FLAHERTY, SENSABAUGH & BONASSO, P.L.L.C. Attorneys at Law

x)0 Hampton Center, Suite I Morgantown, WV 26505 Telephone (304) 598-0788 Telecopier (304) 598-0790

J. Tyler Dinsmore -Mail: tylerd@fsbwv.com iect Dial: (304) 347-4234

ndra Squire, Executive Secretary blic Service Commission 1 Brooks Street 0. Box 812 larleston, West Virginia 25321

Re: Case No. 98-045%E-G1 Order GO-255

200 Capitol Street P.O. Box 3843

Charleston, WV 25338-3843

Telephone (304) 345-0200 Telecopier (304) 345-0260

Web Page: www.fsbw.com

:ar Ms. Squire:

September 18,200O

Wheeline. 1031 National Road, Suite 200

P.O. Box 6545 Wheeling, WV 26003

Telephone (304) 242-3941 Telecopier (304) 242-3944

Enclosed for filing please find the original and fifteen (15) copies of the mments of the West Virginia-Ohio Valley Chapter of the National Electrical mtractors Association Regarding Proposed Rulemaking Related to Restructuring of : Electric Utility Industry in West Virginia in the above-referenced matter. I have this y served all the parties named on the Certificate of Service with a copy of the Comments.

Thank you for your assistance.

‘D/mm rclosures

Counsel of Record 10.3 15 I

Before the Public Service Commission

of the State of West Virginia

Proposed Rulemaking Related to Restructuring of the Electric Utility Industry in West Virginia

Case No. 9%0452-E-G1 Order GO-255

Comments West Virginia - Ohio Valley Chapter

National Electrical Contractors Association

These comments are submitted on behalf of the West Virginia - Ohio Valley Chapter of the National

Electrical Contractors Association (NECA) and are directed to the Commission’s proposed Rules for the

Government of Electric Utilities, Electric Service Providers and Retail Electric Service (Series 3) as

issued in Order No. 255, 16 August, 2000. Specifically, NECA wishes to address the Commission’s New

Electric Rules regarding the establishment of a code of conduct for transactions between electric utilities

and their affiliates engaged in competitive activities.

Separation [lSl(a)(l-3)]

NECA believes that the Commission should require more than mere functional separation for affiliates

engaged in unregulated competitive operations. Specifically, NECA recommends that the Commission

require that unregulated affiliates:

(a) Be a separate corporate entity from the distribution company;

(b) Operate independently from the distribution company;

(c) Maintain books, records and accounts separate from those of its

regulated operations;

(d) Not have officers, directors or employee in common with the

distribution company; and

(e) Not have any member on its board of directors who is also an

employee or officer of the distribution company.

The Commission’s proposed use of purely functional separation is an inadequate means by which to

prevent abuses of the type this Code is designed to address. Numerous states have similarly rejected

purely functional separation since it is an inappropriate measure by which to combat favoritism of utilities

for their affiliates over non-affiliated competitors.

Functional separation, by itself, leaves in place the anticompetitive opportunities and the monitoring and

enforcement difficulties that are inherent in vertical integration between regulated and unregulated

markets.

The need for structural and behavioral safeguards has increased as states implement restructuring and

deregulation in the electric industry by requiring vertically integrated monopolies to unbundle various

services. As the Public Utility Commission of Texas has noted in its code proceedings:

“[Tlhere is a strong likelihood that a utility will favor its affiliates where these afftliates

are providing services in competition with other, non-affiliated entities. [In addition,]

there is a strong incentive for regulated utilities or their holding companies to subsidize

their competitive activity with revenues or intangible benefits derived from their regulated

monopoly businesses. Finally, current regulations are not adequate to prevent

or discourage [this] anticompetitive behavior. .” t

11, ‘. Publtc Uhhty Commission ofTexas, 23 Tex. Reg. 5294 (May 22,1998).

2

In testimony before numerous state utility commissions, the FTC’s Bureau of Economics has frequently

cited the Texas Commission’s observation and has espoused the position that behavioral rules on their

own may be enough to prevent competitive abuses and that structural separation may be needed.

