bottlenecks. In addition, because coal costs comprise
90% of a coal-fired power plant’s variable cost of generating electricity, a coal supplier will
37
Direct Testimony of Anthony M. Ponticelli
know cost information sufficient to predict the price the power plant will likely bid.
~
Peabody is a significant supplier of coal to coal-fired plants, supplying 27% of the coal that
goes to such plants in the WSCC and 15% of the coal going to such plants in the United
States. Many of Peabody’s coal supply contracts have no protection against the transfer of
such competitively-sensitive information, since they were executed prior to regulatory
reform and before purchasers under these contracts had reason to be concerned about the
competitive sensitivity of the information that could be revealed to competitors through
such contracts or through the day-to-day relationship between the coal supplier and
customer. Consequently, by acquiring Peabody, PacifiCorp will gain an invaluable window
on real-time information relating to operating conditions and production plans at many of
the approximately 150 power plants supplied by Peabody. By enabling PacifiCorp to
predict supply shifts and consequent price movements in the market, this information gives
PacifiCorp a significant competitive advantage in power marketing.
PacifiCorp will be able to trade on that information at the expense of other traders of
wholesale electricity. Expected profits for both incumbents and prospective entrants will be
lower if PacifiCorp possesses inside information regarding competitors’ costs, supply
conditions, and future operating plans. Consequently, as a result of PacifiCorp’s perceived
information advantage regarding electricity supply and costs, competitive entry in power
marketing will be discouraged, and existing power marketing companies may defer greater
investments in such enterprises and perhaps even exit, making the market for wholesale
electricity operate less efficiently.
I
VII. PARTICULAR RETAIL COMPETITION ENTRY CONSIDERATIONS
During the FTC Electricig Public Workshop, presenters emphasized several recent
developments in the electric power industry that may affect entry by electric power
suppliers into retail e Iec tricity markets. f114) The first of these competition issues is
supplier-of-last-resort or default service provision. This issue arises when some
consumers intentionally or inadvertently fail to choose a new electric power supplier when
retail competition begins. In such states, “default” customers are assigned to the
generation or merchant affiliate of the existing distribution franchise holder (i.e., the
incumbent utility). Other states have been concerned that assignment of default customers
to the incumbent utility may preserve or enhance the incumbent’s market power and be a
barrier to entry for new electric power suppliers. These states have developed a system in
which supply far this load is subject to competitive bidding among al/potential market
participants. In addition, other issues have arisen, such as whether the default supplier
shouldprovide power generatedfrom the least expensive resources or should employ
“green” resources.
Another competition issue identified by presenters is the price of default service. The
default service price is often termed the “shopping credit” (or avoided cost) that
consumers no longer owe the incumbent utility tf they elect to seek an alternative electric
power supplier. The shopping credit is usually equal to the unbundled rate for generation
services plus costs for related billing and marketing services that the incumbent utility
I
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will no longer incur on behalf of the departing customer. The level of the shopping credit
becomes complicated tf the state has authorized the incumbent utility to recover stranded
generation costs because all customers, regardless of whether they select a new supplier,
will be assessed stranded cost recovery charges. (115) If stranded cost recovery is
authorized, the components of the incumbent’s price for default service will include not
only the shopping credit (i.e., the cost of producing the electricity and the avoided
marketing costs describedpreviously), but also recovery of strandedgeneration costs. The
incumbent’s price for default service, however, is unlikely to be greater than the
unbundledprice for generation services prior to retail competition. Thus, the higher the
stranded cost recovery amount, the lower the shopping credit and vice versa.
Presenters at the Electricity Public Workshop noted that Cahfornia and Pennsylvania,
two of the ‘pioneer” states, have taken differing approaches to establishing and setting
the level of shopping credits. In California, the shopping credit is small, and relatively
few consumers have switched suppliers during the stranded cost recovery period.
Participants emphasized however, that consumers would soon discontinue paying
stranded cost recovery charges (which were to be collected only for up to four years),
which may increase the incentives to shop for alternative suppliers as the shopping credit
increases. In Pennsylvania, a substantial portion of consumers have switched suppliers,
particularly in the eastern part of the state where the shopping credit is relatively large.
The trade-off however, has been that the stranded cost recovery period in Pennsylvania
will be relatively long (approximately IO years), thus resulting in a lower yearly stranded
cost assessment on consumers.
Default service and shopping credit policies both focus attention on contrasting policy
goals in the transition to increased competition in the electric power industry. On the one
hand consumers are likely to obtain the benefits of competition sooner tf entry takes
place and additional, innovative competitors become quickly established In the antitrust
context, entry is considered effective tf it is likely, timely, and sufficient. Quicker and
more substantial entry is better for restraining anticompetitive price increases. Further, tf
entry is insubstantial, it may create a difficult and costly enforcement burden on
regulators to constantly police discrimination and cross-subsidization by incumbents and
assess the effectiveness of potential entry in constraining incumbents’ prices and
maintaining acceptable levels of service. On the other hand entry may be slow and less
substantial because the incumbent electricity suppliers already provide superior service at
low rates. If policies that increase entry do so by handicapping incumbent firms,
ef3ciencies of incumbents may be needlessly wasted and inefficient firms may enter. This
may increase prices and diminish quality.
The issue of default service pricing is further complicated by the possible methodologies
used to recover stranded costs. To avoid biasing the competitive process and
discouraging entry, states may wish to avoidforms of stranded cost recovery that
subsidize or penalize either incumbents or entrants. There are two principal concerns: (I)
stranded cost recovery payments that give incumbents incentives to set arttficiaily low
energy charges that discourage entry, and (2) distortions in energy charges tf stranded
costs are collected as an excise tax on electricity use. The following excerpt addresses
these two areas and is excerptedfiom the January 1999 FTC Staff Comment to the
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Alabama Public Service Commission.
A. A Possible Unintended Consequence: Stranded Cost Recovery May Create
Artificial Incentives to Deter Entry
One potential unintended consequence of stranded cost recovery is that incumbent firms
may be able to use the stranded cost recovery system to deter potentially more efficient and
innovative entrym and thereby delay or harm competiti0n.aIf that occurred,
electricity customers (municipalities, businesses, and consumers) would not only lose the
benefits of price competition but also those flowing from the product and service
improvements and increased product variety that competition brings. They would likely
pay more than they otherwise would during the period after the stranded cost recovery
period ended. [A state commission] could safeguard against these unintended
consequences, however, by adopting, in conjunction with any stranded cost recovery
system, one of three possible remedies discussed in Section C infra.
The harm to consumers would stem from the exclusion of efficient entrants during the
stranded cost recovery period. The harm could result because of a connection between the
way stranded costs are defined and a decision by state regulators to provide incumbent
utilities with recovery of most or all of their stranded costs through surcharges on
electricity use. (118) Stranded costs are often defined by calculating the difference between
the (larger) net present value of future income under traditional regulation using a rate-ofreturn concept and the (smaller) net present value of future income under regulatory
reform. That is, the net present value of the income from a particular generation asset in a
competitive environment is expected to be less than the income regulators would allow
from a particular asset in a regulated environment.
When stranded costs are defined in this manner, the level of stranded cost recovery is
inversely related to how far prices for electric power (energy charges) fall as the result of
competition.m From the incumbent’s perspective, there is an increase in revenue from
stranded cost recovery for every revenue decline due to lower energy charges. With 100
percent stranded cost recovery, as some regulators have chosen, the offset is dollar-fordollar. By contrast, the potential generation entrant has no stranded cost recovery revenue
to offset lower energy charges. Thus, it could be disadvantaged by such a stranded cost
recovery system because it may need to match the incumbent’s lower energy charges in
order to compete, but may lack the wherewithal to do so.
As competition in generation is about to begin, the vertically integrated incumbent must
decide what price (energy charge) to set for the electricity it generates. If it establishes an
artificially low energy charge,m entry would be less likely to take place and competition
from entrants may be less likely to reduce the incumbent’s future prof3s.a Stranded cost
recovery revenue effectively could subsidize such artificially low energy charges, without
proportionately reducing the total charges to consumers.
Customers that leave a vertically integrated incumbent and choose a new electricity
supplier will typically be required to pay an energy charge, a lines charge, and a stranded
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cost recovery surcharge as part of their monthly electricity bill during the stranded cost
recovery period. (122) Because many stranded cost recovery proposals incorporate an
equalization-type formula such that stranded cost is defined as the remainder after
subtracting energy and lines charges from the sum of the total charges projected under
traditional rate-of-return regulation, a decrease in the energy charge prompts an offsetting
increase in the stranded cost surcharge. In this circumstance, a decrease in energy charges
may not be associated with any change in the total charges (price) for consumers and, thus,
would be unlikely to result in increased output. Such a system also would provide less
incentive for the incumbent firm to produce efficiently or to mitigate stranded costs.
Under this scenario, stranded cost recovery might become a license to block or eliminate
entry, even if the entrants would be more efficient and innovative. As addressed in Section
C infra, however, there are at least three alternative remedies that may be effective to
prevent this from occurring, including a structural remedy.
B. Why Vertically Integrated Incumbents May Wish to Deter Entry
From the incumbent firm’s perspective, deterring entry may be attractive if delays in entry
(1) increase costs for entrants, or (2) slow establishment of a competitive market. An
incentive to deter entry may arise, for example, if the initial opening of competition by the
state represents a unique window of opportunity for entrants to attract attention from
potential customers at lower marketing costs than they otherwise would incur in a
competitive market. In other words, the “kick-off’ of retail competition is likely to be
accompanied by publicity (news coverage) and government-authorized consumer
education materials that are designed to raise consumer awareness of the opportunity to
“shop” for power. Later entrants may face higher costs in establishing the same consumer
awareness and interest in switching providers because their efforts will receive no spillover
benefits from government-financed consumer information campaigns and publicity. In
addition, a degree of consumer inertia may make consumers less amenable to “power
shopping.” If such is the case, the incumbent’s ability to deter entry during this critical
period of consumer interest and awareness may raise entrants’ marketing costs above what
they otherwise would be, over both the short and the long run.
A second incentive to deter entry may arise if there are lags in undertaking new generation
and transmission investments that are needed to establish a competitive market. Delays in
new investment sufficient to create a gap between the end of the stranded cost recovery
period and establishment of a competitive market could stem from matters such as higher
marketing costs associated with inducing customers to switch before the new supplier is
ready to start supplying the market. fE3 By delaying entry, the incumbent firm might slow
the development of a competitive market, and thus be able to exercise generation market
power between the end of the stranded cost recovery period and the birth of the
competitive market. If entry can be timed perfectly, however, the transition period may be
brief,m and such competitive problems would not arise due to this incentive.
C. Possible Remedies to Prevent Consumer Harm If Stranded Cost Recovery Is
Allowed
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If the stranded cost recovery mechanism allowed incumbent firms to act in the abovedescribed manner, consumers could find total prices (including stranded cost recovery) to
be no lower in the short run and higher in the long run. In addition, other benefits derived
from early entry could be lost. . . .
[A state commission] may consider the following three policy alternatives to avoid this
possible harm to consumers and competition if it determines that stranded cost recovery is
appropriate.U
1) Require that incumbent, vertically integrated firms sell (divest) their generation capacity,
(126) Vertical divestiture is likely to eliminate the incentive and ability to impose higher
electricity prices after stranded costs are recovered, because the incumbent firms will not
be selling electricity at that time. Although vertical divestiture could result in loss of
economies of vertical integration, institutions such as an independent grid operator may
preserve these economies if they precede or accompany divestiture. This structural remedy
may be attractive because it changes the incentives of incumbent firms and should require
no additional regulatory action.
2) Establish minimum energy charges for the incumbent utility that reflect at least its fuel
costs. If the incumbent utility is required to set its energy charges at least at the variable
costs of fuel, alternative suppliers with lower fuel costs may find sufficient incentives to
enter. LGCQ The regulator’s tasks of collecting data, monitoring compliance, and
determining variable costs (assuming variable costs can even be determined) under this
type of rule, however, would require significant resources. Although this approach may
discourage entry-deterring prices, it also risks discouraging competitive price reductions
aimed at, for example, promoting the sampling of new products, enhancing the demand for
complementary products, or learning more about demand elasticity.
3) Establish caps on electricity prices during a transition period that extends for a fixed
interval beyond the stranded cost recovery period. The price cap would reduce the ability
of the incumbent utility to take advantage of the lack of entry during the recovery period
by raising rates immediately thereafter. One drawback of this approach is that the longterm use of pricing caps may harm competition by muting important economic signals for
additional transmission or generation capacity.
D. Potential Ineffkiencies and Distortions from Stranded Cost and Benefit Recovery
Different methods of recovering net stranded costs or net stranded benefits could have
significantly different economic effects. The likely differences are explored in the public
finance literature about different forms of taxation and subsidization. For example, a
proposal to recover stranded costs through an additional charge on transmission services
for departing customers is analogous to a sales or excise tax, with the charge paid varying
in relation to the amount purchased in the future, thus possibly distorting future electricity
consumption decisions. 0 Its effects can be contrasted with the effects of a lump sum,
fixed charge based on past electricity use, which would not create the same possible
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distortions of future electricity consumption decisions.
VIII. CONSUMER PROTECTION
The FTC anticipates that, as electric power markets become competitive, the agency will
focus closely on two areas of consumer protection. The first is the policing of electric
service providers’ advertising claims, particularly claims about the price and
environmental attributes of the power being sold. The second is the policing of unfair or
deceptive business practices related to supplying and billingfor electricity services.
Section A discusses advertising claims in a deregulated electric power market and is
adaptedfrom the FTC’s testimony in May 1999 before the Committee on Commerce,
Subcommittee on Energy and Power, United States House of Representatives. Subsections
I and 2 discuss two specific issues (advertising claims and substantiation) related to
advertising claims. They are introduced separately, and each is excerptedfrom various
FTC staff comments.
Section B discusses why uniform disclosure of terms, prices and relevant attributes of
electric power will help ensure that consumers are able to make well-informed choices
and thereby reap the bene$ts of competition. The text is excerptedfrom the May 2000
FTC Staff Comment to the West Virginia Public Service Commission.
Section C discusses types of unfair business practices that may be used in a competitive
electric power market. The discussion also is adaptedfrom the FTC’s testimony in May
1999 before the Committee on Commerce, Subcommittee on Energy and Power, United
States House of Representatives.
A. Advertising Claims
In a competitive retail electricity market, electricity service providers are likely to make a
broad range of advertising claims, including claims about the nature of the service
provided, the company selling the electricity, and the price for the service. We have already
seen the use of environmental advertising in those states that have opened their markets to
retail competition. Many consumers are interested in the environmental qualities of the
electric power they buy, and some consumers are willing to pay a premium for
“environmentally friendly” electric power. There is, however, a potential for abuse of
environmental claims because of the premium price, and because consumers cannot verify
any of these advertising claims themselves.
The types of environmental claims already appearing in electricity ads include:
43
l
claims about the level of emissions of a product (“20% lower than average” or
“doesn’t pollute the air or water”);
l
the sources it is produced from (“nuclear free” or “all solar”);
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-l (I-)
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l
overall effect on the environment (“help prevent global warming” or “reduce acid
rain” or “green power”); or
l
the activities of the company selling it (“we support environmental organizations” or
” 10% of profits go to rainforest preservation”).
All of the FTC’s general principles about advertising will apply to these kinds of claims;
that is, advertising claims must be truthful and they-must be substantiated with appropriate
evidence at the time they are made. Under FTC case law, deception occurs “if, first, there
is a representation, omission, or practice that, second, is likely to mislead consumers acting
reasonably under the circumstances, and third, the representation, omission, or practice is
material”0It also is deceptive to omit “material information, the disclosure of which is
necessary to prevent [a] claim, practice, or sale from being rnisleading.“w Express
claims, or deliberately made implied claims, used to induce the purchase of or payment for
a particular product or service, are presumed to be material.0
The FTC, in enforcing the statutory prohibition on unfair or deceptive acts or practices,
requires that advertisers possess a reasonable basis for all objective claims about their
products, express or implied. What constitutes a reasonable basis can vary, depending on
several factors: the type of product, the type of claim, the benefits if the claim is true, the
consequences if the claim is false, the ease and expense of developing substantiation, and
the level of substantiation experts in the field would agree is reasonab1e.O Substantiation
of claims about electricity sources or characteristics presents many challenges because new
tracking systems must be developed, and they must provide a means of independent
verification.
The FTC’s Guides for the Use of Environmental Marketing ClaimsW which were
developed for environmental claims about any type of product, also will provide guidance
to electricity marketers on acceptable advertising practices. In addition, the National
Association of Attorneys General (NAAG) [adopted in December, 19991 similar green
guidelines for electricity. The intent of [NAAG’s Guidelines] is to assist states in their
efforts to encourage fair competition and to provide some consistency in enforcing truth in
advertising laws in the electric power industry. The FTC staff [was] involved in the process
by submitting comments to NAAG and participating in their workshop[s].
-L
1. Voluntary Advertising Claims
The first stage in determining whether an advertisement is deceptive is to determine the
claim being made. In the newly deregulated electricity markets, seilers often use vague
terms such as “environmentallyfriendly”
or “green, ” but the message that is conveyed to
consumers will determine the substantiation needed by the seller. Besides messages about
the power it is marketing, a seller also may send advertising messages about the company
itself An energy company affiliated with the distribution company may be able to obtain
customers simply by virtue of its implied relationship with the parent company. But, as
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discussed in Chapter III, separation rules may be imposed on such affiliates in order to
reduce discrimination or cross-subsidization and, depending on the extent of this
separation, use of a parent’s name or logo could be deceptive. The discussion of ad
interpretation below is adaptedfiom two staff comments (August IO, 1998 andAugust 12,
1999) filed with National Association of Attorneys General on its proposed
Environmental Marketing Guidelines for Electricity. The discussion of affiliate use of
parent name/logo is adaptedfrom the September I998 FTC Staff Comment to the Public
Utilities Commission of Nevada regarding its proposal to allow such use subject to
inclusion of a disclaimer.
a. Interpretation of Advertising Claims
General Environmental Benefit Claims Central to the issue of advertising for electricity is
the question of what standards should guide the making of general claims of environmental
benefit and, in particular, whether these claims should be avoided entirely or should be
qualified. The FTC has taken the position in its Green Guides that claims of general
environmental benefit should not be prohibited per se, but should be avoided or qualified as
to a specific attribute, unless the marketer can substantiate all the implications of the broad
claim. The staff sees no reason to treat general environmental claims for electricity
differently.
Use of the Terms “Green” and “Clean” Two potential claims of general environmental
benefit are “green” and “clean,” and a number of questions have been raised concerning the
meaning of these terms, including whether each term should be defined in the electricity
context, whether these terms should be considered claims of general environmental benefit,
and whether the use of these terms is inherently misleading.
The staff is not aware of any research into how consumers interpret the terms “green” and
“clean” as they relate to electricity. Although there is little experience with the use of these
terms in actual advertising contexts, it seems unlikely that “green” or “clean” claims are
inherently misleading. 0 The term “green” in reference to a specific product (for
example, “we make green electricity”) may imply a claim of general environmental benefit,
and should be treated the same as other claims of that type. Such claims may be made nondeceptively if appropriately qualified, for example, where an advertisement prominently
explains the term’s meaning (“go green by buying our power -- 20% lower emissions than
coal-generated electricity”), assuming that the claim is substantiated.
It is less clear how consumers interpret the term “clean.” The interpretation suggested by
the Draft Guidelines, that “clean” refers to the absence of harmful emissions or pollutants,
may well be supported by research into consumers’ attitudes. It also is possible that
consumers interpret the term “clean” to mean generally beneficial to the environment. On
net, it appears that applying a broad interpretation to the term “clean” could result in
unnecessary limitations on advertising claims and could deprive consumers of a shorthand
way of recognizing certain environmental information about electricity products. Given the
use of the term “clean” in everyday speech and in other energy advertising contexts - such
as the long-standing use of the phrase “clean natural gas” - it seems likely that consumers
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could interpret the term “clean” to refer only to emissions, rather than to other broad
environmental qualities.
Defining minimum performance levels for use of the term “green” in relation to electricity,
which the Draft Guidelines propose as an option, may be unnecessary or premature. For
example, there is no obvious reason that consumers would interpret a “green” electricity
claim differently than a “green” claim for any other product. Specifying a definition would
entail speculation about how advertisers might use the word, as well as difficult value
judgments about the use of the term in the context of various advertisements. Furthermore,
because the term does not yet seem to have acquired a generally accepted meaning,
different advertisers may wish to use the term in different contexts to mean varying things.
There seems to be no reason to prohibit such variety, so long as no deception results.
Finally, creating a standard definition of the term “green” for all electricity advertisements
could discourage companies who want to advertise better environmental performance or
characteristics than the standards established by the guidelines. Companies would have
little incentive to provide products that outperform the defined standard for the term
“green” when sellers of products that do not perform as well can use the term just as easily,
Such a disincentive seems contrary to the original impetus for deregulation, which included
a desire to foster products that are better for the environment.
Because of the ambiguity of terms such as “green,” and the uncertainty of how they will be
used, the best approach for governing their use -- absent consumer research -- may be
simply to rely on the approach taken for general environmental benefit claims in the FTC
Green Guides. Under that approach, advertisers would be responsible both for determining
what claims the terms they use convey, and for having substantiation for those claims. As
with claims like “environmentally friendly,” the likelihood is that interpretations of a term
like “green” will be so broad that few unqualified claims could be made. If actual
marketplace conditions proved otherwise, however, the guidelines should allow such
claims.
Renewable Energy Claims Many of the same considerations discussed above for the terms
“green” and “clean” also apply to the term “renewable.” The meaning of this term is not
clear on its face. It is reasonable to assume that consumers might interpret the term to refer
to fuel sources, such as hydroelectric or biomass sources. Consumer interpretations and
attitudes may vary regionally and may change over time.
The staff advises against assuming consumers would interpret the term “renewable” to be
an overall general environmental benefit claim. Rather, the term should be treated in a
manner similar to the FTC Green Guides’ treatment of specific terms such as
“biodegradable, ” “recycled,” and “recyclable.” The FTC Green Guides do not assume that
such terms imply a general environmental benefit claim. For example, marketers who
advertise a product as “recyclable” do not have to substantiate that no pollution results
from the product’s manufacturing process. Likewise, claims that an electricity product is
produced from a “renewable” source should probably not be interpreted as a claim that the
generation of this electricity produces no emissions. Otherwise, even specific claims would
be practically impossible to substantiate, and, therefore, effectively banned from use.
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Moreover, as the Draft Guidelines mention, California’s restructuring legislation defines
renewable sources to include small-scale but not large-scale hydroelectric power, and does
not mention fuel cells. Massachusetts defines it to include any hydroelectric power, and
also includes fuel cell technologies. Some federal laws and regulations mention neither
hydroelectric nor fuel cell sources. 0 Therefore, defining the term “renewable” could
create unneeded conflicts with varying laws and regulations governing its meaning.
b. Affiliate Use of Parent Name or Logo
There is a justifiable concern regarding the effects on consumers and competition of
unrestricted use by unregulated affiliates of the logo of the regulated distribution firm.
Harm to consumers and competition may occur if elements of the reputation of the
regulated firm are not applicable to the unregulated affiliate, but consumers believe that
they are applicable when the unregulated affiliate uses the parent utility’s 1ogo.m For
example, an element of a parent firm’s reputation might be the credibility of its pledges of
high-quality service that are backed by the parent’s financial stability as a governmentfranchised monopoly. If a consumer imputed this same credibility to an affiliate’s promises
of high-quality service because of its use of the parent’ logo, when in fact the affiliate did
not have access to the revenues of the monopoly franchise, the consumer could be injured
if the affiliate was unable to fulfill its promises in the way the consumer expected.a
Under such circumstances, the use of the logo by the unregulated affiliate could harm
consumers and harm competition in much the same way as deceptive advertising.
Thus, when considering the effect of an affiliate’s use of the logo of the parent utility, the
FTC would consider the impression consumers will have about the relationship between
the utility and the affiliate and whether that impression would be likely to affect purchase
decisions. If use of the utility’s logo implies to consumers that the relationship between the
utility and the affiliate is different from what it really is -- [regarding] an attribute that
consumers care about -- such use of the logo could be considered deceptive.
2. Substantiation
The Commission’s substantiation doctrine requires that advertisers have a reasonable
basis for any objective claim at the time the claim is made. In general, the necessav level
of substantiatiqn will depend on the type of product, the type of claim, the benefits if the
claim is true, the consequences if the claim is false, and the ease and costs of developing
substantiation for the claim. Substantiation of electricity claims may be problematic
because electricity use generally cannot be directly tied to electricity production by any
particular generator (i.e., most electricity customers do not have power lines connecting
them exclusively to their power supplier). fL&% Rather, customers receive electricity from
power lines that are attached to a “Rid” into which numerous generators, using a wide
variety offuel sources and generation systems, transmit their electrici& Once on the grid,
all electriciq is mixed together and its origins become indistinguishable. FKhen a
customer has a demand (Yoad’y for electricity -for example, to turn on lights -- the
amount needed to meet the load is, in effect, drained off the grid. The electricity passing
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through the circuit nearest to that customer’s line goes to the customer’s meter and meets
the load. The issues of how to track electricity and whether the tracking method should be
disclosed to consumers are discussed below and are excerptedfiom staff comments
(August IO, 1998 and August 12, 1999, respectivley) filed with NAAG on its proposed
Environmental Marketing Guidelines for Electricity.
Another issue in substantiation of claims is the variability ofpowerproduction@om
particular sources and the fact that ad claims are made prior to actual production. A
retailer with contractual rights to 10 MKHper month of windpower may receive only 9
MWH in a given month, due to wind conditions. This issue was discussed in the August
12, I999 comment filed with NAA G on its proposed Environmental Marketing Guidelines
for Electricity.
a. Tracking of Electricity
[I]t is impossible to claim that electricity used by a particular customer came directly and
exclusively from that customer’s supplier or to verify the precise sources of the electrons
used by the customer. It is possible, however, to track the financial transactions that occur
as power is supplied to the grid and then to the customer. A customer’s usage is measured
at the customer’s meter. The customer is billed for that usage, and the proceeds go to the
retail supplier. The supplier must in turn pay the middlemen who provided the power, and
the middlemen must pay the generators whose power they bought to service the supplier.
In this way, the customer’s usage is linked, through the financial process, to identifiable
generation plants and the characteristics (e.g., fuel type, emissions, etc.) associated with
those p1ants.m Thus, it can reasonably be said that the customer’s power purchase did
result in electricity, possessing the characteristics advertised by the supplier, being
generated and placed on the grid. .
The Draft Guidelines raise the issue of sellers’ representations about the nature of
electricity transmission and distribution from generator to customer over the power grid.
As discussed above, it is impossible to determine whether electricity used by a particular
customer came directly from that customer’s supplier or to identify the precise sources of
the electrons used by the customer. Therefore, misrepresenting the means of transmission
or distribution of electricity to a consumer can simply be prohibited without the need for
substantiation rules. Absent any claims about the transmission or distribution system,
however, it should not generally be considered deceptive to make claims regarding fuel
source, emission, or other environmental attributes. At the same time, affirmative
disclosures that the consumer’s home will not receive the electricity from the source(s) the
seller advertises are probably not necessary to prevent deception.
b. Disclosures for Claims Substantiated Under a Tagging System
The Draft Guidelines propose that any environmental claims that are substantiated through
a “certificate-based” or “tradeable tags” tracking system should be “accompanied by a clear
and prominent disclosure of the use of a tagging system to substantiate the claim. “ f.l%Q The
staff believes this requirement is not necessary to prevent deception, and will not aid
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consumers in making informed choices about their electricity purchases.
Certificate-based or tradeable tags is one of two methods that have been suggested for
tracking electric power from generator to consumer to substantiate claims regarding the
attributes of retail electricity. A “tagging” system involves the separation of power, which
is a pure commodity, from its characteristics. Each unit of power generated is given a tag
describing its characteristics, and the tag may be sold separately from the power itself.
Under tagging, there are two separate markets operating at the wholesale level. A retailer
(or upstream distributor) may buy power from the pool or from a particular generator and
then buy “tags” from other generators which give the retailer the right to claim that the
power it sells has the attributes associated with the tags that it holds. This allows for
consumers to support environmentally preferred power through their power purchases,
even when technological constraints on the grid would prevent the consumer from
purchasing the green power from the generator that produced it. By contrast, the second
method relies on a “contract path.” Under this method, each unit of power, along with its
attributes (fuel type, emissions, etc.), is accounted for in contractual arrangements between
the generator and a wholesale buyer, between various distributors and retailers, and
between the retailer and the consumer. The distinguishing characteristic of the contracts
system is that power is sold together with its attributes.
Although tags may seem more complicated than contracts and may raise the suspicions of
some consumers with only a cursory understanding of the tagging system, staff does not
believe that the benefits to consumers of NAAG’s proposed required disclosure of the use
of a tagging system would outweigh its burdens. Research conducted by the National
Council on Competition and the Electric Industry (NCCEI)m indicates that consumers
have less confidence in environmental claims about power when they are told that a
tagging system is used to support them. There is no reason, however, that a well-designed
tagging system would be any less reliable for tracking electric power than a contracts
system. Moreover, some believe it would be less expensive to operate. Both systems
succeed in matching the premiums that consumers are willing to pay for green power to the
generators who invest in and produce that power. Thus, for the purposes relevant to
consumers, there is no difference between the methods.0
Furthermore, it is important to note that these tracking methods are systems of
substantiating claims, and should not greatly affect the products or benefits that consumers
are purchasing. The FTC does not generally require that substantiation methods be
disclosed. Rather than require that consumers evaluate for themselves whether a test result
was obtained based on sound scientific methods, the statutes, rules and guides that the
FTC enforces seek to ensure that the substantiation is reasonable. For example, the FTC
Green Guides allow for recycled content to be calculated on the basis of annual averages,
(143) but disclosure of this fact to consumers is not required. Likewise, consumers do not
generally know what test methods are used to calculate the nutritional content stated on
food labels, but as long as the methods are reasonable and reliable, consumers are not
misled or injured by such omissions. Moreover, it would be extremely difficult to craft a
disclosure that would be easy to understand and not confusing. Accordingly, a disclosure
might actually serve to increase consumer confusion, and could needlessly undermine
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consumers’ confidence in the new electricity market. For these reasons, the staff believes
that requiring a disclosure for tags-based claims is not necessary to prevent consumers
from being misled or to assist them in making informed choices about electricity.
c. Claimed Versus Actual Production
Variations between claimed performance and actual performance may occur through no
fault of the marketer, and in greater than de minimis amounts, for a variety of reasons. In
addition, advertising claims for electricity products are necessarily made before the product
is actually produced and before actual demand is known. Thus, it is not reasonable to
expect electricity marketers to be able to match their advertising claims exactly all of the
time, or even over a year’s time. So long as the marketer had a reasonable basis supporting
the claims at the time they were made, and the deviation is not material to consumers’
expectations under the circumstances, numerical or percentage claims that constitute the
reasonably expected amounts will convey useful information to consumers. A rigid
standard defining as deceptive any failure to meet exactly the claimed production will
reduce the incentives of marketers to make useful and informative claims regarding various
types of power that they might provide to consumers.(l44)
The degree to which a tolerance should be specified for the difference between predicted
and actual production has mostly to do with the technological and meteorological
constraints that are specific to the industry, and generally change over time. Because there
has been little experience with competitive electricity marketing claims, using a fixed
tolerance, such as 5% or lo%, would find little support from an analysis of the industry,
Rather than setting a standard using a specific percentage allowance, it might be preferable
to use a reasonableness standard in which deviations from the claimed production would be
considered on a case-by-case basis.
Allowing a tolerance in reasonable amounts for unexpected and unintended deviations from
advertising claims does not mean that marketers would be able to inflate numerical or
percentage claims about the environmental characteristics of their products. That is, an
electricity seller who can reasonably expect to supply 40% of demand from solar power
could not advertise that their product is 50% solar simply because there is an allowance for
reasonable deviances to account for unexpected, unintended events. Such an inflated claim
would not be reasonably substantiated when made, and the subsequent deviation would not
be due to unexpected events.
Unlike the certification organizations such as Green-e, neither the Attorneys General nor
the FTC has the expertise or the resources to audit the portfolio of each electricity
marketer each year. When an investigation is opened because of an apparent discrepancy, it
may be that a marketer with huge differences between projected and actual portfolios
actually has a justifiable reason, while another marketer might have very small differences
that are not justified. Clearly, there would be no justification for persistent downward
deviations year after year. But in a given year, the law enforcement agency would consider
whether it was reasonable for the marketer to make the claim(s) that it did.
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MPSC Case No. U-12134-Exhibit AMP-l (I-)
Pace 5 1 of 69
B. Uniform Labeling Requirements Are Likely to Assist Consumer Choice of Electric
Power Suppliers
In competitive electricity markets, consumers are likely to face a wide variety of price
offers, contract terms, and environmental or service claims that may prove to be confusing,
difficult to evaluate, or even misleading.
One approach to this problem is to standardize some of the information that suppliers
disclose to consumers -- similar to what has been done with nutrition labeling on food, care
labels on clothing, or energy efficiency labels on appliances. In fact, consumers in an
electricity competition pilot project in New Hampshire noted the difficulty of comparing
competing products when suppliers were allowed to present whatever information they
chose about the product in any format they chose.fJ.4% Standardized product labeling can
alleviate this common consumer complaint by ensuring that consumers receive the relevant
information they need to make an informed choice.
Various regulatory groups have recommended developing appropriate uniform disclosure
requirements as a means to facilitate customer choice, provide consumer protections, and
enhance market efficiency. (146) Laws or regulations calling for some degree of mandatory
uniform disclosures have been enacted in a number of states, including California,
Connecticut, Illinois, Maine, Massachusetts, Michigan, Nevada, New Hampshire,
Pennsylvania, and Vermont.(147) Other states are considering disclosure requirements as
well. In addition, various bills introduced in the United States Congress propose federal
disclosure requirements, including the bill supported by the Department of Energy.m
Indeed, the FTC has noted that mandatory disclosures are “likely to help ensure that
consumers receive, prior to purchase, accurate information important to their purchasing
decisions,” and that disclosures should be uniform to “reduce costs to market participants
by enabling them to use one disclosure throughout the country.“W Although existing
laws and FTC rules prohibiting unfair or deceptive claims would govern electricity
advertising, uniform disclosures would provide an important additional consumer benefit in
a new market where consumers have had no prior experience with choice.
Uniform disclosure, however, raises many issues, including determining which types of
information are important to consumers in choosing a supplier. Information that may be
suitable for un&rm disclosure includes price, price variability, environmental attributes of
power supply (generation source and emissions characteristics),m and contract terms
(minimum length, termination fees, transfer charges, etc.).
Another issue when mandating uniform disclosure rules is the format for disclosure of
information. The chosen format should present information simply and clearly, and take a
minimum of time to review and comprehend. A format that is overly restrictive, or that
prohibits any additional claims elsewhere in the advertisement, may place unconventional
or innovative products at a competitive disadvantage. California currently requires
environmental disclosures using a standard label format, and the NECPUC Model Rule
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includes a sample label format.U
If disclosures are standardized, [a state commission] must confront whether they will be
mandatory (required of all marketers regardless of claims made) or claims-based (required
of marketers only when certain claims are made). One consumer study suggests that when
standard disclosures are provided by all marketers, consumers are more likely (1) to think
they had adequate information to make a choice, (2) to correctly identify the lowest priced
product among several samples, and (3) to correctly identify the product with the least
environmental impact among sample products.fHZQ If disclosures are mandatory, [a state
commission] may wish to consider allowing suppliers to use a “default” label, and to
determine the default label’s content.fJXQ Another consideration is the placement of
standardized disclosures -- that is, whether they must appear only in advertising that gives
consumers the opportunity to select a competing supplier, or in all print advertising, or
whether some alternative form of disclosures should appear in small-format print
advertising and in non-print media.0
Each of these issues relating to label format and content raises cost concerns as well.
Mandatory disclosure requirements will impose some level of costs on companies subject
to them. The cost of tracking and maintaining the data necessary for the disclosure will
vary depending on the type of information mandated and the degree of precision required
for the information disclosed. It is likely that these costs, as well as the actual costs of
making the disclosures, will be passed on to consumers. Therefore, the cost of requiring
disclosures should be weighed against the benefit when deciding which items of
information to include and what manner of disclosure to require.
C. Unfair or Deceptive Business Practices
The second major area of consumer protection where the FTC expects to be active in a
deregulated electricity market is in the policing of various unscrupulous business practices.
Based on the deregulation of the telecommunications industry, we may see practices like
“slamming” (changing a customer’s electricity supplier without authorization) and
“cramming” (placing unauthorized charges on a customer’s bill) by dishonest electricity
service providers as markets are deregulated. Indeed, the proposed Comprehensive
Electricity Competition Act provides for the FTC to issue and enforce regulations to
combat slamming and cramming in the sale of electric power.
The FTC has significant experience combating cramming on telephone bills, where
unauthorized charges appear on a customer’s bill, sometimes completely unrelated to phone
service. Cramming was our fifth most common consumer complaint [in 19991. In addition,
the Commission has been active in taking law enforcement actions targeting billing
practices associated with cramming.
Several contributing factors lead us to believe that cramming also may become a problem
in deregulated electricity markets. Billing formats used by electricity providers are often
confusing, and there are many line item charges that consumers may have trouble
identifying, making it more difficult for consumers to notice fraudulent charges. In
52
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Pace 53 of69
competitive markets, the billing system will have to accommodate multiple vendors, some
of whom may offer services unrelated to electricity. Moreover, billing may be handled by
aggregators or service companies rather than the utility or service providers themselves.
The FTC also will be watching for other unscrupulous practices like pyramid schemes and
other investment scams in this newly deregulated market. For example, the FTC [in 19981
settled charges with FutureNet, which was an alleged pyramid scheme. FutureNet was
purporting to sell electricity service, even though at the time, no state had deregulated the
sale of electric power to consumers. (155)
The Commission enforces other consumer protection rules that will apply to the sale of
electricity in a competitive market. The Telemarketing Sales Rule, 16 C.F.R. Part 3 10,
protects consumers from deceptive and abusive telemarketing practices. The Commission’s
Cooling Off Rule, 16 C.F.R. Part 429, applies to door-to-door sales and other sales made
away from the seller’s principal place of business. It requires that a seller in a door-to-door
sale of consumer goods or services (with a purchase price of $25 or more) furnish the
buyer with certain oral and written disclosures of the right to cancel the contract with three
business days from the date of the sales transaction. . . . Finally, the Commission enforces
several statutes and implementing credit rules, such as the Truth in Lending Act (TILA),
(156) and the Equal Credit Opportunity Act (ECOA). 0 These statutes may apply to the
business practices of deregulated electric power marketers.
Appendix A
List of Electric Power Related Advocacy Comments
Federal Energy Regulatory Commission Comments
1. Docket No. RM99-2-000
(Aug. 16, 1999) (regional transmission organizations)
2. Docket EL99-57-000 (May 27, 1999) (Entergy transco proposal)
3. Docket RM98-4-000
(Sept. 11, 1998) (merger filing guidelines)
4. Docket No. PL98-5-000
5. Docket Nos. ER97-237-000
(May 1, 1998) (IS0 Policy)
and ER97- 1079-000 (Feb. 6, 1998) (New England ISO)
6. Docket NO. RM96-6-000
(May 7, 1996) (merger policy)
7. Docket Nos. RM95-8-000
and RM94-7-001
(Aug. 7,1%5) (open access)
State Comments
1. Arkansas Public Service Commission, Docket No. 00-148-R (July 6,200O) (standard
package)
service
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2. West Virginia Public Service Commission, General Order No. 255 (May 19,2000)
(general restructuring)
3. Arkansas Public Service Commission, Docket No. 00-048-R (Apr. 13,200O) (market
power analysis)
4. Virginia State Corporation Commission, Case No. PUE990349 (Feb. 11,200O)
(regional
transmission
entities)
5. New Mexico Public Regulation Commission, Utility Case No. 3 106 (Dec. 6, 1999)
(affiliate codes of conduct)
6. National Association of Attorneys General (Aug. 12, 1999) (environmental marketing
guidelines)
7. Public Utilities Commission of the State of California, Docket No. R.98-12-015
(Mar. 17, 1999) (distributed generation)
8. Alabama Public Service Commission, Docket No. 26427 (Jan. 11, 1999) (restructuring
in general)
9. Louisiana Public Service Commission, Docket No. U-21453 (Oct. 30, 1998) (affiliate
transactions)
10. Massachusetts Department of Telecommunications and Energy, DTE 97-96 (Oct.
8, 1998) (affiliate transactions)
11. Public Utility Commission of Nevada, PUCN Docket No. 97-5034 (Sept. 22, 1998)
(affiliate
transactions)
12. Louisiana Public Service Commission, Docket No. U-21453 (Sept. 4, 1998)
(consumer
issues)
13. Mississippi Public Service Commission, Docket No. 96-UA-389 (Aug. 28, 1998)
(Transco
proposal)
14. Natiohal Association of Attorneys General (Aug. 10, 1998) (environmental marketing
guidelines)
15. Louisiana Public Service Commission, Docket No. U-21453 (Aug. 7, 1998)
(stranded costs)
16. Michigan Public Service Commission, Case No. 11290 (Aug 7, 1998) (market power
issues)
17. Utah Public Service Commission, Docket No. 96-999-001 (July 16, 1998)
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(consumer protection issues)
18. West Virginia Public Service Commission, Case No. 9%0452-E-G1
(electric
(July 15, 1998)
restructuring)
19. Virginia Commonwealth of Virginia Joint Subcommittee, SIR-91 (July 9, 1998)
(electric
restructuring)
20. Texas Public Utility Commission, Project Number 17549 (June 19, 1998) (affiliate
transactions)
2 1. Maine Department of the Attorney General and Public Utilities Commission,
“Interim Report on Market Power in Electricity” (May 29, 1998) (entry conditions)
Endnotes:
1. See Letter of the Federal Trade Commission to Thomas E. Bliley, Chairman, Committee on Commerce,
on H.R. 2944, The Electricity Competition and Reliability Act (Jan. 14, 2000).
2. This foreword has been adapted from the Letter of the Federal Trade Commission to House Commerce
Committee Chairman Thomas Bliley, Analysis of H.R. 2944 (Jan. 14, 2000) (Bliley Letter); Testimony of
the Federal Trade Commission Before the Committee on the Judiciary, United States House of
Representatives (July 28, 1999 and June 4, 1997); and the FTC staff comment to the Alabama Public
Service Commission (Jan. 11, 1999).
3. Surveys of this literature include: Clifford Winston, U.S. Industry Adjustment to Economic
Deregulation, J. Econ. Persp. (Summer 1998) and Economic Deregulation: Days of Reckoning for Microeconomists, 3 1 J. Econ. Lit. 1263 (Sept. 1993); John C. Hilke, Competition in Government-Financed
Services (1992); Paul L. Joskow and Nancy L. Rose, The Effects of Economic Regulation, in Richard
Schmalensee and Robert D. Willig (Eds.), Handbook of Industrial Organization, Vol. II (1989).
4. See R. Crandall and J. Ellig, Economic Deregulation and Customer Choice: Lessons for the Electric
Industry 2-3 (1996) (within 10 years of substantial deregulation, prices in the natural gas, long distance
telecommunications, airlines, trucking, and railroad industries decreased between 25 and 50 percent while
quality of service improved).
5. Federal Trade Commission, “Analysis of Proposed Consent Order to Aid Public Comment in In the
Matter of PacifiCorp et al.,” FTC File No. 971-0091, at 4 (Feb. 18, 1998)
+ww.fic.gov/os/9802/index.htm>.
The FTC withdrew from the proposed consent order as of June 30,
1998 because PacifiCorp withdrew from the merger +vww.fic.gov/opa/
9807/petapp39.98.htm>.
The
PacifiCorp/ Peabody case is discussed further in Chapter VI.
6. See, e.g., Federal Trade Commission, “Analysis of Agreement Containing Consent Orders To Aid
Public Comment in In the Matter of Dominion Resources, Inc. and Consolidated Natural Gas Company,”
FTC File No. 991 0244 (Nov. 8, 1999) <http://www.ftc.gov/os/l999/991
l/dominionana.htm>.
7. The federal antitrust authorities (FTC and DOJ), state public service commissions, and FERC all
potentially have authority to review electric power industry mergers. (The Securities and Exchange
Commission (SEC) and Nuclear Regulatory Commission (NRC) also have statutory authority to review
antitrust implications of a proposed electric power utility merger in certain circumstances.)
55
MPSC
Direct Testimony of Anthony M. Ponticelli
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8. A list of staff comments on electricity matters appears as Appendix A.
9. Generation is by far the largest component of the industry in terms of investment and revenues.
Distribution is the next largest component, and transmission is the smallest component.
10. “Reliability” is an attribute of electric service often measured in terms of disruptions of service and
voltage consistency.
11. Contract Path -- the transmission path that is assumed in traditional transmission regulation and interutility agreements.
12. Loop Flow -- terminology indicating that electricity does not follow the traditional contract path, but
rather flows over several different transmission paths in an inverse relationship to electrical resistance in
each line.
13. There are three areas of synchronized generation in the contiguous states: Texas, the western states,
and the remainder of the country.
14. Scale economies exist when average costs of production fall as the level of output rises. Economies of
vertical integration exist when average costs are lower when two or more stages of production are managed
jointly. A natural monopoly exists when average costs are minimized with only one supplier (assuming the
monopolist produces efficiently).
15. The Federal Energy Regulatory Commission (FERC) recently promulgated regulations encouraging the
voluntary formation of RTOs across the country. FERC Order No. 2000, Regional Transmission
Organizations (Dec. 17, 1999). RTOs operate and control a regional transmission system by implementing
economic dispatch and reliability controls.
16. The list of publicly owned power providers includes several major federal agencies such as the
Tennessee Valley Authority and the BOMeville Power Administration. There are also thousands of local
municipal power suppliers and electric cooperatives, many of which provide only distribution services.
Although most of the municipal utilities and cooperatives serve small towns or rural areas, some supply
large urban centers. The largest of these serves the Los Angeles area. Some states, New York, for example,
also own generation facilities.
17. The California PUC’s 1994 “Proposed Policy Decision Adopting a Preferred Industry
Structure” (California PUC Docket No. R.94-04-03 1 and 1.94-04-032) was developed in large part with
reference to the U.K.% regulatory reforms. See Kenneth W. Costello and Robert J. Graniere, The Outlook
for a Restructured U.S. Electric Industry: Lessons from Deregulation, 10 Elect. J. 81-91 (May 1997) for a
more recent review of the implications for the U.S. of reforms in the U.K.5 electric power and gas
industries.
18. Gridco - a private, for-profit independent system operator that owns the transmission lines in its
region.
19. Retail Wheeling -- policy allowing businesses and consumers to purchase electricity from generators or
power merchants other than the vertically integrated utility that had been assigned as the regulated
monopoly for the service territory in which the customer is located. The last stage of retail competition in
the U.K., individual households, began in 1998. International Energy Agency, Energy Policies of IEA
Countries, Section II (United Kingdom) (1998) <http://www.iea.org/pubs/reviews/files/enpo198/05erv98.htm>.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-l (I-)
Pace 57 of 69
20. Regulatory reforms in the electric power industry in New Zealand, Norway, and Chile have also been
viewed as successful. The International Energy Agency’s review of New Zealand reported increased
efficiency, lower costs, and enhanced consumer choice and service as a result of reforms. In 1998, the
government announced plans to move forward with splitting up the predominant government-owned
generating entity to increase generation competition. International Energy Agency, Energy Policies of IEA
Countries, Section II (New Zealand) (1998) <http://www.iea.org/pubs/reviews/files/enpol98/07brv98,htm>. Significant gains in operating efficiencies have occurred in Argentina due to regulatory
reforms in the electric power industry. Omar Chisari, Antonio Estache, and Carlos Romero, The
Distribution of Gains from Utility Privatization and Regulation in Argentina, 12 Public Policy for the
Private Sector 33 (Dec. 1997).
21. The U.K. restructured its electrical system in March 1990. See Richard J. Green and David M.
Newberry, Competition in the British Electricity Spot Market, 100 J. Pol. Econ. 929 (1992) Catherine D.
Wolfram, Measuring Duopoly Power in the British Electricity Spot Market, 89 Am. Econ. R. 805 (1999)
for a discussion of the extensive data and detailed statistical analyses used to establish the nature and
extent of market power in the U.K.‘s system. In July 1993, the U.K.‘s Director General of Electricity
Supply indicated that the extent of competition was not sufficient to restrain the exercise of market power
by the two dominant generators. See Statement of the Director General of Electricity Supply, “Proposed
Acquisition by Eastern Group PLC of 4,000 MW of Plant from National Power PLC,” at 2 (May 9, 1996).
More generally, see David M. Newberry and Michael G. Pollitt, The Restructuring and Privatization of the
U.K. Electricity Supply -- Was It Worth It?, 11 Public Policy for the Private Sector 7 (Sept. 1997). The
price caps, which were designed to address generation market power by placing an upper limit on the
U.K.‘s electricity rates, also became controversial. Cost decreases associated with regulatory reform were
large. In the presence of price caps, lower costs resulted in dramatically increased profits for incumbent
generating firms. The government eventually imposed a windfall profits tax on these gains. Paul Kemezis,
Diversify or Die? Recent History Has Proved Otherwise, 212 Electrical World 50 (Nov. 1998.)
22. Letter of the Federal Trade Commission to House Commerce Committee Chairman Thomas Bliley,
Analysis of H.R. 2944 at 4-5 (Jan. 14, 2000).
23. See Timothy Brennan, Why Regulated Firms Should Be Kept Out of Unregulated Markets:
Understanding the Divestiture in United States v. AT&T, 32 Antitrust Bull, 74 1 (1987), and Cross
Subsidization and Cost Misallocation by Regulated Monopolists, 2 J. Reg. Econ. 37 (1990).
24. See, e.g., “Petition for a Rulemaking on Electric Power Industry Structure and Commercial Practices
and Motion to Clarity and Reconsider Certain Open-Access Commercial Practices,” filed with FERC by
Altra Energy Technologies, Inc. and others on March 25, 1998.
25. Otter Tail Power Co. v. United States, 410 U.S. 366 (1973).
26. The concerns expressed in the NEPOOL Comment were generalized in the FTC staff comment to
FERC on policies concerning formation of ISOs (May 1, 1998).
27. (Footnote omitted)
28. Under traditional FERC transmission tariffs, an additional charge is incurred any time the contract
transmission path involves more than one firm’s transmission system, thus causing rates to be “pancaked.”
29. A “load pocket” refers to demand in an area that must be satisfied by generation in that area because
transmission congestion prevents utilization of supplies from outside the area.
30. One potential difficulty with the nonprofit status of ISOs is the lack of profit incentives to operate
57
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efficiently and to make economically appropriate investment decisions regarding expansion of the
transmission grid to address transmission bottlenecks. IS0 governing bodies may be able to design the
employment contracts of IS0 managers to provide such incentives.
3 1. Additional guidelines on formation of ISOs have been issued by FERC in Order NO. 888, F.E.R.C.
Stats. & Regs. (CCH) 131,036 (Apr. 24, 1996) (Promoting Wholesale Competition Through Open Access
Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public
Utilities and Transmitting Utilities), and Order No. 889, F.E.R.C. Stats. & Regs. (CCI-I) 131,594 (Apr. 24,
1996) (Open Access Same-Time Information System and Standards of Conduct).
32. U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, issued
April 2, 1992, revised April 8, 1997.
33. In order to provide an effective constraint on the exercise of market power in the short-run, entry must
meet all three criteria. Entry is considered timely if it can be achieved within two years @OJ/FTC Merger
Guidelines, Section 3.2). Entry is considered likely if it would be profitable at premerger prices, and if such
price could be secured by the entrant (id., Section 3.3). Entry in a geographically differentiated market is
considered sufficient if the character (location) and scope of the entrant’s products are responsive to the
localized sales opportunities that include the output reduction associated with the competitive effect of
concern (id., Section 3.4).
34. See Paul L. Joskow, Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector,
11 J. Econ. Pers. 119-38 (1997); Federal Trade Commission, “Analysis of Proposed Consent Order to Aid
Public Comment in In the Matter of PacifiCorp et al.,” FTC File No. 971-0091, February 18, 1998. Note
that because electricity cannot be stored, suppliers may include in the rate base a wide spectrum of costs
ranging from low-marginal-cost base load plants to high-marginal-cost peaking capacity.
35. See, e.g., Scott M. Harvey, William W. Hogan, Susan L. Pope, Transmission Capacity Reservations
Implemented through a Spot Market with Transmission Congestion Contracts, 9 Elect. J. 42-55 (1996),
and Transmission Capacity Reservations and Transmission Congestion Contracts (1996) (unpublished
manuscript); William W. Hogan, Contract Networks for Electric Power Transmission, 4 J. Reg. Econ. 2 ll42 (1992); Paul L. Joskow, Restructuring, Competition and Regulatory Reform in the U.S. Electricity
Sector, 11 J. Econ. Pers. 119-38 (1997); Hon. William L. Massey, Transmission Pricing Reform: FERC’s
Next Frontier?, 10 Elect. J. 14-20 (1997).
36. Computer
detailed level.
path approach,
grid. Paul L.
J. Econ. Pers.
capabilities now allow calculations of transmission congestion effects on a much more
Such improvements permit transmission pricing to move away from the historical contract
which does not account for loop flows and causes suboptimal utilization of the transmission
Joskow, Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector, 11
119-38 (1997).
37. Martha S. Linet, Elizabeth Hatch, Ruth Kleinerman, et al., Residential Exposure to Magnetic Fields
and Acute Lymphoblastic Leukemia in Children, 337 N. Eng. J. Med. 3-14 (1997). This National Cancer
Institute study does not “support the theory that residential magnetic fields cause childhood leukemia,
particularly at the levels found in most homes.” The NC1 study was done with the aim of overcoming some
of the problems of earlier studies and providing more definitive answers. Some Questions and Answers
about the National Cancer Institute/Children’s Cancer Group Study of Magnetic Fields and Childhood
Leukemia <rex.nci.nih.gov/INTRFCE-GIFS/MASSMED-INTR~DOC.htm>
(downloaded Apr. 21, 1998).
38. FERC’s Inquiry Concerning the Commission’s Policy on the Use of Computer Models in Merger
Analysis; Notice of Request for Written Comments and Intent to Convene a Technical Conference, 63 Fed.
Reg. 20,392 (1998) (“The purpose of this inquiry is to gain further input and insight into whether and how
computer models should be used in the analysis of mergers . . .‘I).
58
Direct Testimony of Anthony M. Ponticelli
39. Federal Trade Commission, “Analysis of Proposed Consent Order to Aid Public Comment In the
Matter of PacifiCorp et al.,” FTC File No. 971-0091, at 4 (Feb. 18, 1998). The FTC withdrew from the
proposed consent order as of June 30, 1998 because PacifiCorp withdrew from the merger
+ww.ftc.gov/opa/ 9807/petapp39.98.htm>.
40. FERC Order No. 2000, Regional Transmission Organizations at 35,70 (Dec. 17, 1999).
41. See, e.g., Testimony during Panel III: How Does Wholesale Competition for Generation Affect Retail
Electricity Competition?, Transcript of Federal Trade Commission Public Workshop: Market Power and
Consumer Protection Issues Involved with Encouraging Competition in the U.S. Electric Industry (Sept.
13, 1999).
42. The discussion in Chapter II.C, supra, regarding the benefits of independent system operators (ISOs),
which are a type of RTO, to address market power in generation also is applicable in light of an RTO’s or
ISO’s ability to address transmission discrimination as well.
43. See Timothy BEMan, Why Regulated Firms Should Be Kept Gut of Unregulated Markets:
Understanding the Divestiture in United States v. AT&T, 32 Antitrust Bulletin 74 1 (1987), and Cross
Subsidization and Cost Misallocation by Regulated Monopolists, 2 J. Reg. Econ. 37 (1990).
44. Timothy Brennan, Cross Subsidization and Cost Misallocation by Regulated Monopolists, 2 J. Reg.
Econ. 37 (1990); see also Timothy Brennan and Karen Palmer, Comparing the Costs and Benefits of
Diversification by Regulated Firms, 6 J. Reg. Econ. 115 (1994). The monopolist’s entry could also be
beneficial if the unregulated market is uncompetitive and entry by the monopolist could improve
competitive conditions there, net of the distortions its entry could introduce.
45. The costs and benefits of vertical integration are traditionally treated as part of the corporate make
buy tradeoff where benefits include the realization of scope economies. For a general treatment of
integration considerations, see Oliver Williamson, Markets and Hierarchies (1975).
or
46. South Carolina Comment (February 1994) at Appendix B. The operational unbundling concept has
been incorporated into electricity reforms abroad and is the centerpiece of the recent proposal by the
California Public Utility Commission. Both the United Kingdom and New Zealand have established
independently operated grid operators. In New Zealand, generation firms and the local distribution
companies share ownership interest in the grid operator. In California, the PUC majority has proposed that
transmission lines would continue to be owned by the franchised utilities, but the utilities would grant full
operational control to an independent system operator.
In our view the most effective step which we can promote to resolve the vertical market power issues
focuses on the operation of the transmission assets which are currently owned by utilities in California.
While some have called for the utilities to divest themselves of ownership, we have concluded that our
objectives can likely be met by a less drastic alternative. We propose that . . . all participants in the pool
transfer the operational control of all transmission assets to an independent system operator.
California Public Utilities Commission, Proposed Policy Decision, Dkts. R.94-04-03 1 and 1.94-04-032
(May 24, 1995), Section 1.D.a. See also William Hogan, Electricity Transmission and Emerging
Competition (1995).
47. Separate operation could facilitate more effective direct regulation of transmission, such as through
rate caps tied to inflation and adjusted to accotmt for anticipated technological improvements. And control
over transmission might be assigned to a body that includes parties, such as local distribution company
customers, with an interest in resisting transmission market power. See South Carolina Comment
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Pace 60 of 69
(February 28, 1994) Appendix B. Operational unbundling, by stimulating cost reductions, might also
improve productive efficiency.
48. The countervailing concerns, about new forms or opportunities for discrimination or cross
subsidization and loss of economies of scope, may also be moderated by innovative pricing regulations. For
example, price caps may curtail cross subsidization opportunities as well as limit market power. Ronald
Braeutigam and John Panzar, Diversification Incentives Under “Price Based” and “Cost Based”
Regulation, 20 RAND J. Econ. 373 (1989).
49, In the natural gas industry, FERC has considered similar problems of assessing the costs and benefits
of requiring complete corporate separation. For example, FERC considered whether natural gas pipelines
should be permitted to operate marketing subsidiaries. The staff of the FTC, in its comment on that issue,
suggested that FERC experiment with measures short of formal separation or prohibition, such as
permitting pipelines to own marketing affiliates but prohibiting an affiliate from entering transactions with
its affiliated pipeline. FTC staff comment to FERC on marketing affiliates, Dot. RM87-5-000 (1987).
50. Illustrative figures developed by Oak Ridge National Laboratory show that a 765 kV transmission line
costs at least 30 percent less than a 500 kV line and at least 85 percent less than a 138 kV line, on a cost
per MW-mile basis. FERC Transmission Task Force, StaffReport, 215-16 (1989).
5 1. For a further discussion of this type of concern, see Scott Harvey and William Hogan, “Comments on
the California ISO’s NewGen Policy” (Aug. 1999).
52. Notice at 124-25. See FTC Staff Entergy Services Comment (May 27, 1999); FTC Staff Comment to
the Mississippi Public Service Commission (August 28, 1998). Concerns about the effectiveness of
safeguards against discrimination in access to transmission may be particularly acute where transmission
owners have great discretion in reducing ATC (available transmission capacity) to independent generation
entities by claiming that transmission capacity is necessary to meet native load obligations.
53. Notice at 125-26.
54. In addition, FERC also may want to consider applying whatever ownership rules it develops to third
parties that have a substantial interest in a generation owner. This concept is analogous to the “ultimate
parent entity” concept embodied in the FTC’s rules governing the submission of Hart-Scott-Rodino
premerger notification filings. 16 C.F.R. Part 801.
55. 15 U.S.C. 8 19.
56. The statute provides an exception when there is a de minimis overlap of competing products and
services between the firms.
57. As a remedy for an anticompetitive merger, the FTC sometimes requires parties to divest competitively
overlapping assets or divisions to an existing or newly-created entity. Many of the considerations
mentioned above are examined to determine whether the acquiring entity will operate those assets or
divisions competitively and independently of the merged firm.
58. If FERC elects to allow generators to have a voting interest, it may wish to consider establishing a cap
on the aggregate voting interest of generators and a prohibition on voting pools of generators.
59. For example, cases have been brought charging firm A with inducing firm B to discriminate against a
firm that competes with firm A. See, e.g., Monsanto Co. v. Spray-Rite Service Corp, 465 U.S. 574 (1984)
(a challenge to a manufacturer’s termination of a discounting distributor initiated by requests of rival
distributors); and the FTC’s recent matter Toys “R” Us, Inc., Dkt. No. 9278 (1998) (respondent pressured
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manufacturers to limit supplies to growing competitors) (appealed to the U.S. Court of Appeals for the
Seventh Circuit). Another source of concern occurs if a powerful member of an industry association has the
capacity to use the association as an instrument to injure competition or promote collusion. Recognizing
these dangers, the Supreme Court held in Allied Tube & Conduit Corporation v. Indian Head, Inc., 486
U.S. 492 (1988), that manipulating an industry association’s standard-setting process was subject to
antitrust challenge, even though no association rules were violated. According to the Court, “the hope of
procompetitive benefits [from the standard-setting process] depends upon the existence of safeguards
sufficient to prevent the standard-setting process from being biased by members with economic interests in
restraining competition.” Id. at 509. Since, absent appropriate safeguards, comparable manipulation of an
RTO’s independent decision making process may be possible, FERC may wish to consider requiring that
RTOs and market participants adopt internal procedures to prevent the exercise of inappropriate influence.
60. “Competition by Utilities in Energy Conservation and Home Appliance Markets,”
Statement of Timothy J. Muris, Director of the FTC Bureau of Competition, Senate Committee on Small
Business (Nov. 3, 1983).
61. See, e.g., Testimony during Panel IV: Affiliate Rules and Codes of Conduct, Transcript of Federal
Trade Commission Public Workshop: Market Power and Consumer Protection Issues Involved with
Encouraging Competition in the U.S. Electric Industry (Sept. 14, 1999).
62. Id., Testimony of Commissioner Judy M. Sheldrew, Public Utility Commission of Nevada (Sept. 14,
1999).
63. See John E. Kwoka, Jr., Power Structure: Ownership, Integration, and Competition in the U.S.
Electricity Industry (1996).
64. U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, issued
April 2, 1992, revised April 8, 1997 (Horizontal Merger Guidelines)
<http://www.ftc.gov/bc/guidelin.htm~.
The efficiencies section (Section IV) was revised and adopted in
1997 based, in part, on hearings on changing technology and trade conditions conducted by the Federal
Trade Commission in 1996. In addition, the Horizontal Merger Guidelines also were adopted as the
framework for antitrust analysis by the Federal Energy Regulatory Commission in 1996.
65. Id. at Section IV. In addition, the FTC and the Department of Justice recently have released a draft of
proposed “Antitrust Guidelines for Collaborations Among Competitors” that adopt the same efficiency
analysis for collaborations among competitors. Federal Trade Commission and U.S. Department of Justice,
“Antitrust Guidelines for Collaborations Among Competitors” released Oct. 1, 1999 (Section 3.36)
<http://www.ftc.gov/os/l999/991O/jointventureguidelines.htm>.
66. For example, section 11.2.3 of the proposed code of conduct prohibits a public utility and an affiliate
from sharing facilities, goods and services such as telecommunications and computer systems,
67. Much of this evidence is reviewed in the Notice of Public Rulemaking on Regional Transmission
Organizations issued by the Federal Energy Regulatory Commission in Docket RM99-2-000 on May 13,
1999.
68. Substantiality may refer to the magnitude, duration, or operational significance of the transaction, or a
combination of these and other factors.
69. Although the discussion has been developed in the context of proposed rather than existing
transactions, the same framework of analysis can be applied in instances where a transaction is already
taking place between a regulated utility and its unregulated affiliate. Note that where this analysis results
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in the termination of an existing transaction with the unregulated affiliate, efficiencies that are not specific
to the transaction are unlikely to be lost to the regulated utility or to society because these efficiencies can
be regained through alternative transactions with unaffiliated firms that are less threatening to
competition.
70. For example, Phoenix, Arizona has implemented a system of competitive bidding in which outside
contractors compete against government departments for contracts to provide various city services. Before
a city agency can submit a bid, however, the Office of the Comptroller, which is an independent entity,
must certify that the bid is realistic. John C. Hilke, Competition in Government-Financed Services 16, 6768 (1992). The city continues to save substantially through this bidding process. (Communication with
Lera Riley, Assistant Public Works Director, City of Phoenix, Oct. 1998.)
7 1. For example, Public Utilities Commission on Nevada, “Proposed Regulations Governing Affiliates of
Distribution Companies,” Sec. 22 (Sept. 1998).
72. Edison Electric Institute, 4 Retail Wheeling & Restructuring Report 65 (March 1998).
73. Initial evidence from the Pennsylvania retail competition experiment suggest that consumers may rely
on the use of the logo to select an electricity provider. Customers reportedly disproportionately favored an
affiliate that used the logo of its parent distribution utility relative to an affiliate of the same parent firm
that did not use the logo. Energy Daily (June 23, 1998).
74. The incremental (marginal) cost of marketing to additional customers is likely to be lower if consumers
are already familiar with the logo employed in the marketing effort, since little effort will be required to
establish familiarity.
75. If the competing firms do not respond with lower prices, the affiliate likely will gain market share. If
so, the average price in the market will be lower, even if competitors do not reduce their prices when the
affiliate lowers prices, because of its lower marginal costs.
76. Consumers could view use of the parent utility’s logo as a guarantee that the affiliate firm is not a
fraudulent operator.
77. Transfer pricing rules typically forbid transactions between an unregulated affiliate and its regulated
parent utility at prices that fall outside of specified limits. Commonly used boundaries include market
prices, embedded costs, and book value.
78. If entry is difficult or delayed, market share gained through cross-subsidization also may have
persistent effects even after the cross-subsidization has been discontinued.
79. Although use of a disclaimer may be a remedy worth considering, it may be difficult to develop
disclaimers that are simultaneously sufficient to avoid deception and succinct enough to make affiliate use
of the regulated parent utility’s logo practical.
80. Private parties may submit such evidence from privately funded research. [A state commission],
however, should be wary of testing performed on behalf of special interests, and should take steps to ensure
that the results represent useful indications of likely consumer impressions and behavior.
8 1. Payments to the regulated distribution firm for use of its logo could reduce prices for distribution
services by substituting for revenues what the firm otherwise would be authorized by [a state commission]
to collect through distribution charges.
82. In some situations, firms may sell the right to use a logo to independent entities, contingent upon
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conditions and restrictions placed on use of the logo.
83. The Maine Public Utilities Commission has established rules requiring affiliates to pay the incumbent
utility for use of the goodwill reflected in the utility’s name. The payment is determined according to how
soon the utility succeeds in earning its authorized return on equity. Maine Public Utilities Commission,
Docket No. 98-077 (July 7, 1998). The rules provide a three-year initial payment period followed by a
reassessment with an additional three years of payments if necessary to bring down the value of the
goodwill asset to zero. Corporate Goodwill, Public Utilities Fortnightly 16 (Oct. 15, 1998).
84. See, e.g., FTC v. Cardinal Health, FTC v. McKesson Corp., Civil Action Nos. 98-595 and 98-596, slip
op. at 62 (D.D.C. July 3 1, 1998) (noting that “[t]he FTC at trial showed, through Defendants’ own internal
documents and public statements, that they perceived that the excess capacity currently in the marketplace
was the primary factor fueling so-called ‘irrational’ pricing”).
85. Notice, 63 Fed. Reg. at 20344.
86. Horizontal Merger Guidelines, Sections 1.11 and 1.21.
87. If a monopoly price is used as the starting point for the “small but significant and nontransitory”
increase by the hypothetical monopolist, the market is likely to be drawn broadly and, as a result, mergers
that would reinforce pre-merger market power may be permitted.
88. Notice, 63 Fed. Reg. at 20347.
89. Batteries allow some storage of electrical energy. Other technologies, such as air conditioning systems
that cool water in off-peak demand periods to use for cooling during peak demand periods, also can
provide limited opportunities to store electricity. To date, these storage methods are of relatively minor
significance in most areas.
90. While geographic and product market analysis is typically conducted under the Horizontal Merger
Guidelines using a hypothetical five percent price increase, this analytical convenience does not indicate a
“tolerance level” (Horizontal Merger Guidelines, Section 1 .O) for merger-related price increases that are
smaller, but more likely. At the same time, de minimis increases in market power for short, nonrecurring
periods may receive less attention from antitrust agencies when the costs and benefits of enforcement are
weighed.
9 1. Transmission constraints in one area may have widespread effects due to loop flows: the actual flows of
electrical current follow the paths of least electrical resistance, not the contract path that may be specified
in an electric power transmission transaction.
92. Reduced reserve requirements may allow the merged parties to cease using some generating facilities
with higher marginal costs for reserves. This will reduce the marginal costs of reserves, which in turn is
likely to provide profit incentives for the combined firm to reduce prices.
93. Horizontal Merger Guidelines, Section 4, note 36. Efficiencies in different markets are inextricably
linked if “a partial divestiture or other remedy could not feasibly eliminate the anticompetitive effect in the
relevant market without sacrificing the efficiencies in the other market(s).”
94. Notice, 63 Fed. Reg. at 20348-50.
95. See “FTC to Challenge Questar Acquisition of Kern River, Alleging Monopoly over Natural Gas
Transmission into Salt Lake City Area,” FTC News, Federal Trade Commission, Dec. 27, 1995. The
parties abandoned the proposed transaction shortly after the FTC challenged the merger.
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96. Under the Horizontal Merger Guidelines (Section 1.32) uncommitted potential entrants are assigned a
market share. Firms that must commit resources to enter or take longer to enter are not treated as current
participants in the market, but are regarded as potential entrants (Horizontal Merger Guidelines, Section
1.32).
97. “Safe harbor” provisions, such as FERC’s proposed exception from reporting if a merger’s impact on
concentration is de minimis, may be attractive because they can reduce the regulatory burden where
anticompetitive effects are especially unlikely. Similarly, in our review of merger filings under the HartScott-Rodino premerger reporting program, certain classes of transactions are exempted from reporting
because, based on our experience, they are highly unlikely to harm competition. Where that determination
cannot be made on an a priori basis, merging companies are required to submit a basic amount of
information. In the vast majority of cases, we are able to determine very quickly, based on that information,
that further investigation is unnecessary. But in many other cases, a more detailed examination, based on a
variety of information sources, is needed to check for the possibility of anticompetitive effects. A fraction of
the latter become full investigations and litigated matters.
The presence of a safe harbor provision creates strong incentives for firms to portray acquisitions in such a
way that the acquisition qualifies for the safe harbor treatment. The incentive to “shoe horn” the evidence
to fit within the safe harbor is greater when failure to fit within the safe harbor causes substantially greater
reporting and litigation costs to merger applicants. In our experience, it is important in these
circumstances to seek independent verification of the information used to qualify the proposed acquisition
for safe harbor treatment.
98. Notice, 63 Fed. Reg. at 20353.
99. Alternatively, this market dynamic can be captured if the rate that is frozen is set below the current
level.
100. During periods of moderate inflation, a rate cap lacking an inflation adjustment may provide a rough
substitute for a technology adjustment, since real prices will fall modestly in these circumstances, inversely
with gradual technical improvements rates. With deflation or substantial inflation, there would be greater
cause to separate inflationary and technological effects on costs,
10 1. See Richard Green, Has Price Cap Regulation of U.K. Utilities Been a Success?, 12 Private Sector 25
28 (Dec. 1997); Lambert, Privatizing Electricity in Britain: The Role of the National Grid, 122 Pub, Util.
Fortnightly 14-18 (Mar. 30, 1989).
102. Notice, 63 Fed. Reg. at 20348.
103. Horizontal Merger Guidelines, Sections 3 and 4.
104. The Horizontal Merger Guidelines (Section 1.4 1) generally prescribe capacity as an appropriate
measure of market share for relatively undifferentiated products and dollar sales if firms are distinguished
primarily by differentiated products.
105. For example, some states are considering requirements that a portion of electricity supplies come from
facilities that use renewable sources of energy for generation. Where such legal requirements are in place,
lower-cost electricity produced from non-renewable fuel sources may not be a close substitute for highercost electricity produced from renewable fuel sources.
106. FTC staff Comment to the Maine Department of the Attorney General and Public Utilities
Commission (May 29,1998).
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107. Horizontal Merger Guidelines, Section 2.2 1.
108. Notice, 63 Fed. Reg. at 20343, 20349.
109. Horizontal Merger Guidelines, M. 6 & 20 and Section 2.21. Indeed, the FTC has brought cases that
focus on these other performance measures when a transaction may significantly affect these aspects of
economic performance. See, e.g., Boston Scientific Corp., 119 F.T.C. 549 (1995). An early suppression of
technology case was United States v. Automobile Mfrs. Ass’n, 307 F. Supp. 617 (CD. Cal. 1969). For a
discussion of FTC and DOJ cases regarding technological competition, see FTC staff report, Anticipating
the 21st Century: Competition Policy in the New High-Tech, Global Marketplace, Ch. 7 (1996).
110. For example, if a substantially higher percentage of the merging parties’ sales occurs in a particular
season, while other firms’ sales are more evenly distributed across the seasons, the parties may report data
from a “typical month” that leads to a high estimate of sales by competing firms and a low estimate of their
own sales. In these hypothetical circumstances, the merging parties’ approach would minimize the reported
effects of the proposed merger on market share statistics.
111. Under the delivered price test currently used by FERC, the scope of relevant geographic markets
depends (other things equal) upon which value is nominated as the appropriate pre-merger price. Relevant
suppliers would then include all suppliers that, given their costs of generation and transmission, can
deliver power to a specific destination market at no more than 105 percent of the pre-merger price in that
market. Consequently, a high estimate of the pre-merger price would generally support a broader and less
concentrated geographic market; alternatively, a low estimate of the pre-merger price might support a
conclusion that the merging parties do not compete in that relevant market.
112. The FTC did not issue a final order in this case because PacitiCorp withdrew from the merger
+vww.fic.gov/opal9807/petapp39.98.htm>.
113. At current electricity prices, Mohave operates at full capacity. Hence Mohave is currently an inframarginal producer and unlikely to be a price setter. However, as California deregulates its electricity
market, prices are likely to fall and Mohave could then be in a position to be a marginal, price-setting
plant.
114. See, e.g.,Testimony of Commissioner Nora Mead Brownell, Pennsylvania Public Utility Commission,
Transcript of Federal Trade Commission Public Workshop: Market Power and Consumer Protection Issues
Involved with Encouraging Competition in the US. Electric Industry at 84 (Sept. 13, 1999); Testimony of
Alfred E. Kahn at 169 (Sept. 13, 1999) <http://www.ftc.gov/bco/elecworks/index.htm~.
See also the
discussion in Chapter VIII, Consumer Protection, which discusses other considerations that may have an
effect on entry.
115. The staff takes no position as to whether stranded cost and benefit recovery is in the public interest -a determination best made by state and local regulators with knowledge of unique local circumstances.
116. Entry in generation could take the form of new generation facilities, or it could consist of improved
transmission capacity that makes distant generation sources more effective competitors to local generation
sources.
117. This discussion is developed in the context of retail competition and retail stranded costs. Similar
concerns may arise concerning wholesale competition and stranded costs.
118. Recent publications that discuss specific instances and present a similar discussion of the issues
include Richard Pierce, Conceptual Issues Raised by the PECO/Enron Dispute, 11 The Elec. J. 26-38 (Apr.
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AMP-1 (I-)
1998); and Jeffrey D. Watkiss, Retail Competition: Preliminary Results, Electric Utility Consultants’
Transmission Pricing Conference, Denver, Colorado (June 26-27, 1998).
119. Under traditional regulation, the price of electricity is a bundled price that includes generation and
transmission/distribution components blended together. Under most competitive scenarios, the individual
components are unbundled and reported separately. Here we refer to the generation component of
traditional rates as the “energy charge” and the transmission/distribution components as the “lines charge.”
120. The level of the incumbent’s energy charge necessary to deter entry depends, in part, on the costs
faced by prospective entrants. Establishing a very low energy charge -- one that is below the expected
variable costs of potential entrants, for example -- is quite likely to deter entry.
12 1. In theory, if a state determines not to permit 100 percent stranded cost recovery, the utility’s incentive
to engage in entry-deterring pricing of energy charges will be weakened, depending upon the amount not
recovered. Although the aggregate stranded cost recovery amount is lower, which should result in a lower
total price for electricity to consumers and increased output by producers, the actual effect on output may
be slight because electricity demand is commonly thought to be relatively inelastic, at least in the short run.
122. Although the new supplier would bill and collect these three charges, it would remit the stranded cost
recovery surcharge to the vertically integrated incumbent.
123. If there is uncertainty about the viability and reliability of new suppliers, as is likely, customers may
be reluctant to undertake the costs of search and of switching to alternative suppliers until such suppliers
are operating.
124. Similarly, if entry takes longer than the period allowed for stranded cost recovery, artificially low
energy charges during the recovery period may not affect the timing of entry or the length of the transition
between the end of the stranded cost recovery period and entry. Assuming that entry is motivated by
prospective profit at the time the entry takes place, artificially low prices during the interim are unlikely to
change the potential entrant’s evaluation of the attractiveness of entry so long as entry takes longer than the
stranded cost recovery period.
125. A policy of fixing the level of stranded costs at the onset may solve the problem in principle because it
makes it impossible for the incumbent firm to influence the level of stranded cost recovery by lowering the
energy charge during the recovery period. This may not be a sufficient remedy in practice, however,
because it may motivate incumbent firms to overstate stranded costs (understate the competitive level of
energy charges) and to understate its ability to reduce stranded costs in ways that deter entry and are
difficult for regulators to detect.
126. Massachusetts, for example, has required that generation capacity be divested as a condition for
stranded cost recovery. Edison Electric Institute, Retail Wheeling & Restructuring Report, A Quarterly
Report 65 (Mar. 19,98). New York State similarly has required divestiture of most generating facilities.
Edison Electric Institute, Retail Wheeling & Restructuring Report, A Quarterly Report 91 (June 1998).
This approach also provides certainty about the magnitude of stranded costs by defining stranded costs as
the gap, if any, between the sale price of the plants and their regulated (book) value. California has
required divestiture of a large portion (50%) of generation assets. California, Brubacker & Associates
Electric Industry Restructuring Newsletter 1 (Oct. 1998). To date, all divestiture sales have occurred at
prices above the book value of the generating facilities. The premiums over book values range from 19% to
253% for completed transactions. One pending transaction involves a premium over book value of 485%.
Electric Utility Plant Divestitures: Transaction Summary, Brubacker & Associates’ Electric Industry
Restructuring Newsletter, insert (Oct. 1998).
127. Fuel costs (including transportation costs for fuel) typically represent a substantial proportion of total
generation costs, and differences in fuel costs typically represent a large portion of the difference in the
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relative costs (both total and variable) of various generating facilities. Hence, a minimum energy charge set
at fuel costs represents both a substantial difference from a near-zero energy charge, and a suflicient
inducement to entrants to invest either in new generation with low fuel costs or new transmission
providing access to low-cost generation.
128. Net stranded benefit recovery implemented with lower energy charges would have the reverse effect,
but would equally distort choices about electricity use. By contrast, payments of net stranded benefits to
customers based on past consumption would avoid this type of distortion.
129. Federal Trade Commission Policy Statement on Deception, appended to Cliffdale Assocs., Inc., 103
F.T.C. 110, 165, appeal dismissed sub nom. Koven v. FTC, No. 84-5337 (1 lth Cir. 1984) (Deception
Statement).
130. Id. at 177.
131. ThompsonMedical
Co., Inc., 104 F.T.C. 648, 816 (1984), aff’d, 791 F.2d 189 (D.C. Cir. 1986), cert.
denied, 479 U.S. 1086 (1987). Information concerning the cost of a product or service also has been found
to be material. Deception Statement at 174.
132. See Pfizer, Inc., 81 F.T.C. 23,64 (1972); FTC Policy Statement Regarding Advertising
Substantiation, appended to Thompson Medical Co., 104 F.T.C. 648,839 (1984) afl?d, 791 F . 2 d 189
(D.C. Cir. 1986) cert. denied, 479 U.S. 1086 (1987).
133. 16 C.F.R. Part 260 (FTC Green Guides).
134. To conclude that these terms are inherently misleading would mean they effectively would be banned,
a drastic and probably unnecessary step.
135. See, e.g., 42 U.S.C. 9 7135(j)(3) (Energy Information Administration Act, definition of “renewable
energy resources”); 10 C.F.R. 3 45 1.2 (Department of Energy, Renewable Energy Production Incentives,
definition of “renewable energy source”).
136. We use the term logo here to include the logo, name, and other elements used to identity the regulated
utility.
137. Arguably, injury could occur even if the affiliate did not renege on its promises, because the actual
expected value of the promise is less than the consumer perceived it to be due to the affiliate’s use of the
parent utility’s logo.
138. The rare exception would be a customer (usually a large, remote industrial user) who is connected
directly to a generation source rather than being supplied through the power grid. There probably would be
little advertising associated with such exceptional cases.
139. An alternative system for tracking electricity, referred to as a tradeable tags system, also has been
proposed. In this system, each characteristic would be assigned a tag, which could be traded separately
from the electricity itself. The system would work similarly to the system of sulphur emissions certificates
administered by the Environmental Protection Agency. . . . See “Uniform Consumer Disclosure Standards
for New England,” National Council on Competition and the Electricity Industry (Jan. 1998)
<www.rapmaine.orglnccei/altindex.html>.
140. Draft Guidelines, Section 2(b), Substantiation.
141. Melissa J. Hermann & Brian Roe, “Consumer Research on Tracking Approaches and Product Versus
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Supplier Labeling,” National Council on Competition and the Electric Industry (Oct. 1998).
142. It may make a difference to consumers if the environmental benefits associated with the power they
are buying will be enjoyed in a remote geographical area rather than in the region where they live. If
advertising implied a geographical scope that was different from the scope of the tagging system, the
existing guidelines prohibiting misrepresentation or overstatement of environmental benefits would cover
them. This problem could also be solved by limiting the geographical area over which tags can be traded.
143. FTC Green Guides, 16 C.F.R. 5 260.7(e).
144. The chilling effect on numerical or percentage claims could have economic consequences for the
electricity market’s development as well. If the claim by a company that wishes to advertise its wind power
is limited by the strict need to produce the claimed amount of wind power, then the company will be less
likely to be able to obtain an adequate return on the investment that it made. Thus, there will be less
incentive for companies to invest in environmentally superior technologies that happen to have variable
production potential, a result contrary to most states’ goals of encouraging such development.
145. “Information Disclosure for Electricity Sales: Consumer Preferences from Focus Groups,” Regulatory
Assistance Project (Mar. 19, 1997) <http://www.rapmaine.org>.
146. The National Association of Attorneys General (NAAG) adopted a resolution in March 1997
supporting “the establishment of appropriate and adequate consumer safeguards [in] . . . the restructured
retail electricity marketplace,” including uniform disclosures in plain language of “price, duration of
contract, quantities, and other material terms.” The National Association of Regulatory Utility
Commissioners (NARUC) and the New England Governors’ Conference, Inc. also have issued resolutions
supporting states’ adoption of mandatory, uniform disclosure standards (NARUC in November 1996 and
the Governors’ Conference on June 3, 1997).
147. On March 3, 1998, the New England Conference of Public Utility Commissions (NECPUC) issued a
Model Rule on Information Disclosure, intended as “a common starting point for commissions in the
region developing information disclosure policies,” based on the belief that “a uniform regional approach is
in the public interest.” The Model Rule is available from the Regulatory Assistance Project web page at
<www.rapmaine.org/nepage.html>.
148. S. 1047, introduced May 13, 1999 by Sen. Frank Murkowski and referred to the Senate Committee on
Energy and Natural Resources and the House Commerce Committee.
149. Fetter of the Federal Trade Commission to House Commerce Committee Chairman Thomas Bliley,
Analysis of H.R. 2944 (Jan. 14, 2000)] at 4.
150. The feasibility of requiring disclosure of fuel source may depend on availability of tracking
mechanisms through which sources of supply may be substantiated and verified. Likewise, reasonably
reliable data for emissions must be available to substantiate any required disclosures. Other questions
would be whether fuel source and emissions data would be based on historical or projected information,
and the degree of precision required for such data.
15 1. Information about the California uniform disclosure and label requirements is available at
<http://www.energy.ca.gov/sb1305/documents/index.
html>; the NECPUC proposal is available at
<http://www.rapmaine.org/nepage.html>.
152. “Label Testing: Results of Mall Intercept Study,” National Council on Competition and the Electric
Industry (April 1998) <eetd.lbl.gov/nationalcouncil/publications,html~.
68
Direct Testimony of Anthony M. Ponticelli
153. For suppliers that do not wish to incur the expense of maintaining and substantiating information for
the label, [a state commission] may wish to allow suppliers to report system average information or to
indicate that supplier-specific information is not shown.
154. For example, some contract terms may be more suitable for required disclosure in a contract
document, whereas in advertising, it may be advisable to require that only the one or two most important
terms be disclosed.
155. FTC v. FutureNet, No. 9%1113GHK
(AJJx) (C.D. Cal. 1998).
156. 15 U.S.C. § 1601 et seq.
157. 15 U.S.C. § 1691 et seq. The TILA and ECOA are implemented by Regulation Z, 12 C.F.R. 9 226,
and Regulation B, 12 C.F.R. $ 202, respectively. Although the Federal Reserve Board promulgates these
regulations, the Commission enforces these requirements for most non-bank entities around the nation. See
Section 108(c) of the TILA, 15 U.S.C. § 1607(c) and Section 704(c) of the ECOA, 15 U.S.C. 9 1691c(c).
69
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
Page 1 of 168
ORDER NO. 76292
*
IN THE MATTER OF THE
INVESTIGATION INTO AFFILIATED
ACTIVITIES, PROMOTIONAL
PRACTICES AND CODES OF CONDUCT
OF REGULATED GAS AND ELECTRIC
COMPANIES.
Before:
Filed: July 1, 2000
*
BEFORE THE
PUBLIC SERVICE COMMISSION
OF MARYLAND
*
*
CASE NO. 8820
Glenn F. Ivey, Chairman
Claude M. Ligon, Commissioner
Susanne Brogan, Commissioner
Catherine I. Riley, Commissioner
J. Joseph Cm-ran, III, Commissioner
Direct Testimony of Anthony M. Ponticelli
TABLE OF CONTENTS
Page
EXECUTIVE S U M M A R Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I.
vii
BACKGROUND................................................