“As a general proposition, we have found that structural remedies to address market

power, such as divestiture in merger cases, are the most effective and require the least

amount of subsequent monitoring by government agencies. The effectiveness of

structural remedies stems from the fact that they directly alter incentives . Behavioral

remedies, in contrast, leave incentives for discriminatory behavior in place. They also are

likely to impose a substantial burden on government agencies to monitor subsequent

conduct. Because behavioral rules leave incentives to discriminate in place, active

monitoring and enforcement of such rules is essential if the rules are to appreciably curtail

discrimination.“2

The FTC also explicitly expressed the view that rules might need to be extended to non-energy

affiliate operations: “Our concerns about the effectiveness of rules against cross-subsidization apply

equally to energy-related and non-energy- related affiliates.” 3

The State of California was one of the first states to deregulate its electric power market. In establishing

regulations to prevent market abuses in that state the Commission observed that:

3, Ibid.

3

With the advent of a new marketplace characterized by increasing competition, we wish

to ensure that the utilities’ market power does not discourage competition and does not

foreclose the entrance of, or disadvantage, electric service providers or other businesses

that are unaffiliated with the utilities. Rules focusingprimarily on corporate

separation and cost accounting may not be adequate to overcome the incumbent’s

advantage.” (Emphasis added.) 4

‘l$e lack of adequate separation between the regulated and unregulated operations of utilities and their

affiliates increases the opportunity for discriminatory behavior, cross-subsidization and cost shifting, as

well as the inappropriate sharing of information. The less distinct tbe separation between the entities

offering regulated and unregulated, competitive services, the greater the incentive for and opportunity to

abuse monopoly power. The more distinct the separation between regulated and unregulated entities, the

greater the likelihood that a truly competitive market will develop and abuses be curtailed with a minimum

of oversight.

The Commission appears to have implicitly recognized this fact in its proposed rule at 15.1 .b. 1 which

requires that each incumbent utility fully separate its generation into a separate corporate entity from its

remaining regulated transmission and distribution operations. However, no comparable requirement is

proposed for a utility’s other unregulated affiliate operations which engage in competitive markets. This is

in direct contrast with previous proposals made by Commission staff in its May 24*‘, 2000 “Strawman”

document which represented a consensus of all non-utility parties reached at the Canaan Valley meeting.

In its “Strawman” document, the staff proposed, at 2.2.1 (Corporate Separation), that each electric utility

“shall fully separate its generation and non-regulated businesses into a separate corporate

entity(ies)...“[Emphasis added.]

The Commission’s departure from this approach creates an enormous opportunity for abuse and

circumvention of the objectives of the Code in preventing cross-subsidization, cost shifting and

djscriminatory conduct. Further, it is unclear why the Commission believes that ratepayers and

competition will be protected by requiring corporate separation in some unregulated markets and not in

others. Cross-subsidization and cost shifting can arise anywhere there are both regulated and unregulated

competitive operations performed by an entity under common ownership and control. The Commission

owes no less a duty to ratepayers who may suffer from these abuses when they arise as a result of

actions in a non-generation setting than they do when they occur in generation markets. Complete

corporate separation should be required for all utility affiliates engaged in unregulated, competitive

markets regardless of the particular type of market in which the unregulated affiliate competes.

C#her states have chosen to employ the requirement of separate corporate entities for all competitive

ai‘filiates. Arizona’s Code states that a utility, or utility distribution company, and its affiliates shall operate

as separate corporate entities. Books and records shall be kept separate and shall be open for examination

by the Commission and its staff. In addition, a utility, or utility distribution company, shall not share office

space, equipment, services, and systems with its competitive electric affiliates, nor access any computer

or information systems of one another, except to the extent appropriate to perform shared corporate

sppport functions. 5

‘~ See, A.A.C. R14-Z-1617 (A) (1) and (2)

California requires, in its standards of conduct, that a utility and its affiliates shall be separate corporate

entities; keep separate books and records; not share office space, office equipment, services, and

systems, nor permit the sharing of computer information between the utility and its affiliates.