1
II. STANDARDS OF REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
A. PSC Statutory Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
B. CaseNo. 8747 Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
III. GENERAL, POSITIONS OF THE PARTIES . . , . . . . . . . . . . . . . . . . . .
. . 12
IV. NEW STANDARDS OF CONDUCT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
l
Standards of Conduct for Utilities in Transactions with
Core Service Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
l
Standards of Conduct for Utilities in Transactions with
Non-Core Service Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . .27
V. ISSuES........................................................32
A. Core and Non-Core Issues . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . .32
1. Parties’ Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2. Commission Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
B. Gas, Electric and Combination Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
1. Parties’ Positions . . . . . . . . . . . _. . . . . . . . . . . . . . , . . . . . . . . . . . . . . . .38
2. Commission Decision . . . . . . . , . . . . . . . . . . . . _. . . . . . . . . . . . . . 4 1
Direct Testimony of Anthony M. Ponticelli
AMP-2 (I)
Page 3 of 168
MPSC Case No, U-12134-Exhibit
Page
C. GENCO Codes of Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
1. Parties’ Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
2. Commission Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 9
D. Transfer of Assets . . . . . . . . . . . . . . . . . .
.1 . . . . . . . . . . . . . . . . . . . . . . .
52
1. Definition.................................................5 2
(a) Parties’ Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
(b) Commission Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.54
..............
2. Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
.............
54
.............
57
E. Shared Services and Employees/Loans and Guarantees. . . . . . . . . . . . . . .
58
(a) Parties’ Positions . . . . . . . . . . . . . . . . . . . . .
(b) Commission Decision . . . . . . . . . . . . . . . . .
. .
1. Services and Employees. . . . . . . . . . . . . . . . . . . . . . .
..............
58
(a) Parties’ Positions. . . . . . . . . . . . . . . . . . . . . .
..............
58
(b) Commission Decision. . . . . . . . . . . . . . . . . .
..............
65
2. Loan/Guarantees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.68
(a) Decision in Case No. 8747 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.68
(b) Parties’ Positions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
,70
ic> c ommission Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
F. Reporting Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75
1. Parties’ Positions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.75
2. Commission Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.79
Direct Testimony of Anthony M. Ponticelli
Page
G. Promotional Practices and Marketing Communications . . . . . . . . . . . . . 82
1. Parties’ Positions. . . . . . . . . . . . . , . . . _. . . . . . . . . . . . . . . . . . . .82
2. Commission Decision . . . . . . . . . . . . . . . . . . . .
H. Name andLogo.
...........................
. . .
. . . . . . . . . . 93
. . . . .
2. Commission Decision . . . . . . . . . . . . . . . . . . . .
(a) Royalties . . . . . . . . . . . . . . . . . . . . . .
I. Enforcement and Penalty Provisions. . . . . . . . . . . .
91
. . . . . . . . . . 93
.
1. Parties’ Positions . . . . . . . . . . . . . . . . . . . . . . . .
(b) Disclaimers . . . . . . . . . . . . . . . . . . . . .
..........
.
. . . . .
..........
128
..........
128
.........
139
..........
140
1. Parties’ Positions . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 140
2. Commission Decision . . . . . . . . . . . . . . . . . . . .
..........
147
..........
148
VI. ORDERED PARAGRAPHS. . . . . . . . . . . . . . . . . . . .
APPENDIX A - Generic GENCO Code of Conduct
. . . . .
Direct Testimony of Anthony M. Ponticelli
APPEARANCES
~
Andrew P. Mosier, Jr., and Dr. Kenneth Gordon, for Baltimore Gas & Electric Company.
Andrew P. Mosier, Jr., Steven A. Morman and Kathy Davenport, for BGE Home
Products and Services, Inc.
Paul S. Buckley and James Wagner and Harry Warren, for Washington Gas.
Kirk J. Emge, Mindy L. Herman and Dennis R. Wraase, for Potomac Electric Power
Company.
Gary Alexander, Thomas Kinnane and Chantel Omstein Freedman, for Air Conditioning
Contractors of America - National Capital Chapter, Mid-Atlantic Petroleum Distribution
Association and Association and Maryland Alliance for Fair Competition.
Thomas Kinnane, Eleanor D. Craig and William Aitken, for Maryland Alliance for Fair
Competition and Mid-Atlantic Petroleum Distributors Association.
Gary R. Alexander and Suzanne Daycock, for Mid-Atlantic Power Supply Association.
Marleen L. Brooks, for Potomac Edison Company, d/b/a Allegheny Power.
Marta D. Harting and Jeffrey Tietbohl, for Chesapeake Utilities Corporation.
Ransom E. (Ted) Davis, for Maryland Energy Administration.
Christie Day Leiser, William H. Moore, Jr. and Thomas P. Perkins, III, for Conectiv
Power Delivery and Delmarva Power & Light Company.
William R. Moore, Jr., Thomas P. Perkins, III, and Randall V. Griffin, for Conectiv.
Francis X. Wright, for Columbia Gas of Maryland, Inc. and Eastern Shore Gas of
Maryland, Inc.
Kenneth W. Christman and Melanie K. Popovich, for Columbia Gas of Maryland, Inc.
Matthew W. Nayden and Terry Murray, for Trigen and Operators Energy Services.
Jeffrey H. Howard, for Conectiv and Baltimore Gas & Electric Company.
Rebecca Bowman, for Consumer Protection Division of the Attorney General’s Office.
William B. Marcus, for JBS Energy, Inc.
Mark A. MacDougall, for Southern Maryland Electric Cooperative.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-Z (I--)
Page 6 of 168
Edward G. Banks Jr., Mike Wheatley, Charles H. Ireland and Douglas G. Sites, Jr., for
Choptank Electric Cooperative, Inc., Thurmont Municipality and Town of Berlin.
Thomas C. Osina, for Mid-Atlantic Propane Dealers Association.
Lisa D. Yoho and Robin M. Nuschler, for Enron Energy Group
Mary Elizabeth Tighe and Robin M. Nuschler, for Statoil Energy, Inc.
William J. Fields, for Maryland Office of People’s Counsel.
Tracey L. Stokes, Jeffrey Conopask, David L. Valcarenghi and Herbert Thompson, for
Staff of the Public Service Commission of Maryland.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I)
Paee 7 of 168
EXECUTIVE SUMMARY
I.
Introduction
This Order, along with others issued during the restructuring proceedings, is
designed to promote the creation of competitive electric and gas markets with appropriate
customer safeguards. Building upon recent Commission decisions and the passage of
recent legislation, this Order directs gas and electric companies to implement rules
designed to ensure an appropriate degree of separation from their affiliates.
The Commission takes these actions for the following reasons: (1) to prevent
cross-subsidization of affiliates and maintain the financial integrity of regulated utilities;
(2) to prevent affiliates from unduly exploiting any competitive advantage due to their
relationship to the utility and help foster competitive markets for gas and electricity; (3)
to minimize the sharing of confidential information; (4) to protect consumers and
ratepayers; and (5) to prohibit discrimination by utilities in provision of utility services,
The Commission sought to achieve a reasonable balance between the positions of the
parties and the mission of the Commission along with the various statutory directives,
which include the provision of just and reasonable rates, and maintenance of safe, reliable
distribution systems.
II.
Discussion
A.
Standards of Conduct
The Commission modifies the standards of conduct for transactions between a
utility and both core and non-core affiliates that were adopted in Case No. 8747.
Because
of recent changes in energy markets and the move towards customer choice, the
Commission concludes that new standards are required. Rather than choose the extremes
of strict separation between utilities and affiliates on the one hand, or maintain the
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (1-A
Page 8 of 168
standards of Case No. 8747 - which have proven to be less effective than originally
expected - the Commission chooses a middle course.
The Commission retains the
core/non-core distinction established in Case No. 8747.
restrictions
on
tying
arrangements, discriminatory
For example, previous
treatment
suppliers and joint sales leads will remain in. place.
towards
competitive
However, joint promotions,
marketing and advertising between a utility and its affiliates are now prohibited.
The Commission, yet again, endorses asymmetric pricing for assets, and permits
utilities and their affiliates to share certain employees performing general corporate tasks
and services. The Commission finds that these principles can be beneficial to ratepayers,
but do not enhance market power.
B.
GENCO Code of Conduct
Except for a separate GENCO code of conduct, gas, electric and combination
utilities should be subject to the same rules and practices adopted in this case.
For
electric companies, this Order lets stand the GENCO codes of conduct adopted in the
Baltimore Gas and Electric Company (“BGE”) and Allegheny Power System (“APS”)
individual settlements. The BGE GENCO code of conduct will be adopted as the generic
code of conduct applicable to any utility operating in Maryland that does business with
any company affiliate that acquires electric generation assets in the future.
C.
Cost Allocation Manual (CAM) and Reporting Requirements
To address concerns about cross-subsidization, and to ensure that ratepayers
receive all benefits to which they are entitled, the Commission will require most energy
utilities to file Cost Allocation Manuals no later than November 1, 2000. More extensive
reporting will be required to ensure that the CAM methodologies are being followed.
In
Direct Testimony of Anthony M. Ponticelli
addition, the Commission will closely monitor the sharing of employees, loans and other
financial transactions between a utility and its affiliates.
D.
Royalties and Disclaimers
If a utility permits its affiliate to use the utility’s name and logo, the Commission
finds that it is appropriate, in principle, to impute a royalty to the regulated gas and
electric utilities: (1) for the value of the name and logo of a utility; and (2) for
unquantified benefits conferred upon affiliates because of lack of complete separation
This finding builds on precedents established in several prior Commission cases and
represents the Commission’s continuing efforts to appropriately allocate the cost of
benefits and services between utilities and affiliates
to reduce and eliminate cross-
subsidization. The Commission will docket separate proceedings to determine: (1) the
appropriate royalty to be imputed to utilities for use of the name and logo; and (2) the
unquantified assets that have been transferred from a utility to its affiliate(s).
Such
valuation shall be effective as a revenue adjustment to the cost of service effective July I,
2000.
In addition, to minimize customer confusion the Commission will require
prominently displayed disclaimers when an affiliate uses the utility’s name or logo. The
disclaimers must state that the utility and the affiliate are separate entities, and that the
Commission does not set the affiliate’s prices.
E.
Waivers and Exemptions
In recognition of the unique circumstances of the various energy utilities in
Maryland, the Commission provides for certain waivers and exemptions to the rules
adopted in this Order. Municipal utilities and Eastern Shore Gas Company are exempt
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
Page 10 of 168
from these rules. Cooperatives and small utilities are covered by these rules, but may
request a waiver of these rules if they are unduly burdensome.
III.
Conclusion
This Order establishes reasonable standards of conduct for electric and gas
utilities and their affiliates in light of emerging competitive energy markets. Further this
Order will serve to foster the development of competitive retail electric and gas markets
within the State, maintaining the financial stability of regulated utilities, and promote
opportunities for economic benefits for all customer classes.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I)
Page 11 of 168
ORDER NO. 76292
IN THE MATTER OF THE?
INVESTIGATION INTO AFFILIATED
ACTIVITIES, PROMOTIONAL
PRACTICES AND CODES OF CONDUCT
OF REGULATED GAS AND ELECTRIC
COMPANIES.
I.
*
*
BEFORE THE
PUBLIC SERVICE COMMISSION
OF MARYLAND
*
*
CASE NO. 8820
BACKGROUND
The Public Service Commission of Maryland (“Commission”) docketed this case
on July 26, 1999 to examine issues relative to the relationship and conduct between
Maryland’s utilities and their affiliates. The primary concern of this case is to ensure that
ratepayers of the regulated entities do not subsidize an unregulated enterprise. In
addition, Order No. 75381 directed the parties to address any remaining issues from Case
No. 8747l, which focused upon affiliated activities and standards of conduct and Case
No. 8677, which focused upon promotional practices. Finally, the passing of The
Electric Customer Choice and Competition Act of 1999 (“the Act”) 2 and the Natural Gas
Supplier Licensing and Consumer Protection Act of 2000 (“the Gas Act”) 3 provided
further impetus to the Commission’s continuing effort to address changes taking place in
the electric and gas industries and how these changes affect utility/affiliateinteractions.
In CaseNo. 8577,4 an investigation into the relationship between Baltimore Gas
and Electric Company (“BGE”) and its gas marketing affiliate, BNG, the Commission
adopted four cost allocation and transfer pricing principles to be applied by BGE and
’ Re Aflliated Transactions and Af$liate Standards of Conduct of Companies Providing Gas or Electric
prvice in +@yland, Ca.se No..8747, Order No. 74038; 89 MD PSC 54 (1998).
Public Uthty Compames Arhcle, Annotated Code ofMaryland, Section 7-501 et seq.
3 Public Utility Companies Article, Annotated Code OfMaryland,
Section 7-601 et seq.
4 Re Baltimore Gas and Electric Company; Small Business Coalition for Fair Utility Practices v. Baltimore
Gas and Electric Company, Case No. 8577, Order No. 72107,86 MD PSC 225 (1995).
Direct Testimony of Anthony M. Ponticelli
BNG relative to transfers of assets, services and personnel between the companies.
These principles were designed to ensure that BGE ratepayers would not pay for the
activities of the utility affiliates and provide that:
l
cost allocations should be made on the basis of a fully distributed cost allocation
methodology;
l
the cost of services provided by BGE to its affiliate should be based upon the full
cost of such services, including any indirect costs;
l
l
the fair market value of services which reasonably could be marketed by BGE to
the public must be allocated as the imputed cost to its affiliate; and
asymmetric pricing principles were adopted for transfers of assets between the
utility and the affiliate.
The Commission concluded that the adoption of these principles “will ensure that
utility operations do not subsidize the subsidiary, and they will result in market prices
being paid where appropriate.“5 In Case No. 8709, the Commission expanded upon this
basic framework and adopted 12 standards of conduct to be followed by BGE in its
relationship with BNG.6
These standards included rules requiring BGE to:
l
contemporaneously provide gas system information to competitive gas suppliers that
it provides to BNG;
l
offer equal prices;
l
provide gas sales and delivery on similar terms;
0
apply its tariff in a similar manner to both BNG and suppliers;
l
and process service requests in a similar manner.
’ Id. at 234. In addition, the Commission affirmed its finding in Case No. 8487 which required BGE to
reflect operations of BGE’s Gas Appliance and Service Department above-the-line.
6 Re BNG, Inc. Case No. 8709 Order No. 72523,87 MD PSC 43 (1996).
Direct Testimony of Anthony M. Ponticelli
In addition, the Commission made other findings to reduce cross-subsidization, to
protect customer pricing and to help create a competitive natural gas market.
Specifically, the Commission ordered BNG and BGE to operate from physically separate
locations and prohibited shared sales leads and joint calls. Finally, the Commission
found that while promotional material may allow BNG to be identified as an affiliate of
BGE, neither BGE nor an affiliate may represent that any advantage accrues to customers
or others in the use of BGE services as a result of that customer or others dealing with the
affiliate.
More recently, in Case No. 8677, the Commission initiated an investigation of the
promotional practices of gas and electric companies to consider regulatory changes.
In
1998, a Hearing Examiner issued a Proposed Order noting that significant changes,
including restructuring, were taking place in these industries. Accordingly, the Hearing
Examiner determined that many positions taken by the parties in Case No. 8677 had been
superseded by changes in Commission policy or legislation, which rendered moot many
of the parties’ comments and recommendations.
Therefore, the Proposed Order
recommended closing that case. The Commission concluded that it was appropriate to
consider promotional practice issues in the overall context of restructuring the utility
industry. Thus, Case No. 8677 has been closed and issues involving utility promotional
practices will be addressed herein.
On February 23, 1998, the Commission issued Order No. 74038 addressing
transactions and standards of conduct for affiliates
in its generic gas and electric
proceeding in Case No. 8747. As discussed in more detail below, the Commission
adopted 14 standards of conduct therein that apply to “core” gas and electric affiliates of
Direct Testimony of Anthony M. Ponticelli
all regulated utilities and four standards of conduct that apply to “non-core” affiliates.7
The Commission in that case also agreed to extend the four cost allocation principles
from Case No. 8577 to all gas and electric utility businesses with unregulated affiliates.
In light of the mandates contained in the recently adopted Act and other statutory
requirements, the Commission is revisiting these issues in conjunction with other
restructuring proceedings.
The parties to this proceeding generally fall into three distinct groups: (a) the
utilities; (b) potential competitive energy suppliers or marketers (“marketers”); and (c)
regulatory/consumer
advocates. The utilities advocate a restrained regulatory approach
in this case, citing the advent of competition in their industry. Generally, they support a
continuation of the affiliated activities standards and codes of conduct set forth in the
Commission’s 1998 decision in Case No. 8747. In addition, the electric utilities support
the individual codes of conduct recently adopted in their restructuring proceedings.’ In
particular, the utilities claim that compliance reporting requirements are unnecessary and
unfairly burdensome. They also take the position that broader disclaimers are generally
unnecessary since any misconduct is governed by existing codes.
Application
different standards of conduct should be based upon the services provided, they say.
of
The
utilities conclude that the standards adopted in Case No. 8747 and the settlement codes
are sufficient and consistent with the Act and therefore, no further revisions or
modifications are needed.
On the other hand, marketers support strict regulation of Maryland utilities and
their affiliates, citing the perceived competitive advantages local utilities hold. Marketers
7 In Case No. 8747, the term “core” service affiliate referred to affiliates engaged in activities previously
provided by a utility as monopoly services (e.g., gas or electric marketing). “Non-core” services referred to
all other services provided by the affiliates of utilities.
’ See Case Nos. 8794,8795,8796 and 8797.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-_)
( 168
Page150f
generally recommend complete separation (locational, operational, personnel, financial,
etc.) of the utility from all affiliates,
and they support applying an extensive list of
additional standards. Marketers also recommend that the transfer of assets, in particular
electric generation assets, should be made at fair market value.
Staffs comments in this proceeding have generally been consistent with the
policies of the Commission set forth in Case Nos. 8577, 8709, and 8747. OPC generally
favors the positions advocated by marketers. OPC strongly supports full separation of all
utility affiliates and a prohibition of the use of the utility’s name and logo by an affiliate.
A pre-hearing conference was held in this case on August 16, 1999. On September 10,
1999, the Commission adopted a list of 18 issues and directed the parties to file
comments on these issues as provided in Order No. 7538 1.’
’ The issues are as follows:
.
What standard(s) of conduct should govern the interaction between a utility and its affiliates?
.
Should there be different
“non-core” services?
.
If an affiliate provides both “core” and “non-core” services, which standard(s) of conduct should
apply?
.
Should different standards of conduct apply to a regulated utility and its GENCO than to other
regulated utilities and their unregulated affiliates?
.
Should a utility’s affiliate(s)
distribution territory?
.
Should the Commission establish a code of conduct regulating interactions between affiliates
conducting separate activities where both activities have been deregulated?
.
What value should be used when utility assets or aIIYiated assets are sold or transferred between the
companies (book or fair market value)?
.
What constitutes a “utility asset”‘?
.
What specific rules and procedures should the Commission adopt governing the sharing of employees
and/or services between the utility and its affiliate?
.
What reporting requirements should be developed to demonstrate utilities are in compliance with the
standards of conduct?
standards of conduct depending on whether an affiliate provides “core” or
be permitted to engage in the generation of electricity within the utility’s
I
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-3
Page16of168
The September 10, 1999 directive also determined that municipal utilities should
be excluded from this proceeding and that discovery would not be necessary since this is
a generic proceeding. Further, the Commission determined that pending the decision in
this case, Order No. 74038 in Case No. 8747 should remain in effect.
The parties filed Initial Comments on October 1, 1999. Reply Comments were
filed October 26, 1999. The Commission held hearings in this matter from November 15
through November 19, 1999. Post-hearing Comments were filed December 10, 1999.
II.
A.
STANDARDS OF REVIEW
PSC Statutory Authority
It is well settled that the Commission has broad discretionary powers to regulate
traditional utility functions in Maryland. Section 2-l 12 of the PSC Law” provides that
“the Commission has jurisdiction over each public service company that engages in or
operates a utility business in the State” and that it “has the implied and incidental powers
(continued)
When should the details of utility’s proposed promotion be filed with the Commission?
What requirements should govern marketing of standard offer service for utilities and their affiliates?
What disclaimers should be provided to detail the relationship between a utility and its affiliate or
between an affiliate and parent?
Should the Commission’s Promotional Practices Regulations, codified as Subtitle 40 of Title 20 of the
Code of Maryland Regulations, be revised?
How and to what extent, if any, should utilities and/or their affiliates be permitted to engage in
promotional practices as currently defined to offer incentives, rebates, or other promotions, including
but not limited to, demand-side management to encourage the use or sale of electricity in any form?
What requirements and restrictions should govern the relationship between utilities and their aftiliates
in communications, marketing, and permissible promotional practices?
What enforcement and penalty provisions should be developed by the Commission for violations
relating to the Standards of Conduct?
Should there be any differences in standards or practices between regulated companies that provide: 1)
gas service; 2) electric service; and 3) combined electric and gas service?
lo Public Utility Companies Article of the Annotated Code of Maryland (“the PSC Law”)
Direct Testimony of Anthony M. Ponticelli
needed or proper to carry out its functions.” Section 2-113 of the PSC Law provides that
the Commission shall “supervise and regulate” public service companies subject to its
jurisdiction to “ensure their operation in the interest of the public,” to “promote adequate,
economical, and efficient delivery of utility services in the State without unjust
discrimination,”
and to “enforce compliance with the requirements of law by public
companies, including requirements with respect to financial condition,
service
capitalization, franchises, plant, manner of operation, rates and service.”
In addition to these broad powers, the Act sets forth certain legislative policies
designed to facilitate the implementation of electric customer choice.
Many of the
provisions of the Act relate directly to utility/affiliate interactions. In particular, the Act
requires the Commission to:
ensure creation of competitive electric markets with
appropriate customer safeguards; adopt appropriate codes of conduct; develop policies
against
discrimination; adopt complaint and enforcement procedures; and develop
appropriate separation requirements. l1 This is consistent with Commission policies and
initiatives in recent years. Specifically $ 7-505(b) (10) provides:
(i) On or before July 1, 2000, the Commission shall issue
orders or adopt regulations reasonably designed to ensure
the creation of competitive electricity supply and electricity
supply services markets, with appropriate customer
safeguards. On or before July 1, 2000, the Commission
shall require: 1. an appropriate code of conduct between the
electric company and an affiliate providing electricity
supply and electricity supply services in the State;2. access
by electricity suppliers and customers to the electric
company’s transmission and distribution system on a
nondiscriminatory basis; 3. appropriate complaint and
enforcement procedures; and 4. any other safeguards
deemed necessary by the Commission to ensure the
creation and maintenance of a competitive electricity
supply and electricity supply services market. (iii) On or
‘I Section
7-505 (b>( 10)
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (1-L
before July 1, 2000, the Commission shall require, among
other factors, fUnctional, operational, structural, or legal
separation between the electric company’s regulated
businesses and its non-regulated businesses or nonregulated affiliates.
In addition, 5 7-505(b)(3) requires the Commission to order electric companies to
adopt policies and practices reasonably designed to prevent:
(i) discrimination against a person, locality, or particular
class of service or give undue or unreasonable preference in
favor of the electric company’s own electricity supply,
other services, divisions, or affiliates, if any; and(ii) any
other forms of self-dealing or practices that could result in
non-competitive electricity prices to customers.
The Act also contains other important provisions relevant to this proceeding. The
Act requires the Commission to establish rules regarding appropriate marketing and trade
practices. l2 Section 7-505(b)(7) states that “[A]n electricity supplier may not engage in
marketing, advertising, or trade practices that are unfair, false, misleading, or deceptive.”
Further, the Act provides that:
(i) An electric company shall comply with all requirementsof the
Commission in conducting regulated operations in compliance with this
article.(ii) The Commission shall require each electric company to adopt a
code of conduct to be approved by the Commission by a date to be
determined by the Commission to prevent regulated service customers
from subsidizing the services of unregulated businesses or affiliates of the
electric company. 13
Finally, the Act requires the Commission to “adopt regulations or issue orders to: (1)
protect consumers, electric companies and electricity suppliers from anticompetitive and
abusive practices;. . . and (7) establish procedures for dispute resolution.“r4
” Section 7-505(b)(7)
l3 Section 7-505(b)(13)
I4 Section 7-507(e)(l) and (7)
Direct Testimony of Anthony M. Ponticelli
MPSC Case NO. U-12134-Exhibit AMP-2 (I-)
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Section 7-506(b) requires electric companies to provide distribution services in
their distribution territories to all customers and electricity suppliers on rates, terms of
access, and conditions that are comparable to the electric company’s own use of its
distribution system. In addition, electric companies shall connect customers and deliver
electricity on behalf of electricity suppliers consistent with the PSC Law.”
These
provisions are consistent with Commission policies adopted for the competitive provision
of natural gas services. Non-discrimination in the provision of gas and electric services
and access to monopoly distribution systems by competitive suppliers is a tindamental
Commission requirement to implement competition in these markets.
Section 7-507(e)(l) directs the Commission to adopt regulations or issue orders to
protect consumers, electric companies, and electricity suppliers from anti-competitive
and abusive practices.
The Commission is also directed to require each electricity
supplier to provide adequate and accurate customer information to enable customers to
make informed choices regarding the purchase of any electricity services offered by the
electricity supplier. l6
The Commission is also required to establish appropriate
procedures for dispute resolution. I7
Similarly, the Gas Act requires the Commission to adopt consumer protection
orders or regulations for gas suppliers that: “(1) protect consumers from discriminatory,
unfair, deceptive, and anticompetitive acts and practices in the marketing, selling, or
distributing of natural gas, [and] (2) provide for contracting, enrollment, and billing
practices and procedures . . .“18
I5 Section 7-506(d).
l6 Section 7-507(e)(2).
l7 Section 7-507(e)(7).
‘* Gas Act, 5 7-604(a). The statute provides that the protections for gas and electric customers should be
consistent, one with the other and that the requirements imposed on gas and electric suppliers should also
be consistent.
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MPSC Case No. U-12134-Exhibit AMP-2 (I--)
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regulated utility services to marketers or their customers. Additionally, any information
provided by a utility to its energy marketing affiliates related to the utility’s system, the
marketing or sale of energy, or the delivery of energy was required to be made available
contemporaneously to all non-affiliated energy suppliers. Of particular importance, the
Commission determined in Case No. 8747 that an affiliate may use the utility’s name or
logo, but that neither may represent that an advantage accrues as a result of dealing with
the affiliate. However, the Commission clearly ordered that there must be a prominently
displayed disclaimer, which states that the utility and affiliate are separate entities. The
Commission also decided that a complete prohibition on utility/affiliate transactions
would be inappropriate. Finally, the Commission determined that the management and
operational principles and policies adopted in Case No. 8709 should be embodied in
standards of conduct set forth therein.22
In resolving the many issues raised in this case regarding affiliate relations with
their regulated utilities, the Commission is guided by the precedents established in prior
cases and by the extensive directives found in the Act. Some parties advocated lessening
oversight standards while others would have us adopt strict separation standards. The
regulatory mission to protect ratepayers, ensure just and reasonable rates, and maintain
the financial integrity of the regulated entity in order to assure a safe, reliable system for
the provision of gas and electricity guides the decisions in this case.
The Commission
will be monitoring the implementation of these standards very carefully and will enforce
them strictly.
III.
GENERAL POSITIONS OF THE PARTIES
** Although the Commission did not order full structural separation in either Case No. 8577 or Case No.
8709, in the latter proceeding, the Commission did direct that the operational and managerial personnel of
BGE’s unregulated energy marketing affiliate be separate from BGE’s utility operations personnel.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
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In this generic proceeding, the Commission solicited the views of interested
parties concerning the overall framework for affiliate standards of conduct. Numerous
parties responded with detailed recommendations.
Generally, the utilities endorse a
continuation of the standards promulgated in Case No. 8747, but consistent with recent
electric restructuring settlements. Delmarva Power and Light Company, d/b/a Conectiv
Power Delivery (“Conectiv”)23 stated that three principles should be adopted in this case.
Standards of conduct should prevent cross-subsidization, allow free markets to operate,
and protect customers rather than competitors.24
In addition, standards should
differentiate between core and non-core afflliates.25 Cone&v stated that core standards
should be “strictly limited” to the retail energy marketing affiliate that competes with the
jurisdictional service of the affiliated
utility within that utility’s franchised distribution
service territory. Baltimore Gas and Electric Company (,‘BGE”)26,
Power Company (“Pepco”)27,
Potomac Electric
and The Potomac Edison Company, d/b/a Allegheny Power
(,‘APS”)28 all express support for the standards developed in Case No. 8747, as modified
by their electric restructuring settlements.2g
BGE stated that the proponents of change
should be required to make a clear case for any changes from the 8747 standards and that
the Commission should honor the recently adopted standards in its settlement. Pepto
stated that there is no need for new standards which will only undermine the efficient
23 The written comments filed by Cone&v are at docket numbers 53,74 and 97. Conectiv also filed Joint
Final Comments with BGE at Docket No. 102.
24 Docket No. 53.
25 In Case No. 8747, the Commission drew a distinction between core operations of affiliates - “those
activities which duplicate or replace the essential services formerly provided only by a utility,” and noncore activities - “those activities which are unrelated to the utility company’s primary function.” Order No.
74038, 89 MD PSC 54, 66 (1998). The Commission has also stated that transactions are core-service
related if the affiliate engages in “activities previously provided by a utility as a monopoly service.” Id. at
76.
26 BGE’s written comments are at docket numbers 57, 79 and 102. BGE also filed Joint Final Comments
with Cone&v at Docket No. 102.
27 Pepto’s written comments are at docket numbers 64,83 and 106.
28 The written comments of APS are at docket numbers 46, and 96.
1
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MPSC Case No. U-12134-Exhibit AMP-2 (I-)
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operation of the marketplace by providing artificial advantages to out-of-state
competitors.
The gas utilities in this proceeding generally support the principles espoused by
the electric utilities. However, NUI Corporation (,NUI’y)30 and Chesapeake Utilities
Corporation, Maryland Division (“Chesapeake”)31
conduct is inappropriate32
emphasize that a generic code of
because the Commission should not impose the same standards
for affiliate transactions and standards of conduct on all utilities.33 NUI and Chesapeake
note that due to their smaller size, their regulated utility customers in Maryland benefit
from being part of a larger organization.
Washington Gas Light Company (“WGL”)34
and Columbia Gas of Maryland, Inc.
(“Columbia”)35 also support the standards adopted in Case No. 8747. WGL argued that
these standards reflect a balance for natural gas and other non-electricity marketing
affiliates which adequately protects ratepayers without unduly restricting Maryland
public service companies. WGL submitted that four goals must be met: no subsidies to
affiliates, no undue preferences, a level playing field for all, and appropriate standards to
protect consumers, not competitors. Columbia stated that a code should require utilities
to offer services on a non-discriminatory basis, require that if confidential customer
information is made available that it be available to all suppliers under similar terms, only
permit a utility to engage in joint promotional activities with affiliates if such
*’ The electric restructuring settlements are case numbers: 8794/8804 BGE, 8795 (Delmarva) Conectiv,
8796 Pepto, and 8797 (PE) APS.
3o NUT’s written comments are at docket numbers 69. NUI does business in Maryland through an operating
division now known as NUI Elkton Gas.
31 Chesapeake’s written comments are at docket numbers 54, 75 and 100. The natural gas transmission
segment of Chesapeake’s business is conducted through its wholly owned subsidiary, Eastern Shore
Natural Gas. Eastern Shore’s activities are regulated by the FERC, according to Chesapeake.
32 NUI, Docket No. 69 at 3.
33 Chesapeake, Docket No. 54 at 3.
34 WGL’s written comments are at docket numbers 55,80 and 101.
35 Colombia’s written comments are at docket numbers 49, 78 and 98.
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MPSC CaseNo. U-12134-Exhibit AMP-2 (I-2
Page 25 of 168
opportunities are available to all marketers on a non-discriminatory basis, and prohibit
utilities from promoting any particular energy supplier.
Columbia concludes that the
8747 standards are more than adequate to accomplish the desired activities and that there
are instances where the standards should be relaxed.
Choptank Electric Cooperative (“Choptank”) has addressed the issues from the
perspective of a local cooperative.36
Choptank generally agrees with Staff that the
standards applicable to the utility and non-core affiliates adopted in Case No. 8747
provide adequate protection for customers and the competitive market.37 However, as for
Standard Offer Service (“SOS”), Choptank noted that it has neither settled its stranded
cost case nor agreed to any code of conduct adopted in the investor-owned electric
restructuring cases.38
Choptank emphasizes that “[Clooperatives are treated differently
under State of Maryland Law with regard to Standard Offer Service.“3g
Section 7-
5 10(c)(3)(i) of the Act provides that cooperatives may choose to continue providing SOS
beyond July 1, 2003.40
Since cooperatives may choose to continue providing SOS,
Choptank concludes that it has been an oversight on Staffs part to conclude that the
settlements in the investor-owned utility cases should form the basis for standards of
conduct between the electric utility’s distribution business and its SOS business during
the transition.41 “It is inappropriate for provisions that the four IOU’s have agreed to in
settlement to apply universally to all electric companies in this case.“42 Further, while
Staff suggested that the core service standards from Case No. 8747 should apply to all
other energy affiliates, Choptank stated that there should be at least two modifications.
36 Docket No. 7 0 .
37 Id. at 2.
38 Id. at 2-3.
3g Id. at 3.
4o This is generally the termination date for investor-owned utilities to be required to provide SOS.
41 Docket No. 70 at 2-3.
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1
6
8
42 Id. at 2.
1
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Paae 27 of 168
As for sales leads,43 Choptank stated that as a member owned utility, if a customer
requests a joint sales call or enters into contracts with a utility and its affiliate, joint calls
should be permitted because this is “good member service.“44 According to Choptank, if
a customer requests information about competitive core-service providers,45
to the extent
a list of core-service competitors is provided (including affiliates), the Commission
should be the one that evaluates the worthiness of the service quality of those on the list
and maintains the list going forward.46
A number of intervenors either provide services which are competitive to services
of a utility or an affiliate or are assessing Maryland’s restructuring energy markets with
an eye toward becoming competitors of the incumbent natural gas and electric utilities,
These “marketers” include: the Air Conditioning Contractors of America - National
Capital Chapter, Maryland Alliance for Fair Competition and the Mid-Atlantic Petroleum
Distributors Association (“Alliance”)47; the Mid-Atlantic Power Supply Association
(“MAPSA”)48;
Maryland Natural Gas, Ltd., t/a Operators Energy Services, Inc. and
Baltimore Steam Company, t/a Trigen-Baltimore Energy Corporation (“Joint
Commenters”)4g; Enron Energy Services, Inc. and Statoil Energy, Inc. (“Enron/Statoil”)50
and the Mid-Atlantic Propane Gas Association (“PGA”).”
Generally the marketers
propose a more stringent code of conduct than the standards adopted in Case No. 8747
The Alliance submitted that standards based on separation should be adopted to
ensure that monopoly utilities do not interfere in competitive markets by conveying
43
44
45
46
47
48
4g
So
”
Case No. 8747, Standard
Core No. 6 .
Docket No. 70 at 4.
Case No. 8747, Core Standard No. 7 .
Id.
The written comments of the Alliance are at Docket Nos. 59,87 and 108.
The written comments of MAPSA are at Docket Nos. 6 3 , 86 and 1 0 9 .
The written comments of the Joint Commenters are at Docket Nos. 6 1, 84 and 107.
The written comments of EnronMatoil are at Docket Nos. 60,85 and 104.
The written comments of PGA are at Docket No. 45.
Direct Testimony of Anthony M. Ponticelli
substantial and irreproducible advantages upon their unregulated affiliates, and to ensure
that ratepayers do not cross-subsidize the utilities’ unregulated ventures.52 The Alliance
concludes that separation also renders much of the tracking, enforcement and dispute
resolution procedures unnecessary.53
The Alliance has proposed a code of conduct for
Commission adoption.54
MAPSA recommends replacing the core/non-core distinction with a distinction
between regulated utility services and unregulated activities. A code of conduct should
also require physical and operational separation of the utility and affiliate with exceptions
held to a minimum. All utility services should be provided on a non-discriminatory basis.
MAPSA also contends that to the extent permitted, transfers of assets should be at least at
fair market value.
MAPSA opposes the sharing and non-permanent transfer of
operational personnel as well as joint promotions and marketing. In addition, MAPSA
asserted that a disclaimer should be required where the affiliate uses the name and logo of
the utility. Finally, MAPSA advocates adoption of strict and expeditious compliance
enforcement and requirements.
The Joint Commenters say that the unequal starting positions of potential
competitors greatly complicates the transition to competition and that inertia may
preserve the utility’s dominant market share. The Joint Commenters say the Commission
should adopt standards on non-discrimination, disclosures, information, and separation.
Specifically, the utility should not disclose customer information to affiliates except
where the customer consents to disclosure and the information is available to all
competitors on a non-discriminatory basis.
:’ A$iance; Docket No. 59 at 4.
54 Docket No. 59, Appendix A.
Affiliates should be prohibited from
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advertising their affiliation with utilities, or using utility names or logos. The Joint
Commenters emphasize that in order for these standards to be of benefit, they must be
enforceable. Therefore, the Commission should require all exchanges between the utility
and its affiliates to be made public unless the utility has, in advance, met its burden of
proving that the public interest warrants exemption for a particular transaction or class of
transactions.
Further, the utility should establish a single gateway for all electronic
interchange with its affiliates and publicly post the full prices, terms and conditions upon
which it buys services from an affiliate or sells services to an affiliate.
The Joint
Commenters conclude that strict structural separation provides a more certain and easy
method for controlling the abuse of market power than either cost accounting rules or
reporting requirements.
EnronBtatoil
submitted that anti-competitive conduct by utilities, such as
discrimination in providing access to essential facilities, sharing of information with
affiliates and cross-subsidization, must be prohibited if consumers are to see the benefits
that come from competitive alternatives. Enron/Statoil concludes that the Case No. 8747
standards represent a good starting point. However, as a result of the Act and changes
about to take place in the provision of energy services, certain additional standards and a
degree of re-tooling of existing standards is required. Enron/Statoil
submitted that
physical and operational separation between the utility and all unregulated competitive
affiliates will minimize inadvertent interaction and communications among personnel
that should not be interacting.
They believe that, to be meaningful,
the distribution,
generation, and marketing businesses must be separated from each other. In addition,
during the transition period, there is a need for functional separation within the utility
between merchant-related (i.e., Standard Offer Service) activities and wires-related
Direct Testimony of Anthony M. Ponticelli
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activities, Once appropriate separation principles are established, EnronBtatoil
asserted
that standards must govern the conduct between these separate entities and draw bright
lines between permissible and impermissible behavior
To effectuate these goals, EnronBtatoil
Case No. 8747 code of conduct.
proposes a number of additions to the
First, to ensure non-discrimination, EnronBtatoil
suggested that a distribution company should be prohibited from providing preferential
services to an affiliate, transmission service should be supplied only under the utility’s
FERC open access tariff and associated rules, and utilities should provide distribution
service only under their Commission approved tariff. Second, EnronBtatoil advocates a
prohibition on the promotion of SOS because as a default service, SOS is not intended to
be a service that is marketed. Citing examples in Pennsylvania, Enron/Statoil said that if
the incumbent utility is allowed to market SOS, then it will undermine the development
of a competitive market. Third, they propose six modifications to the existing code to
strengthen the protections against affiliate abuse.
GeneralIy, these proposals prohibit
affiliates from representing that their service is superior, or that there is any benefit to a
distribution customer by purchasing power from an affiliate. These rules are extended to
gas and combination utilities as well. Finally, Enron/Statoil recommends disclaimers for
affiliates, including that the affiliate is not regulated by the Commission. Enron/Statoil
stated that name recognition for affiliates is at odds with competitive goals. Competition,
they claim, is furthered only if affiliates are made to market and attract customers based
on the quality and price of their own stand-alone services. If the use of common names
and logos is not prohibited, however, Enron/Statoil recommends that the Commission
require the afliliate to pay fair market value for such use.
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The Mid-Atlantic Propane Gas Association generally favors separation,
competitive procurement, no sharing of customer information or billing, and nondiscriminatory services by utilities. Further, joint promotions with an affiliate should be
permitted only if such promotions are made available to third parties under the same
terms and conditions. PGA also argued that affiliates should be prohibited from claiming
any advantage due to their relationship with the utility. Affiliates should be prohibited
from using trade names or logos of the utility, but, an affiliate could identify itself as a
subsidiary of a utility. Sales leads should be prohibited unless provided by the utility to
all suppliers, with certain customer privacy protections. Transfers of assets, services or
personnel should comply with a Cost Allocation Manual (“CAM”) and be at market rates.
Complaints should first be filed with the utility and then with the Commission if not
resolved by the utility within 45 days. The Commission should audit and inspect utilities
as necessary to enforce compliance according to the PGA.
The Office of People’s Counsel (“OPC”)” submitted extensive comments in this
proceeding. OPC submitted that a code of conduct for affiliated businesses is important
for two reasons: 1) to avoid cross-subsidies; and 2) to prevent affiliates from gaining an
advantage in their retail market because of their affiliation to the regulated utility. OPC
advocates complete separation of utility and affiliate activities, except for shared
corporate services. According to OPC, clear separation of entities and names has an
added advantage in that it makes enforcement of affiliate rules easier and less invasive. I f
any other employees are shared, asymmetric pricing (at the greater of market price or
book value) should be used or fully allocated costs plus a 10% adder to cover
unquantified costs and benefits. Utility assets, including intellectual property, should be
I
I
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priced at the higher of cost or fair market value.
Sharing of customer databases and
billing systems should be prohibited unless offered to other market participants at the
same cost. Joint marketing of utility and affiliate services should also be prohibited.
Books and records should be available to the Commission and periodic audits performed
to assure compliance with the standards.
Affiliates should be financially separate to
avoid adverse impacts on the utility or the utility should be compensated for loans and
guarantees. The Commission should also adopt restrictions on utility dividend pay-outs
that assure that the utility capital structure is maintained at a reasonable level and that the
worthiness of the utility is not impaired by transfers to the holding company.
The Attorney General’s Consumer Protection Division (“AG-CPD”)56
participated in this case.
also
According to AG-CPD, consumers must be able to make
informed decisions based upon complete and accurate information regarding goods and
services. Initially, AG-CPD stated that consumers need to know who is making the offer
and the relationship of that entity to other companies participating in the electricity
marketplace in order for consumers to make informed purchasing decisions.57
In its
Reply Comments, the AG-CPD stated that “[Ulpon reflection, however, we realize that
no amount of disclosure can overcome the misimpression given to consumers by an
affiliate’s use of its parent utility’s name or logo in its advertising and promotional
materials.7’58
. Since regulated utilities will operate separate and apart from their
deregulated affiliates, the AG-CPD concludes that it would be inappropriate for these
affiliates to use the name or logo of the utility.
55 OPC’s written comments are at docket numbers 50, 77 and 103. OPC’s testimony was prepared by
William B. Marcus.
56 The written comments of the AG-CPD are at docket numbers 52,71 and 95.
s7 Docket No. 52 at 1.
” Docket No. 71 at 1
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The Public Service Commission Staff (“StafY)5g
recommends that the core/non-
core definitions that were adopted in Case No. 8747 be replaced with a broader model of
affiliate
relationships. Staff asserted that its model addresses changes in the industry that
result from the Act and the electric utility stranded cost settlements. Staff recommends
that utility/affiliate relationships be separated itit0 four distinct categories.