The state of Maine, in its code, requires that a utility must establish a separate corporate entity from

which to provide non-core services, non-core services being all those other than generation, transmission,

or distribution of electricity or gas. 6

In its code, Nevada prohibits a distribution company from providing any “potentially competitive or

discretionary electric” or gas service except from an affiliate which is a separate corporate entity which

operates independently from the distribution company. In addition to keeping separate books, accounts

and records, an affiliate shall not have officers, directors, or employees in common with the distribution

company, nor have any member on its board of directors who is also an employee or office of the

distribution company. Affiliates may not use office space, office equipment or office services provided by

the distribution company unless it does so through a contract approved by the commission. ’

‘Ihe Illinois commission rules require that, except in relation to corporate support and emergency support,

electric utilities and competitive affiliated interests shall function independently of each other and shall not

share services or facilities or have employees in common. *

‘i 65-407 C.M.R. Chapter 820, § 3(B)

1 N.A.C. Chapter704,$ 11.1 (a)-(h)

1 83 III. Admin. Code, Part450.10Oand450.1 IO,

The Texas standards require that a utility shall be a separate, independent entity from any competitive

affiliate, a competitive affiliate being one which provides services or sells products in a competitive

energy-related market in that state.’

The State of New Mexico requires separate corporate entities for regulated non-competitive companies

and unregulated, competitive affiliates in its restructuring statute. lo

The state of Kentucky, although it has yet to deregulate, recently enacted a statute which requires that a

utility and its affiliates shall be separate corporate entities and maintain separate books and records.”

In light of the above comments, 15.1 .b. 1 should be changed to include non-regulated businesses and the

code should be revised so as to require unregulated affiliates be structurally, as well as functionally,

separated from regulated affiliates.

Books and Records [15.1(c)].

The Commission’s proposed rules regarding books and record keeping are minimal at best and again

represent a departure from what Staff had proposed in its May 24”l, 2000 “Strawman” document. The

Commission should require that each LDC keep separate accounts and records from those of its affiliates,

as was proposed in the “Strawman”. The Commission’s proposed rule appears to be limited to review of

LDC records only. It should be clear that the Commission has a right to inspect any records and accounts

9 ~ $25.272. Code of Conduct for Electric Utilities, Pmjecl20936, Public Utilities Commission ofTexas, adopted Nov. 28, ~ 1999.

‘9 Section 8(B) and (C), SB 428,lst Session, 1999; enacted May 8, 1999

I? KRS 278.2213

7

necessary to monitor compliance with any Code of Conduct ultimately adopted, or other Commission

rules and orders, even where such records and accounts are for an unregulated, competitive affiliate. By

limiting review only to LDC operations, the Commission is severely and unnecessarily circumscribing its

ability to monitor and enforce its own rules and encouraging a shell game by which evidence of violations

and misconduct can be effectively hidden.

Sharing of Office Space and Employee Transfers [15.1. (d) and (e)]

(A) Reliance on $24-2-12

NECA supports the competitors’ consensus proposals contained in the Staffs May 24” “Strawman”

document. The Commission’s proposed rule again departs from that proposal and substitutes what may

be a far more problematic approach of reliance on West Virginia Code 5 24-2-12. Such an approach

would create a continuing necessity for Commission review and approval for each and every transaction

between an LDC and its affiliates regarding the combined use of shared property, equipment, computer

systems, information systems, and other corporate support services or employees. NECA has been

involved in such proceedings previously with regard to services performed by a utility on behalf of its

unregulated affiliate and is aware of the shortcomings of adopting such an approach. [See, Allegheny

Power and AYP Capital, Procedural Order of March 18, 1998, and Case No. 9%0185E-PC.] That case

involved the use of utility personnel, tools and equipment to fulfill performance of a contract between

AYP Capital and a third party, a fact pattern which is anticipated to be frequently repeated in future years

in a deregulated environment and for which the Code of Conduct, which is the subject of this proceeding,

is specifically contemplated to address.