Staffs
position is summarized as follows:
1) For the Regulated Electric Company (Electric Company) and all non-energy
affiliates, Staff recommends the Standards of Conduct adopted in Case No.
8747 for non-core services, after making the language consistent with the Act,
2) For the Electric Company and the SOS provider, Staff recommends the
generic version of the Standards of Conduct for SOS contained in the
individual settlement agreements.
3) For the Electric Company and its GENCO affiliate, Staff recommends that
during the transition period, the generic standards based on the individual
settlement agreements for GENCOs should apply. Following the transition
period, the GENCO should be fully structurally separated from the electric
company, and that standards of conduct adopted for energy service affiliates
in Case No. 8747, language corrected, should apply.
4) For the Electric Company (Gas Company) and all other Energy Supply
affiliates, the Staff recommends the standards of conduct adopted for energy
service affiliates in Case No. 8747, language corrected, should apply, as well
as the Equal Access Standards developed in the settlements.60
With regard to these standards, Staff argued that the non-core standards applied to nonenergy afflliates
Staff, the GEN?IO
are all-inclusive, flexible, and avoid micro-management. According to
standards in the electric settlements are consistent with the Case No.
8747 standards and in addition, include necessary customer and market protections for
the transition period. Therefore, Staff does not believe that additional generic standards
need to be developed for gas company affiliate relationships or any other relevant person
during the transition period. However, afterward the GENCO must be fUy structurally
59 Staffs written comments are at Docket Nos. 51,73 and 105.
Direct Testimony of Anthony M. Ponticelli
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separated from the electric company in order to comply with the Act. This would also
restrict any financial relationship between these aftiliates such as loans or loan
guarantees.
In conclusion, Staff argued that standards should be designed to protect customers
from anti-competitive abuses, including equal access limitations, cross-subsidization,
information asymmetries, and financial risks. However, standards should not, according
to Staff, deny customers the benefits of efficiencies
interaction, nor should the affiliate
that can result from affrliate
face unnecessary restrictions that could result in
financial harm compared to their competitors.
Iv.
NEW STANDARDS OF CONDUCT
The Commission concludes that the standards of conduct for transactions between
a utility and both core and non-core affrliates that were adopted in Case No. 8747 provide
a good starting point, but should be modified.
Those standards reflected appropriate
decisions at that time. However, with the advent of electric generation competition, the
expansion of the competitive gas programs, legislative changes, the many changes
utilities are currently undergoing, and the compliance problems that may have arisen as a
result of perceived ambiguities in the standards, it is necessary to revisit those standards.
The new standards of conduct adopted in this case are based upon the record herein and
are intended to-foster the following important Commission goals to:
0
l
0
prevent cross-subsidization of affiliates;
prevent affiliates from gaining any improper advantage in their competitive
markets because of their affiliation to the regulated entity;
minimize inappropriate communication between the utility and afftliate
regarding confidential information;
‘a Docket No. 51 at 15.
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l
protect the privacy of consumers; and
l
prohibit discrimination in the provision of regulated services.
Some parties recommended that the Commission impose strict structural
separation between utilities and all affiliates to advance these goals.
Other parties
suggested that the 8747 standards were sufficient to meet these goals and therefore, no
changes were necessary. After analyzing the record in this case, the Commission has
chosen a more moderate course than strict structural separation because it recognizes that
certain economies of scale and scope can be beneficial to ratepayers. The Commission is
aware that it must be vigilant in making sure that utilities and their affiliates do not
overstep appropriate boundaries to disadvantage the ratepayers or harm the competitive
markets.
Furthermore, the Commission is mindful that compliance with the 8747
standards has been uneven at best. Consequently, the Commission has chosen to enhance
the standards of conduct and broaden their applicability to non-core affiliate transactions
in certain instances.
Standards of Conduct for Utilities in Transactions
With Core Service Affiliates
1. Neither a utility nor its core service affiliate(s) shall
represent that any advantage accrues to a customer or
others in the use of utility services as a result of that
. customer or others dealing with the core service
affiliate(s). Neither a utility nor its core service
affiliate(s) shall represent that their affiliation allows
the core service affiliate(s) to provide a service superior
to that available from other suppliers.
2. Joint sales calls may not be initiated either by a utility
or its core service affiliate(s) in order to avoid the
appearance of favoritism. If a customer requests a joint
sales call, joint calls may be conducted. If a customer
enters into a contract with a core service affiliate, a
joint call relating to that contract may be conducted.
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3. Advertising material utilized by a core service affiliate
of the utility may identify the core service affiliate’s
association with the utility. If the core service affiliate
identifies its association with the utility, then each
advertisement must state that the core service affiliate is
“not the same company as the utility” and that the core
service affiliate’s “prices are not set by the Maryland
Public Service Commission.” If core service affiliates
share the name or logo of the. utility, the core service
affiliate(s) must state the above disclaimer in any
advertising material.
4. Joint promotions, marketing, and advertising between a
utility and its core service affiliate(s) are prohibited.
5. A utility and its core service affiliate(s) shall operate
from physically separate locations to avoid the
inadvertent sharing of information.
6. A utility must not provide sales leads to its core service
affiliate(s).
It must refrain from speaking for or
appearing to speak on behalf of its core service
affiliate(s).
7. If a customer requests information from the utility
about competitive core services, to the extent the utility
responds to the request, it shall provide a list of all
similar providers of that core service on its system. It
shall not highlight or promote its core service
affiliate(s) in any way.
8. A utility must process all requests for service by any
provider in the same manner and within the same
period of time as it processes requests for service from
its core service affiliate(s).
P. A utility must apply all the terms and conditions of its
tariff and other tariff provisions related to delivery of
energy services in the same manner, without regard to
whether the supplier is a core service affiliate.
1 0 A utility may not condition or tie the provision of
regulated utility services to any other product or
service.
11. A utility may not give any preference to its core service
affiliate(s) or customers of its core service affiliate(s) in
providing regulated utility services. The utility shall
treat all similarly situated providers and their customers
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-3
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in the same manner as the utility treats the core service
affiliate or the core service affiliate’s customers.
12. Except upon the informed consent of the customer, a
utility may not disclose any customer-specific
information obtained in connection with the provision
of regulated utility services. This requirement does not
apply to the extent a utility makes a disclosure that
complies with the Commission’s Consumer Protection
Orders, Nos. 75949 and 76110.
13. A utility must contemporaneously
disclose any
information provided to its energy marketing affiliate(s)
to all non-affiliated suppliers or potential non-affiliated
suppliers on the system with respect to its system, the
marketing or sale of energy to customers or potential
customers, or the delivery of energy to or on its system.
Disclosure of such information must be made by a
posting on the general alert screen of the utility’s
electronic bulletin board.
14. A utility must offer the same discounts, rebates, fee
waivers, penalty waivers or other special provisions to
all similarly situated non-affiliated suppliers or
customers that it may offer its affrliate or customers of
its affiliate.
The utility must make such
contemporaneous offers by making an appropriate
posting on the general alert screen of its electronic
bulletin board, or by some other appropriate fashion
which insures an equal ability and time to utilize such
offering.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
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Standards of Conduct for Utilities in Transactions
With Non-Core Service Affiliates
1.
Neither a utility nor its non-core service affiliate(s)
shall represent that any advantage accrues to a
customer or others in the use of utility services as a
result of that customer or others dealing with the
non-core service affiliate(s). Neither a utility nor its
non-core service affiliate(s) shall represent that their
affiliation allows the non core service affiliate(s) to
provide a service superior to that available from
other suppliers.
2.
A utility may not give any preference to its noncore service affiliate(s) or customers of its non-core
service affiliate(s) in providing regulated utility
services. The utility shall treat all similarly situated
providers and their customers in the same manner as
the utility treats the non-core service affiliate or the
non-core service affiliate’s customers.
3.
Advertising material utilized by a non-core service
affiliate of the utility may identify the non-core
service aff~liate’s association with the utility. If the
non-core service affiliate identifies its association
with the utility, then each advertisement must state
that the non-core service affiliate is “not the same
company as the utility.”
If non-core service
affiliates share the name or logo of the utility, the
non-core service affiliate(s) must state the above
disclaimer in any advertising material.
4.
A utility may not condition or tie the provision of
regulated utility services to any other product or
service.
5.
Joint promotions, marketing and advertising
between a utility and its non-core service affXate(s)
are prohibited.
6.
Except upon the informed consent of the customer,
a utility may not disclose any customer-specific
information obtained in connection with the
provision of regulated utility services. This
/
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I)
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requirement does not apply to the extent a utility
makes a disclosure that complies with the
Commission’s Consumer Protection Orders, Nos.
75949 and 76110.
7.
A utility must offer the same discounts, rebates, fee
waivers, or penalty waivers or other special
provisions to all similarly situated non-affiliated
suppliers or customers that it may offer its affiliate
or customers of its non-core service affiliate.
Core and Non-Core Standards No. 1 have been modified to clarify the
Commission’s policy prohibiting any representation or suggestion that the relationship
between a utility and its affiliate allows the affiliate to provide a service that is superior to
competitors. These standards further prohibit any representation or suggestion that an
advantage accrues to a customer in the use of utility services as a result of dealing with
the affiliate.
This broad general non-discrimination provision reflects longstanding
Commission policy and legal requirements, particularly 5 7-505(b)(3).
Core Standard No. 2 prohibits joint sales calls because the Commission wants to
prevent utilities from favoring their affiliates in ways that could be detrimental to the
development of competitive markets.
Moreover, the modifications to this standard
clarify that the Commission will only permit joint sales calls upon the request of a
customer. However, it does not prevent joint calls once a contract has been entered into
between an affiliate and a customer
Core and Non-Core Standard No. 3 continues to permit an affiliate to identify its
association with a utility in its advertising materials. However, the Commission will now
require appropriate disclaimers to protect the public from confusion.
This is a
modification to our previous standard because the Commission believes it is important
that customers clearly understand that they are not dealing with the utility. The core
’/
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - E&bit AMP-2 (I--)
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standard has an additional disclaimer that requires affiliates to notify customers that the
affiliate’s services, which generally were formerly regulated monopoly services, are not
subject to price regulation by the Commission.
Core Standard Number 4 implements a complete ban on joint promotions with a
core affYiate.61 This is a modification to the previous standard adopted in Case No. 8747
which permitted such promotions, provided such promotions were offered to all other
core service competitors upon the same terms and conditions.
This prohibition is
extended to marketing and advertising practices as well. The Commission concludes that
it is not the role of utilities and their ratepayers to promote or market the activities of
affiliates. Affiliates should succeed or fail as a result of their own efforts. Lastly, the
prohibition is made applicable to transactions with non-core affiliates
in Non-Core
Standard No. 5 because the Commission’s concerns regarding cross-subsidization and a
competitive marketplace are not limited to utility transactions with core affiliates.
Consequently, use of the utilities’ billing envelope for affiliate
marketing materials is
prohibited for both core and non-core affiliates.
Additionally, some of the parties to this proceeding requested clarification on
whether certain specific joint promotional or marketing practices are prohibited by the
Commission’s codes of conduct. Several parties have asked whether the following
practices are permissible: shared booths at a fair or trade show; T-shirts or other personal
items indicating the names of both a utility and an affiliate; joint web sites as well as
“hyperlinks” from a utility’s web site to an affiliate’s; and references or access to an
‘I Joint promotions do not include billing. The Commission has previously addressed billing for electric
and gas supply, which permits all marketers (both affiliate and non-aEiliates) to use the utility’s bill for
consolidated billing. A non-core affiliate may use the utility’s bill to bill for its services.
1
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I--)
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affiliate through a utility’s call center. The Commission hereby declares that all of these
efforts at joint marketing, advertising
and
promotions
which
inappropriately
corporate efforts to market their sales and services are specifically prohibited.
link
This is
because these references would create an inappropriate benefit for an affiliate in the
newly competitive markets. In addition, misrepresentations of an affiliate’s
relationship
with the utility would cause customers to be confused that the utility and an affiliate are
the same company.
Similarly, the Commission wishes to specifically note that an
affiliate’s use of the phrase, “the company you’ve known and trusted [for X years]” or,
comparable phrases, are misleading because they falsely imply that the affiliate has a
history of service and reliability that is co-extensive with the utility. Therefore, these
representations are hereby prohibited.
Core Standard No. 5 requires a utility and a core affiliate to operate from separate
locations. This protection is necessary to prevent the inadvertent sharing of market
sensitive information and to promote and protect the competitive environment.
Core Standards No. 6, No. 7 and No. 11 as well as Non-Core Standard No. 2
reflect the need to prohibit utilities from bestowing undue advantages upon affiliates.
This serves to safeguard competition and encourage marketers to offer their services in
Maryland. Neti language has been added to clarify these prohibitions.
Core Standards No. 8, No. 9 and No. 13 are specific non-discrimination
provisions.
As the Commission has stated repeatedly, non-discrimination in the
provision of regulated utility services is a hallmark of Commission policy. Utilities are to
apply their tariffs evenhandedly.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-2
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Core Standard No. 10 and Non-Core Standard No. 4 reflect the fact that
consumers should not be bound to purchase anything to receive natural gas or electric
service. These consumer protection standards reflect long-standing Commission policy.
Core Standard No. 12 has been modified to reflect recent Commission decisions
regarding the disclosure of confidential information.
As the Commission stated in its
recent consumer protection orders, utilities may sell customer lists (consisting of
customer names, addresses and telephone numbers) upon the same terms to affiliates and
non-affiliates, provided that the utility conspicuously discloses to affected customers that
the utility intends to release customer lists and that customers may prevent disclosure
upon request.
The Act62 also permits electric companies and suppliers to disclose a
customer’s billing, payment and credit information for bill collection and credit reporting
purposes. In all other instances, except upon the informed consent of the customer, a
utility may not disclose any customer-specific information obtained in connection with
the provision of regulated utility services.
The Commission finds that consumer
confidentiality is such an important issue that the protections should be extended to
transactions involving non-core affiliates. This is embodied in new Non-Core Standard
No. 6.
Core Standard No. 14 requires utilities to offer the same rebates and other special
promotions on‘a non-discriminatory basis. New Non-Core Standard No. 7 applies this
rule to transactions with non-core affiliates because of the rapid changes taking place in
the scope of affiliate activities and the need to prohibit utilities from bestowing undue
benefits on these new affiliates. Furthermore, the Commission wishes to clarify that Core
Standard No. 14 and Non-Core Standard No. 7 do not permit utilities to engage in joint
62 Section 7-505(b)(6).
Direct Testimony of Anthony M. Ponticelli
MPSC Case NO. U-12134-Exhibit AMP-2 (I--)
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-,
promotions, marketing or advertising in contravention of Core Standard No. 4 and new
Non-Core Standard No. 5.
As a final matter, the Commission notes that municipal utilities and Eastern Shore
Gas Company are exempt from this Order.63
Furthermore, cooperatives and small
utilities are covered by these standards of conduct and other rules set forth herein.
However, because of their unique characteristics, cooperatives and small utilities may
have these rules waived by the Commission if, upon request, the Commission determines
that the rules are unduly burdensome.
Finally, the parties are advised that the
Commission may revisit some issues at the end of the electric restructuring transition
period, if appropriate, or at an earlier date, if necessary.
V.
A.
ISSUES
Core and Non-Core Issues64
1.
Parties’ Positions
A key issue raised in these proceedings is the’distinction between “core” and
“non-core” services.
The utilities generally accept the core/non-core distinction but
emphasize that it is the nature of the services that is the distinguishing feature, not the
affiliate
itself. Dr. Kenneth Gordon, Senior Vice President of National Economic
Research Associates, Inc. (“NERA”) testified as a policy witness on behalf of several
utility
companies. 65
He stated that the purpose of standards of conduct covering
distribution utilities and core affiliates is to prevent misuse of the distribution utility’s
control of essential facilities and to prevent subsidies of competitive energy suppliers by
the utilities. Essential facilities, Dr. Gordon argued, are not involved in non-core
z Order does not apply to Municipalities and ESGC.
This section deals with Issue No. 2: Should there be different standards of conduct depending on
whether an affiliate provides “core” or “non-core” services? and Issue No. 3: If an affiliate provides both
“core” and “non-core” services, which standard(s) of conduct should apply?
MPSC
Direct Testimony of Anthony M. Ponticelli
Case No. U-12134-Exhibit AMP-2 (I-)
Page 44 of 168
activities. Therefore, he concludes that it is appropriate to exclude non-core affiliate
activities from standards of conduct designed for core service affiliates. In addition, he
takes the position that, absent demonstration that non-core activities involve crosssubsidization or discriminatory transfers of public utility services, products or
information, then the Commission should not be concerned with the activities of nonenergy affiliates. Dr. Gordon submitted that consumers benefit when utilities compete in
non-energy markets. Dr. Gordon concludes that “[Tlhe application of the standards of
conduct to the activities of non-energy affiliates is unnecessary and would only serve to
artificially limit the competition faced by firms in those non-core, non-utility markets.“@’
Conectiv noted that the non-core markets in which Conectiv and its affiliates in Maryland
compete are generally “fully mature, vigorously competitive markets.” The utility and its
affiliates are the new entrants and as such, do not pose any threat of monopolizing any
one of the existing markets.67
Pepto also recommends eliminating entirely the
regulations governing utilities and non-core service affiliates.
According to Pepto,
“Maryland utilities enjoy no special advantages in the provision of ‘non-core’ services
and should not be handicapped in their efforts to build businesses in ‘non-core’ areas.“68
The utilities also take the position that the Commission should avoid imposing the
strictest code of conduct on all activities of the “hybrid” affiliate which is an affiliate that
provides both core and non-core services. According to Pepto, “[Tlhe standards of
conduct should apply on the basis of the type of service being provided by the affrliate.“6g
WGL, Columbia and Chesapeake agree.70
BGE stated that “an across-the-board
65 Dr. Gordon’s testimony was sponsored by BGE, Conectiv, Columbia, Pepto and APS.
66
67
68
6g
”
Docket
Docket
Docket
Docket
Docket
No.
No.
No.
No.
No.
56 atp . 14.
53 atp. 13-14.
64, Attachment A, p . 1.
64, Attachment A, at 1 - 2 .
55, Appendix A, at 2; Docket No. 49 at 3; and Docket No. 54.
Direct Testimony of Anthony M. Ponticelli
application” of the core standards “may only lead to the creation of additional affiliated
companies in order to achieve compliance.“71 Conectiv submitted that as a general rule,
the core standards should be applied only to energy transactions engaged in by the
affiliate within the utility’s regulated service territory.72
The marketers take a much different position. Generally, they recommend a
single code of conduct, which is more stringent then what the utilities proposed.
The
Alliance argued that “[Tlhere should be no distinction in the standards of conduct that
apply to the relationship of the utility and the affiliate regardless of the services provided
by the affrliate.“73 According to Enron/Statoil, “[A]11 services provided by distribution
companies are core in nature, and it is appropriate for a single set of standards to govern
all behavior of the monopoly utility with regard to its affrliates.“74
The Joint
Commenters say that there is not any single bright line test and “[Biasing different codes
of conduct on a distinction between core and non-core services places too much pressure
on the determination of the core vs. non-core nature of an. affiliate’s activities.“75
However, if there are to be two sets of standards, the marketers advocate application of
the core service standards to hybrid affiliates. According to the Alliance, “by applying
the most stringent standards that are applicable to any one component of the business to
the entire business, the Commission will ensure that business is not able to use less
stringent standards to gain a competitive advantage in the market.‘y76
MAPSA argued that, in light of the evolution of the energy services markets, the
Commission should disregard the core/non-core services distinction and focus instead
” Docket
‘* Docket
73 Docket
74 Docket
75 Docket
76 Docket
No.
No.
No.
No.
No.
No.
57 at 5 .
53 at 1 4 .
59 at p. 5 .
60 at p. 16.
61 at p. 9.
59 at 8 .
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I--)
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upon the distinction between the regulated services of the utility and any unregulated
activities. If any distinction beyond this is necessary, then it should be based upon an
affiliate’s provision of energy-related (i.e., traditional utility services) or non-energyrelated activities.77
OPC emphasizes that a core vs. non-core distinction should not be related as
much to the energy-related nature of the business as to the type and location of products
being sold.“78
OPC suggested that evidence indicates that utility name recognition is
very low outside the utility’s service territory.
“If there is a differentiation in
applicability of standards, more stringent standards would be necessary for “core”
products and services, marketed in the utility’s territory.“7g OPC asserted that issues of
self-dealing, unfair competition and market power are more likely to apply to massmarketed retail unregulated activities that target the utility’s customers.
Consequently,
more stringent requirements are necessary for affiliates that target the utility’s native
customers.*’ OPC concludes that, “[I]f a single affiliate provides both core and,non-core
services, the core service code of conduct should apply to that affiliate.“*i
Staff has recommended replacing the core/non-core distinction with a four-part
model of affiliate relationships that reflects the changes in the industry as a result of the
passage of new legislation and the settlements of the stranded cost cases.82 Staff also
noted that the electric company’s power marketing affiliates are currently providing both
core and non-core services. According to Staff, during the transition period, the generic
” Docket No. 63 at p . 6.
78 Docket No. 50 at p. 12.
“Id.
*‘Id.
” Id. at 14.
82 Docket No. 5 1 at p. 1 5 .
Direct Testimony of Anthony M. Ponticelli
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settlement standards are adequate for hybrid affiliates. After the transition period, Staff
supports application of the core service standards to hybrid affiliates.
2.
Commission Decision
In Case No. 8747, the Commission observed that “[mloving
from monopoly
providers to provider choice introduces complexities not in existence” before.83
The
Commission stated:
The standards of conduct which we adopt today will put all
participants in these emerging markets on notice as to those
things which a utility may and may not do in
interactions/transactions with its energy affiliates. Thus, in
addition to protecting customers of the regulated utility, our
interest in prescribing these standards of conduct is
to facilitate the growth of competitive markets in the retail
sale of gas and electricity. If such markets can be achieved,
consumers should benefit through lower prices and
expanded choices for these services.
From the standards of conduct to be applied to a utility’s
energy affiliates, we adopt a more limited set of standards
to be applied to affiliate activities unrelated to the core
utility business. For non-core service affiliates, our interest
extends to standards necessary to assure just and reasonable
rates for and the adequate provision of regulated utility
services and to protect against the preferential provision of
utility services.84
The Commission then adopted four non-core affiliate standards of conduct and 14 coreservice afIXate standards in Case No. 8747.
The Commission is mindful of the rapid changes taking place in the energy
marketplace. Some parties have advocated standards based upon energy or non-energy
affiliate
relationships. Others have suggested that one set of standards should apply to all
affiliate relationships. Multiple variants have been suggested by a few parties. However,
the Commission finds that the core/non-core standards reflect the fact that important
83 Case No. 8747, Order No. 74038,89 MD PSC 54 ,67 (1998).
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MPSC Case No. U-12134-Exhibit AMP-2 (I)
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distinctions exist between various types of utility/affiliate transactions, Furthermore,
these standards have been tailored to prevent cross-subsidization of affiliates by utilities,
minimize any anti-competitive conduct as a result of transactions between utilities and
their affiliates and to preserve the confidentiality of certain information and data. Upon
analysis, the Commission concludes that the basic.core/non-core framework continues to
be appropriate and will be retained for the affiliate standards of conduct.
The Commission has also stated that “jurisdiction over a utility’s unregulated
activities exists to the extent ‘necessary to assure just and reasonable rates for and the
adequate provision of regulated utility services.“‘85
In addition:
The Commission’s regulatory authority extends to public
utility services. “Public utility services” are limited to
those services which a utility company provides under the
privileges granted to it by the State.
Thus, the
Commission’s jurisdictional powers permit us to regulate
ancillary or miscellaneous business activities related to a
company’s franchise rights and duties to provide utility
service. Further, the Commission regulates those practices
and services that have a sufficient nexus to the utility
company’s status as a public utility.86 (emphasis added)
Furthermore, as a result of passage of the Natural Gas Act, the Legislature has
clarified the Commission’s authority and jurisdiction over gas companies and gas
suppliers. Generally, this authority is consistent with the Commission’s present authority
over electric companies and electric suppliers. Therefore, this Order will apply to all gas
and electric utilities in Maryland, and all core affiliates. This Order extends to non-core
affiliates to the extent necessary to protect regulated services, the financial integrity of
regulated entities, and to avoid cross-subsidization.
84 Id. at p. 19-20.
85 Id.
86 Case No. 8577,
Order No. 72107,86 MD PSC 225,230 (1995).
Direct Testimony of Anthony M. Ponticelli
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For purposes of clarification, the Commission finds that core services of a gas
utility include the provision of electric service and core services of an electric company
include the provision of gas service. This clarification avoids the incongruous result of
stricter treatment of a combination gas and electric utility compared with a gas only or
electric only utility. Therefore, all affiliates
that provide essential gas or electric services
will be deemed “core affiliates.”
Furthermore, the Commission also finds that the core standards of conduct will be
applicable to all activities of an affiliate that provides any core services. An affiliate that
provides both core and non-core services can avoid application of the core standards by
establishing a separate non-core affiliate.
The Commission reiterates its previous
findings that the core standards of conduct will be applicable to all activities of an
affiliate that provide any core services.
B.
Gas, Electric and Combination Utilities”
1.
Parties’ Positions
There was some discussion in this proceeding about whether distinctions should
be recognized for gas, electric, and combined gas and electric companies based upon the
type of energy service they provide. The utility companies generally agreed with Pepto’s
position that the codes of conduct “should be equally applicable to all regulated entities in
order to ensure that none receive a competitive advantage.“88
BGE suggested that the
standards adopted should also reflect the principles approved in its restructuring
settlement.89 APS concurred with BGE.90
” This section responds to Issue No. 18: Should there be any differences in standards or practices between
regulated companies that provide: 1) gas service; 2) electric service; and 3) combined electric and gas
service?
88 Docket No. 64, Attachment A at 6.
” Docket No. 57 at 8.
SQ Docket No. 46 at 5.
Direct Testimony of Anthony M. Ponticelli
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Page 50 of 168
WGL suggested that the Commission should be cognizant of the differences in
electric and gas restructuring. “The obvious difference is that competition for natural gas
commodity is at a very mature stage.“”
In addition, there are physical differences.
Historically, electricity used in Maryland has been generated near service territories,
which has had a tremendous impact on resolving transmission constraints.92 In addition,
electricity cannot generally be stored on an economic basis.
WGL argues that the
“absence of storage capability of electricity has rather natural implications for pricing as
well as potential opportunities for market manipulation.“93 The ability to store gas
mitigates market power because of the supply enhancement capability during peak
Chesapeake emphasized that the Commission “should take into account the
unique aspects of the individual utility involved such as the utility service territory, the
size of the utility, and the market share and power of the utility.“95 Consequently,
Chesapeake. does believe there should be different standards for gas, electric, and
combination utilities.96
Chesapeake argues that, “[Tlhe reason for establishing any
standards of conduct should be to address real problems, not require a company to abide
by a set of rules when the underlying problems do not exist for that company.‘797
The marketers advocate a single generic code of conduct.98 The Alliance argued
that a separate GENCO code of conduct might be an exception.99
EnronBtatoil
noted
that while there are differences in the commodity and operations, “the same economic
il ?Tckef No. 55, Appendix A at 7.
g3 g at 8.
g4 Id.
g5 Docket No. 54.
g6 Id.
” Id.
” Docket N o . 62 at 28, Docket No. 60 at 2 8 , Docket No. 59 at 2 3 .
” Docket No. 59 at 2 3 .
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-)
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_” 51 of 168
incentive exists for a distribution company, gas or electric, to favor a transaction that
benefits the corporate group of which it is part.“‘oo
Enron/Statoil also argued that the
adoption of electric restructuring settlements “does not eliminate the need for a
comprehensive code of conduct to be developed in this proceeding for generic application
to all utilities in the State.“‘o’
The Joint Commenters say that the Commission may wish
to consider particular provisions that would apply to a combination utility. They claim
that the “potential for fuel substitution creates unique competitive issues where a utility
provides combined electric and gas service.711o2 The Joint Commenters suggest that the
Commission consider a more stringent code for combination utilities in a separate
proceeding. lo3
At the very least, they say, core service standards should apply to all
transactions between the distribution function of a combination utility and any of its gas
or electric affiliates. lo4
OPC argues that “the additional complexities of the competitive market and the
need to avoid market distortion in so many areas demands a common set of affiliate
standards.“‘05
Staff submitted that “[A]11 regulated utilities . . . have the seeds of affiliate
abuse within their organization if proper rules and structure are not required and
enforced.“lo6 Staff concludes that there are not any unique characteristics which would
exempt any of the types of regulated utilities. “All of the issues are, in general, the same
for all types ofutilities.“’
loo Docket No. 60 at 28.
lo1 Id.
lo2 Docket No. 61 at 28.
lo3 Id
lo4 Id. at 29.
lo5 Docket No. 50 at 36.
:“,5 ydrket No. 51 at 32.
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2.
Commission Decision
The Commission concurs with the general consensus of the parties that, except for
a separate GENCO code of conduct, gas, electric and combination utilities should be
subject to the same rules and practices adopted in this case. In this way, no regulated
entity will receive a competitive advantage, and inconsistencies can be avoided.
However, the Commission has noted throughout this Order those instances in which a
utility should be exempted from a particular requirement due to its size, its governing
structure, or the nature of its particular service.
To the extent GENCO rules are not
specifically applicable to gas operations, a gas utility or division is not subject to those
provisions.
C.
GENCO Codes of Conduct”’
The relationship between electric generation companies (“GENCOs”), marketing
affiliates, utilities and the provision of Standard Offer Service (“SOS”) caused much
debate both in this case and during the electric utility restructuring proceedings. The
essence of the debate is the avoidance of favoritism by utilities and the development of a
competitive and level playing field for electric generation.
Robust competition is an
essential ingredient of the restructuring process if consumers are to actually receive the
benefits of competition, such as lower prices and additional choices and services.
To a
substantial degree, these issues are being addressed through GENCO Codes of Conduct.
Therefore, the Commission will examine GENCO codes in detail.
lo8 Issue No. 4: Should different standards of conduct apply to a regulated utility and its GENCO than to
other regulated utilities and their unregulated a.fTiliates?
Issue No. 5: Should a utility’s affiliate(s) be
Direct Testimony of Anthony M. Ponticelli
1.
Parties’ Positions
During the restructuring proceedings, both BGE and APS filed GENCO Codes of
Conduct as a part of that process. The Commission approved those GENCO codes when
it approved their restructuring settlements.
Pepto did not file a GENCO Code of
Conduct because it is divesting all or practically -all of its generating assets. Cone&v
also did not submit a GENCO Code because it is divesting itself of substantial generating
assets. Both the BGE and APS GENCO Codes of Conduct provide that they are effective
until the Commission renders a decision regarding a GENCO Code of Conduct.
The BGE GENCO Code of Conduct has the following relevant provisions: log
l
Until June 30, 2006, the BGE-GENCO must sell all of the generation output of
the assets transferred under the Settlement (excluding all output sold to BGE for
SOS) into the wholesale market.
0
Until June 30, 2006 (the end of the BGE residential rate cap period) the BGEGENCO shall be a separate subsidiary from BGE’s retail marketing affiliate
and separate from BGE.
0
0
Until June 30, 2003, the BGE-GENCO shall not offer power or ancillary services
at prices and terms more favorable to an affiliate for resale to retail electric
customers in the BGE distribution service territory.
While it serves as the SOS provider, BGE shall not be able to market or promote
its SOS. However, this limitation shall not preclude BGE from providing
unbiased information to customers that SOS is available and the terms thereof
APS also filed a GENCO Code of Conduct as part of its restructuring
proceeding. ‘lo The APS GENCO Code of Conduct stated that until January 1, 2004, any
unregulated retail marketing affiliate of APS may sell or market to “retail electric
customers” generation service in APS’s Maryland distribution territory only through a
permitted to engage in the generation of electricity within the utility’s distribution territory? Issue No. 12:
What requirements should govern marketing of standard offer seryice for utilities and their tiliates?
lo9 The BGE GENCO Code of Conduct is set out in full in its Settlement in Case Nos. 8794/8804.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-__)
Page 54 of 168
subsidiary which is separate from the GENCO and APS. To the extent that an APS
marketing affiliate offers retail service in APS’s Maryland territory, the GENCO shall
offer power and ancillary services to non-affiliated licensed electric supplier up to the
same amount and upon the same terms as the GENCO provides such services to APS’s
marketing affiliate. Information on GENCO sales to affXates shall be simultaneously
posted with the execution of any agreement for such sale on a publicly available
electronic bulletin board. However, these provisions do not apply to sales by the GENCO
to AF5 for SOS supply.
In addition, the APS-GENCO Code of Conduct provides that until January 1,
2004, to the extent that the GENCO makes sales to retail electric customers outside of the
APS distribution territory, but within Maryland, the GENCO shall offer to sell to nonaffiliated licensed electric suppliers at least 75 megawatts of power annually. (This is in
addition to 180 megawatts of Warrior Run output being made available to the wholesale
market under the APS Settlement).
However, GENCO sales made using power
purchased in the wholesale market or from facilities or assets built or acquired after the
date of the APS Settlement,“’ or as part of a competitive bidding process, shall not be
subject to these requirements. The AI5 Settlement Affiliate Code of Conduct provides
that APS may not market SOS, but may provide unbiased information.
BGE stated that it views the GENCO standards contained in its settlement as an
appropriate revision to the standards established by the Commission in Case No. 8747.
Further, its settlement standards “represent a bargained-for exchange and address the
legitimate concerns for the new retail sales market.““2
Because it is divesting
‘lo The APS GENCO Code of Conduct is Attachment 3 of its Settlement in Case No. 8797.
‘*’ The Settlement was signed by the parties effective September 23, 1999.
‘I2 Docket No. 79 at 8.
its
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I-_)
Page 55 of 168
generation assets, Pepto has stated that “it should not be required to bear the costs of
implementing a GENCO standard of conduct during its transition to a wires-only
company.“113
Conectiv’s settlement code of conduct provides that the “DPL-GENCO”
shall be a separate corporate entity from “Delmarva” (now Conectiv). Conectiv noted
that there are not any special requirements applicable to its GENCO affiliate in its
settlement. * l4
Conectiv is selling off some generation assets, so its share in the
generation market is diminishing. Conectiv asserts that since it has no market power, nor
ability to exercise market power in the generation market, it has no ability to “unfairly
compete in that market.“l15
According to Conectiv, “There is simply no factual basis for
imposing a GENCO code on Conectiv to govern the transactions between the GENCO
and the retail marketing affrliate.“116
Neither the gas utilities nor Choptank address this
issue in detail because they do not presently have any generation assets.
In addition to BGE, many other parties support BGE’s Genco Code of Conduct.
Enron/Statoil urges the Commission to adopt BGE’s settlement standards as the generic
GENCO standards, revised to apply such standards to all electric companies and to
amend the standards to apply to the longer of a utility’s stranded cost recovery period or
the term of its SOS obligation1r7 Enron/Statoil argued that the “purpose of the GENCO
code is to minimize the opportunity for unduly discriminating behavior between the
utility.. . and new GENCO affiliate and any retail marketing affiliate of the utility.““8
The Joint Commenters say that Enron/Statoil “propose appropriate rules to address these
‘13 Docket No. 83 at 12.
‘I4 Docket No. 97 at 5. Conectiv’s Settlement is found in Case No. 8795.
“‘Id. at 3.
‘I6 Id.
I” Docket No. 85 at 15-16.
‘~3 Docket No.104 at 5-6.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I--)
Page 56 of 168
circumstances. ““’ The Alliance also supports “standards of conduct for GENCOs
that
are different from those applied to the relationships of utilities and other affiliates.‘7’20
Enron/Statoil concludes that “a GENCO code is the single most essential change to the
Case No. 8747 standards.“121
MAPSA emphasized the need for standards of conduct related to utility affiliated
generation companies. MAPSA noted that problems related to utility market power and
competitive market development are well documented in Pennsylvania. Also, market
inertia is a given. Consequently, “MAPSA strongly recommends that the Commission
establish, at a minimum, the BGE standards as the foundation for developing more
comprehensive standards for all state utilities that operate or will transfer title to utility
generation assets to an affiliate.“‘22 “These comprehensive standards should include an
expeditious decision-making process and stiff penalties to the utility for infractions on the
part of the utility or the affiliate.“‘23
Two GENCO-related issues received particular discussion, affiliate electric
generation marketing practices and the marketing of SOS. The utilities take the position
that an affiliate should be permitted to sell generation supply within the utility’s service
territory. Since the Act permits utilities to procure electricity for SOS from an affiliate,
Conectiv stated that “[I]t would, therefore, be inconsistent with the . . . Act to preclude an
affiliate from engaging in generation of electricity within the utility’s distribution service
territory.“124
“So long as appropriate standards of conduct are in place . . .to govern the
transactions and relationships between the utility and its core-service affiliates, there is no
‘lg Docket
lzo Docket
‘*’ Docket
12* Docket
No.
No.
No.
No.
84 at 19.
59 at 9.
104 at 7.
63 at 8.
‘23 Id.
124 Docket No. 53 at 16.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I)
Page 57 of 168
need to handicap utility affiliates in their efforts to compete in any marketplace.“125
Pepto stated that “economic theory and evidence from other deregulated electricity
markets indicate that generation markets are intensely competitive.“‘26 Pepto concludes
that “there is no reason to deprive consumers of an opportunity to buy power from their
distribution utility’s power producing affrliate.“‘27
WGL noted that “[IIf an affiliate
attempted to purchase or build facilities to generate electricity within the utility’s
distribution territory, then there are state requirements already in place that provide the
PSC the opportunity to review the proceedings to ensure that there are no unfair
advantages to the utility distribution company.“‘28
As for Standard Offer Service, the BGE-GENCO Code of Conduct and the APS
Affiliate Code of Conduct adopted as part of their respective settlements prohibit the
marketing of SOS, although unbiased information may be provided to consumers. Pepto
has stated that it “will not promote standard offer service.“12’
WGL asserted that
“incumbent utilities should not promote standard offer service as a ‘competing’
service. yy130 Only Conectiv and Choptank took a contrary position. Conectiv argues that
utilities “should be able to market, advertise or otherwise provide information regarding”
SOS, provided that the information is factual and that the utility does not imply that SOS
is more reliable than service from competitive suppliers.131
Choptank stated that it
“agrees wholeheartedly with Conectiv” that utilities should be able to market SOS.‘32
*Z Id. at 16-17.
126 Docket No. 64, Appendix A at 2.
12’ Id.
12’
129
13’
13’
132
Docket
Docket
Docket
Docket
Docket
No.
No.
No.
No.
No.
55, Appendix A at 2.
64, Attachment A at 4.
55, Appendix A at 5.
53 at 27.
70 at 8.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I)
Paee58of168
“We believe this is particularly true for a member-owned Cooperative.“133
Choptank
asserts that SOS is an important service and consumers should be aware of it.‘34
The marketers generally oppose permitting a GENCO to market electricity.
Enron/Statoil takes the position that a utility’s GENCO should not be permitted to sell
power at retail within the utility’s distribution territory while the utility is recovering
stranded costs or while the utility is providing SOS, whichever is longer. EnronBtatoil’s
position is based upon their belief that GENCOs receive advantages from below-market
transfers of assets from the utility to the GENCO, that there is inherent potential for selfdealing, and that the need exists for GENCOs to sell their output into the wholesale
market. Retail sales by afIiliates would not be inappropriate after the stranded cost or
SOS period, in the absence of market power.‘35
The Joint Commenters say that the Commission “should not permit a utility’s
affXate(s)
to engage in the generation of electricity within the utility’s distribution
territory unless and until the utility has voluntarily divested all of its generation assets via
a competitive bid process.‘Y136
This will prevent a utility from leveraging its incumbency
advantages to the detriment of consumers, according to the Joint Commenters.
The marketers also oppose the promotion of SOS because, they say, it would be
anti-competitive.
The Alliance argued that SOS is a “safety net service.“‘37
Further,
“SOS should not be marketed as a competitive alternative for customers by the utilities or
by affiliates
I
on the utilities’ behalf”138 According to the Alliance, “the terms and
conditions of SOS are most appropriately distributed via the State’s Consumer Education
133 Id.
134 Id. at 9.
I35 Docket N o . 60 at 2 1.
136 Docket N o . 61 at 1 0 .
13’ Docket N o . 59 at 1 6 .
13* Id. at 17.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I-)
Page 59 of 168
Campaign.” 139
The Alliance concludes that “[mlarketing
of the SOS would create an
insurmountable barrier to competitors and must be strictly prohibited.“14’ The Joint
Commenters say that the Commission should prohibit the promotion of SOS and require
GENCOs
to be separate subsidiaries from retail marketing or the SOS function.
The
Joint Commenters continue to advocate a single uniform code of conduct for all
Maryland energy utilities. Lastly, they say that the Commission “should also consider
extending the Standard Offer concept to the utilities’ natural gas supply operations.“r4’
OPC argued that since “generation ownership is allowed in the local area, clear
separation must be required between generation, retail marketing, and default service.“142
This means the GENCO affiliate must be separate from both the utility and any retail
affiliates. Since bilateral transactions between the GENCO and the SOS provider are
permitted, OPC submitted that the Commission “must be ready to regulate such bilateral
transactions to assure that they are made on an arm’s length basis” once the rate cap
period ends. 143 OPC also stated that SOS “should not be actively promoted by the utility
in the initial three year period or if the utility is awarded the right to continue to offer
standard offer service after the end of the three year period.“‘44 According to OPC, “This
restriction is necessary to encourage the development of a competitive market without the
utility attempting to hold on to customers.“‘45
Staff has proposed four separate standards for affiliates,
GENCO standard.
I39 Id.
14’ Id. at 18.
14’ Docket No. 61 at 2 2 .
14* Docket No. 50 at 1 5 .
143 Id. at 16.
144 Id. at 29.
‘45 Id.
one of which is a
“Staff recommends that during the transition period, the generic
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
Page 60 of 168
standards based on the individual settlement agreements for GENCOs should apply.“‘46
Staff also noted that bilateral contracts between Maryland GENCOs and utilities “could
be a source of concern.“147
If St&s recommendations for GENCOs are adopted (&II
structural separation with standards of conduct appropriate for marketing affiliates),
electric company consumer protection and any idverse competitive effects would be
accounted for in an adequate manner. I48 Staff noted that “[A]11 non-utility parties agree
that the utility should not engage in promotion of SOS or in any way acknowledge it as a
‘competitive service”‘. 14’ Staff supports its generic version of the settlement standards
on this issue. 15’
2.
Commission Decision
The Commission finds that it is appropriate to adopt a GENCO Code of Conduct
because it will foster competitive electric generation markets, minimize market power,
and help to eliminate any inherent advantages that a GENCO might currently possess.
The Commission concurs with the prevailing sentiment of the parties that the BGE
settlement GENCO standard should be adopted as the generic GENCO standard. It
should also be noted that in adopting this generic GENCO standard it will be made
applicable to any utility operating in Maryland that does business with any company
affiliate that acquires electric generating assets in the Wure. In this way, another utility
that has an affiliate or acquires generation assets will be subject to the same standards as
the current electric utilities.
The Commission is not unmindtil of the extensive negotiations that led to the
APS GENCO code of conduct. No party to the APS stranded costs proceeding, Case No.
146 Docket No. 51 at 1 5 .
147 Id. at 17.
14’ Id. at 16.
14’ Docket No. 73 at 1 3 .
Direct Testimony of Anthony M. Ponticelli
8797, opposed that settlement. In particular, Staff and OPC supported that settlement and
the Commission recently approved it. Therefore, during the term of the residential price
cap in Case No. 8797, APS shall conduct its activities consistent with its GENCO code of
conduct rather than the generic code adopted herein. However, the Commission will
continue to monitor the effects of this decision on the development of a competitive
market and reserves its right to institute a proceeding to review the APS GENCO Code of
Conduct, if necessary.
As for Pepto, the Commission will grant its request to be exempt from the
GENCO code of conduct adopted herein because Pepto will have no generating assets, or
be retaining only insignificant generating assets. However, if a Pepto affiliate acquires
new generation assets, then the GENCO code of conduct will apply. On the other hand,
Conectiv will be subject to the generic GENCO code of conduct adopted herein.
As
Conectiv noted in its comments, there are not any special requirements applicable to its
GENCO affiliate in its settlement, Case No. 8795. Unlike Pepto, Conectiv will retain
sufficient generation assets to warrant the application of the generic GENCO Code of
Conduct. Moreover, as the end of the transition periods approach, the Commission will
determine the appropriateness of extending or modifying the provisions of the GENCO
Codes of Conduct in light of the status of generation and retail electricity markets at that
time.
In this proceeding, the Commission has adopted a generic GENCO Code of
Conduct that requires a GENCO to be a separate subsidiary from the retail marketing
affiliate and separate from the utility until June 30, 2006. Therefore, a GENCO may not
I50 Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I--)
Page 62 of 168
itself “market” the electricity produced from its generation assets. The APS GENCO
Code of Conduct has a similar provision applicable only to the APS distribution territory.
Except for SOS, the GENCO will be required to sell all generation output into the
wholesale market. (Al% has different terms that have a similarly non-discriminatory
impact). Consequently, the marketing affiliates- will be required to procure electric
supply in the wholesale market for subsequent sale to retail customers. Inasmuch as
retail marketing affiliates will have to procure electricity in the wholesale marketplace,
they will not possess any market power. Therefore, it is appropriate to encourage retail
marketing affiliates to participate in the competitive retail market in the utility’s existing
service territory. In fact, the Commission notes that both the BGE and APS stranded cost
settlements exhibit an effort by the settling parties to require the utility’s retail marketing
affiliate to participate in the local market, on a non-discriminatory basis.
In conclusion, until June 30, 2006 a GENCO (except as provided in the AR’s
GENCO code of conduct) must sell all of its output not dedicated for ‘SOS, into the
wholesale market. Retail marketing affiliates may, and in fact are encouraged, to
participate in the local retail market, on a non-discriminatory basis as explained herein.
There is almost unanimous agreement among the parties that a utility should not
be permitted to market standard offer service. To begin with, SOS is not a competitive
service; it is a default service. In addition, the Commission desires to eliminate
unnecessary barriers to competition. Overcoming customer inertia may itself be difficult
and this should not be compounded by the promotion of a service that is not intended to
be a competitive service. As the Alliance noted, SOS is a “safety net service.” No party
presented any persuasive evidence to convince the Commission that there is a public
benefit to marketing SOS. Therefore, consistent with the near unanimous position of the
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I-)
Page 63 of 168
parties, the Commission will prohibit the marketing of SOS by utilities.
A utility may,
however, provide unbiased educational information to customers that SOS is available
and the terms of SOS. The Commission will address this issue again if, and when, an
entity other than the electric utility is considered as the provider of SOS.
D.
Transfer of Asset?
1.
Definition
(4
Parties’ Positions
In Case No. 8747, the Commission determined that “utility assets are tangible
property included in a utility’s rate base.“‘52 The utilities agree with this determination.
Pepto asserted that there is “no reason to alter this definition.“153
The marketers take a differing view. The Alliance argued that the Commission’s
definition of a utility asset “fails to recognize the value of services and personnel that are
also integral parts of the utility and which can be used to substantially benefit the
utilities’ affiliates.“‘54
Further, if the Commission is not willing to classify utility
personnel as “assets” and require appropriate valuation of, and compensation for their
services, then the Commission “must ensure that no transferring of personnel is
permitted.“155
The Alliance concludes that utilities should not serve as the training
ground for affrl~ate employees.
15’ Issue No. 7: What value should be used when utility assets or affiliated assets are sold or transferred
between the companies (book or fair market value)?Issue No. 8: What constitutes a utility asset’?
‘52 Case No. 8747 at 50.
‘53 Docket No. 64, Attachment A at 3.
154 Docket No. 59 at 11.
‘55 Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I)
Page 64 of 168
The Joint Commenters state that a “utility asset” should be defined “as all utilityowned or controlled property, real or intangible, that would be saleable in a market.“‘56
They argue that the Commission’s definition “is too narrow because it leaves numerous
opportunities for the utility or its affiliates to exploit the utility’s incumbency advantages
in unfair and anti-competitive ways.‘Y157
The Joint Commenters state that the definition
of “utility asset ” “does not hinge on who owns the asset.“158 Rather, the question is
whether the value of the asset is a result of the utility’s provision of franchise monopoly
services. “15’ In that case, affiliates will gain an unfair advantage if they have access to
these assets on terms and conditions that are more favorable than those available to
competitors. The Joint Commenters emphasize, as an example, that the brand name and
reputation convey an unfair advantage and that the utility should be required to charge its
affiliates a royalty for use of the utility’s brand name and logo.
OPC submitted that utility assets “include not only physical assets but intellectual
property created by the utility, any proprietary information, computer data bases owned
by the utility, and access to utility services such as billing envelope” and which exist
solely because of the existence of the regulated utility and because of billing fUnctioni
paid for entirely by ratepayers. 16’ Intellectual property includes the utility logo and other
proprietary materials. OPC concludes that transfers of these intangible assets, that can be
used by more than one entity, should be prohibited unless they are available to others at
the same cost.
No. 61 at 12.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-Z (I-2
Page 65 of 168
The Maryland Energy Administration (“MEA”) asserts that the Commission’s
definition of assets “is unjustifiably too narrow.7’161 It asserted that non-tangible assets
can be associated with income and are routinely included on utility balance sheets and
may or may not qualify for inclusion in rate base. 162 “Because non-tangible assets as well
as tangible assets can be the source of gain when transferred to an affiliate, the MEA
believes the Commission should discard the recognition of only tangible assets
incorporated in its Case No. 8747, Order No. 74038 affiliated transactions standards and
take a commensurately broader view of utility assets.“163
Staff takes the position that utility assets “should be construed as those economic
resources that have historically either been included in rate base or necessarily represent
cost components devoted to utility operations that would be typically reflected in rate
base.” 164
Staff does not include intangible assets in its definition because “historically
these assets have not been included in the cost of service.“‘65
m
Commission Decision
Many of the parties asserted that the Commission’s definition of utility assets
adopted in Case No. 8747 is too narrow. The Commission agrees. The Commission finds
that the definition of a utility asset should encompass intangible property as well as
tangible property.
Clearly intellectual property, computer data, access to the billing
envelope and any other proprietary information has substantial value.‘@’ These valuable
assets are the product, at least in part, of the utility’s provision of State-franchised
monopoly services, ratepayer funded support, and State regulation and protection.
I61 Docket N o . 72 at 2 .
162 Id.
‘63 Id. at 2-3.
164 Docket N o . 51 at 1 8 .
‘M Docket No. 73 at 1 0 .
166 As discussed in detail in Subsection H, utility names and logos have significant value.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I)
Page 66 of 168
Consequently, the Commission believes that it is appropriate to require that intangible
assets be subject to the same principles and allocation procedures as tangible assets. 167
2.
Valuation
(4
Parties’ Positions
In Case No. 8747, the Commission found that “asymmetric pricing should govern
the sale or transfer of assets between a utility and its affrliates.“‘68 Asymmetric pricing
requires that transfers of assets from the regulated utility to an afftliate
should be
recorded at the greater of book cost or market value while transfers of assets from the
affiliate to the regulated utility should be at the lesser of book cost or market value. This
principle had been previously adopted in Case No. 8577 and was affrrmed in Case No.
8709.
The utilities oppose asymmetric pricing.
Dr. Gordon stated that “the affiliate
should pay no less than the utility’s appropriately specified incremental cost of providing
an asset or service. “16’ “The use of fully-allocated cost by utilities . . . more than meets
this criterion, and builds in a ‘margin of protection’ that provides a high level of
assurance that ratepayers are not subsidizing the firm’s competitive ventures.Y’17o
According to Dr. Gordon, “payments by affiliates that are above incremental costs
represent overcompensation to ratepayers, limits the benefits of competition in other
markets and punishes companies for being affiliated with utilities.“‘71
Conectiv argues that “rather than apply asymmetrical pricing across the board to
all utilities, it is appropriate for utility companies to provide cost allocation manuals to
167 Although some parties discussed employees within the context of defining assets, the Commission
addresses issues relating to employees within the context of the sharing of services, in Subsection E.
‘68 Case No. 8747, Order No. 74038, 89 MD PSC 54, 79 (1998).
16’ Docket No. 56 at 19.
“O Id.
“’ Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I-)
Page 67 of 168
the Commission . . to ensure that . . . ratepayers do not subsidize competitive
activities.“‘72 Further, a waiver process should be established for accounting standards.
During the period of capped rates, “concerns about affiliate transactions should be
virtually irrelevant since it is [the utility] . . . and its shareholders that are at risk
irrespective of the price at which the transaction occurs.“173
Pepto submitted that “[C]ustomers will benefit if utilities are permitted to use fair
market value pricing, instead of fblly allocated costs, in appropriate circumstances.“‘74
WGL asserted that assets should be transferred at fair market value because this “is
consistent with the widely accepted practice of employing competitive procurement
policies whenever possible.“‘75
Chesapeake concurs. 176
Columbia argued that
asymmetric pricing constitutes “over protection” for regulated utility customers and
should be abandoned. 177 NUI stated that “requiring the transfer price to be set at net book
value or prevailing market price regardless of the transaction’s direction” will protect
ratepayers and encourage economic eficiency. 178 When a prevailing market price cannot
be established, NUI recommends a negotiated price no lower than book value, or possibly
an appraisal. 1 7 9
The marketers support the continuation of asymmetric pricing.
The Joint
Commenters say that the “asymmetric pricing principle continues to provide valuable
protections for*monopoly distribution ratepayers, as well as competitors.“180
“* Docket No. 53 at 19.
173 Id. at 19-20.
174 Docket No. 64 at 7.
175 Docket No. 55, Attachment A, p. 3.
176 Docket No. 54, Comment on Issues 7 & 8 .
“’ Docket No. 49 at 4.
17’ Docket No. 69 at 6.
‘79 Id.
‘*’ Docket No. 61 at 12.
“To aid in
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-2
Page 68 of 168
applying the principle, the utility should bear the burden of establishing the market value
of goods and services exchanged between itself and its affiliates.“181 Enron/Statoil
supports asymmetric pricing because it will “prohibit cross-subsidization by the utility’s
ratepayers of unregulated activities and eliminate the potential for anti-competitive
pricing that favors utility affiliates. 182 The Alliance stresses that the Commission must
ensure that no confusion results for customers from asset transfers, such as trucks from
BGE to BGE Home. ls3
OPC also supports asymmetric pricing.
However, OPC suggested that for
physical assets with a net book value of $100,000 or less, the asset could be transferred at
net book value to streamline the process. OPC suggests that the Commission maintain
access to data regarding inter-affiliate transfers to guard against abusive practices. ls4
Staff also supports the continuation of asymmetric pricing of assets, The purpose
for this policy “is to guarantee that the regulated utility operations are made whole for
assets that are transferred to an affiliate and to ensure that assets are not transferred into
the utility at inflated prices.“‘85
“Staff believes this methodology provides appropriate
security to prevent any self-dealing that may occur.“186 Staff suggests that assets with a
book value below $5,000 may be transferred at book value for administrative
efficiency. 187
Assets with a book value greater than $100,000 should require an
independent assessment of the value of the transferred assets at the time of transfer.‘88
u-0
Is1 Id.
‘** Docket
lE3 Docket
184 Docket
‘85 Docket
:i: ydmket
‘**Id:
No.
No.
No,
No.
No.
60 at 2 2 .
59 at 9-10.
50 at 1 8 .
51 at 1 7 .
73 at 9 .
Commission Decision
Direct Testimony of Anthony M. Ponticelli
The Commission has endorsed the principle of asymmetric pricing on three
previous occasions. As the Commission stated in Case No. 8577, “[t]he purpose of this
principle is to guarantee that . . .[the utility] is made whole for any assets it transfers away
from regulated operations, and to ensure that assets are not transferred to regulated
operations at inflated prices.“lgg
The Commission also determined that asymmetric
pricing “is fair to utility ratepayers, provides a reasonable insurance policy against
improper self-dealing, and constitutes a necessary protection against the possible
improprieties that can result from a corporate structure that does not completely separate
regulated from unregulated operations.““’ The only parties to this proceeding that have
opposed asymmetric pricing are the utilities. The utilities have not advanced any new
arguments to persuade the Commission to alter its current policy. Therefore, it is
appropriate to continue the principle of asymmetric pricing of assets.“’
E.
Shared Services and Employees/Loans and Guarantees”’
1.
Services and Employees
(4
Parties’ Positions
The utilities generally support permitting employees and services to be shared
because of economies of scope and scale. Dr. Gordon asserted that limitations on sharing
employees should be “carefully considered, narrowly drawn, and based on legitimate
concerns for consumer welfare.“193
However, he also stated that it is inappropriate to
share employees “who possess non-public, market sensitive information.“rg4 BGE noted
18’ Case No. 8577, Order No. 72107,86
Md PSC 225,234 (1995).
Igo Id.
lgl Any transfer of a utility name or logo is specifically subject to the Commission’s findings and decision
as stated in Subsection H.
lg2 Issue No. 9: What specific rules and procedures should the Commission adopt governing the sharing of
employees and/or services between the utility and its affiliate?
lg3 Docket No. 56 at 20.
lg4 Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I--)
Page 70 of 168
that it “supports the Commission’s rules and procedures governing the sharing of
employees and/or services as established in Case Nos. 8577, 8709, and 8747 as applied in
BGE’s Cost Allocation Manual on file with the Commission.“‘g5
Conectiv noted that in Case No. 8747, the Commission determined that “a utility
must identify and separate its affiliates’
operational and managerial employees from
those of the utility in order to avoid cross-subsidization and to assure fairness in the
competitive marketplace.“lg6 “[Flor those employees and services which can be shared, a
utility must identify them and seek Commission approval for such sharing.“lg7 Conectiv
requests that the Commission clarify that the operational and managerial separation
requirements be applied only to a retail electric or gas marketing affiliate that provides
the same product as the utility in Maryland. lg8 Conectiv asserted that while core service
afiliate Standard No. 5 requires physical separation of core affiliates, there is no
corresponding requirement for non-core affiliates. lgg Conectiv concludes that consistent
with this approach, Case 8747 should be “clarified to confirm that it is not applicable to
non-core-service affiliates.“200 Conectiv also stated that it “agrees that the Commission
should ensure that costs are properly accounted for and allocated for any facilities or
employees shared” with afiliates.201 This is the purpose of Conectiv’s Cost Allocation
Manua1.202
Conectiv concludes that applying these separation requirements to all
affiliates “would impair beneficial competition.“203
Dr. Gordon supports Conectiv’s
lg5 Docket No. 57 at 6.
:z jI!!se No. 8747 at 45.
198 Docket No. 53 at 21.
I99 Case No. 8747, Core Service AfEiliate Standard No. 5 stated: “A utility and its core-service affiliate(s)
shall operate from physically separate locations to avoid the inadvertent sharing of information.”
‘O” Docket No. 53 at 22.
20’ Id. at 23.
‘02 Conectiv has a Cost Allocation Manual that has been filed in Delaware. A copy has been provided to
this Commission. However, this Commission does not currently require Conectiv to file a CAM.
‘03 Docket No. 53 at 22.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-3
Page 71 of 168
position204 Pepto also supports Conectiv. Pepto asserted that “there is no economic or
ratepayer protection rationale for applying . . . [core standard No. 51 to ‘non-core’ service
Choptank also asserts that the Commission needs to address confusion
surrounding this issue.206
Choptank argued that .the Commission needs to clarify that
identification and separation of operational and managerial employees of a utility and its
affiliates should only apply to affiliates engaged in an unregulated business which was
formerly a monopoly offering. 207 Choptank argues that placing restrictions on managers
or employees used by non-core affiliates, or even requiring approval prior to any sharing
is beyond the Commission’s authority.208
“Choptank thinks it should be sufficient to
inform the Commission of such activities instead of asking for permission. YY20g Choptank
argues that Maryland utilities and affiliates should not be barred from using personnel to
any greater extent than competitors.210
“Choptank believes that it is vital to the interests
of its members and for the State that the State’s Utilities are not put at a disadvantage
when trying to compete for non-core businessyY2r1
WGL asserted that “[Rlules and procedures for the sharing of employees should
be based on the type of services being provided by the employees. A distinction can be
drawn between ‘operational’ and ‘non-operational’ employees.“212
According to WGL,
non-operational employees should be permitted to provide services to affiliates because it
‘04 Docket No. 56 at 20.
205 Docket No. 64, Attachment A at 3 .
206 Docket No. 70 at 6.
“’ Id.
‘08 Id.
2og Id. at 7.
210 Id.
“’ Id. at 6-7.
‘I2 Docket No. 55, Appendix A at 4.
Direct Testimony of Anthony M. Ponticelli
benefits ratepayers. “The allocation of the costs of these services to the affiliate reduces
costs to ratepayers.”
Chesapeake supported the standards adopted in Case No. 8747. It argued that
those cost accounting principles and standards of conduct “are the appropriate
mechanisms to govern the sharing of employees and/or services between the utility and
its affiliates and will ensure that the affiliate is not being subsidized by the utility
ratepayersyY2i4
Chesapeake also supports Conectiv’s position that rules for sharing
employees and services should only apply to interactions with core-service affiliates.215
NUI insisted that the utility should be permitted to share employees and services
with affiliates “for all functions which would not cause the utility to have an unfair
competitive advantage due to the utility’s provision of monopoly service.“216 According
to NUI, services that could be shared include:
“accounting, human resources, legal,
treasury, information systems (with appropriate safeguards), executive, and any other
service that would not create an unfair advantage to a competitor in the market.“217 NUI
opposed full structural separation and argued that there is “no rationale as to why such
extreme measures are necessary.“21g
NUI emphasizes that it is particularly important for
smaller utilities to generate significant economies of joint use with affiliates.
The marketers take a much more stringent view of sharing employees and
services. The Mid-Atlantic Propane Gas Association (“PGA”) indicated that the utility
and affiliate should maintain separate work forces.
“At no time . . . [should] any
personnel be employed simultaneously for both the regulated utility or electric
2’3 Id.
2’4 Docket No. 54
215 Id.
2’6 Docket No. 69 at 7 .
217 Id.
218 Id. at 8.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhib;it AMP-2 (I--)
Page 73 of 168
cooperative and its affdiates(s).“21g
Enron/Statoil
insisted that there should be
“absolutely no sharing of employees and/or services between the utility, any GENCO,
and any marketing affiliate of the utility, with the possible exception of certain ‘corporate
support’ type functions.77220 Further, “to the extent some might consider, as a ‘service’,
the offering of loans or loan guarantees by a utility .to, or on behalf of, any utility affriliate,
it should be clear that this kind of service is prohibited.“221
The Joint Commenters recommend a detailed list of rules for sharing employees
and services between utilities and afftliates.222
“As a general principle, such joint
utilization shall not allow or provide a means for the transfer of confidential information
from the utility to the affiliate, create the opportunity for preferential treatment or unfair
competitive advantage, lead to consumer confusion, or create significant opportunities for
cross-subsidization of afXliates.“223
Except for certain corporate support functions,
utilities and affiliates should not be permitted to jointly employ the same employees, or
make temporary or intermittent assignments or rotations, according to the Joint
Commenters. A utility should also be required to track and annually report publicly all
employee movement between the utility and affiliates. The Joint Commenters say that
their proposed rules “represent a tradeoff between the protection of competition through
strict structural separation and the preservation of some scope economies through shared
corporate support functions.“224
‘I9 Docket No. 45 at 2.
‘*’ Docket No. 60 at 22.
‘*’ Id.
223
***Docket
No. 61, p. 15-19.
Id. at 16-17.
224 Id. at 18.
Direct Testimony of Anthony M. Ponticelli
The Joint Commenters make a point that a utility should not be permitted to
guarantee the debt of an affiliate. There are at least two reasons for the Commission to
reconsider its previous position:
First, the Commission’s reduced reliance on traditional
cost-of-service regulation makes it more difficult to use
periodic cost-of-capital reviews to protect monopoly
ratepayers against the possible harmful effects of such debt
guarantees. Second, the potential magnitude of the generalrelated debt that the distribution utility might be asked to
guarantee is much greater in relation to the remaining
utility assets than any previously contemplated affiliate
debt to be guaranteed.225
The Joint Commenters conclude that these risks “outweigh any possible gain to Maryland
consumers that would result from giving utility aff3iates access to lower cost debt.“226
Finally, the Joint Commenters say that “the public policy benefits of protecting
competition through strict structural separation generally outweigh the scope economies
achievable through sharing of employees and services.“227
The Alliance recommends that all sharing and transferring of personnel be
prohibited. “The Alliance’s experience indicates that the utilities are generally incapable
of adhering to Commission orders respecting employee sharing, and are similarly
incapable of properly accounting for and properly charging employee time above or
below the line.“228 According to MAPSA, “[IInappropriate relationships between utilities
and retail affiliates drive competitors out of the marketplace.“22g
OPC also offered extensive recommendations on this issue. OPC stated that the
“greater the possible degree of separation, the better.“230 In addition, “shared services
225 Id. at 19.
226 Id.
227 Id. at 18.
228 Docket No. 59 at 11-12.
22g Docket No. 63 at 1 0 .
230 Docket No. 50 at 2 0 .
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
Page 75 of 168
OPC supports a
should be limited to corporate governance and similar services.“231
requirement that each utility submit a CAM for approval. By requiring approval of the
manual in advance, OPC noted that the Commission could avoid surprise changes in
allocation methods between rate cases.
OPC emphasizes that it is important that
separation be maintained for affXiates operating. in the utility’s service area and for
energy supply and trading affiliates.
OPC urged that shared employees “should be
compensated on an asymmetric basis (the higher of cost versus value).“232 Generally,
OPC recommends that transfers of employees to affiliates should require the affiliate to
pay 25% of a year’s salary to the utility “to reflect the value to the affiliate of using the
utility as a personnel agency.“233
In addition, such employees should be prohibited from
returning to the utility for two years “to prevent frequent exchange of employees and the
information they bring with them.“234
Other goods and services, OPC argued, should be
compensated at the higher of market value or cost, or cost plus a 10% royalty.
services purchased by the utility in excess of $‘50,000
Goods or
should require a competitive
bidding process. OPC suggested that any premiums or royalty payments “must be placed
in an account for refund to customers on an annual basis.“23s
OPC also addressed the issue of loans and loan guarantees.236
required that loans from a utility reflect a market rate of interest.
Case No. 8747
According to OPC,
market rate should reflect the credit standing of the affiliate on “a stand-alone basis.Y’237
Moreover, OPC noted that: “[A]ny rate which is less than 25 basis points above the
market rate appropriate for the term of the loan and the credit rating of the utility should
231 Id.
232 Id.
233 Id.
234 Id.
235 Id.
236 Id.
at 2 1.
at 22.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-2
Page 76 of 168
be deemed unreasonable in the absence of clear evidence that the affiliate standing alone
has the same credit rating as the utility.“238 OPC also recommends imposing an annual
fee of 25 basis points to the amount guaranteed to compensate ratepayers for the value of
the guarantee.
Staff argued that goods and services that are transferred “should be based on a
fully-distributed cost.“23p This is based upon the “concept of flowing all costs to relevant
business activities . . . so that reasonable cost attribution occurs.“24o Staff supports a
continuation of the policy in 8747 of separating operational and managerial employees
“in order to avoid concerns of cross-subsidization and to assure fairness.“241
The utility
should seek approval to share employees and services and provide certain information to
the Commission. In addition, Staff recommends implementing a competitive bidding
process for utility purchases from affiliates with an estimated purchase price of $50,000
or more. Staff supports the sharing of non-operational resources. Finally, for services
that can be marketed by the utility, “it must be priced at market value rather than fullydistributed cost and it should be made available to the market on the same terms and
conditions as those offered to the affiliate.“242
W
Commission Decision
The Commission herein reaffirms in principle the findings adopted in Case No.
8747, and certain previous proceedings, that some degree of sharing of utility employees
and services is appropriate. The Commission again rejects the concept of strict structural
separation.
Furthermore, sharing of certain general corporate services employees
237 Id.
238 Id.
239 Docket No. 51 at 18.
240 Id.
241 Id.
242 Id. at 19.
Direct Testimony of Anthony M. Ponticelli
produces opportunities for greater efficiencies that can reduce the cost of service for
ratepayers while avoiding adverse impacts on the competitive market. If these costs are
properly allocated, this results in a net benefit for ratepayers. As we stated in Case No.
8747:
Although customers do not acquire a proprietary interest in a utility’s
assets through the payment of rates for service, they are, nevertheless,
responsible for the total cost of service. If any portion of this total cost
can be allocated to an affiliate which is using assets included in that cost
of service, ratepayers are entitled to an offset . . . Accordingly, we find
that a fully distributed cost methodology should be used in allocating
joint costs between a utility and its affiliates.243
However, as previously noted, there must be limits because of the potential
adverse consequences of customer confusion, ratepayer cross-subsidization, transfer of
confidential utility or customer information or preferential treatment in the provision of
utility service. Specifically, the Commission finds that utility operational and managerial
employees may not be shared between a utility and a non-core affiliate, just as they are
prohibited from being shared with core affiliates.
Generally, employees providing corporate support-type services may be shared.
However, market research, public relations, and advertising employees, as well as major
account executives and other marketing staff employees, customer service
representatives, and accounts receivable staff may not be shared.
As a general matter, the Commission finds accountants and lawyers may not be
shared between a utility and an affYiate. Legal services and accounting personnel may be
shared only under limited circumstances. For instance, accounting personnel may be
shared for the purpose of establishing corporate accounting policies and standards,
243
Case No. 8747,
Order No.
74038,89 MD PSC 54,70 (1998).
Direct Testimony of Anthony M. Ponticeili
MPSC Case NO. U-12134-Exhibit AMP-2 (I-)
producing consolidated corporate financial and tax statements, and for preparing
consolidated financial records or reports. Legal personnel may not share responsibilities
for contract negotiations and regulatory affairs with an affiliate but may share
responsibilities for consolidated corporate support, such as OSHA and ERISA
compliance, or preparation of certain Internal. Revenue Service or Securities and
Exchange Commission filings.
While the broad parameters of the Commission’s policy on the sharing of
employees is set forth herein, the Commission intends to review each utility’s proposed
employee sharing plan to ensure its compliance with these policies. Prior to any sharing,
the utility must identify the employees and their functions that it seeks to share with
either a core or non-core affiliate and obtain prior Commission approval. To the extent
that employees are being currently shared, they must be identified immediately for the
Commission and a prompt request for approval must be filed. To the extent the utility
shares any employee with an affiliate that is contrary to the policies adopted herein, such
sharing must cease as soon as practicable.
The Commission hereby reaffirms previous decisions that all joint costs for
services, including shared employees, will be allocated between the utility and its
affiliates upon the basis of a fully distributed cost methodology. However, when services
can reasonably be marketed by a utility to the public, the fair market value of such
services must be allocated as the imputed costs to the subsidiary. Appropriate costs will
be allocated with the sharing of services and the utility will receive a commensurate
return for the sharing of services and employees. This will benefit ratepayers by reducing
the cost of service. The Commission declines to extend asymmetrical pricing principles
Direct Testimony of
Anthony M. Ponticelli
to services and employees and rejects OPC’s suggestion that an additional fee of 10% to
25% should be added to the cost of utility services in certain instances.
2.
Loans/Guarantees
(4
Decision in Case No. 8747
The Commission specifically addressed the issues of affiliate borrowing and
utility loan guarantees in Case No. 8747. In that proceeding the utilities, not surprisingly,
argued that they should be permitted to make loans to affiliates and issue guarantees on
their behalf. They asserted that as long as there was no ratepayer subsidization,
competition should not be impeded.244
Further, they said that standard regulatory
practices could be used to prevent any adverse impact on ratepayers.
The utilities
emphasized that they should be permitted to guarantee loans to affiliates without any fee
being imposed or imputed for this service because affiliate loan guarantees are a standard
business practice.246
However, at least one utility stated that utilities in a holding
company structure are not allowed by PUHCA to guarantee loans (although a non-utility
parent may do so).247
Finally, some utilities argued that pursuant to the PSC Law, the
Commission may only regulate loan guarantees made by utilities organized under
Maryland law.248
244 Case No. 8747, Order No. 74038, 89 MD PSC 54, 8 3 (1998).
245
Id.
246 Id. at 80.
247 Id. at 80 and 92.
248 Id. at 80; see §§S-202, 5-203 and 6-101 (formerly 524(b)(4)).
Direct Testimony of Anthony M. Ponticelli
Equally not surprising, the marketers opposed these types of activities.
emphasized that affiliates
They
should stand alone and not be subsidized by ratepayers.24g
Marketers argued that loan guarantees place the utility’s credit worthiness at risk, which
might eventually be reflected in rates for service. 250 The marketers also complained that
utilities can raise capital at costs below that of most small businesses and therefore, loan
guarantees are a non-competitive subsidy to afflliates.251
The marketers also stated that
all borrowings by affiliates must be at market rates.252
OPC emphasized in Case No. 8747 the need for certain restrictions on loan
guarantees. These would be designed to avoid placing the utility’s credit standing at risk
and ensure that ratepayers are not harmed.253
Staff concurred with a previous
Commission position that utilities should be permitted to guarantee the debt of an
afflliate, provided that the fair market value of the guarantee is imputed to the regulated
activities of the utility.254
However, Staff took the position that utilities should not be
permitted to loan affiliates’ money because the utility is not a financial institution.255
OPC agreed that long-term borrowings should not be allowed.256
In Case No. 8747, the Commission determined that upon its review and approval,
utilities would be allowed to lend money to their affiliates at rates the affiliate could
obtain in the open market.257
The Commission found that this would avoid certain
transactions’ costs without harming ratepayers. The Commission also determined that
24g Id.
‘So Id.
251 Id.
252 Id.
253 Id.
254 Id.
255 Id.
256 Id.
257 Id.
258 Id.
at
80.
at 83.
at 80.
See Case No.
at 83.
at
83-84.
8710.
Direct Testimony of Anthony M. Ponticelli
“under the appropriate circumstances” it would approve loan guarantees.25g
The
Commission determined that authority to permit such requests is found in the PSC
Law.26o
The Commission also determined that an additional fee for such guarantees
would not be required because non-Maryland corporations make loans to affiliates
without a fee being imposed.261
Loans and guarantees present another issue that should be reexamined in light of
changing circumstances in the restructuring energy marketplace and the record herein.
With electric generation assets being transferred to GENCOs
and a myriad of new
affiliate relationships taking shape, the regulated utility is being exposed to
unprecedented outflows of cash and other assets while being saddled with new debt
obligations in addition to those for the transferred assets. Therefore, special scrutiny is
now required for these transactions.
(b)
Parties’ Positions
The marketers and OPC have been vociferous in their opposition to shared
services. EnronBtatoil has stated that “to the extent some might consider, as a ‘service’,
the offering of loans or guarantees by a utility to, or on behalf of, any utility affrliate, it
should be clear that this kind of service is prohibited.“262
The Joint Commenters have
noted with concern the reduced reliance on cost of service regulation and the
substantially increased magnitude of utility debt obligations as reasons for not allowing a
utility to guarantee the debt of an affrliate.263
They conclude that “[Tlhese risk factors
outweigh any possible gain to Maryland consumers that would result from giving utility
5gId. at 81.
261 Id., See tj 5-202, fj 5-303, § 6-101, 0 6-102 and § 6-103.
260
Id. at 81.
262 Docket No. 60 at 23.
263 Docket No. 6 1 at 1 9 .
2
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-)
Page 82 of 168
affiliates access to lower cost debt.“264 As for OPC, it argued that loans should reflect
market rates (i.e., the credit standing of the affiliate on a stand-alone basis) and concludes
that this requires a 25 basis point adjustment to the utility’s credit rating.265
In this proceeding, Staff has addressed concerns raised by the Commission
regarding the impact of loans and loan guarantees by a utility upon the regulated
operations of a utility.266 Staff noted that volatile earnings, risky investments, mergers or
takeovers, significant changes in the capital structure, and other factors can increase risks
for a utility.
Staff argues that “[Tlhe most direct and common result of increasing
(business or financial) risk to a utility is an increase in the cost of capita1.“267 “If the
‘allowed’ cost of capital (rate of return) is set to a higher value as a result of increased
risk, utility rates must increase.“268
Staff noted that it is the Commission that has ultimate
authority over rates generally, and the rate of return specifically. Staff asserts that if the
allowed rate of return is significantly below the market cost of capital for an extended
period of time,’ utilities will respond accordingly.269
“That it, they will ‘disinvest’,
allowing the system to slowly deteriorate, ultimately affecting the quality of service and
safety.“27o However, it is the Commission’s responsibility to assure service quality and
safety. According to Staff, the necessary financing would have to come from equity or
additional operating economies. Staff noted that if the parent company is healthy, this
may not be a problem but if not, then “deterioration of the system could occur without
some form of forceful intervention.“271 Staff noted that a utility may become a “cash
=@ Id.
265 Docket No. 50 at 22.
266 Docket No. 105 at 10-22.
267 Id. at 12.
268 Id. at 13.
26g Id.
270 Id.
271 Id.
Direct Testimony of Anthony M. Ponticelli
cow” for a holding company that is in trouble.272
Staff concludes that “as a result of the
potential for increased risk and the resulting increase in rates, Staff recommends that the
Commission consider some additional safeguards for ratepayers.”
Staff noted that the
federal government and other states have addressed these issues.274 According to Staff,
while the banking industry has been deregulated in recent years, federal legislation has
created safeguards or “firewalls” to prevent holding company finances from negatively
affecting federally insured deposit companies.275
For example, regulations provide
access to holding company finances and the ability to require divestiture of depository
institution subsidiaries under certain circumstances. “In addition, inter-affiliate activities
are strictly limited, similar to our existing standards of conduct.77276
Staff has described a number of Commission alternatives to respond where a
utility requests an escalating rate of return as a result of company-specific risks. For
example, the Commission may order a utility to restructure its debt or refinance in order
to control capital costs. The Commission also might order a utility to cease any and all
financial transactions with the holding company or any affiliates
financial or legal separation.277
or consider fLrther
Staff also suggests the institution of appropriate reporting
requirements.
Staff foresees the regulated operations of utilities being overshadowed by
unregulated businesses. Therefore, “as the utilities transform themselves into ‘just wires’
companies, the Commission may want to impose limitations (as a percentage [%I of total
assets or of regulated debt for example at any one time) on that type of lending
“’ Id.
273 Id. at
274 Id.
275 Id. at
276 Id. at
“’ Id. at
14.
14-15.
15.
16.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (1-A
Page 84 of 168
activity. “278 Staff claims that it will require certain oversight of loan activities for it to
maintain information on the credit quality of a utility’s cost of capital.
Staff argues that “[c]ontinuous
support for multi-billion dollar ventures that rival
or exceed the regulated utility’s capitalization should not be condoned as prudent
financial behavior.“27g
In general, some type of separation is necessary.‘y280 Staff
indicates that one way to protect ratepayers is to permit utilities to use retained earnings
as “seed money” for unregulated investments but prohibit recourse financing so that only
the seed money, and not utility assets or future earnings, are at risk.281
Staff argued that
the large amount of debt incurred by affiliates of BGE and APS should be self-supporting
now.282
While the Commission has supported modest loan amounts in the past, Staff
mentioned that “it is sheer hubris to expect any Commission to support credit supports (or
debt) on unregulated investments gone bad or if the sum total exceeds the invested
regulated capital, let alone many times that amount.“283
Staff concludes that utilities
should exercise prudence’in establishing a credit rating for its affiliates and that part of
that process should be an annual utility tiling that identifies which affrliates have credit
guarantees or sponsorship and to what degree that exists.284
w
Commission Decision
The Commission has given careful consideration to the financial relationship
between utilities and their affiliates. Consistent with its policy to reject strict structural
separation, the Commission declines to adopt the recommendation of the marketers that
all loans and guarantees should be prohibited. However, this does not give the utilities a
2781d. at 18
27g Id. at 19.
*” Id., Staff noted that Florida Power & Light Co. is shielded from a non-utility affiliate, FPL Capital
Group, Inc., and is not responsible for the latter’s debt repayment.
*‘I Id. at 20-21.
*“Id. at 20.
Direct Testimony of Anthony M. Ponticelli
license to engage in imprudent activities or to jeopardize investments in utility services,
maintenance or improvements.
As both OPC and Staff have noted, certain rules and
restrictions are appropriate.
The Commission determines that a utility shall not issue a loan or guarantee the
debt of an affiliate if it creates a reasonable likelihood that the utility’s cost of capital,
credit worthiness or ability to provide regulated services will be adversely affected.
Loans should be from retained earnings only. Retained earnings should be used only
when the utility is assured that its ongoing required investment in pipes, wires and other
assets will be maintained at a sufficiently high level to assure continued safe, reliable and
economical electric or gas service for its customers. A utility or affiliate, or any part of a
consolidated company, should not assume that the Commission will automatically
approve a loan by a utility or authorize any guarantee of an affiliate’s debt.
Guarantees
of loans will be strictly scrutiniied. Loans should be arranged on an arm’s length basis,
they should be set at fair market rates, they should include standard terms and conditions,
and they should contain standard penalties for failure to repay the loan consistent with the
stated terms and conditions.
In Case No. 8747, the Commission determined that:
[alpproval of loan guarantees may be granted ‘upon a
finding that to do so is consistent with the public
convenience and necessity.’ . . , If, subsequently, the loan
guarantee has a negative impact upon a utility’s credit
standing, a corrective adjustment can be made in the
utility’s next base rate case.
Thus stockholders, not
ratepayers would bear the costs of any adverse effects on
the cost of capita1.285
283 Id. at 2 l-22.
284 I d . at 22.
285 8 9 M D PSC 54,81 (1998)
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-Z (I)
Page86of168
The Commission will continue to look to stockholders to bear such costs. However, the
concerns of the Commission extend beyond the application of risk in the setting of rates.
Given the substantial shifts taking place in the structure and operation of the electric or
gas companies, and their attendant affiliates, there is heightened awareness regarding the
impact that loans and guarantees could have on the safety and reliability of utility service
and the overall financial well-being of the regulated entity. Therefore, each gas or
electric utility doing business in Maryland shall file with the Commission an annual
report that provides appropriate details of all outstanding loans and guarantees of debt by
the utility. This report shall include the amount of debts, securities, loan, guarantees,
terms of payment, call provisions, name of the corporate record keeper, credit agency
analysis, issuance costs, default terms, and any other appropriate data necessary for this
Commission to appropriately analyze these financial activities.
F.
Reporting Requirements286
1.
Parties’ Positions
The utilities say that no new reporting requirements are necessary beyond those
enumerated in Case No. 8747. Conectiv suggested that the Commission may request
information as issues arise. It noted that the existing standards have been in existence for
over 18 months and stated that to its knowledge, no evidence has been presented of any
violation. Conectiv also argued that “reporting requirements should be developed on a
case-by-case basis.“287 Pepto insisted that “Maryland utilities and their affiliates should
not be required to bear the expense of, and competitive disadvantage associated with, an
elaborate reporting and inspection scheme in the absence of some reason to believe that
286 This section responds to Issue No. 10: What reporting requirements should be developed to demonstrate
utilities are in compliance with standards of conduct?
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I)
Page 87 of 168
code of conduct violations will occur or, if they do occur, will likely go undetected.“288
Choptank stated that [F]or a Cooperative, additional costs are a large concern because
increased costs deteriorate the money allocated to the member-owner.‘7289
Choptank
noted that “a Cooperative has no shareholders to fall back on for excessive costs.“2go
Conectiv also noted that the Commission’s existing complaint procedure is available.
Columbia agrees with this point.2g1
WGL mentioned that “the relatively few complaints from the over 100,000
customers purchasing their gas from non-utility companies would indicate that the
current standards and subsequent reporting requirements are working.y’292 WGL argues
that the purpose of reporting requirements is to “enable the Commission to determine
whether the non-utility activities will affect regulated services, and to take timely steps to
protect utility services, if necessary.“293
Chesapeake believes the use of cost allocation
principles by the utilities requires the utility to monitor its own relationship with its
affiliates
to insure fair allocation and efficient management of costs.
Reporting
requirements to demonstrate that utilities are in compliance would be excessive and
unnecessary.“294
Chesapeake asserted that issues can be addressed through a complaint
procedure or as part of the next utility rate case.
NUT suggested that reporting requirements “should be based on regulatordetermined materiality thresholds.“2g5
This will avoid unnecessary costs and burdens on
the utilities and Commission. Further, the utility should keep sufficient records to enable
287 Docket No.
288 Docket No.
28g Docket No.
‘go Id. at 8.
2g1 Docket No.
2g2 Docket No.
2g3 Id. at 5.
2g4 Docket No.
2g5 Docket No.
53 at 24.
64, Attachment A, p . 3-4.
70 at 7.
49 at 5.
55, Appendix A at 4.
54.
69 at 8.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-3
Page 88 of 168
the Commission to resolve any alleged improprieties. NUI generally advocates that
utilities maintain CAMS.
The marketers generally prefer strict separation requirements, which they note
eliminate the need for most reporting and compliance requirements.
Alternatively,
detailed reporting and CAMS are necessary. The Joint Commenters “recommend that the
Commission adopt a relatively rigorous set of record-keeping, reporting and audit
requirements to apply for an initial three-year period, and re-evaluate the need for this
information thereafier.“2g6
These records should include appropriate information
regarding affiliate transactions and the maintenance of affiliate contracts and related bids.
In addition, to the extent that FERC requires more detailed information or expeditious
reporting, utilities must comply with FERC rules. The Joint Commenters recommend
that for the first three years that these records be subject to an annual independent audit.
They also say that such records should be available for third party review upon 72 hours
notice. Finally, the Commission should reaffirm the disclosure and non-discrimination
provisions adopted in Case No. 8747.
The Alliance has proposed a number of reporting and compliance requirements
including: utilities must demonstrate their efforts to educate utility and afftliate personnel
regarding the code of conduct and a continuing training plan; a CAM must be submitted
to the Commission that sets forth appropriate allocation and pricing of shared services,
personnel or assets approved by the Commission; utilities shall file compliance programs
with the Commission annually; and Employee Transfer Reports shall be filed quarterly.
The Alliance emphasized that these reports “must be publicly available.“297
The Alliance
concludes that the Commission “must implement standards of conduct that eliminate to
2g6 Docket No. 61 at 19.
Direct Testimony of
Anthony
M. Ponticelli
the greatest extent possible the need for the competitors of utility affiliates to police their
compliance with Commission rules and regulations.“2g8
EnronLStatoil noted that utilities should be required to demonstrate compliance
with the standards of conduct by: incorporating affiliate standards into their tariffs; filing
proposed implementation procedures with the Commission and all interested parties;
providing appropriate employee training; and filing annually (or within 15 days of a
material change) a report identifying the corporate organizational structure, affiliated
entities and the services performed, employees within each affiliate, and a disclosure of
all services provided by the regulated utility to its competitive affrliates.2gg Additionally,
the Commission should perform regular compliance audits and implement appropriate
complaint procedures.