Section 24-2-12 proceedings are insufficiently noticed to provide affected parties adequate opportunity to

intervene. The proceedings, including any denial of approval, may occur, and have occurred, only after

firm contractual commitments have been entered into by an unregulated affiliate of an LDC. Competitors

8

of an unregulated affiliate of an LDC can be adversely impacted in such circumstances because they

have lost a potential contracts which they might have obtained otherwise, even where approval is

ultimately denied.

One of the principle objectives of any Code of Conduct is to provide clear notice, in advance, to all parties

as to what rules will apply with respect to the transactions regarding the sharing of assets, employees,

services, facilities, and the like. Reliance on case-by-case determinations under $24-2-12 fails to provide

any advance clear and concise indication regarding the criteria by which an LDC and its unregulated

affiliates may share facilities, equipment and other assets or services which are contemplated under the

proposed rule. Further, under the proposed approach, it is uncertain that similar sharing arrangements will

always produce consistent holdings. Results may well be determined by which parties become aware of

the tilings and choose to, or are permitted to, intervene rather than upon the facts any particular sharing

arrangement or the potential for abuse which may occur. Neither is it clear as to whom may be permitted

to intervene in such proceedings to contest such sharing arrangements. Parties which can not show a

direct interest in any particular proceeding may be denied the opportunity to object, on only general

grounds, to such arrangements.

Further, although 15.2.b of the Commission’s proposed code makes clear thatprior approvals granted

under 5 24-2-12 must not violate any Code of Conduct provisions, the Commission has not proposed any

amendments to Code $24-2-12 which would make subsequent approvals contingent on compliance with

the Code of Conduct, particularly with respect to those proposed code provisions dealing with cross-

subsidization, cost shifting, or creation of ai unfair competitive advantage. The Commission should adopt

language which clearly requires that any $24-2-12 approval require, and be contingent upon, compliance

with the final Code of Conduct.

Given that affected parties would need to raise specific objections in a 5 24-2-12 proceeding in order to

contest approval of sharing arrangements or employee transfers, the Commission’s proposed rules at 15.1

(d) and (e) create a substantial likelihood that such proceedings will become protracted and contested

cases in the future and significantly increase the Commission’s workload while delaying the approval

process. Such a prospect serves no one’s interests, including those of the LDC or its affiliates.

(B) Sharing of Employees.

The sharing of employees should be minimal, at best. As a general rule, the greater the possible degree of

separation, the better for ratepayers and competition alike. As was recently determined by the Maryland

Commission with respect to this same issue:

“... 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 tinds 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.” I2

NECA agrees with the findings of the Maryland Commission and suggests that such sharing be prohibited

with respect to operational and managerial employees. This is precisely the position in the Staffs May

24” “Strawman” draft at 2.6.1: “Except for common officers and directors, an electric utility shall not

” Re: In the Matter ofThe investigation into Affiliated Activities, Promotional Practices, and Code of Conduct of Regulated Gas and Electric Companies, Md. Pub. Serv. Comm’n Order No. 76292, Case No. 8820, July 1, ZOCO, p. 66.

10

jdintly employ or otherwise share employees with any of its non-regulated affiliates.” NECA requests

that the Commission adopt the Staffs recommended language and prohibit the sharing employees.

NECA objects to the Commission’s use of a Section 24-2-12 procedure as a means of avoiding even the

minimal requirements contained in the Commission’s proposed rule at 15.1 .e( 1) which would prohibit

direct employment of any individual jointly by an LDC and its non-regulated affiliates. Such a loophole

swallows the prohibition and creates substantial opportunities for evasion of the intent of the rule.

NECA also objects to the Commission’s use of the terms “To the extent practicable” and “to the extent

necessary” in 15.1 .e (2) regarding the degree of independence required for employees of an LDC and its

unregulated affiliates. Such terms are vague and ambiguous at best and do not provide any clear

indication as to what may or may not be acceptable with respect to independent employment of personnel.

The use of such terms, along with that of “undue” with respect to preferential treatment in 15.3, will only

have the effect of deferring, in each and every instance, any final determination as to whether any

employee sharing is “practicable” or “necessary”.