OPC supports substantial reporting requirements, including annual reports and
concurrent reports.300 Annual reports should cover the following areas: operational and
organizational charts and information; allocations to affiliates
of administrative, general,
joint and common costs; reports of all affiliate transactions during the year; cash
management transaction reports, including information or earnings, dividends, loans and
other infusions of equity; and reports of all employee transfers.
Concurrent reports
should be filed shortly after a new affiliate is formed, containing basic organizational
information and a description of new products and services and business objectives of the
affiliate, plus compliance plans. OPC also stated that records of affiliates that transact
business with the utility must be available for Commission audit and that the utility
should itself have periodic audits conducted at shareholder expense.
“’ Docket No. 59 at 1 4 .
2’S Id.
“’ Docket No. 60 at 2 3 .
3oo Docket No. 50 at 23-27.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-Z (I-)
Page 91 of 168
previously adopted, 308 as well as the standards of conduct contained in this Order. The
purpose of the CAM is to formulate the methodologies and procedures for the allocation
of the costs of shared assets, employees and services between the utility and its affiliates.
CAMS will serve as an aid in identifying the transactions that are actually taking place
and will assist the Commission in verifying that appropriate methodologies are used and
appropriate cost allocations are being made.
Although each CAM should be tailored to the specific circumstances of a given
utility, the following elements are required:
a
Corporate organization;
0
Location of each corporate entity;
l
Officers of each corporate entity;
l
Index of operational and managerial employee units of the utility and each
affiliate;
l
Index of shared services; and
l
Methodologies and procedures for cost allocations of services and asset transfers.
Changes to the CAM will require Commission approval.
While energy utilities will generally be required to file a CAM, the Commission
finds that the record reflects that this requirement should not be applied to every gas or
electric utility.’
Cooperatives, due to their particular structure, lack of generation
facilities, and federal requirements are hereby exempted from filing a CAM. They are
not exempted from the annual reports required below. Municipal utilities and Eastern
307 Id.
308 The four cost allocation principles are: allocations should be made on the basis of a fully distributed
cost allocation methodology; the cost of services provided by a utility to its affiliate should be based upon
the full cost of such services, including any indirect costs; the fair market value of services which
reasonably could be marketed by a utility to the public must be allocated as the imputed cost to its affiliate;
and transfers of assets between the utility and the affiliate should be based upon asymmetric pricing
principles.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I)
Page 90 of 168
Staff argued that “[T]he point of compliance is to ensure that the regulated entity,
which has no competitors, is not subsidizing non-regulated affiliates or discriminating
against non-affiliate
companies in providing services.7y3o1 Staff stated that within six
months from the adoption of final standards, utilities should file appropriate compliance
plans.302 Plans should be filed annually thereafter, or within 90 days of any changes303
Staff strongly supports adoption of CAMS, which along with a code are “essential tools to
ensure that ratepayers receive accurately priced products and services.“304 Staff requests
that the Commission require utilities to “allow Staff complete and total access to all
corporate books and records of the corporate organization that develop, verify and/or
substantiate the reasonableness of all charges and allocations of costs to the utility and
ratepayers.” Staff suggested this is necessary to assure that costs assessed to ratepayers
are reasonable and equitable.
Staff also recommends that utilities undertake, “at
shareholder expense,” an independent audit of their CAM at least once every three years,
or upon a change in corporate structure, or when utility rates are revised.306 Finally, Staff
insisted that utilities should file annual reports of assets transferred during the year
between the utility and affiliate. This will provide a “reasonable basis” to ensure that
assets are transferred at appropriate values307
2.
Commission Decision
The Commission will require most energy utilities in the State to file Cost
Allocation Manuals beginning with a CAM to be filed by no later than November 1,
2000. CAMS will be filed in accordance with the four cost allocation procedures
30’ Docket No. 73 at 1 1 .
302 Docket No. 51 at 1 9 .
303 Id.
304 Docket No. 73 at 1 1 .
3o5 Docket No. 51 at 20.
306 Id.
Direct Testimony of Anthony M. Ponticelli
Shore Gas Company, which are both exempted from this proceeding, are exempted from
these CAM requirements. Likewise, a CAM may impose too much of a burden on small
utilities. Therefore, any gas or electric utility doing business in Maryland with annual
gross revenues of less than $20 million shall be exempted from filing a CAM.
This will
minimize the burdens on these smaller companies.
Case No. 8747 required each gas and electric company that tiled a quarterly
earnings report to file at the same time an affidavit that its cost allocations and transfer
pricing of assets comply with the principles adopted in both Case Nos. 8577 and 8747. A
requirement for affirming the accuracy of its cost allocation manual was also included
In addition to the other reports required herein, these reports and affidavits should be
continued.
In general, gas and electric utilities are presently required to file annual reports in
accordance with §$6-205
through 6-210 of the PSC Law. It is the expectation of the
Commission that each utility will apply their CAM in determining the total revenues and
total earned returns that are reported in the annual report. The purpose of these reporting
requirements, among other things, is to facilitate Commission oversight of utility
activities and ensure that utilities are complying with the appropriate cost allocation
procedures and the various standards of conduct adopted in this proceeding.
These
allocation procedures and standards are being implemented to protect ratepayers, ensure
the financial integrity of the regulated entity, and foster competition Consequently, the
Commission requires that the following additional information be included in the annual
report:
0
Complete descriptions of all affiliate transactions, including asset transfers;
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-)
Page 93 of 168
l
Complete descriptions of the utility services, including employees, shared with
each affiliate;
l
Complete description of all cash management transactions between a utility and
any affiliate involving loans, securities, guarantees of debts or changes in capital
structure;
l
All information currently filed on FERC Form No. 1 if such information is not
required by FERC after the date of this Order; and
l
Descriptions of employee transfers from the utility to an affiliate or from an
affiliate to the utility, including the employee’s name, department, general
responsibilities and duration of assignment.
The Commission is mindful of the independent audit requirement for cost
allocation manuals contained in $4-208 of the PSC Law. In addition, each utility shall
permit the Staff access to all books and records of the utility. The utility shall provide
access or a copy of any necessary books and records to Staff in order to ensure that the
utility is complying with the Orders of the Commission and that ratepayers are not
subsidizing affiliate activities.
G.
Promotional Practices30g
1.
Parties’ Positions
Generally, the utilities take the position that the Promotional Practices
Regulations (“PPRs”) are an unnecessary competitive handicap and should be repealed.
Consequently, they support unlimited discretion for utilities and afftliates
to engage in
such practices. Dr. Gordon recommends “that these rules be rescinded in their entirety,
since they have been superseded by subsequent commercial and regulatory events
3og Issue No. 14: Should the Commission’s Promotional Practices Regulations, codified as Subtitle 40 of
Title 20 of the Code of Maryland Regulations, be revised? Issue No. 15: How and to what extent, if any,
should utilities and/or their affiliates be permitted to engage in promotional practices as currently defined to
offer incentives, rebates, or other promotions, including but not limited to, demand-side management to
encourage the use or sale of electricity in any form? Issue No. 11: When should the details of a utility’s
proposed promotion be filed with the Commission? Issue No. 16: What requirements and
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-)
Page 94 of 168
(especially Order No. 74038).“310
He argued that the Commission “has sufficient tools to
address the legitimate regulatory concern of preventing utilities from subsidizing their
affiliates.“311
BGE supports Dr. Gordon’s positions.312
BGE asserts that “the Commission’s
transfer pricing rules, cost allocation principles and Cost Allocation Manual already
prevent subsidies from BGE to its affiliates.“3’3
In addition, BGE suggested that the
Commission has sufficient audit and ratemaking authority over the utility to protect
ratepayers from inappropriate promotional expenditures314
Pepto argued that the PPRs are anti-competitive “to the extent they limit the
activities of Maryland utility affiliates while imposing no restrictions on out-of-state
competitors.“315
According to Pepto, joint promotions should be allowed as long as
affiliates bear their own fair share of the cost of such promotions and comply with all
other code of conduct requirements.316
Pepto emphasizes that the PPRs should be
repealed because they were designed to suppress competition between electric and gas
utilities, which is no longer compatible with the pro-competitive orientation of current
State policy.317
According to Pepto, “other market participants will be well-situated to
detect any violations and call them to the Commission’s attention.“318
Pepto
recommends that the Commission rely on consumer protection regulations to be
restrictions should govern the relationship between utilities and their affiliates in
communications, marketing, and permissible promotional practices?
310 Docket No. 56 at 22.
3*’ Id.
::t Fpcket No. 57 at 7.
314%
315 Docket No. 64, Attachment Aat 5.
3’6 Id. at 6.
3’7 Id. at 5.
318 Id. at 4.
Cl
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhbit AMP-2 (I)
implemented under the Act rather than the “outdated” PPRs to guard against abuses319
Pepto also argued that if the PPRs are not repealed, then the Commission should
eliminate their applicability to non-residential customers and rule that the PPRs do not
apply to activities of utility affiliates in a competitive ma.rket.320
Conectiv stresses that as long as below-the-line dollars are used, there should be
no restrictions, including promoting the sale of electricity or DSM measures.321
Only if
the costs of a utility promotion will be captured “above-the-line” should it be filed with
the Commission.322
If the PPRs are not rescinded, “the Rules should be amended to
clarify that non-jurisdictional activities performed by affiliates are not subject to such
Rules.“323
Conectiv says that marketers might try to use the PPRs as a “sword” to assert
that any retail marketing activity of an affiliate is a “promotional practice.” This would
require the affiliate to show that its marketing activity is a just and reasonable business
practice and is calculated to benefit the utility and its customers.324
Conectiv requests
that the Commission reconsider its requirement for utilities to inform the Commission of
new non-utility activities on a time-concurrent basis and the level of assets committed to
the venture. According to Conectiv, “[Dlisclosure
of individual investments in non-
utility activities would competitively disadvantage Maryland utilities.“325
proprietary,
commercially-sensitive
This is
information that competitors not subject to
Commission jurisdiction will not be required to reveal. Conectiv says that reporting the
aggregate investment in such activities annually would be preferable. In addition, if
every new investment in non-utility activities must be reported, it will likely require
3’g Id.
320 Id.
32’ Docket No. 53 at 32.
322 Id. at 25.
323 Id.
324 Id.
at 30.
at 31.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-2
Page 96 of 168
hiring personnel solely to comply with this requirement. Conectiv noted that the PPRs
require that details of a promotion must be filed 30 days in advance of issuance.
Conectiv says that “[N]o participant in a competitive market should be required to
disclose its marketing plans to competitors 30 days in advance of execution of those plans
or to perform and disclose its analysis of the costs and benefits of such plans.“326
Conectiv also points out that COMAR 20.40.01.02(F) may be interpreted to prohibit a
utility affiliate from packaging two competitive products if one product is offered below
cost.327
Conectiv says non-utility affiliates would not be barred from making such
package offers.328
Columbia says the PPRs are no longer needed and should be rescinded.32g “They
are inappropriate in today’s highly competitive energy markets, and place utilities and
their affiliates at a competitive disadvantage because they do not apply to other
participants in the market.“330
In particular, Columbia argues that “the standards adopted
in Order No. 74038 should be modified to permit utilities to engage in jbint advertising,
sales calls, and other promotional activities with their afflliated energy suppliers if they
are willing to engage in similar activities with unaffiliated suppliers under the same terms
and conditions.33’
NUI says that “[Nleither a utility nor its affiliate should be discouraged from
participating in a market, particularly in the demand side management area where
efficient utilization of energy is encouraged.“332
325
326
327
328
Id. at 26.
Id.
Id. at 3 l-32.
Id. at 32.
32g Docket No.
N o . 49 at 5-6.
330 Id. at 5.
33’ Id. at 6.
332 Docket No. 69 at 1 1 .
NUI concludes that because the PPRs
Direct Testimony of Anthony M. Ponticelli
have this “discouraging effect” they are “completely outdated.“333 However, NUI argues
that it would be reasonable to file proposed promotions 30 to 60 days in advance, on a
confidential basis, with implementation at the end of this period.334
Chesapeake says the PPRs should be modified to exclude their application to
affiliates “because it exceeds the jurisdiction of the Commission to directly regulate the
promotional activities of unregulated afIiliates.“335
Chesapeake also says that the
definition of “public utility” or “person” under COMAR “should include gas marketers
and suppliers because they should be subject to the same standards as the regulated utility
and its core service afflliates.“336 Chesapeake says that “[A]s long as no harm comes to
the ratepayers . . . the standards of conduct adopted in Case No. 8747 should be sufficient
to monitor promotional practices, including incentive and rebate offers, and any
promotion to encourage the use of the utility’s regulated energy source, like demand-side
management promotions.“337
The Commission “could monitor promotional practices
thrbugh the utility’s code of conduct and cost accounting principles.“338 Chesapeake
concludes that annual reporting can provide the Commission with the information
necessary to protect ratepayers from potential harm that could result from public utility
PSC’s
WGL takes a different position than most other utilities. WGL “believes that the
*.
Promotional Practice Regulations should not apply to an affiliate of a public
service company. Otherwise, the regulations should remain in effect.“340 WGL says the
reasons for this are: 1) “the focus and approach to regulating public service companies
333 Id.
334 Id.
at 1 0 .
::i Fdocket No. 54.
337 Id.
338 Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
Page 98 of 168
have changed dramatically since the regulations were first adopted in 1970” and 2) “the
Commission’s jurisdiction over the activities of unregulated affiliates
questionable.“341
is highly
Further, non-jurisdictional utility affiliates are not subject to a
prohibition against promotional offerings. According to WGL, “lifting of the restrictions
on an affiliate while retaining the restrictions on the regulated entity will foster the
economic use of energy sources without ratepayer subsidies.342 WGL concludes that as
long as affiliate costs are not subsidized by ratepayers, any tirther action is beyond the
Commission’s jurisdiction.343
The marketers take a strict view of promotional practices. The Alliance takes the
position that “promotions by regulated utilities should be prohibited entirely and the
Promotional Practices Regulations repealed.“344
Therefore, promotional filings are
unnecessary. The Alliance claims that the PPRs have been routinely ignored. Therefore,
if they are retained, they should be enforced.345
In addition, it says “[Ultilities must also
be precluded from engaging in merchandising, service and repairs, and providing various
equipment, appliances and materia1.“346
However, affiliates should not be precluded
from offering manufacturer incentives and rebates.347
The Alliance argues that because
utilities’ sole function will be to deliver electricity, “there is simply no justification for
permitting utilities . . . to engage in promotional practices for conservation, energy
-_
efficiency, or to promote the use of electricity, or to engage in any other non-distribution
33g Id.
340 Docket No. 55, Appendix A at 6.
341
Docket No. 55 at 6.
342 Id., Appendix
343
A
at
6.
Id. at 8.
344 Docket No. 59 at 19.
345 Id.
346 Id.
347 Id. at 16.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I--)
Page 99 of 168
related activity.“348
“These are functions of the competitive market, not monopoly
EnronBtatoil says that revision of the PPRs “should be addressed only after first
attending to the necessary revisions and additions to the standards of conduct.“350
EnronLStatoil argues that if a service can be provided competitively by an entity other
than a utility, then the utility should not be offering a promotion, unless the incentive is
targeted to its distribution business, its distribution customers can receive the incentive
regardless of their electricity supplier, and the incentive is applied as a distribution cost
savings to the customer.3s1
EnronBtatoil
advocates “a prompt Staff review process for
any utility promotions to ensure compliance with the prohibition against the marketing of
standard offer service, and with the necessary disclaimer requirements.352
MAPSA says that the PPRs are old, have stagnated, and largely been ignored.353
In addition, “the markets in which they purport to operate in and regulate have changed
dramatically.“354 Now that electric service is to be competitive, “the promotion of energy
efficiency, energy efficient appliances and equipment, and conservation programs
appropriately belongs in the competitive market.‘7355 MAPSA argues that “[UJtilities
34a Id. at 20.
34g Id.
350 Docket No. 85 at 2 9 .
351 Docket No. 60 at 25.
352 Id. at 24.
353 Docket No. 63 at 1 2 .
354 Id.
3s5 Id. at 12-13.
I
I
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-_)
Page 100 of 168
should only be delivering energy. 77356
Once utility participation in these programs is
prohibited, then the PPRs should be repealed, MAPSA says.357
The Joint Commenters urge the Commission to “restrict the utilities themselves to
providing Standard Offer Service and . . prohibit any promotions of such service.“358
Therefore, affiliates should not be prohibited from engaging in promotional practices.
However, all promotions should comport with code of conduct provisions. The Joint
Commenters say that utilities should file the details of proposed promotions “with
sufficient lead time to allow for review and amendment as needed to comply with the
code of conduct.‘735g
They suggest 30 days.
They argue that this recommendation
“strikes a balance between the utility’s legitimate desire to respond in a timely manner to
market conditions and the public interest in ensuring that utility promotions do not
undermine the development of competition.“360
“To the extent that the utility still
administers any demand-side management programs, it is especially important that the
Commission apply the non-discrimination provisions.“361
OPC says “afEliates should be allowed to engage in most promotional practices to
sell their services without either regulation or requirement that promotional plans be filed
with the Commission. “362
According to OPC, this puts utility affiliates on the same
footing as other unregulated energy service companies. However, OPC recommends two
restrictions on - afiliate promotional practices:
“1) They should be prohibited from
discounting or repackaging services offered by the regulated utility to prevent customer
confUsion and unfair marketing; 2) To the extent that they are permitted to advertise their
~~~1~ at 13.
I .
358 Docket No. 61 at 24.
35gId. at 21.
360 Id.
361 Id. at 25.
I
affiliation
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I--)
Page 101 of 168
with the utility in any way, they must clearly state in promotional materials
that they are not part of the regulated utility and that customers need not contact them to
obtain utility service.y’363 As for the regulated utilities, OPC says that they should “not be
allowed to advertise, except for advertising related to safety and the offering of energy
conservation and low income assistance through public benefits programs.“364
OPC says
DSM programs funded through a public benefit surcharge should not be provided by
utilities in the long run, if possible.365
OPC asserts that if the utility is the service
provider, it should be required to provide a disclaimer “that DSM programs will be made
available to all wires customers, regardless of their retailer and that customers do not
have to purchase electric energy either from the utility as default service or from the
utility’s affiliate to be eligible for these programs.366
Utilities should also be permitted to
provide factual information requested by customers as required by the Commission.367
OPC says it is reasonable for a utility to file a schedule of promotional practices 30 days
before beginning a promotional campaign.
OPC emphasizes that utilities should no
longer be permitted to promote appliance retailing, rental and service guarantee activities.
Therefore, utilities would have to spin off these activities to afftliates.368 OPC’s
recommended changes will require certain one-time filings by utilities.369
“Staff recommends that the existing Promotional Practice Rules in COMAR be
repealed.“37o
According to Staff “the nature of the regulated utility will likely be one of
a smaller business entity in a large group of unregulated generation and marketing
:z: p No. 50 at 3 1.
364 Id.
x5 Id.
x6 Id.
367 id.
368 Id.
36g Id. at 28.
370 Docket No. 51 at 2 3 .
I
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MPSC Case No. U-12134 -Exhibit AMP-2 (I)
Page 102 of 168
businesses, perhaps within a holding company umbrella.“371
In a holding company
structure, the regulated wires company only has an indirect interest in helping maximize
the output of its sister affiliates. ‘7372 “Thus, it would seem to follow that the incentive to
sell the utility’s generation solely into the former native load market does not exist as
strongly as it used to.“373
Therefore, Staff concludes that the PPRs are “no longer
appropriate within the context of the emerging deregulated arena, and should be repealed
within the transition period.“374
If a distribution company wants to present a particular
service offering to customers, then it should be required to tariff that offering consistent
with Commission regulations, Staff says.375 Staff noted that affiliates can be expected to
make unique customized offers to consumers to be competitive with marketers. The
current PPRs would restrain this activity, thereby restraining the market and its
creativity.376
Staff noted that DSM programs are designed to promote conservation and
more efficient uses of resources.377
Staff concludes that “there is no reason to prevent the
promotion of electricity use (or gas use for that matter) in any form, by distribution
utilities and affXates.378
Staff also concludes that “[R]estructuring
all of Maryland’s
formerly regulated energy markets creates a different situation for all competitors which
requires very little promotional practice oversight from this Commission.“37g
2.
Commission Decision
The Commission notes approvingly the general agreement of all parties that the
PPRs should no longer be applied to utility affiliates. The Commission agrees that in a
371 Id. at 22.
372 Id.
373 Id.
374 Id.
375 Id.
376 Id. at 23-4.
377 Id. a t 24-25.
378 Id. at 25.
37g Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-3
Page 103 of 168
competitive marketplace it is inappropriate to require affiliates to abide by the PPRs
when other competitors do not have to comply with these regulations. Application of the
PPRs to affiliates creates an unnecessary competitive handicap for the affXates.
The utilities (except for WGL) and Staff support complete repeal of the PPRs.
This would result in no promotional practices restrictions being applied to the utilities
and would allow them to freely promote their services.
The marketers and OPC argue
strenuously that the only services the utilities should provide is their regulated
transmission and distribution services. Therefore, they say that the PPRs can be totally
repealed because utilities should be completely prohibited from engaging in promotional
practices.
The Commission concurs with the parties and will exempt affiliates from the
PPRs. However, the Commission will take a more moderate approach regarding the
regulated
utilities. The Commission will undertake a review of COMAR 20.40 in due
course to determine whether those regulations should be repealed or revised. In the
meantime, the Commission notes that $ 4-503(b) of the PSC Law prohibits a utility from
using special rates, rebates, drawbacks, or refunds to treat persons of similar
circumstances differently, or to give undue preference to a person, locality, or class of
service. Additionally, the Commission notes that this Order establishes prohibitions on
the marketing of Standard Offer Service and on joint promotions of a utility and an
affiliate.
The Commission also wishes to make clear that the utilities will be permitted to
promote energy conservation, energy efficiency, and the use of electricity or gas within
the confines of these constraints.
utility if it provides DSM services:
The following disclaimer must be provided by the
MPSC
Direct Testimony of Anthony M. Ponticelli
Case No. U-12134-Exhibit AMP-2 (I)
Page 104 of 168
DSM programs (fill in the specific program if applicable)
are available to all distribution customers, regardless of
their generation supplier. Customers do not have to
purchase electric energy either from (till in the utility’s
name) or from any affiliate to be eligible for these
programs.
Finally, a request by a utility to engage in any promotional practice must be filed with the
Commission at least 14 calendar days before the proposed promotion is to begin.
H.
Name and Logo3*’
1.
Parties’ Positions
The utilities generally take the position that minimal disclaimers are appropriate
when an affiliate uses the utility’s name or logo. In addition, they argue that affiliates
should neither be banned from using the name or logo of the utility or be required to pay
a royalty for such usage. Not surprisingly, the marketers argue that affiliates should be
prohibited from using the utility’s name or logo. In the alternative, they support the
imposition of a royalty. OPC supports the marketers on this issue. The AG-CPD favors
a ban. Staff recommends that comprehensive disclaimers be adopted. No issue in this
proceeding has generated more controversy.
Dr. Gordon, testifying on behalf of several utilities, stated:
From an economic perspective, the only reason to require a
disclaimer is to alert the potential customer to the fact that
it is not dealing with the utility. Such a notice does not
require an extensive disclaimer and to create a requirement
for an extensive disclaimer only raises costs to one set of
non-affiliated
competitors,
thereby providing
the
competitors with a cost advantage.3 ’
380 This section analyzes Issue No. 13. What disclaimers should be provided to detail the relationship
between a utility and its affiliate or between an affiliate and parent?
381 Docket No. 56 at 20.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (1-A
Page 105 of 168
In addition, he says that the affiliate’s roots in the regulated company “are a major source
of any legitimate competitive advantage the afIiliate may possess. ‘7382
Dr. Gordon says
that permitting afftliates to use the same or similar names and logos is beneficial to
consumers because it provides “information on who they are dealing with at a time when
many regulators and state legislatures are funding consumer education programs and
generally searching for ways to help consumers adjust to the new gas and electricity
markets.“383
He argues that clear brand identification encourages accountability and
provides an incentive for firms to maintain high levels of quality and service. Dr. Gordon
concludes that “[Elliminating the apparent connection with the incumbent will give a
windfall to new entrants but it will do nothing for customers.“384
Dr. Gordon also says
that requiring affiliates to pay royalties when they use the utility’s name or logo “is an
unreasonable policy with no basis in the economics of either competitive or regulated
markets.“385
Royalties “simply create a transfer from the affiliate to the utility.“386 Dr.
Gordon also claims that “there is no objective, practical means for setting royalty
payments.“387
Pepto says that in Case No. 8747, the Commission determined that an affiliate
may use a utility’s name or logo provided that there is no representation that an
advantage accrues to customers as a result of dealing with the affiliate.
The Commission
also determined that a prominent disclaimer that the utility and affiliate are separate
entities must be displayed. Pepto says there “is no need for additional disclaimer
382 Id. at 21.
383 Id.
384 Id.
385 Docket No. 79, Reply Testimony of Kenneth Gordon at 24.
386 Id.
387 Id.
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requirements.“388 Pepto also says that restrictions on names/logos are bad policy because
“utility brand names and logos are an effective means of conveying truthful information
to consumers.‘738g
Pepto argues that “[olwners of brand names and logos also have a
powerful incentive to maintain the value of the brand/logo by maintaining high standards,
which also ultimately redounds to the benefit of .consumers.y73go Pepto says that while
some parties have argued that consumers will be confused by shared trade names and
logos, no evidence supports this proposition. “Customer confusion is unlikely to be a
problem where adequate disclaimers are in place to guard against deceptive practices, as
they are in Maryland,” says Pepco.3g1
Pepto says that not all utilities have favorable
reputations and that utilities that do “have earned that goodwill by providing high quality
service. 7y3g2 As for royalties, Pepto noted that “no utility has ever included this so-called
goodwill asset in rate base and received a rate of return on its value.“3g3 Further
proponents of royalties have not presented a viable means of valuing a utility’s
name/logo. Pepto also points out that most neighboring stated freely permit names/logos
to be shared, “subject only to reasonable disclaimer requirements.“394 Pepto concludes
that if Maryland adopted harsher policies, it would simply harm local utilities and give
competitors an unfair advantage.
As for disclaimers, “Pepto
has reservations concerning the much-discussed
proposal to add new language to the existing disclaimer, which indicates that utility
affiliates are not regulated by the Commission.“395
388 Docket No. 64, Attachment A at 4-5.
38g Docket No. 106 at 1 6 .
3go Id.
3g1
3g2
3g3
3g4
3g5
Id. at 17.
Id.
Id.
Id. at 18.
Id. at 20.
Pepto says it appears that some
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parties want to create the impression that utility affiliates are completely unregulated and
“somehow more dangerous to do business with than non-utility affXates.“3g6 According
to Pepto, all unregulated entities should indicate this status or there may be an
implication that companies that do not have the disclaimer are regulated. Pepto also
argues that “[Ilengthy
disclaimer requirements impose heavy costs on utility affiliates”
and that “the Commission should avoid overly complex language that will have little
meaning to most consumers.“3g7
APS supports the agreement reached in its restructuring settlement. Pursuant to it
settlement AfEliate Code of Conduct, Section IV provides:
A. Disclaimers. Whenever a Utility affiliate provides
written or printed mass marketing materials to the public
using the Utility’s name or logo, it shall include a
disclaimer that states that the affiliate and the Utility are not
the same business and that the affiliate is not a regulated
utility.398
APS says that its settlement disclaimer “requires disclosing the most vital information,
that the affiliate and the utility are not the same business.‘73gg APS says the most serious
concern was that affiliate use of the name/logo might be viewed as a deceptive trade
practice. However, APS says that “[Tlhe simple truth is that it is bad policy to bar a
customer from receiving accurate information with which to make a decision in a
competitive marketplace, especially a marketplace which is just opening up.“4oo If there
is any deception, APS says that the AG-CPD “will be on top of it.‘7401 Further, the real
reason, according to APS, that some parties want affiliates to pay a royalty is to raise the
price of affiliate services so that potential competitors can undercut these prices.
396 Id.
397 Id.
3g8 Docket No. 4 6 at 3.
3gg Docket No. 9 6 at 9.
4oo Id. at 10.
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Artificially raising prices is not the way a competitive market should work, says APS.
APS concludes that it would be appropriate for the Commission to adopt the disclaimer
from its settlement.
Conectiv agrees with the Commission’s previous position that affiliates should be
permitted to use the utility name/logo. However; Conectiv “disagrees that a disclaimer
should be required.“402
Conectiv says the name and logo are corporate assets that do not
belong to customers. The Company says that if a disclaimer is required, “it should only
apply to energy marketing activities for all of the same reasons that it is appropriate to
have different sets of standards for core-service and non-core-service affrliates.‘7403
Further, Conectiv says the disclaimer should be adaptable to cover competitive “below
the line” activities that from a legal standpoint are performed within the corporate utility
structure. Conectiv also requests that the Commission clarify whether the disclaimer
would be required in connection with the use of “a related but clearly distinguishable
name (i.e., Conectiv Communications versus Conectiv Power Delivery).“404
Lastly,
Conectiv says a disclaimer should be limited to mass media or printed solicitation
materials of general circulation.
Conectiv says that it specifically objects to any restrictions or imputed royalties
on the use of the Conectiv name or logo. “Conectiv has expended considerable belowthe-line resources developing its relatively new brand.“405 Conectiv says it has embarked
on an “umbrella brand” strategy. It argues that Maryland law prohibits false claims of
affiliation, not truthful ones. The name, brand and reputation belong to Conectiv and its
shareholders, the Company claims. “Common branding also is important to realizing
401 Id.
402 Docket No. 53 at 28.
403 Id. at 29.
404 Id.
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economies of scope.yy4o6
Conectiv says that with a common brand, there is an incentive
to improve and maintain quality service, “including the market in which it has franchised
transmission and distribution operations, in order to maintain the value of the brand.“407
Lastly, if the Commission adopts a disclaimer, it should use the one adopted in Case No.
8747. However, it should be clarified that this disclaimer only applies to energy
marketing affiliates within the franchised service territory of the utility.408
Conectiv makes a point of arguing that it “is differently situated with respect to
the use of the name and logo of Conectiv and derivatives of that name and logo for the
businesses under Conectiv.“409
Neither Conectiv Power Delivery (“CPD”), the regulated
utility, nor any of the other businesses will be using the old utility name, “Delmarva
Power.” “ Over approximately the last two years, the new name Conectiv was created and
substantial sums were spent . . on creating a new image for Conectiv’s various
businesses under the new name and logo. All of the dollars spent advertising the new
name and image, and creating and developing the new logo, were below-the-line
shareholder dollars.“410 Conectiv says that even if the Commission adopts restrictions for
“well-established” utility names and logos, “any such new rule should exempt distinct
names and logos, such as Conectiv’s, that have been in use less than three years.“411
Conectiv concludes that a ban on the use of the Conectiv name or logo, or a royalty
requirement, Gill only “hamper its ability to compete but would serve no public
405 Docket No. 74 at 10.
4061d. at 11.
407 Id. at 12.
408 Id. at 13.
4og Docket No. 97 at 7-8.
410 Id. at 8.
4” Id.
412 Id.
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BGE and Conectiv also submitted the testimony of Jeffrey H. Howard, Esq., an
antitrust law expert413
Mr. Howard says that there “is certainly no need to absolutely bar
the use of a common name or logo to achieve any of the policy goals established in $0 7504 and 7-505(a).“414
He argues that a prohibition constitutes competitive handicapping,
which is anti-competitive, anti-consumer, and inconsistent with the Act. Mr. Howard
says that name recognition and reputation is one of the significant areas where a firm can
take advantage of economies of scale and scope. He says many competitive firms enjoy
these same efficiencies. Mr. Howard concludes that it would be “highly anti-competitive
and anti-consumer to allow large competitors to take advantage of these economies while
barring Maryland’s utility industry from doing the same.‘Y415
Mr. Howard also claims
that surveys indicate that consumers: support the continued sale of electricity by the
utility or its affiliate; feel it’s important to know the owner of their electric power;
generally oppose regulatory limits on afftliate use of utility names; favor rules that permit
utilities to provide information concerning their affiliates, and generally support the use
of utility names and logos by affiliates.416
Mr. Howard concludes that if affiliates are not
allowed to use utility names and logos, consumers lose information on who they are
dealing with and their search costs are raised. In addition, “if consumers are denied
brand identity for utility affiliates, they may in fact be confused about the ownership of
the affrliate.“417
Mr. Howard says that to the extent disclaimers are required, they should
be limited to commercial advertising. Finally, he says that the “advocacy of royalties is
simply another way for competitors to raise their rivals’ costs.Y’418
413 Docket No. 79, Reply Testimony of Jeffrey H. Howard, Esq.
414 Id. at 3 5 .
415 I d . at 3 6 .
416 I d . at 3 7 .
4’7 Id. at 38.
4’8 Id. at 39.
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BGE and Conectiv also filed Joint Final Comments herein.41g They say that the
Commission should reject a ban on a common name and logo because it is unnecessary, it
is anti-consumer, it would violate First and Fifth Amendment rights, and other state
commissions have consistently rejected such bans4” BGE and Conectiv say a ban does
not advance the goals of the Act because:
any. name value belongs to shareholders,
therefore use by an afftliate is not a ratepayer cross-subsidy; a ban would artificially raise
a Maryland company’s costs; and it would limit customer information. Ratepayers, BGE
and Conectiv say, have no property interest in the name or logo because they have not
subsidized any value that may be attached to these assets. In addition, “if consumers are
denied brand identity for utility affiliates, they may in fact be confused about the
ownership of the affiliate.“421 BGE and Conectiv also question the intent of some of
Enron/Statoil’s
suggested disclaimers.
BGE and Conectiv say that if Enron/Statoil’s
disclaimers are adopted, they should apply to affiliates and marketers alike. BGE and
Conectiv claim that “virtually every state commission that has adopted a Code of
Conduct for energy deregulation has declined to impose the outright ban urged by the
Alliance here.“422
Moreover, FERC has adopted Codes of Conduct regarding electric
transmission and natural gas sales and these codes are “narrowly circumscribed to
address only the legitimate issues of open access and cross-subsidization.“423
BGE has also submitted a proposal for “Recommended Disclaimer Procedures” to
be applied to BGE and any of its affiliates that use the BGE name or logo.424 BGE says
41g Docket No. 102; Joint Final Comments Brief of Delmarva Power & Light Company d/b/a Conectiv
Power Delivery and Baltimore Gas and Electric Company.
420 Id. at 14-15
421 Id. at 17.
422 Id. at 18.
423 Id. at 18-19.
424 Docket No. 102; Final Comments of Baltimore Gas and Electric Company, (Attachment A),
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I)
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the proposal is not for application to other Maryland utilities.425 However, one disclaimer
would apply to all marketers selling to end-use customers in Maryland.
BGE Home Products and Services, Inc. (“BGE HOME”) also filed comments
regarding the use of names and logos by an affiliate as well as the use of disclaimers.426
“BGE HOME strongly urges the Commission to reject any unfair recommendations
concerning either a ban on the use of a common name/logo, or the imposition of a
4251d.at3.
426 Docket No. 102, Final Comments of BGE Home Products and Services, Inc.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-3
Page113of168
royalty. These extreme measures will harm many customers by creating significant
confUsion and substantially driving up marketing and advertising costs.“427 BGE HOME
claims that it “has invested nearly $24 million in both advertising and branding activities,
which have enabled the Company to create its own distinctive identity.“428
In its Final
Comments, BGE HOME has proposed “enhanced and specific disclaimer language”
which it says will cost BGE HOME “in excess of $250,000 annually.“42g BGE HOME
claims, among other things, that a ban or royalty: may degrade its “superior service;”
“may result in the potential destruction of economic and employment growth which we
have fostered; will certainly create more customer confUsion and complaints; and, will
potentially cause the exporting of a significant local tax and employment base to firms
located outside the State of Maryland.“430
BGE HOME says branding is a necessity in
today’s marketplace: and that many competitors are “national in name recognition.“43 ’
BGE HOME says that “use of a new and fictitious name for BGE HOME . . . would
cause significant confUsion among our many loyal customers,” “artificially raising
advertising and marketing costs” which “would inevitably be passed onto Maryland
consumers. ‘Y432 For all these reasons, BGE HOME urges the Commission to reject a ban
or require a royalty for use of a common name/logo.
In addition to the policy arguments raised by the utilities for not imposing a ban
or royalty on ai?iliate use of utility names and logos, they also argue that Constitutional
restraints prohibit the Commission from taking such action.
427 I d . at 3 .
428 I d .
42g Id. at 3-4.
430 I d . at 7-8.
431 I d . at 8 .
432 I d . at 9 .
See Attachment A for the disclaimer language and matrix.
Conectiv says that
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Page114of168
“advertising is protected under the First Amendment as commercial speech.“433 Conectiv
says that any prohibition on advertising must be a reasonable time, place or manner
restriction, a permissible subject matter regulation, or a narrowly tailored means to serve
a compelling state interest or the prohibition is a violation of freedom of speech under the
First Amendment.434
Conectiv and BGE argue that the First Amendment “prevents this
Commission from restricting truthful commercial speech, which includes the choice of
the affiliate’s name.“435
“Even in monopoly markets, the suppression of advertising
reduces the information available for consumer decisions and thereby defeats the purpose
of the First Amendment.“436
Conectiv and BGE also say that such a ban would constitute
an illegal prior restraint.437
They also state that “the Supreme Court has consistently
recognized that regulations that ban a particular use of private property and do not
substantially advance legitimate state interests constitute a taking without just
compensation in violation of the Fifth Amendment.“438
Perhaps the most forceful advocate of the Constitutional arguments has been
Pepco.43g
Pepto says that the First Amendment, as applied to the stated through the
Fourteenth Amendment, protects “commercial speech” from unwarranted restrictions. It
says the Supreme Court has defined commercial speech broadly to include trade
names. 440 Other courts have emphasized that product labels and trade names provide
important information worthy of constitutional protection.441
Pepto says the
“cornerstone of the Supreme Court’s commercial speech jurisprudence is Central Hudson
433 Docket No. 53 at 28.
434 Id.
435 Docket No. 102, Joint Final Comments of Conectiv and BGE at 17. See Consolidated Edison Co. v.
Public Serv. Comm ‘n, 447 U.S. 530,543 (1980).
436 Id. at 17-18 quoting Central Hudson at 567.
427 U.S. 539, 559 (1976).
437 Id. at 18. See Nebraska PressAss’n v. Stuart,
438 Id., citations omitted.
106at 10-15.
43g Docket No.
440 Id.
at
Virginia
10.
State
See Bd. 425 U.S. 748, 762 (1976).
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MPSC Case No. U-12134-Exhibit AMP-2 (I-3
Page 115 of 168
Gas & Electric Corp. v. Pub. Serv. Comm ‘n of New York (“Central Hudsor~~‘),~~
which
held that a regulation completely banning promotional advertising by an electric utility
violated the First Amendment.“443
According to Pepto, Central Hudson uses a four-part
analysis for reviewing regulations that restrict commercial speech. First, the court must
determine if the speech at issue is misleading or pertains to unlawhl activity, in which
case it is not entitled to protection. Second, the government is required to show a
substantial interest in the challenged regulation.
advance the asserted governmental interest.
The regulation must also directly
Lastly, the regulation must not be more
extensive than necessary to serve the government’s substantial interest.444
Pepto
concludes that the restrictions on names/logos proposed in this proceeding “fall far short
of satisfying the Central Hudson test. Pepto asserts that “it is not misleading for a utility
affiliate to use the utility’s trade name or logo, especially when adequate disclaimers .
are in place.“445
Pepto says that affiliate use of a utility’s trade name/logo “is a
legitimate competitive advantage derived from years of reliable, responsive service and
[is not] . . . unlawtil for purposes of the first prong of the Central Hudson test.“446 Pepto
says courts are hostile to “paternalistic efforts to protect consumers from truthful
information on the ground that it might confuse them” and therefore, restrictions on the
use of trade names and logos would likely fail the second prong of Central Hudson.447
Pepto s’ays that to satisfy the third prong of Central Hudson, the government must
show that “the harms it recites are real and that its restriction will in fact, alleviate them
44’ Id. at 10-11.
442 447 U.S. 557 (1980).
443 Docket No. 106 at 11.
444 Id. at 11-12.
445 Id. at 1 2 .
446 Id. at 12-13.
447 Id. at 1 3 .
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MPSC Case No. U-12134-Exhibit AMP-2 (I-)
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to a material degree.“448
Pepto argues that to justify restrictions, the government would
have to show that they promote competition, prevent cross-subsidization and avoid
consumer confusion, when the opposite is true.44g
Hz&on,
As for the fourth prong of Central
Pepto asserts that the goals sought to be achieved “can be met without
burdening First Amendment rights, through
open-access
requirements,
regulatory
oversight of the utility-affiliate relationship and the adoption of reasonable
disclaimers.“450
According to Pepto, there is no need for new regulations because these
elements are already in place in Maryland.45’
According to Pepto, content-based restrictions on speech are subject to “strict
scrutiny” and “will be struck down unless they are the least restrictive means of
advancing a compelling state interest.“452
Pepto says that a prohibition on an affiliate’s
use of a utility name/logo “would be a content-based restriction because it would
effectively bar any communication to the public concerning the utility-affiliate
relationship, as distinct from all other subjects.“453 Pepto concludes that consumers “can
be just as effectively protected by disclaimers and consumer education programs.“454
Lastly, Pepto argues that “a rule prohibiting utilities and their affdiates from using the
same logo and trade name would constitute a taking of utility property under the Fifth
and Fourteenth Amendments which would necessitate the payment of just
1’; I$, See Edenjeld v. Fane, 507 U.S. 761,770-71 (1993).
450 Id: a t 1 4 .
45* Id.
452 Id. at 14, See Perry Educ. Ass’n v. Perry Local Educators’Ass’n, 460 U.S. 37,45 (1983).
453 Id. a t 14-15.
454 Id. a t 1 5 .
455 Id.
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WGL says there is no factual basis in this proceeding to justify a ban on affiliate
use of a utility’s name/logo.456
Therefore, WGL recommends that the Commission await
more experience with the practices of affiliates and competitors before considering such
action. 457
WGL’s position is as follows:
Marketing literature provided by utility affiliates should
contain a disclaimer by the affiliate to assist in increasing
customer understanding of the affiliate being a separate
entity from the utility. The disclaimer should indicate that
the utility and affiliate are separate entities. The marketing
literature should not represent that any advantage would
accrue to customers from the utility in the selection of the
affiliate for a particular service.458
Further, “the Commission should reaffirm the Case No. 8747 ruling regarding the use of
a utility’s name and logo.“45g
WGL says that claims that ratepayers have an equity
interest or have established any goodwill that the utility name or logo may have are
incorrect. Goodwill is not a cost of service line item. It is “built through high quality
management and service.‘Y46o WGL argues that “[Rlatepayers do not have an equity stake
in the utility, nor have they paid for the enhancement of the intangible assets, which have
been built by the Company’s management.“461
WGL concludes that “[IIndirect attempts
to acquire or dilute the ownership of utilities should be summarily dismissed.“462
Furthermore, WGL says utility affiliates should be permitted to use the utility’s
name/logo “since affiliates of other large corporations with whom they compete will have
456 Docket No. 101 at 8.
457 Id.
458 Docket No. 55, Appendix A at 6 .
45g Docket N o . 80 at 6.
460 Id.
46’ Id. at 7.
462 Id.
Direct Testimony of Anthony M. Ponticelli
this same advantage in the marketplace.“4h3
WGL also claims that there has been no
evidence to show that affiliate use of a utility name or logo is a barrier to the
development of competitive markets.
It cites experience in its natural gas customer
choice program to support this position.464
WGL supports the current disclaimer
requirement which it says avoids customer confusion regarding
the
utility-affiliate
relationship. However, WGL “would object to the use of multiple disclaimers that will
produce unnecessary confusion.“465
WGL would support the suggestion that all suppliers
disclose the non-regulated nature of their product or service, “thereby maintaining the
‘level-playing field’ that should be available to all suppliers.“466
Columbia says that “[N]o specific disclaimers are necessary, absent a showing
that the utility and its affiliate have engaged in promotional activities or communications
that are misleading or deceptive.“467
Columbia says a ban on affiliate use of a utility
name/logo is unfair to consumers because some consumers may prefer to take service
from a utility affiliate.468
Columbia says “consumers are clearly entitled to know just
who they are dealing with.“46g
Columbia claims that requiring affiliates to adopt a
dissimilar name “would almost certainly lead to complaints that consumers had been
tricked into dealing with utility affiliates.“470 Columbia emphasizes that there is no legal
basis for a prohibition, particularly where the marketing affiliate is a separate entity not
subject to the utility’s control. Columbia and the marketing affiliate are separate
463 Docket No. 101 at 4 .
464 Id. at 4-5.
465 Id. at 6.
466 Id.
467 Docket No. 49 at 5 .
468 Docket No. 98 at 4 .
46g Id. at 5.
470 Id.
Direct Testimony of Anthony M. Ponticelli
subsidiaries of Columbia Energy Group. Further, “the Columbia name and logo are not
assets of Columbia, and the Company has no authority to dictate what names or logos can
be used by other affiliates within the Columbia Energy Group.“471
The Joint Commenters take the position that “consumers and competition would
best be served by an outright ban on affiliates’ use of the utility’s brand name and
logo.“472 Alternatively, they support imposition of a royalty for use of the utility’s brand
name and logo.473 The Joint Commenters say that use of a similar brand name or logo by
an affiliate “is one of the most effective means by which a utility can transfer its
incumbency advantages to its unregulated affrliates.“474
They also say:
Even with the strictest disclaimer requirements, there is
bound to be some customer confusion about the
relationship between a similarly named affiliate and the
utility that has been providing that customer’s service for
years. Indeed, regardless of corporate intent, a similarity of
business names between the affiliate and the utility will
tend to create the false impression that the affiliate has all
of the attributes of the re lated utility merely by virtue of
f
its corporate affiliation. 47F
The Joint Commenters say that a royalty would compensate ratepayers for the use of
these valuable assets and offset an affiliate’s
advantage over competitors. Discussing
royalties in Case No. 8577, the Commission said that a company “ought not price
valuable services or assets to subsidiaries at levels that it would be unwilling to give,
under the same terms and conditions, to a third party.“476 The Joint Commenters
conclude that “imposition of a royalty payment for the use of the utility’s brand name
471
472
473
474
475
Id.
Docket No. 61 at 14.
Id.
Id. a t 1 3 .
Id.
476 Id. at 1 4 quoting C a s e No. 8 5 7 7 at 31(86 Md. PSC 239).
I
I
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and/or logo is therefore fully consistent with the principle upon which Case No. 8577
turned.“477 However, if affiliates are permitted to use the utility trade name or logo, then
the Joint Commenters recommend the following disclaimers be required for all
communications regarding the affiliate:
l
the affiliate “is not the same company as [e.g., BGE], the utility”;
l
the affiliate is not regulated by the Maryland Public Service Commission;
and
l
“you do not have to buy [the affiliate’s] products in order to continue to
receive quality regulated services from the utility.“478
However, they say that the disclaimers should be limited to the use of the name/logo in
Maryland. Lastly, the Joint Commenters say that the Commission should retain the
requirement that affiliates
may not represent that an advantage accrues in the use of
utility services as a result of dealing with the affrliate.47g
The Joint Commenters note that the Commission has stated that utilities and their
affiliates are to be treated as separate entities.480
Consequently, “the law of trademarks
provides guidance on how the Commission should treat ‘separate entities’ with the same
or similar names.“481
The Joint Commenters argue that trademark law provides a 13 part
test to determine whether a likelihood of contusion exists under the Lanham Act 3
2(d).482 Factors include: similarity of marks, similarity of the goods, similarity of trade
channels, sophistication of the party, fame of the prior mark, and the number of sellers
who use the mark.483
The Joint Commenters conclude that the Commission should “find
that the use of similar names by the utility and its affiliates is likely to lead to customer
“’ Id,
:iY.at 23.
--_.
480 Docket No. 84 at 5.
481 Id. at 6.
482 Id., See Application of E.I. DuPont de Nemours & Co., 476 F. 2d 1357, 1360-62 (C.C.P.A. 1973).
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confusion Y’484
Further, Dr. Gordon’s suggestion that an affiliate shares the utility’s
history of service, would “be highly misleading” according to the Joint Commenters.485
Dr. Gordon also suggests that an affiliate’s use of a utility’s name or logo will improve
“accountability.”
However, the Joint Commenters say that as a result of separation, the
utility will not be accountable for anything that the afftliate does. “The accountability
stops at the affiliate, unless the utility is violating other standards of conduct regarding
separation.“486
The Joint Commenters also claim that “the entry barrier associated with
the utility’s name and logo recognition would deter potential competitors from entering
the market.“487
They also say that a simple ban will involve less day-to-day monitoring
than any attempt to enforce fair use of the utility’s name or logo.488 While the Joint
Commenters support a ban, at least in the utility’s service territory, they say that the ban
need not be in perpetuity. Perhaps three years will be sufficient to permit competition to
begin to take root.48g The Joint Commenters also say that “the utilities’ trade names and
logos have acquired secondary meanings over the decades that they held state-granted
monopolies. ‘7490
“Thus, the names and logos should be protected from appropriation by
‘separate entities’, such as the affrliates.“491
As for disclaimers, the Joint Commenters
say that “lack of an extensive disclaimer would restrict the amount of information
available to the customer, forcing the customer to make ‘poorly informed choices”‘.492
483 Id. at 6-7, citations omitted.
484 Id. at 8.
48s Id.
:zf $ at 9.
488
489
490
491
492
Id:
Id.
Id.
Id.
Id.
at 10.
at 21.
at 29.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I-)
Page 122 of 168
Furthermore, the complaint process is inadequate. It “deals with the problem in a post
hoc fashion.“4g3 Also, “the complaint procedure takes too long to resolve issues.“4g4
The Joint Commenters say that BGE HOME has failed to establish a separate
brand identity for itself, but rather has increased customer confusion. Further, BGE
HOME’s use of the BGE name will confuse customers regardless of any disclaimers.4g5
The Joint Commenters cite claims of actual customer confusion to support their
recommendation of a ban. 4g6 The Joint Commenters argue that “caveat emptor is not the
appropriate standard by which to judge the confusing effect of utility and affiliate
behavior.“4g7
The Joint Commenters also argue that BGE should be prohibited from
including BGE HOME’s number on its automated customer service telephone message
because this would allow both of them to take advantage of confusion which they
initiated.4g8 “By creating this consumer confusion, BGE and Home have also created an
excuse to engage in joint marketing and promotion of their goods.“4gg This should not be
permitted, the Joint Commenters say. The Joint Commenters also say that BGE HOME
has exacerbated the confusion through continuing use of BGE identifying marks on its
vehicle fleet.500
The Joint Commenters say, “[Tlhis confusing combination of names,
logos, phone numbers, and colors remains on Home’s vehicles even five years after the
company’s incorporation. Only after photographs taken by the Alliance were introduced
in this case did-Home identify four vehicles that still had the BGE logo on them and take
steps to remove the logo from the offending vehicles.“50’ This “violated the code of
4g3 Id. at 30.
4g41d.at31.
4g5 Id.
4g6 Id. a t 19-2 1.
4g7 Id. at 21.
4gg Id.
4gg Id. at 22.
5oo Id. at 23.
501 Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case NO. U-12134 - Exhibit AMP-2 (I-_)
Page 123 of 168
conduct prohibition on joint promotions.“502
Further, “the vehicles reinforced the
public’s perception that BGE and Home are the same entity.“503 The Joint Commenters
also say that BGE HOME’s claim that it adopted its name to create a distinctive brand is
undermined by the actions of Conectiv. Delmarva decided to pursue a new brand identity
and consequently, chose “a completely new name as an umbrella for all of its
companies. Y7504 Therefore, “to establish its new identity, Delmarva distanced itself from
its old name, ensuring that consumers would not automatically associate the new brand
identity with the regulated company. ‘y505 The Joint Commenters note that BGE’s parent
has also adopted a new umbrella name, Constellation, which is used by all but two
subsidiaries. The Joint Commenters argue that the motivation for not changing BGE
HOME’s name is the same as BGE’s, “to take advantage of the 183-year value of the
name. 77506 The Joint Commenters conclude, “[Slignificantly,
the one BGE affiliate that
uses a version of the utility’s name is the affiliate that is marketing to the consumers most
likely to be confused by use of a similar name-residential consumers.7’507
’
The Joint Commenters argue that if an affiliate wants customers to know its
relationship to the parent, then “[Tlhe Commission could permit the affiliate to include a
statement with its name indicating that the affiliate is a subsidiary of the parent company.
For example, BGE Home, under a name other than BGE, could state that it is a subsidiary
of Constellation Enterprises, Inc.“508 The Joint Commenters say that because “customers
of an affiliate are not actually dealing with the utility or its employees, [and] any attempt
502
503
‘04
505
‘06
507
jo8
Id.
Id.
Id.
Id.
Id.
Id.
Id.
at 24.
at 27.
at 28.
at 29.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-)
Page 124 of 168
to convince them of a meaningful linkage between the affiliate and the utility is
deceptive.““’
The Joint Commenters also respond to the constitutional arguments proffered by
the utilities510
According to the Joint Commenters, “[Allthough
commercial speech
receives some protection under the First Amendment, it merits only a type of
intermediate scrutiny.“5”
They note that Central Hudson applies a four-part analysis.512
First, misleading or unlawfL1 speech is not protected. Therefore, “[tlhe government may
ban forms of communication more likely to deceive the public than to inform it.“513 If
the speech passes the first Central Hudson test, then the government must satisfy three
additional tests to validly regulate the commercial speech. The regulation must be based
upon a substantial state interest, it must directly advance this interest, and the regulation
must be narrowly drawn to meet the state interest514
The Joint Commenters argue that
“the first prong of this test is dispositive because the affiliate’s use of the utility’s name is
misleading or deceptive.“515
According to the Joint Commenters, the U.S. Supreme
Court ruled in Friedman v. Rogers that trade names qualify as commercial speech
because they acquire a secondary meaning that the public associates with an expected
level of quality or price of goods and services.‘16
The Joint Commenters conclude that
“[IIn this case, the presentation of the affiliate’s name in conjunction with the utility’s
‘09 Id. at 28.
‘lo Id. at p.31-36.
“I Docket No. 84 at 3 1. See Florida Bar v. Went For It, Inc., 115 S. Ct. 2371,2377 (1995).
a2 Id. at 32.
5’3 Docket No. 84 at 32. See Friedman v. Rogers, 99 S. Ct. 887,896-97 (1979); Edenfield v. Fane, 113 S.
Ct. 1792,1799.
‘I4 Id. at 32, paraphrasing Central Hudson.
‘I5 Id. at 33.
‘16 Docket No. 107 a t 3 3 , citing Friedman a t 8 9 5 .
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I)
Page 125 of 168
name is deceptive because it does not contain completely accurate information about the
‘separate entity’ relationship between the affiliate and the utility.“S’7
The Joint Commenters say that the Commission should only require disclaimers
for affiliates of regulated utilities because the risk of confUsion exists only because of
similar names.
518
“Consumers do not automtitically
associate either non-affiliated
companies or distinctly named affiliates with regulation, as they do with affiliates using
the utility name.“5’g
As an alternative to requiring non-affiliates to use a disclaimer, the
Joint Commenters propose that licensing regulations prohibit companies from advertising
or suggesting that their prices are regulated.520
The Joint Commenters agree with utilities
that there is an immense practical difficulty in incorporating a disclaimer in every
situation in which an affiliate uses the utility name. Therefore, a ban is the best solution
to this problem. 521
The Joint Commenters continue to argue for imposing a royalty when an affiliate
uses a utility’s name/logo. It says that “[Tlhe real question is whether the name and logo
are utility assets.“522 The Joint Commenters argue that an affiliate’s use of the Conectiv
name is “a transfer of value from the parent entity, ” “similar to the source of value in the
Constellation name.77523
In contrast, use of the BGE name by BGE HOME “is an
unambiguous transfer of value” from BGE, the utility.524 “To avoid cross-subsidy, BGE
should not perinitted to transfer this valuable asset to an unregulated affiliate without
“‘Id. at 3 6 .
5’8 Id. at 36.
51g Id. at 37.
520 I d . at 37-38.
521 I d . at 3 8 .
s22 Id. at 39.
523 I d .
524 I d .
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I--)
Page 126 of 168
appropriate compensation.“525
As for measuring the amount of the royalty, the Joint
Commenters say this can be done “using analyses from experts and economists.“526
Summarizing the position of the Joint Commenters, they say that an affiliate’s use
of the utility name/logo creates two special problems. First, potential customers of the
affiliate may be deceived into assuming that there is a relationship between services of
the utility and the affiliate that does not, and under the code of conduct cannot, exist.
Second, utility ratepayers may cross-subsidize the affiliate because the utility makes
valuable assets, its name, logo and therefore reputation, available without charge to the
affiliate.527
The Joint Commenters conclude, that in the absence of an outright ban “strict
disclosure requirements and the imposition of a royalty payment” are “the best means for
addressing the deception and cross-subsidy issues inherent in use of similar names by
utilities and their affiliates.“528
EnronBtatoil
is a strong proponent of disclaimers. They recommend that the
existing code of conduct be modified to include the following disclaimers:
a
0
l-
0
Neither a utility nor its affiliates shall imply or express that their affiliation allows
the affYiate to provide a service superior to that available from other suppliers.
Neither a utility nor its affiliates may directly or by implication represent that the
MPSC regulated services provided by the utility are of a superior quality when
energy or energy-related services are purchased from a utility affiliate.
Whenever a utility affiliate provides written mass marketing materials to the
public using the utility’s name or logo, it shall include a disclaimer that states
that (i) the affiliate and the utility are not the same company, (ii) the affiliate
is not regulated by the MPSC, and (iii) the customer does not have to purchase the
affiliate’s products in order to receive regulated service from the utility.
In the case of electric utilities, neither an electric utility nor its affiliates may
directly or by implication represent: (i) that merchant service (power sales)
provided by an affiliate is being provided by the utility; (ii) that the power
purchased from a supplier that is not a utility affiliate may not be reliably
delivered; and (iii) that power must be purchased from a utility affiliate to
525 Id.
526 Id. at 40.
:ti ydocket No. 107 at 18.
Direct Testimony of Anthony M. Ponticeili
a
l
receive the utility’s MFSC regulated services.
In the case of gas utilities, neither a gas utility nor its affiliates may directly or by
implication represent: (i) that merchant service (gas commodity sales) provided
by an affiliate is being provided by the utility; (ii) that the gas purchased from a
supplier that is not a utility affiliate may not be reliably delivered; and (iii) that
gas must be purchase from a utility’s affiliate to receive the utility’s MPSC
regulated services.
In the case of combined gas and electric utilities, neither a utility nor its affiliates
may directly or by implication represent: (i) that merchant service (gas
commodity sales and/or power sales) provided by an affiliate is being provided
by the utility; (ii) that the gas and/or power purchased from a supplier that is not
a utility affiliate may not be reliably delivered; and (iii) that gas and/or power
must be purchased from a utility’s affiliate to receive the utility’s MPSC regulated
services. 529
Enron/Statoil says that use of “utility names themselves provides a competitive advantage
to affiliates who use them.“530 It also provides affiliates with a head start on the playing
field.“531
Further, EnronLStatoil contends that “[clompetitive
goals are served only if
utility affiliates are made to market and attract customers based on the quality and price
of their own stand-alone services, and not on the strength and name recognition of the
utility.“532
Enron/Statoil says if common use of names/logos is not prohibited, then
affiliates must be required to “pay fair market value for such use” and disclaimers must
be imposed “to educate consumers and protect against misleading representations.“533
Summarizing, Enron/Statoil
proposes the following affiliate disclaimer: “(i) the affiliate
and the utility are not the same company, (ii) the affiliate is not regulated by MPSC, and
(iii) the customer does not have to purchase the affiliate’s products in order to receive
regulated service from the utility.“534 In addition, neither the utility nor its affiliates
should be allowed to imply or express that their affiliation allows either entity to provide
52p Docket No. 6 0 at 14.
530 Id. at 1 5 .
53’ Id.
s32 Id.
533 Id. at 1 6 .
534 Id. at 2 8 .
Direct Testimony of Anthony M. Ponticelli
superior service. ‘y535
“In fact, the disclaimers proposed by Enron and Statoil Energy are
identical to those proposed by OPC, Alliance and Maryland Natural Gas.‘7536
EnronLStatoil says that “[C]onflrsion and manipulation are real threats to non-residential
customers a1so.“537
Therefore, they recommend that the Commission “make its
disclaimer requirement broad enough to capture all mass marketing materials, without
regard to customer c1ass.“538
MAPSA says that at a minimum, the Commission should require a conspicuous
disclaimer that: “(a) the affiliate and the utility are different companies; (b) the affiliate’s
prices and services are not regulated by the Public Service Commission; (c) that the
affiliate’s services are of no greater quality than that of unaffiliated companies; and (d)
that the price and reliability of utility services are in no way contingent upon obtaining
the services of the affiliate.“53g
MAPSA also says Dr. Gordon’s disclaimer
recommendation is “weak and ineffective.“540 “ Merely declaring that the utility and its
similarly or identically named affiliate are not the same company fails to inform the
customer of the ramifications of engaging in business with the affiliate should the
customer choose to do ~0.“~~~ In addition, merely adding the word “unregulated” to the
simple disclaimer will confuse matters even more.542 In particular, “suppliers of electric
generation, whether or not affiliated with a utility, will be subject to some form of
regulation. Y’543 *According to MAPSA, “[Jloint marketing, affiliate use of a like or similar
535 Id.
536 Id., Maryland Natural Gas is referred to as the Joint Commenters in this Order.
537 Docket No. 104 at 9.
538 Id.
53g Docket N o . 63 at 5.
540 Docket No. 86 at10.
s4’ Id.
542 Docket No. 109 at 7.
543 Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case NO. U-12 134 - Exhibit AMP-2 (I-2
Page129of168
name or logo, and under-regulated utility-sponsored customer education efforts all
promote market confUsion and thwart competition.“544
Further, “[Clustomers and
competition may be irrevocably harmed when regulators do not move promptly and
decisively to address problems that arise within the framework of a competitive
The Alliance “maintains that unregulated affiliates must not be permitted to use
names or logos that are identical or similar to those of their affiliated utility.‘7546
However, if such use continues to be allowed, the Alliance recommends the following
disclaimer:
(1)
(2)
(3)
(4)
that the affiliate is a separate corporation/entity
from the utility;
that the affYiate’s prices and terms of service are
not regulated by the Maryland Public Service
Commission;
that the relationship between the aff3iate and utility
does not mean that the quality of the affiliate’s
services are superior to that of similar services
performed by unaffiliated companies; and
failing to conduct business with the affiliate will
have no impact, positively or negatively, upon the
provision of regulated services.5 7
The Alliance says that its recommended disclaimer “permits the affiliate to
identify its relationship with the utility, but precludes a situation where that relationship
might be used t-0 obtain a competitive advantage or to otherwise deceive the customer.548
The Alliance has also addressed the legal authority of the Commission to prohibit
affiliate use of utility names/logos.54g
The Alliance concludes that “[Tlhe Commission
has the legal authority to preclude affiliates’ use of the same or similar name and logo of
Docket No. 63 at 1 1 .
Id. at 12.
Docket No. 87 at 1 1 .
Docket No. 59 at 18.
548 Id. at 19.
544
545
546
547
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MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
Page 130 of 168
their regulated utility affiliate. ‘r550 The Alliance, concurring with the Joint Cornmenters,
says that affiliate use of a utility’s name does not pass the first prong of the Central
Hudson test, that the commercial speech must concern lawful activity and not be
misleading.551
Further, the Court of Appeals has said the standard for deception is
whether a material representation or omission has occurred that is likely to mislead
consumers acting reasonably under the circumstances.552
The Alliance says that it is
important that The Consumer Protection Act does not require that a consumer actually be
deceived.553
The Alliance concludes that Maryland utilities have structured affiliate
relationships “to deliberately create and capitalize upon the confusion created in the
minds of consumers by the affiliates use of the utilities’ names.‘7554 The Alliance also
emphasizes that the likelihood of confusion between affiliates and utilities has increased
where affiliates move into specific product lines identical to that of the associated
utility.555
The Alliance also argues that its Exhibit 2 “adequately demonstrates that the
likelihood of customer confusion is inescapable.‘7556
The Alliance concludes that “the
Commission is absolutely justified, and in fact, obligated by its duty to serve the public
interest, to preclude affiliates use of regulated utility names.7’557 The Alliance also
argues that “the utility name and logo have substantial value to the unregulated
affrliates.“558
Since cross-subsidization is prohibited, the Alliance says an alternative is
54g Docket No. 108 at 11 to 3 4 .
5501d. at 11.
“’ Id. at 15.
552 Id. at 16, citing Luskin ‘s Inc. v. Consumer Protection Division, 353 Md. 335 (1999).
553 Id. at 18.
5s4 Id.
s5 Id. at 2 l-22.
s6 Id. at 25.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-3
Page 13 1 of 168
to impose a royalty, although this is less desirable than an outright ban.559 However,
implementing a royalty “in no way” addresses the confusion caused by such usage.
“Thus, while there may have been a time when a royalty was appropriate, it now appears
that the Commission is left solely with the option of simply precluding the affiliates’ uses
of the names.Y’56o
OPC says that an affiliate’s use of a utility’s name and logo “provides a
significant advantage especially in dealing with residential customers, where the cost to
reach and sign up new customers can be a large barrier. ‘7561
“It is little wonder,” OPC
says, “that the Constellation Energy Group, parent of Baltimore Gas and Electric,
retained the ‘BGE’ name only for BGE Home Products & Services, which markets to
residential customers.“562
OPC argues that “[Tlhe impact of the utility’s name and logo
is most significant in the utility’s own service territory, but virtually nil outside of its
service boundaries.“563
OPC says affiliate use of the utility brand “creates a form of cross
subsidy” because the brand “implicitly confers information about product quality and is
generally associated with goodwill”, thereby lowering costs and increasing sales versus
competitors.564
Additionally, it creates an entry barrier if the affiliate is not required to
pay for the brand.565 OPC concludes that the “power of the utility brand can be so great .
. . as to effectively wipe out competition.“566
OPC claims that such damage to
competitors in a newly competitive market cannot be undone and that the market is
559 Id.
x0 Id. at 34.
s1 Docket No. 50 at 4.
562 Id.
563 Id.
564 Id.
S’ Id.
566 Id.
Direct Testimony of Anthony M. Ponticelli
permanently altered.567
OPC also claims that “m]o amount of customer education and
disclaimers can undo the security that many
customers will associate with continuation with a name brand they recognize and have
received reasonable service from over the years. “N According to OPC, “[DIetails of
separate corporate relationships cannot be explained
succinctly and effectively in
disclaimers, especially by the utility and affiliate in whose interest it is to keep the barrier
fuzzy.“56g
Summarizing, OPC says prohibiting affiliates from using the name and logo of
the incumbent utility, at least in the utility’s service territory will avoid misleading or
conksing customers, avoid creating price or efficiency distortions in the affiliate market,
is a better solution than trying to mitigate problems with disclaimers and detailed
monitoring,
and will allow appropriate development of new competitive energy
markets.570
OPC says that if affiliate use of the utility name/logo is permitted, it “could
be compensated by a royalty to ratepayers of the utility.“571
OPC says that if name/logo
usage is not banned, then “a disclaimer similar to the following . . . is recommended for
all print and internet information presented by the affiliate:
PG&E Energy Trading is not the same company as Pacific
Gas & Electric Company, the utility, and is not regulated
by the California Public Utilities Commission. Customers
of Pacific Gas and Electric Company do not have to
purchase products or services from PG&E Energy Trading
to continue to receive quality service from Pacific Gas and
Electric Company.‘72
“A shorter form approved by the Commission could be used in radio and
television advertising.“573
ss7 Id. at 5.
5a Id.
56y Id.
570 Id. at 6.
571 Id.
572 Id. at 30.
573 Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-_)
Page 133 of 168
-
OPC says that a further disclaimer is required when promoting DSM services under a
public benefits charge. It recommends the following:
You do not have to purchase electricity from Baltimore Gas
and Electric Company or its affiliated company(ies)
[INSERT THE WORDS ABOUT AFFILIATES AND
THE NAME OF ANY AFFILIATE(S) ACTIVE IN THE
ENERGY MARKET HERE IF APPLICABLE, e.g., BGE
Home Products and Services] to receive energy efficiency
services. These services are offered to all residential
customers, regardless of electric service provider, in the
area where BGE provides distribution service. s74
OPC says that a utility brand is “an intangible asset whose name recognition and quality
reputation has been built at ratepayer expense.“575
OPC argues that this “is not a brand
that has been developed through competitive efforts.“576
OPC claims that the
“information the brand conveys . . may not even be accurate or relevant.“577 This is
because the utility’s reputation, a result of a monopoly energy business, will not
necessarily produce the same quality under different market conditions requiring different
expertise.578
OPC says it is “particularly concerned that consumers could be harmed if an
affiliate is able to obtain an economic advantage (i.e., through name and logo) that allows
it to capture a greater market share than it otherwise would have without providing real
value in terms of price or service quality in exchange.“57g
While OPC recommends full
corporate separation and prohibition of the utility brand in the utility territory, it says less
stringent requirements are applicable outside the utility’s service area. OPC says that the
“primary distinction between levels of applicable codes of conduct should be based on
the scope of the utility’s brand recognition, not the energy-related and non-energy-related
574 Id.
575 Docket No. 77 at 1.
576 Id.
577 Id. at 2.
*‘* Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I--)
Page 134 of 168
distinction from Case No. S747.“580
OPC also makes the argument that adding the utility
affiliate to the newly competitive market may, in fact, not be good for competition. This
is because competitors could be driven out of the market by confused consumers who
“choose the affiliated company that is ‘supposed’ to provide the service because (in the
view of the confused customer faced with name and logo) the same company has always
done so in the past as the integrated utility.“581
OPC also claims that affiliate use of the
utility name/logo aggravates customer inertia to create an unequal playing field.
OPC says that when affiliates use the utility brand, they are “attempting to send a
message to consumers that there is some benefit to the affiliate in the competitive market
by being connected to the utility.“582 This is contrary to the Commission’s position.
“Even under the loose separation rules of Case No. 8747, the Commission has attempted
to ensure that the affiliates maintain a separate operation from the utility.“583 According
to OPC, the record in this case “contains persuasive evidence that there exists a
substantial confusion among the public as to offerings being made by utility affIiates.“584
OPC says that because utility services will remain a regulated monopoly, its need for
advertising is extremely limited and the benefits of the use of the same name all accrue to
the affiliate. Therefore, OPC concludes that there is not really any economy of scope.585
OPC noted that the utilities have responded to the branding issue “by stating that
ratepayers have not gained an interest in Company property . . . by years of paying for
regulated service.“586
57g
‘*’
581
582
583
584
585
586
Id.
Id. at 4.
Id. at 5.
Docket No. 103 at 24.
Id. at 25.
Id. at 26.
Id.
Id. at 30.
However, OPC says that this argument “is contrary to the
Dired Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-Z (I-3
Page 135 of 168
argument made by utilities for stranded cost recovery.‘y587 OPC noted that “the utilities
had no qualms with ratepayers having an interest in generating plants which utilities
believe to be a liability.“588
OPC concludes that if ratepayers are responsible for a
liability, they should have an interest in property that has accumulated a net benefit
during the regulatory period.58g
OPC claims that it “is the ability of the Commission to
carry out the regulatory task assigned to it by the Legislature which is responsible for the
price, service quality, and reliability of utility service that customers associate with the
incumbent utilities.“5g0 OPC also claims that the disclaimer required by Case No. 8747,
simply that the affiliate is an affiliate of the utility, “probably does more to emphasize the
connection between the utility and the affiliate to the benefit of the affiliate than it does to
clarify the situation for the average consumer.“5g1 OPC goes on to say that it “is not
opposed to a requirement that all suppliers in the market, for at least some transition
period, be required to identify for consumers that the price of their product is not
regulated by the Public Service Commission.“5g2
OPC also says that the branding
“prohibition can be reviewed after a transition period to determine if the restriction can be
removed without misleading consumers.7’5g3
OPC also argues that the Commission has the legal authority to prohibit an
affiliate from using the utility’s name or logo.
OPC’s
argument emphasizes the
Commission’s traditional authority over utilities. OPC claims that the record in this case
supports a finding that such usage “results in the misleading of customers, impedes the
creation of a competitive market, and results in cross-subsidization of the affiliate by
5g7 Id.
588 Id.
58g I d . a t 30-3 1.
5goId. a t 31.
5g1 Id. at 33.
“‘Id. a t 34.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-2
Page 136 of 168
-
utility ratepayers.” OK argues that the Commission “has the authority under its basic
ratemaking function to issue an Order which dictates the conduct necessary by utilities
and its affiliates to prevent cross-subsidization.“595 OPC argues that “if the Commission
has the authority to prohibit the utility from claiming a benefit based on its affiliation
with the utility and had the authority to prohibit the affiliate from occupying the same
business location as the utility, it has the authority to prohibit use of the utility name and
logo of the utility if the Commission finds, as a matter of fact, that such action is
necessary to prevent subsidization of the affiliate by utility ratepayers.” OPC also said
that the Legislature has envisioned a transition period during which the Commission
would act to ameliorate the risks to consumers and the competitive market of a transition
from regulated to competitive services. OPC says these risks arise “because consumers
will not have the knowledge necessary for the functioning of a truly competitive market
at the beginning of retail competition in electricity supply and electricity supply services,
there remains a regulated alternative to the services being offered on a competitive basis,
and consumers are apt to be confused or misled by the state’s change in regulatory
The AG-CPD stated that “[Tlhe electricity marketplace must allow consumers to
make informed purchasing decisions. This will allow competition to be based upon
product, service, and price, as it should be.“598 In addition, consumers need “complete
and accurate information regarding the goods and services” utilities and others are
5g3
5g4
5g5
sg6
“I
Id.
Id.
Id.
Id.
Id.
at 35.
at 35.
at 36.
at 39.
5g8 Docket No. 52 at 1.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
Page 137 of 168
offering. 599 Initially, the AG-CPD took the position that “consumers need to know who
is making the offer and the relationship of that entity to other companies participating in
the electricity marketplace.‘y600
In its Reply Comments, the AG-CPD stated that “[Ulpon
reflection, however, we realize that no amount of disclosure can overcome the
misimpression given to consumers by an affiliate’s use of its parent utility’s name or logo
in its advertising and promotional materials.“601
Since regulated utilities will operate
separately from affiliates, “the utility’s reputation for reliability, experience and quality
of service has no relevance to the operation of the affrliate.“602 When an affiliate uses the
utility brand “it does so to create the impression that its relationship with the parent utility
is a relevant fact for consumers to consider when selecting a gas or electric supplier.
~603
AG-CPD concludes that if the relationship is not relevant, then it is “misleading to
consumers to refer to it in advertising and promotional materials.“604
The AG-CPD urges
the Commission to prohibit utility affiliates from using the utility name or logo, “or other
reference to the parent utility in advertising, marketing and promotional materials.“6o5
“Such a prohibition would be consistent with the Consumer Protection Act’s general
prohibition against false and misleading oral and written statements that have the
capacity, tendency or effect of deceiving or misleading consumers. >,606
Staff noted that in Case No. 8747, the Commission reaffirmed its decision in Case
No. 8709 that an affiliate that uses a utility’s name or logo must prominently display a
disclaimer that the utility and the affiliate are separate entities. “Staff recommends that
“’ Id.
‘O” Id.
CS” Docket No. 71 at 1.
6~’
‘03
‘04
‘OS
606
Id.
Id. at 1-2.
Id. at 2.
Id.
Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I)
Page 138 of 168
Staff noted that the utilities generally
this disclaimer be adopted in this case as we11.“6o7
resist any further disclaimers. The utilities say that the name and logo are corporate
property and that restrictions generally violate First Amendment free speech rights. The
marketers and OPC advocate substantial additional disclaimers which they say are
Staff says that the intent of these extra
necessary to avoid customer confusion.
disclaimers is already covered by Staffs recommended standards of conduct. However,
Staff did revise its position in its Reply Comments.608
In addition to the Case No. 8747
disclaimer, that the utility and affiliate are separate entities, Staff recommends “a more
comprehensive
disclaimer
for
electric
company affiliates.
rr609
Staff argues that
“[IInherent in a utility’s name is [the] impression that the entity’s prices are subject to
review and verification by the Commission.“610
Consequently, Staff recommends that an
affiliate that uses a utility brand display an additional disclaimer “indicating that the
affiliate’s prices are not regulated by the PSC.“611
In its Post-Hearing Comments, Staff
noted that it has again “re-analyzed” this issue and presented a further
proposal.“612
“modified
Staff noted its concern with possible consumer confusion and “the natural
implication [is] that the two entities are or may be the same and as such that the
Commission regulates the affiliate.‘7613 “The inclusion of a disclaimer acknowledging an
affiliate relationship does little to dispel the misconception,” Staff says.614 Therefore,
“Staff recommends that the Commission require the affiliate to use a variety of
disclaimers.“615
“The choice of disclaimer would be dependent upon the activity the
‘07 Docket No. 51 at 23.
m8Docket No. 73 at 13-14.
609 Id. at 13.
‘lo Id.
“’ Id.
‘I2 Docket No. 105 at 7-9.
a3 Id. at 7.
a4 Id. at 8.
a5 Id.
I
I
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (1-J
Page 139 of 168
affiliate is engaged in.“616
Staff says that the “basic disclaimer,” that the Commission
does not regulate the affiliate’s prices and services will serve as a “flag” to the consumer.
“Staff
further recommends that this disclaimer be required of all marketers/suppliers, so
that there is minimal confusion regarding the Commission’s role in the commodity
market.“617
Staff also says that requiring this “unobtrusive disclaimer” of marketers
assists the Commission in fulfilling its responsibilities under the Act.618 Staff says “[Tlhe
intermediate disclaimer would restate that the Commission does not regulate the
affiliate’s prices and services, and that the affiliate is not the same company as the utility.
The most stringent disclaimer would add that the consumer does not have to purchase the
affiliate’s services in order to receive regulated services from the utility.“619
Staff also addressed the constitutional issues.620 Staff says that the U.S. Supreme
Court has made it clear that commercial speech receives “a limited measure of protection,
commensurate with its subordinate position in the scale of First Amendment values,
while allowing modes of regulation that might be impermissible in the realm of
noncommercial expression.“621
Further, the Supreme Court has “recognized the validity
of reasonable time, place, or manner regulations that serve a significant governmental
interest and leave ample alternative channels for communications.“622 Staff says trade
names convey information based upon association.
Staff argues that “when the
association implied is misleading, ambiguous or is contrary to a legitimate state interest,
the use of that trade name, without qualification, is objectionable.“623
Staff noted that the
616 Id., See Appendix 2.
“’ Id.
618 Id.
‘I9 Id.
a0 Id. at 22-21.
621 Id. atciting
23,
Ohralik v . Ohio State BarAssociation, 436 U . S . 447, 456 (1978).
622 Id. at 24, citing Consolidated Edison Company of New York v. Public Service Commission ofNew York,
447 U.S. 530,535 (1980).
623 Id. at 26.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I--)
Page 140 of 168
“Supreme Court has held that restrictions on the use of trade names are permissible where
the State has a substantial and demonstrated interest in protecting the public from
deceptive and misleading information, and where factual informational advertising may
be communicated freely and explicitly to the public.““24
Accordingly, there is no First
Amendment rule . . . requiring a state to allow deceptive or misleading commercial
speech whenever the publication of additional information can clarify or offset the effect
of the spurious communication.Y’625
Staff proposes that affiliates that use the utility
name/logo “provide a disclaimer which clarifies the relationship of the utility and the
affiliate and the jurisdiction of the Commission.“626
2.
Commission Decision
(4
Royalties - Name/Logo and other Intangible and
Unquantified Benefits
The Commission determines herein that it will not require an outright ban on the
use of a utility’s brand name and logo by an affiliate. However, the Commission finds
that use of a utility’s name or logo by an affiliate constitutes a transfer of a valuable asset
from the utility to that affiliate.
It is also clear that this valuable intangible asset is
difficult to quantify, but valuable nonetheless, because of the power of the brand in the
market and the related quality, reputation and accountability suggestions that are
conveyed to consumers. Further, the Commission adopts the position of many of the
parties that the transfer of the name and logo requires that some compensation is due to
the utilities, and indirectly the ratepayers, for the affiliate’s use of the assets, which value
624 Id.,
625 Id.
citing edman
Fri v.Rogers, 440 U.S. 1, 15-16 (1979).
at citing
26-27,
Friedmanat 13, n. 11.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-2
Page141of168
was built at ratepayers’ expense. Not only does the name/logo have value that must be
recognized, but the “transfer” of this asset to an affiliate is anti-competitive because no
other company would be permitted to use the asset without compensating the utility.
Therefore, the Commission adopts, in principle, the concept of a royalty.
In addition, the Commission will apply this concept to other intangible or
unquantified benefits, services, or assets being transferred from a regulated entity to
growing numbers of affiliates.
These decisions support an earlier decision herein, which
finds the existing definition of utility asset to be too narrow and expands that definition to
include intangible assets and unquantified assets.
Both OPC and the marketers supported outright bans on the use of brand name
and logo. OPC proffered that development of a market could be harmed by affiliates, and
the use of name and logo may allow an affiliate to capture a greater market share than it
would otherwise if customer decisions were based solely on price and value.
Some
marketers stated that use of the name and iogo may create market power problems,
However, the marketers and OPC agreed that if the Commission did not impose an
outright ban on the use of the brand name or logo as they advocated, then the
Commission should at least impose a royalty to allow the ratepayers to have some
benefits accrue to them. Marketers also said that imposing a royalty on utilities would
compensate ratepayers for the use of intangible assets and offset an affiliate’s advantage
over its competitors in the marketplace. The marketers and OPC argued that the transfer
of all utility assets must be compensated.
The utilities take the position that requiring an affiliate to pay a royalty would be
an unreasonable policy because it has no basis in economics. Further, they say that the
a6 Id. at 27.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I)
Page 142 of 168
name and logo are utility assets that have never been included in the rate base.
Therefore they claim that ratepayers are not entitled to anything because this asset has
never provided the company revenue through the rate of return. They say that goodwill
and other intangibles have been accumulated through good management and service.
Utilities also claim that the reason marketers want them to pay a royalty is to increase
affiliates’ cost of doing business so that they can undercut an affiliate’s price.
In Order No. 74038, in Case No. 8747, the Commission determined that “a
utility’s affiliates may use the utility’s name or logo but neither the utility nor its affiliates
may represent that any advantage will accrue to customers or others in the use of utility
services as a result of that customer or others dealing with the aff%ate.“627 That decision
represented a continuation of a Commission policy from Case No. 8709 wherein the
Commission permitted BNG, a gas marketing affiliate, to be identified as an affiliate of
BGE.628
The Commission has carefully reviewed the extensive record on this matter in this
case and finds that it is inappropriate, at this time, to modify the decision in Case No.
8747 and require a ban on affiliate use of a utility’s name or logo. Therefore, the
Commission declines to prohibit a utility affiliate from using the brand name and logo of
the regulated entity.
The Commission is persuaded that, at this point in the restructuring process, it is
appropriate to continue to permit affiliates to use the name and logo of their associated
utility, but under the guidelines provided in this Order. The Commission notes its
concern with this practice. The Commission credits the concerns raised by OPC, AGCPD and the marketers regarding the use of name and logo. However, the Commission
627Case No. 8747, Order No. 74038, 89 MD. PSC 54, 89 (1998).
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (1-L
Page 143 of 168
declines to require a ban on this practice.
Instead, the Commission will permit an
affiliate to use the utility name and logo, but will require the utility to impute royalty
revenues for transferring this valuable intangible asset. Alternatively a utility may forego
the opportunity to permit an affiliate to use its name and logo and thereby avoid the
imputation of a royalty.
In addition a royalty will provide just and reasonable
compensation to the utility for use of its assets.
The Commission has determined previously that affiliates of a regulated utility
must be considered as stand-alone, separate entities. The decision to impute a royalty
under certain circumstances does not undermine this determination. This Commission
has a long history of making decisions to achieve just and reasonable rates which reflect
its best efforts to apply appropriate cost allocation methodologies.
royalty is designed to accomplish this objective.
Iimposition of a
It is just another tool that the
Commission now adopts to preclude utilities from subsidizing affrliate activities.
The royalty concept is not new. The use of a royalty to recognize the inherent
value of certain transfers of utility property was first discussed at length in Case No.
8577.62g
In that proceeding, the Commission focused upon transfers of intangible assets,
such as the name and logo, as well as transfers of unquantified benefits to an affiliate of
BGE. Several parties, including Staff and OPC, advocated imputing a royalty to the
regulated utility based on gross revenues of the affiliate. This payment sought to capture
the intangible or unquantified benefits which the affiliate receives from a utility in
addition to capturing some of the value related to the use of the name and logo.
BGE
argued that intangible assets are shareholders’ property and that a royalty would result in
an unwarranted subsidy to the utility, which does not correspond to any expense.
“* Case No. 8709, Order No. 72523, 87 MD. PSC 43, (1996).
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I)
Page 144 of 168
The Hearing Examiner concluded in Case No. 8577 that it was appropriate to
impute a two percent royalty to the utility to compensate BGE for intangible benefits
provided to its affiliate as well as for other unquantified benefits which exist when there
is not strict structural separation between the two entities. His finding was based, in
part, upon Staffs testimony concerning royalties imposed by other state commissions,
citing in particular a case involving Rochester Telephone Company.630
The Hearing Examiner also affirmed, and the Commission later upheld, a corollary
issue determined in Case No. 8487. In that case, the Commission required BGE to
reflect operations of BGE’s unregulated Gas Appliance and Service Department abovethe-line because of the substantial intertwining of both entities.
Over time, the
imputation of shared costs and revenues continues as substantial benefits and crosssubsidies continue to flow to what has now become BGE Home.
This imputation of
revenues to the utility is a part of the just and reasonable determination process and
results in more reasonable rates for the ratepayers.
The most recent Commission
decision upholding this practice occurred on June 19, 2000 in Case No. 8829.
In Case No. 8577, Staff argued that a royalty is consistent with fully distributed
cost allocation principles. Staff asserted that BGE’s approach to cost allocation resulted
in ratepayers paying rates which exceed the cost of service, in part, because it overlooks
intangible and unquantified benefits. However, according to Staff, a royalty operates to
correctly allocate all costs and expenses so that an accurate cost of service is established.
By establishing an accurate cost of service, a royalty is helpful in aiding the Commission
a9 Case No. 8577, Order NO. 72107,86 MD. PSC 225, (1995).
630 Re Rochester Telephone Company, 145 PUR 4* 419; Re
aff’d,Rochester Telephone
of New York, 614 N.Y.S. 2d 454 (N.Y. App. Div. 1994); aff’d, Re Rochester Telephone
of New York, 87 N.Y. 2d 17,660 N.E. 2d 1112 (1995).
Company v. PSC
Company v. PSC
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I--)
Pace 145 of 168
in’ implementing just and reasonable rates as required by law.631 In addition, Staff
argued that there was an expense associated with developing the name and logo and that
cost is reflected totally in utility rates. The royalty allocates some of the cost to the
affiliate.
Staff asserted that the Hearing Examiner’s Proposed Order did not confer any
property rights to ratepayers in the corporate name or logo. The purpose of a royalty,
Staff said, is to allocate costs to the affiliate for the use of intangible assets and for use
of shared services that would be uncompensated in a fully distributed costing method.
In addition, Staff opined that a royalty reflects the inherent unreliability of allocations; it
captures misallocations
that are difficult to detect, quantify and prove. Finally, Staff
argued that a royalty provides an administratively efficient way to avoid piecemeal
allocations.
In Case No. 8577, OPC also supported imposition of a royalty and agreed with
Staff that the Commission’s reasonable rate standard cannot be fulfilled if BGE is
permitted to allow afftliates to use corporate assets without just compensation. OPC
concluded that there is value associated with intangible assets which is not accounted for
in BGE’s cost allocation process. OPC emphasized that no firm would allow another
unrelated entity, to use its name and logo without appropriate compensation.
OPC
maintained that just because tangible costs might be properly allocated through a fully
distributed cost methodology does not mean that intangible benefits are allocated
properly.
OPC suggested that the Hearing Examiner chose to capture many of the
unquantifiable benefits in the royalty imputation instead of fine tuning BGE’s current
cost allocation procedure. OPC concluded that a royalty is an administratively cleaner,
less costly form of regulation. OPC also asserted that an imputed royalty should reflect
631 See Section 4-102(b) of the PSC Law.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I--)
Page146of168
favorably on the utility’s financial condition with the financial community. The royalty
could be quantified by appraisers at an appropriate time. OPC argued that imputation of
a royalty results in fair and reasonable compensation for the intangible and
unquantifiable benefits provided to the affiliate when there is not clear structural
separation between the two entities. OPC concluded that imposition of a royalty is an
appropriate regulatory response for the relationship that exists between BGE and the
subsidiary.
BGE, of course, took a much different position. BGE contended that the fully
distributed cost allocation procedures reflects all costs that should be charged to the
affiliate and protects ratepayers from cross-subsidization. According to the Company,
since all costs are fully allocated, there are no benefits left to deal with and therefore,
there is no rational basis for the royalty. BGE argued that ratepayers do not have a
property right in a utility’s name and reputation.
It claimed that any value associated
with its’reputation is a result of BGE’s management and the dedication of its employees.
BGE also disputed the Hearing Examiner’s finding that BGE’s name has value because it
is a monopoly. Since competitors would not pay a royalty, BGE concluded that unilateral
application of a royalty would be an anti-competitive penalty. BGE also noted that in the
Rochester Telephone Company case, the New York Commission imposed a royalty on
total capitalization, not on gross revenue. BGE asserted that a royalty based on gross
revenues has no relationship to the benefits the subsidiary receives. BGE also criticized
implementation of a royalty because it claimed that it sends the wrong signal to the
financial
community.
According to BGE, a royalty would limit BGE’s ability to
compete, thereby eroding confidence in the financial community and create negative
implications on the cost of capital.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-_)
Page 147 of 168
In Case No. 8577, the Hearing Examiner found that based upon that record, it
was fair and reasonable to impute a royalty payment in the amount of two percent upon
the gross revenues of the nonutility operations as compensation for the intangible benefits
and tmquantified benefits provided by BGE to its affiliate in situations where there is not
clear structural separation between the two entities -632. The Hearing Examiner stated that,
“[Tlhe record is clear that BGE provides benefits to the subsidiary which the subsidiary
gets from its affiliation to the Company, and I find that it is a reasonable ratemaking
practice to impute some measure of these benefits back to the parent company as a fair
recognition of the benefits the subsidiary enjoys through its affiliate relationship.“633 The
Hearing Examiner emphasized that “a royalty also recognizes the fact that the Company
itself admits there are certain services that the Company believes are too small or too
difficult to reasonably quantify which are provided to the subsidiary.“634
The Hearing
Examiner concluded that “a royalty provides some compensation to the utility to balance
the incentives for affiliated companies to shift costs to the regulated operations.“635
The
Hearing Examiner also stated that “as all parties recognize.. . there is clear value to the
intangible benefits of the corporate name and logo, which assets can clearly be marketed
to the public and outside enterprises, and I find a royalty payment is the proper method to
fairly recognize the use of such corporate assets.‘7636
“ Clearly, the corporate reputation is
an asset which has been greatly contributed to by the parent company’s status as a
regulated utility, and ratepayers have contributed to the value of the corporate reputation
632 Case No. 8577, Order No. 72523,87 M D PSC 225,258 (1995).
633
Id.
634 Id.
63s Id.
‘xi Id.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 -Exhibit AMP-2 (I-2
Page 148 of 168
-
by their payments of rates over the years and their status as a large, captive customer base
of the utility with an ongoing customer relationship.“637
In Order No. 72107, issued August 4, 1995, the Commission chose not to adopt
the royalty proposed by the Hearing Examiner in Case No. 8577
The Commission stated
that it preferred to more completely examine BGE’s current cost allocations on an issue
by issue basis using the allocation principles adopted therein to ensure that utility
operations do not subsidize the affiliate. The Commission also stated: “The underlying
principle for these kinds of imputations is the fact that the Company ought not price
valuable services or assets to subsidiaries at levels that it would be unwilling to give,
under the same terms and conditions, to a third party.‘,638 Sales of goods and services to
affiliates at below market prices raise legitimate issues regarding fairness, the
Commission
declared.
Therefore, the Commission decided that it would make
accounting adjustments based on market pricing principles for services, and on
asymmetrical piicing principles for assets.63g
The Commission finds that it is an inescapable fact that the name, logo,
reputation, and goodwill of a utility constitute very valuable intangible utility assets.640
Equally clear is the fact that the use of name and logo by an affiliate constitutes a transfer
of these valuable assets, along with reputation and goodwill. Utilities have argued that
since these assets are not included in rate base, the ratepayers are not entitled to any
compensation for such asset transfers. However, their argument fails to recognize that
utility name and logo are utility property. As OPC said, it is important to remember that
b37 Id.
b38 Id. at 239.
63g Id.
b40 For example, Pepto argued that “a rule prohibiting utilities and their affiliates from using the same logo
and trade name would constitute a taking of utility property under the FifIh and Fourteenth Amendments
which would necessitate the payment of just compensation.” Docket No. 106 at 15. Obviously, this
Direct Testimony of Anthony M. Ponticelli
MPSC Case NO. U-12134 - Exhibit AMP-Z (I-3
Page 149 of 168
the utility position here is contrary to that which they adopted in their stranded cost cases.
There the utilities argued that ratepayers had an interest in generating plants that the
utilities’ claimed were liabilities. OPC argues it is only fair that the ratepayers have an
interest in intangible assets that have increased in value during the same regulatory
period.
The Commission agrees.
Based upon the record in this proceeding, the
Commission concludes that it is inappropriate to permit utility companies to transfer
valuable intangible property to another legal, stand-alone entity without just and
reasonable compensation to the utility. The Commission is charged by law with ensuring
that rates are just and reasonable and that a utility’s financial integrity is maintained
Failure to provide for an imputation of revenue to a utility when it is shown to be
appropriate would result in rates that are higher for ratepayers, than would be appropriate
under the just and reasonable standard.
The record is clear in this proceeding that affiliates have not compensated their
associated utility for the use of their name and logo. Consequently, the Commission has
concluded that, in principle, a royalty will provide an appropriate mechanism to rectify
this practice to some extent.
Further as Staff noted in Case No. 8577, a royalty is
compatible with the fklly distributed cost allocation methodology used for transfers of
tangible assets and shared services.
In Case No. 8577, the Commission did not uphold the Hearing Examiner’s
application of a royalty to intangible or unquantified transfers but rather to focus on
appropriate allocation of costs for transfers of tangible goods and assets. However, in
this Order, the Commission accepts the argument proferred by many of the parties in this
argument is based on the assumption that the name and logo have significant value that could be
Direct Testimony of Anthony M. Ponticelli
MPSC Case NO. U-12134-Exhibit AMP-2 (I-)
Page 150 of 168
proceeding that the previous definition of utility asset was too narrow and did not fully
reflect the various benefits and cross-subsidies that can flow from the regulated entity to
an affiliate.
The record is clear that utilities should be appropriately reimbursed for all assets
transferred to affiliates. Processes were adopted in the past including the four pricing
principles, CAMS in one case and verification procedures for others to assure that
appropriate accounting occurred for asset transfers from regulated entities to their
affiliates. Despite those efforts in prior cases, it appears that certain costs have been
transferred between the regulated and unregulated entities, which have not been
accounted for or have been accounted for in an incomplete method. Even with the use of
a CAM, certain costs remain unquantified and there is no assurance that ratepayers are
not providing a subsidy. De minimus amounts are not included despite the cumulative
effect, book values may be used as opposed to market value despite escalation in value
over time, and the value of having a guaranteed source of revenue through the regulated
entity is not reflected.
For example, when a utility guarantees a debt incurred by an
unregulated affiliate, loans an affiliate money, or carries unreconciled debts, risks are
imposed on the financial well-being of the utility with potential repercussions for
ratepayers. Many such unaccounted for values are highlighted in the comments of Staff
and other parties in this proceeding.
Therefore, the Commission finds that it is appropriate, in principle, to impute a
royalty to the regulated gas and electric utilities, with the exception of municipal
utilities, in this State: (1) For the value of the name and logo of a gas or electric
company used by an affiliate in the State; and (2) intangibles, unquantified assets or de
determined in an evidentiary proceeding.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-2
Page 151 of 168
._
minimus benefits conferred on afliliates because of a lack of complete separation
between the regulated and non-regulated entities. The utility is not entitled to give away
assets, no matter the recipient. A royalty captures the value of assets such as those listed
above.
This decision builds on prior decisions of the Commission in Case Nos.
8487, 8577, 8697, and 8829. The Commission found and repeatedly affirmed that the
value of benefits and services accruing first to BGE’s Gas Appliance and Service
Division, and subsequently to BGE Home, was so intertwined with the regulated service
that a sharing of revenues was appropriate, despite being separate entities. In this
instance, upon imposition of a royalty, the Commission will consider the elimination of
that sharing provision.
The Commission will docket two separate proceedings.
One will
determine the appropriate value to be imputed to the utility for use of the utility’s name
and logo. The second will determine the appropriate value for unquantified and other
intangible benefits transferred that should be imputed to a utility. Each gas and electric
utility as well as Staff, OPC, and other interested parties will have a opportunity to
address these issues in a proceeding designed to sharply focus and resolve each of the
two royalty issues.
w
Disclaimers
In Case No. 8747, the Commission determined that if an affiliate uses the utility’s
name or logo, then a prominent disclaimer that the utility and affiliate are separate
entities must be displayed by the affiliate.
As expected, the utilities have generally
advocated that no new disclaimers be required.
However, in their post-hearing
comments, some utilities and affiliates supported additional disclaimers under certain
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-)
Paee 152 of 168
circumstances. The utilities have also suggested that if affiliates are required to display a
disclaimer, then in certain instances marketers should be required to do likewise.
The marketers generally supported a ban on an affiliate’s use of a utility name or
logo. In the alternative, they have recommended requiring a number of disclaimers. The
marketers emphasized that disclaimers are required to educate customers, provide them
with necessary information and minimize customer confusion. They also recommended
that disclaimers be broad enough to capture all mass marketing materials, without regard
to customer class.
EnronBtatoil’s
OPC, the Alliance and the Joint Commenters supported
disclaimers or similar standards. However, the marketers resisted the
application of any disclaimers to themselves. The marketers did agree with the utilities
that there is an immense practical difficulty in incorporating a disclaimer for every
situation where the affiliate uses the utility name or logo. The marketers also stated that
it is appropriate to limit the use of disclaimers to affiliate activity in Maryland.
OPC argued that an affiliate that uses the utility’s name or logo has a significant
advantage in dealing with customers in the utility’s own service territory, particularly in
dealing with residential customers. OPC also argued that a specific disclaimer is required
when DSM services are promoted under a public benefits charge.
Staff proposed a
variety of disclaimers, which would depend upon the activity in which the affiliate is
engaged.
The Commission doubts that extensive disclaimers will be of significant value to
consumers. Consumers may not be attuned to subtle distinctions in energy regulation,
Therefore the Commission has adopted concise disclaimers, written in plain english that
provide useful information to consumers. If a core service affiliates identifies itself as an
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I)
Page 153 of 168
affiliate of a utility, or uses the name or logo of an associated utility, then it must
prominently display a disclaimer in all mass marketing or advertising that states:
The (name of afftliate) is not the same company as the
(name of regulated utility) and prices and services of (name
of affiliate) are not set by the Public Service Commission.
If a non-core service affiliate identifies itself as an affiliate of a utility or uses the
name or logo of an associated utility, then it must prominently display a disclaimer in all
mass marketing or advertising that states:
The (name of affiliate) is not the same company as the
(name of regulated utility).
I.
Enforcement and Penalty Provisions641
1.
Parties’ Positions
The utilities generally take the position that the Commission’s current powers,
particularly its complaint procedures, are sufficient to enforce its rulings. Dr. Gordon
testified that, “[Plenalties
and enforcement expenditures should be proportionate to the
costs and risks to consumers from violations of the Commission’s standards.“642 In other
words, “they should be based on economics,” and “should not be so draconian as to
eliminate efficiencies arising from affiliate competition.“643
Further, any penalties for
rules violations “should be based on the likely social costs of infractions.“644 The size of
the penalty should reflect the harm done to consumers and the cost of enforcement.
Dr.
Gordon says the standards of conduct should establish the framework for addressing
64’ This section addresses Issue No, 17 - What enforcement and penalty provisions should be developed by
the Commission for violations relating to the Standards of Conduct?
642 Docket No. 56 at 23.
643 Id.
644 Id.
Direct Testimony of Anthony M. Ponticelli
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.-
violations.
“Specific issues can then be addressed on a case by case basis,” he
Conectiv says that “the Commission’s complaint procedure is available to resolve
disputes.“646
The Commission can issue cease and desist orders and craft appropriate
reporting requirements to deal with violations. Conectiv argues that “penalties should be
imposed only in particularly egregious cases.“647 It says penalties are not appropriate for
technical or inadvertent violations.648
While the Commission should take note of its
enforcement powers, Conectiv says particular violations are more appropriately resolved
on a case by case basis.64g
Pepto concludes that there “is no need for special
enforcement and penalty provisions” because the Commission “already has sufficient
mechanisms in place.“650
WGL, NUI and Columbia all support this position.651
However, Columbia says that if new penalties are developed, they should be sufficient
enough to deter violations but not so tough as to deter affiliates from participating in the
market.652
Chesapeake says serious complaints should be handled through the current
complaint process on a case by case basis.653 It argues that penalties “should be reserved
for repeated or flagrant violations.“654
The marketers support structural separation to prevent violations from occurring.
They also recommend stiff financial penalties and emphasize the need for expedited
complaint procedures. MAPSA says that the “magnitude of compliance and enforcement
provisions is directly proportional to the extent of the interaction among utilities and
645 Id.
646 Docket No. 53 at 34.
647 Id.
a8 Id. at 35.
64g Id.
‘So Docket
651 Docket
“* Docket
653 Docket
No.
No.
No.
No.
64, Attachment A at 6.
55, Appendix A at 6 , Docket No.69 at 12 and Docket No. 49 at 6 .
49 at 6.
54.
Direct Testimony of Anthony M. Ponticelli
MPSC Case NO. U-12134-Exhibit AMP-Z (I-)
Page155of168
afiliates.“655
“Further, the procedural approaches that have worked well in the past,
relative to a regulated industry must be revisited in parallel with the development of
utility standards of conduct in order to ensure that the Commission is able to address anticompetitive infractions on an expedited basis.656 The PGA recommends that complaints
be filed in writing with the utility or affiliate and that responses to the complainant be
filed within 45 days.657
If the complaint cannot be resolved informally, then the
complainant may file a complaint with the Commission or seek any other relief permitted
by law.658
The Joint Commenters say that the Commission “should adopt efficient, low cost,
timely enforcement procedures and should match penalty provisions to the nature and
magnitude of the violations.“65g They recommend that all utility affiliate intercharges be
public to aid in the detection of violations.
Enforcement mechanisms should also
“facilitate the intervention by affected consumers and competitors.“660
The Joint
Commenters also argue that any utility found violating the code of conduct should be
required to reimburse all reasonable costs of the complainant.661
They conclude that,
“[IIf the selected punishment appropriately fits the crime, the Commission may succeed
in deterring similar anti-competitive behavior by other utilities.“662
The Alliance says that “appropriate penalties should be modeled upon other
penalty provisions contained in the Act.‘7663
The Alliance argues that code of conduct
penalties should be modeled upon the penalty provisions for electric supplier violations
a4 Id.
655 Docket No. 63 at 5 .
656 Id. at 12.
657 Docket No. 45 at 6 .
a8 Id.
65g Docket No. 61 at 2 7 .
~6’ Id.
a’ Id. at 28.
662 IdA
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-2
Page 156 of 168
which are contained in $7-507(l) of the Act; a civil penalty of not more than $10,000 per
violation.
The Alliance concludes that, “[Tlhere is no reason to suggest that utilities and
affiliates who violate code of conduct provisions should face less severe penalties for
infractions than competitive suppliers of electricity.“664
EnronBtatoil
essential.665
emphasizes that monitoring by the Commission and Staff is
EnronBtatoil
says the Commission should make it clear that if the rules are
violated the Commission may terminate the inappropriate transaction or prospectively
restrict the amount, percentage or value of transactions between the utility and its
affiliates.
666
Penalties should not be recovered from utility ratepayers according to
Enron/Statoil.667 However, penalties should not preclude injured persons from seeking
damages in court668 Local distribution companies should be required to notify ratepayers
of violations. 669
OPC argued that penalties for violation of afftliate transaction regulations should
be large enough to dissuade the utility from considering them a ‘cost of business.“‘67o
Penalties should range from $5,000 to $20,000 per violation. In addition, penalties
should reflect the injury to ratepayers and competitors and the seriousness of the
violation.671
Repeated violations should result in more severe sanctions. Under certain
circumstances,
the
Commission
should
appropriate period due to violations.672
663 Docket No. 59 at 21.
664 Id.
at 22.
665 Docket No. 60 at 26.
666
667
‘a
“’
Id.
Id.
Id.
Id.
670 Docket No. 50 at 34
671 I d .
672 I d .
prohibit
utility/affiliate
interactions
However, none of OPC’s
for
an
recommendations
Direct Testimony of Anthony M. Ponticelli
should preclude exercise of any of the Commission’s existing enforcement powers.673
Finally, OPC suggests that, “[T]o the extent legally feasible, all collected fines could be
deposited in a fund that would support the Commission’s complaint resolution
MEA addressed the issue of suspension of electricity supplier licenses. It stated
that “the issue of suspension of licenses is closely linked to the other issues involved in
affiliated transactions, and demands comment.“675
MEA noted that the Act authorizes the
Commission to suspend or revoke electricity supplier licenses.676 MEA argues that the
severity of this sanction demands that the Commission not delegate this authority to a
utility.“77 MEA asserts that it would be unsound regulatory policy to expect a utility to
fairly determine suspension or revocation issues regarding a non-affiliated supplier’s
license at its sole discretion, or even with Commission review on an after-the-fact
“MEA believes the Act reserves revocation and suspension authority to the
basis.678
Commission.“679
Consequently, MEA concludes that “Any revocation or suspension of a
license should require a Commission Order.“680
Staff recommends adoption of extensive complaint and penalty procedures.681
Staff noted that $7-505
of the Act requires the Commission to adopt “policies and
practices to prevent discrimination against customers, self-dealing, and undue or
unreasonable preferences in favor of the electric company’s own electricity supply, other
673 Id.
674 Id: at 35.
675 Docket No. 72 at 3 .
676 Id. @7-507(k)(l) and (n).
“’ Docket No. 72 at 3 .
678 Id.
“’ Id.
‘*’ Id.
681 Docket No. 5 1 at 25-3 1.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I--)
Page 158 of 168
services, divisions, or afflliates.“682 To address the need for timely resolution of code of
conduct
complaints, Staff recommends that the Commission modify its complaint
procedures with respect to informational, service, and filing requirements, as well as the
“Staff stresses that
time period for answers and the structure of the review process.683
these recommended modifications should only be applicable to complaints alleging
violations of the gas and electric Standards of Conduct.‘y684
Staff suggests that
complaints include information about the alleged action or inaction of the respondent
which is the source of the complaint, including any financial impacts; a statement
concerning whether the issues are pending in another case; the remedy requested; and any
basis for preliminary relief.685
Staff recommends equal specificity for the answer.686
Staff says that service should be concurrently on the Commission and the respondent and
in an expeditious manner.687 Staff suggests that answers be filed within 20 days after the
complaint is filed, unless the Commission indicates otherwise.688
Staff also recommends
that complaints be delegated to the Hearing Examiner Division on an expedited basis and
that requests for preliminary relief be determined within 30 days.68g In extreme cases, a
“fast track” procedure should be established.6g0
Again, Staff emphasizes that time is of
the essence in these matters.6g1
Staff also noted that $13-201 of the PSC Law provides authority to fine a public
service company that is in violation of any Commission rule, regulation, order, or law.692
“’ Id.
683 Id.
684 Id.
685 Id.
686 Id.
687 Id.
688 Id.
at 2 5 .
at 2 7 .
at 2 9 .
at 28-29.
at 2 9 .
at 29-30.
68g Id. at 30.
‘go Id. at 30-3 1.
“’ Id. at 3 1.
6g2 Id. at 26.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I)
Page 159 of 168
This section establishes a maximum penalty of $2,500 for each offense.6g3
“Staff
recommends that the Commission strictly enforce compliance and penalize violations to
the fullest extent possible” because of the effect violations could have on the emerging
competitive markets.6g4
Staff argues that the penalty recommendations of some parties
do not comply with the current state of the law.6g5
Staff suggests that penalties be
determined on a case by case basis because this will allow the Commission to retain the
necessary flexibility to ensure that the penalty fits the circumstances of the offense.6g6
Finally, Staff asserts that the “combination of active (reports and penalties) and reactive
(complaint procedures) policies along with timely resolution of disputes should assist in
making a smooth transition to competition.“6g7
2.
Commission Decision
The Commission has broad authority to enforce the PSC Law and Commission
orders and to protect consumers and suppliers from discriminatory, unfair, deceptive and
anticompetitive acts and practices in the marketing, selling and distribution of gas and
electric services. The PSC Law, including 4 7-507(l) of the Act and 5 7-603(a) of the
Gas Act, authorize the Commission to levy tines of up to $10,000 per violation, revoke or
suspend supplier licenses, order refunds and credits to customers, or impose other
remedies to redress violations of Commission orders and to adjudicate complaints.
6g3 Id.
6g4 Id.
6g5 Docket No. 73 at 18.
“’ Id.
6g7 Docket No. 51 at 31.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-_)
Page 160 of 168
.__
Given the potential risks associated with anticompetitive behavior and the market
share implications associated with such conduct between utilities and their affiliates,
companies should consider carefully the emphasis the Commission places upon the
standards adopted in this Order and should be aware that the Commission will not
hesitate to impose severe penalties upon companies that violate the rules of conduct set
forth herein. Accordingly, the companies are expected, at the earliest opportunity, to give
explicit instructions and directives to their affiliates concerning the requirements of this
Order.
The Commission also has a complaint process in place. Title 3 of the PSC Law
establishes a comprehensive set of rules and procedures for complaints, presentation of
evidence and appeals.
As in the past, these procedures will be used to resolve all
complaints, including complaints involving electric and gas suppliers. At this time, the
Commission believes that this is an appropriate process for promptly addressing
complaints involving affiliate transactions.
Moreover, the Commission has begun a review of its complaint and dispute
resolution procedures in light of the emerging competitive energy markets. In Order No.
75949, the Commission established the Complaint Procedure Design Group (“CPDG”) to
recommend additional streamlined and expedited procedures to facilitate disputes filed by
customers, utilities, suppliers and other interested parties. Pending fiuther action by the
Commission on that matter, however, the existing procedures set forth in the PSC Law
and in the Code of Maryland Regulations shall apply.
The Commission finds that these
represent appropriate complaint and enforcement procedures at this time.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-Z (I--)
Page161of168
VI.
ORDERED PARAGRAPHS
IT IS, THEREFORE, this 1st day of July, in the year Two Thousand, by the
Public Service Commission of Maryland,
ORDERED:
(1) That the standards of conduct for utilities which are set forth in
the text of this Order are hereby adopted for all gas and electric companies subject to this
Order;
(2) That the policies and standards adopted in Case No. 8747 shall
continue in force to the extent that they are consistent with this Order. Inconsistent
standards are hereby repealed;
(3) That except as provided herein, the GENCO Code of Conduct,
adopted by the Commission in Order No. 75757, for the Baltimore Gas and Electric
Company, is adopted as the generic GENCO Code of Conduct for all appropriate electric
utilities and shall govern all transactions between electric companies and their generation
affiliates;
(4) That during the residential price cap period adopted in Case
No. 8797, relating to Allegheny Power Supply, APS shall abide by the GENCO Code of
Conduct approved by the Commission in Order No. 76009;
(5) That the cost allocation principles which are set forth in the
text of this Order are hereby adopted for all gas and electric utilities subject to this Order;
(6) That the employee sharing and loan and loan guarantee
provisions set forth herein are adopted for all gas and electric utilities subject to this
Order;
(7) That Cost Allocation Manuals shall be filed as required in the
text of this Order;
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-)
Page 162 of 168
(8) That the promotional practices regulations found at Title 20,
Subtitle’ 40 of the Code of Maryland Regulations do not apply to affiliates of gas or
electric utilities;
(9) That separate proceedinga shall be docketed to determine the
appropriate value that should be imputed to gas and electric companies for the use of the
company’s name and logo and other intangible or unquantified benefits;
(10) That the complaint and dispute resolution procedures set forth
in the text of this Order are hereby adopted.
Glenn F. Ivev
Claude M. Ligon
Catherine I. Riley
J. Joseph Cur-ran, III
Commissioners
Commissioner Brogan concurs in part and dissents in part.
Direct Testimony of Anthony M. Ponticelli
APPENDIX A
GENCO Code of Conduct
While it serves as SOS provider, a utility shall not be able to
market or promote its SOS. However, this limitation shall not
preclude a utility from providing unbiased information to
customers that SOS is available and the terms thereof.
b)
Until June 30, 2006, the GENCO must sell all the generation
output of the assets transferred under its settlement, including
energy, capacity and other products (excluding all output sold to
the utility for SOS) into the wholesale market.
4
Until June 30, 2006, the GENCO shall be a separate subsidiary
from the unregulated retail marketing affiliate and separate from
utility.
4
With respect to sales or any other transfer to any of its affiliates for
resale to “retail electric customers” as defined in Code Section l101 (AA) (including but not limited to the utility’s unregulated
retail marketing affiliate) in the utility distribution service territory
until June 30, 2003, the GENCO shall not offer power or ancillary
services incident to the delivery of power at prices and terms more
favorable than those available to non-affiliated electric suppliers.
Such information regarding the above sales or transfers of power
and ancillary services by the GENCO to its affiliate shall be
simultaneously posted with the execution of any agreement for the
sale or transfer on a publicly available electronic bulleting board.
This provision shall not apply to sales by the GENCO to the utility
for SOS.
e>
A utility shall not market or promote the competitive supply
service.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I--)
Page 164 of 168
IN THE MATTER OF THE INVESTIGATION *
ACTIVITIES,
AFILIATED
INTO
PROMOTIONAL PRACTICES AND CODES *
OF CONDUCT OF REGULATED GAS AND
*
ELECTRIC COMPANIES.
*
BEFORE THE
PUBLIC SERVICE COMMISSION
OF MARYLAND
CASE NO. 8820
DISSENTING OPINION OF
COMMISSIONER SUSANNE BROGAN
I concur with the determinations made by the Commission with regard to the need
for modifications to the standards of conduct, the adoption of pricing principles and the
broad parameters of the regulation of the relationship between utilities and their affiliates
set forth in this Order. I respectfully disagree, however, with the majority Opinion
regarding promotional practices and the imposition of royalties for the use of name, logo
and other intangible or unquantified benefits.
Promotional Practices
In this Order the Commission determined that the promotional practices
regulations (“PPR”) should not apply to affiliates and should remain in effect for gas and
electric utilities, subject to later revision or repeal.
I favor immediate repeal of the
promotional practices regulations and see no reason for further proceedings on this matter
or for revising these regulations.
The record in this case is sufficient to determine that the PPRs should be repealed.
The gas and electric industries have undertaken many changes since the inception of
these regulations in the 1970’s. The shifting paradigm of these energy industries renders
the PPRs unsuitable. The standards of conduct that have evolved through Case Nos.
8709, 8577, 8747 and this Case No. 8820 establish sufficient safeguards to warrant repeal
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I-)
Page 165 of 168
of the regulations.
Additionally, I note and concur with the Standard Offer Service
marketing prohibitions placed on electric companies by this Order.
Finally, as the
majority Opinion notes, there are already statutory prohibitions on some promotional
practices set out in $ 4-503(b) of the PSC Law. I would place no further restrictions and
would undertake immediate repeal of the promotional practices regulations.
Rovalties
The majority Opinion in this Case adopts the concept of a royalty to compensate
the utility and its ratepayers for the affiliate’s use of the name, logo, and other intangible
and unquantified benefits, services and assets.
The value of the royalty will be
determined in two separate proceedings, This appears to be an attempt to protect
ratepayers from cross-subsidization by imputing a value for the benefits that an affiliate
gets from its relationship with the utility. I disagree.
While I find merit in the notion that the value of the utility’s name and logo results
from the utility’s provision of franchised monopoly service, I am persuaded that for
purposes of pricing asset transfers, a utility asset is tangible property that is included in
rate base. In setting rates for public service companies, the Commission is required to set
rates that are just and reasonable.’ Inherent in this requirement is the notion that the rates
will yield operating income to the utility that accounts for depreciation and provides a
reasonable return on the fair value of the utility’s property used and useful in providing
service to the public.’
In order to include an asset in rate base and therefore recover its
costs through rates, the asset must be used to provide utility service. If a rate base asset is
used by an affiliate, the affiliate must compensate the utility for such use.
otherwise would result in the ratepayer subsidizing the operations of the affiliate.
’ Section 4-102 of the PSC Law
To do
The
Direct Testimony of Anthony M. Ponticelli
name and logo and other intangible assets of a utility are not currently considered used
and useful in the provision of service. The ratepayer is not paying for that intangible
asset through rates. Therefore, use of the asset by the affiliate is not a ratepayer subsidy.
I also disagree with using a royalty payment as a means of capturing the value
of unquantified benefits received by the affiliate from the utility.
The majority Opinion
seems to rely on the notion that a royalty will compensate for the inherent unreliability of
the cost allocation process. While I agree that the fully distributed costing method and
cost allocation process may be imprecise at times, I am uncomfortable ascribing some
percentage royalty as a means of valuing unidentified or unquantified assets, services or
benefits. If the asset or service can be identified and a value placed on it, then the cost
allocation process should do so.
Legitimate concerns are raised by the affiliate’s use of the utility’s name or logo.
When an affiliate uses the name/logo of the utility, customers are likely to believe that the
companies are one and the same or that the quality of service of the affiliate is somehow
superior.3
The use of disclaimers is a less intrusive solution to the problems or
confusions that arise from name and logo use.
Core Standard No. 3 and Non-Core
Standard No. 3 established in this Case require disclaimers. The addition of this new
language to those standards was intended to eliminate customer confusion. With these
requirements in place, the imposition of a royalty on the use of the name or logo seems
A royalty, in this instance, imposes financial burdens on the affiliate that surely
will result in competitive disadvantages. In restructuring the gas, electric and telephone
industries in this State, the Commission traditionally has emphasized the importance of
2 Section 4-101 of the PSC Law
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134 - Exhibit AMP-2 (I-__)
Page 167 of 168
adopting policies that promote competition, not any specific competitors. The adoption
of the royalty concept seems to deviate from this.
It is conceivable that competition
could be harmed given the fact that a utility marketing afflliate may play an integral role
in transitioning the electricity market towards retail choice. The marketing affiliate may
provide customers with a level of comfort because of its utility aff%ation.
Therefore
customers who would be hesitant to choose an unknown supplier may indeed switch from
utility-provided SOS to the marketing affiliate. This initial acceptance of the notion of
choosing an energy provider, however tentative, may ultimately lead to a more
competitive market. These benefits are eradicated if the marketing affiliate must either
change its name or pay a royalty to the utility and thereby increase its costs.
My final concern is an equitable one. In Case Nos. 8577 and 8747, the
Commission determined that royalties would not be imposed on a shared name or logo.
The utilities relied on that decision first made in 1995. At the time of those decisions, the
gas market was undergoing major changes and electric restructuring was imminent. The
utilities made corporate structure decisions based on those 8577 and 8747 determinations.
It seems unfair and overly burdensome to adopt changes now that will have major
impacts while achieving no additional safeguards as a result of such actions.
The
protections that come from royalties can come from less extreme measures such as
disclaimers.
My colleagues have reached well-reasoned decisions on Core and Non-Core
Codes of Conduct, GENCO Codes of Conduct, SOS marketing restrictions, principles of
cost allocation, pricing policies and a broad scheme of regulation of utility/affiliate
relationships. I disagree with the majority Opinion’s conclusions on the treatment of the
3 Arguably that is a violation of Core Standard No. 1 and Non-Core Standard No. 1.
Direct Testimony of Anthony M. Ponticelli
MPSC Case No. U-12134-Exhibit AMP-2 (I)
Page 168 of 168
promotional practices regulations and the royalty as a concept for capturing the value of
the affiliate’s use of the name/logo and other intangible and unquantified benefits and
dissent from those portions of the Opinion.
Susanne Brogan
Commissioner
MPSC Case No. U-12134 - Exhibit AMP-3 (I-)
TECHNOLOGY AND ENERGY COMMIITEE
SENATOR MAT DUNASKISS.
s-8 wrroc
CHAIRMAN
RO. BOX 30036
L A N S I N G , MlCHlGAN 48909-7536
MEMBERS:
SENATOR KEN SIKKEMA MAJORIW VICE CHAIR
SENATOR
BILL
SCHUETTE
SENATOR
MIKE
ROGERS
PHONE: (517) 373-2417
FAX: 6171 373-2694
SENATOR DIANNE BYRUM. MINORITY VICE CHAIR
SENATOR
BURTON
SENATOR
CHRISTOPHER
TOO: (5171 373.0543
LELAND
DINGELL
July 20,200O
Ms. Dorothy Wideman, Executive Secretary
Michigan Public Service Commission
6545 Mercantile way
Lansing MI 48910
Dear Ms. Wideman:
We would like this letter to be part of the contested case hearing for the Docket # U-12134. This
docket addresses a major issuethat was addressed in PA 141 of 2000, utility code of conduct.
We understand that numerous proceedings that are being initiated at the Commission in order to
implement this act and appreciate the ability to participate in this process.
The Senate Technology and Energy Committee labored long and hard in putting together code of
conduct language. We feel that the language contained in section lOA(4) is very clear.
(4)Within 180 days after the effective date of the amendatory act that
added this section, the commission shall establish a code of conduct that shall
apply to all electric utilities. The code shall include, but is not limited to,
measures to prevent cross-subsidization, information sharing, and preferential
treatment, between a utility’s regulated and unregulated services, whether those
services are provided by the utility or the utility’s affiliated entities. The code of
conduct established under this subsection shall also be applicable to electric
utilities and alternative electric suppliers consistent with section 10, this section,
and sections lob through 1Obb.
It was our intent in committee deliberations and through final passage of PA 141 of 2000 that the
code of conduct was meant to apply to all electric utilities and & of their unregulated services
whether those services are provided by the utility or the utilities’ affiliated entities. This means
that the electric utility may not cross-subsidize, share information, or give preferential treatment
between the utilities regulated and unregulated services. It was our intent that the commission
take into consideration the unregulated services that the regulated utility provides so that the
electric utility is not unfairly competing with private entities providing similar services. The last
Recycled
@ Paper
~
Direct Testimony of Anthony M. Ponticelli
sentence in the paragraph also highlights the intention that the code of conduct should also apply
to the electric utility and alternative electric suppliers. In essence, all the unregulated businesses
ofthe utility and their affiliates are covered under section 10a (4).
Thank you for your time and consideration of this matter.
,
.
szJ&
MAT DUNASKISS, Chairman
Senate Technology and Energy Committee
/j md
cc: Service List for Docket #U-12134 as of July 20,200O:
Mr. George Schankler
Ms. Susan Beale, The Detroit Edison Company
Mr. Haran Rashes, Clark Hill PLC
Mr. John Shea, Consumers Energy Company
Mr. John M. Dempsey, Dickinson Wright PLLC
Mr. James D. Florip, Gillard, Bauer, Mazrum, Florip, Smigleski, and Gulden
Ms. Sheni A. Wellman, Loomis, Ewert, Parsley, Davis & Getting, P.C.
Mr. Eric J. Schneidewind, Varnum, Riddering, Schmidt & Howlett
Mr. Thomas McNish, Consumers ‘Energy Company
Mr. David M. Gadaleto, Assistant Attorney General
Mr. Robert,Strong, Clark Hill PLC
Mr. Ojiakor N. Isiogu, Dept. of Attorney General
Mr. Michael Ashton, Fraser, Trebilcock, Davis & Foster, PC
Mr. Michael J. Brown, Howard & Howard
Mr. Bruce R. Maters, The Detroit Edison Company
STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
*****
In the matter of the approval of a
code of conduct for CONSUMERS
ENERGY COMPANY and THE
DETROIT EDISON COMPANY.
)
)
)
)
>
Case No. U-12134
PROOF OF SERVICE
STATE OF MICHIGAN
COUNTY OF INGHAM
)
) ss:
)
Kristi A. Grieve, being duly sworn, deposes and says that she is an employee of Clark Hill
P.L.C., and that on August 31, 2000, a copy of the Request for Immediate Consideration of and
Appeal of ALJ’s Ruling Striking the Testimony and Exhibits of Michigan Alliance for Fair
Competition’s witness Anthony M. Ponticelli was served upon:
See attached service list
Except as otherwise noted on the attached list, service was accomplished by depositing same in a
regular mail depository, enclosed in envelopes bearing postage fully prepaid and addressed properly.
A- g&u
Krisfi A. Grieve
Subscribed and sworn to before me
this 31”’ day of August, 2000.
Ingham County, Michigan
My Commission Expires: May 20,2003
3061031.1
13540/081722
SERVICE LIST
CASE NO. U-12134
ADMINISTRATIVE LAW JUDGE
Honorable George Schankler
Michigan Public Service Commission
6545 Mercantile Way
Suite 14
Lansing, MI 48911
INDIANA MICHIGAN POWER
COMPANY
Daniel L. Stanley, Esq.
Honigman Miller Schwartz & Cohn
222 North Washington Square
Suite 400
Lansing, MI 48933
ALPENA POWER COMPANY
James D. Florip, Esq.
Gillard Bauer Mazrum Florip Smigelski &
Gulden
109 East Chisolm Street
Alpena, MI 49707
ASSOCIATION OF BUSINESSES
ADVOCATING TARIFF EQUITY
THE DETROIT EDISON COMPANY
Robert A.W. Strong, Esq.
Robert A. LeFevre, Esq.
Clark Hill P.L.C.
255 S. Old Woodward Ave, 3rd Floor
Birmingham, MI 48009
Bruce R. Maters, Esq.
Jon P. Christinidis, Esq.
The Detroit Edison Company
2000 Second Avenue
688 WCB
Detroit, MI 48226
WISCONSIN ELECTRIC POWER
COMPANY, NORTHERN STATES
POWER COMPANY - WISCONSIN,
WISCONSIN PUBLIC SERVICE
CORPORATION and UPPER
PENINSULA POWER COMPANY
CONSUMERS
Harvey J. Messing, Esq.
Sherri A. Wellman, Esq.
Loomis Ewert Parsley Davis & Gotting, P.C.
232 South Capitol Avenue
Suite 1000
Lansing, MI 48933
ENERGY
COMPANY
John C. Shea, Esq.
Consumers Energy Company
212 West Michigan Avenue, M-1074
Jackson, MI 49201-1923
ServiceList, MPSC CaseNo. U-12134
Page 2
MICHIGANELECTRIC COOPERATIVE
ASSOCIATION, EDISON SAULT
ELECTRIC COMPANY
Albert Ernst, Esq.
Dykema Gossett PLLC
800 Michigan National Tower
Lansing, MI 48933
MICHIGAN PETROLEUM
ASSOCIATION/MICHIGAN
ASSOCIATION OF CONVENIENCE
STORES
Don L. Keskey, Esq.
Knaggs Harter Brake & Schneider, P.C.
1375 South Washington Avenue, Suite 300
Lansing, MI 489 10
UNICOM ENERGY, INC.
John M. Dempsey, Esq.
Dickinson Wright PLLC
215 South Washington Square, Suite 200
Lansing, MI 48933
ENERGY MICHIGAN
Eric J. Schneidewind, Esq.
Vamum Riddering Schmidt & Howlett LLP
201 North Washington Square, Suite 210
Lansing, MI 48933
MIDLAND
COGENERATIONVENTURE
Michael J. Brown, Esq.
Howard & Howard
222 North Washington Square, Suite 500
Lansing, MI 48933
NEW ENERGY, INC.
Jack D. Sage, Esq.
Vamum Riddering Schmidt & Howlett LLP
P.O. Box 352
Grand Rapids MI 49501
MICHIGAN ALLIANCE FOR FAIR
COMPETITION
Roderick S. Coy, Esq.
Haran C. Rashes, Esq.
Clark Hill P.L.C.
2455 Woodlake Circle
Okemos, MI 48864
MICHIGAN PUBLIC SERVICE
COMMISSION STAFF
David Gadaleto, Esq.
Assistant Attorney General
Public Service Division
6545 Mercantile Way, Suite 15
Lansing, MI 48911
ServiceList,MPSCCaseNo.
PG&E CORPORATION
FIBER LINK, INC.
Michael S. Ashton, Esq.
Fraser Trebilcock Davis & Foster, P.C.
1000 Michigan National Tower
Lansing, MI 48933
Roderick S. Coy, Esq.
Haran C. Rashes, Esq.
Clark Hill P.L.C.
2455 Woodlake Circle
Okemos, MI 48864
Freddi L. Greenberg, Esq.
1603 Orrington Avenue
Suite 1050
Evanston, IL 60201
MIDWEST INDEPENDENT POWER
SUPPLIERS COORDINATION GROUP
Michael S. Ashton, Esq.
Fraser Trebilcock Davis & Foster, P.C.
1000 Michigan National Tower
Lansing, MI 48933
Ms. Melissa Lavinson
PG&E Corporation
77 Beale Street
Mail Code B29
San Francisco, CA 94105
MICHIGAN
ATTORNEY
U-12134
Page 3
GENERAL
Orjiakor N. Isiogu, Esq.
Assistant Attorney General
Special Litigation Division
6520 Mercantile Way, Suite 2
P.O. Box 30218
Lansing, Ml 48909