The ratepayers and competition would be better served by a clear and unambiguous rule regarding

sharing of employees. Such sharing should 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 affiliates. With a possible exception for certain corporate support functions, utilities and

affiliates should not be permitted to jointly employ, or otherwise share, the same employees, or make

temporary or intermittent assignments or rotations. NECA agrees with the Commission’s requirement

11

that a utility should also be required to track and annually report publicly all employee movement between

the utility and affiliates.

(C) Cost of Shared Employees. Office Space, Equipment, Etc.

NECA objects to the language contained in proposed Code section 15.1 .d which limits the costs of shared

facilities, equipment, etc., to only the fully allocated costs. A more appropriate methodology to protect

ratepayers and competition is to require the higher of market price or, in the event the market price

cannot be determined, the fully allocated price for such sharing of an LDC’s property, equipment, or

systems with its affiliates. This is especially true where employees are used to perform services which

can reasonably be marketed by a utility to the public. In such cases, the fair market value of such services

should be allocated as the imputed costs to the subsidiary.

In this context, NECA also notes that the Commission’s proposed code does not contain any provisions

regarding asset or service transfer pricing rules beyond that contained in 15.1 .d regarding the use of fully

allocated cost methodology for sharing. Any final code should contain provisions regarding transfer

pricing for goods, assets, and services provided by an LDC to, or for the benefit of, its unregulated

affiliates. In addition, the Commission has implicitly proposed to use a Section 24-2-12 proceeding as the

basis for determining costs with respect to sharing of employees, space, equipment, etc. Such an

approach is entirely unsatisfactory and NECA renews its objections to such an approach. It is entirely

unclear as to whether the Commission would grant approval based on an incremental, fully allocated, or

market valuation methodology in such proceedings. Again, such an approach will only serve to turn §24-

2-12 proceedings into a protracted and contentious forum for resolving issues of the type which should be

encompassed under a code of conduct.

12

The Commission should incorporate appropriate transfer pricing rules as part of it tinal Code. Further,

such rules should be based upon an asymmetrical, market price approach rather than relying on

incremental or fully allocated methodology, with the exception of those instances where market price can

not be determined. Such an approach is widely used in other states which have faced this issue, including

Maryland, Colorado, Maine, Arizona, California, and Nevada. Again, NECA notes that the Commission’s

proposed Code departs from the Staffs proposed language in the May 24”, 2000 “Strawman”. That

draft required, at 3.5.1 and 3.5.2, asymmetrical transfer pricing as suggested by NECA and NECA

supports the adoption of such provisions.

Given that the Commission’s proposed code fails to incorporate rules regarding the pricing of transfers

and, as a consequence, may elicit only limited responses on this issue from those commenting on the

Proposed rule, NECA recommends that the Commission institute a separate proceeding to develop a

more extensive record on this subject and establish transfer pricing rules to be incorporated into any final

Code document.

Transactions Between an LDC and Its Affiliates (15.2)

(A) Cross-subsidization

NECA agrees with the Commission’s proposed rule at 15.2.d which seeks to prohibit cross-subsidization,

cost shifting and the creation of unfair competitive advantages. The Commission should retain its present

language in any final Code.

(B) Credit Arrangements

De deregulation and restructuring of the electric power industry has brought significant and substantial

change with attendant uncertainties. With electric generation assets being transferred to separated

13

entities and a myriad of new affiliate relationships taking shape, the traditional 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, heightened scrutiny by the

Commission is now required for these transactions. In general, NECA agrees with the Commission and

staff objectives in proposing Code provisions which relate to credit support by an LDC for its unregulated

affiliates (15.2.e).

However, although the Commission has proposed that an LDC not permit its affiliates to obtain credit

under an arrangement whereby specific LDC assets or operating capital are pledged, more is necessary.

As a minimum, limitations on credit arrangements should be designed which avoid placing the LDC’s

credit standing at risk and ensure that ratepayers are not harmed and that fair competition is maintained.

bJECA also recommends to the Commission that, should it retain its proposed language, the language in

15.2.e.2 should be clarified to avoid possible misinterpretation. The requirements of maintaining

confidentiality, preventing preferential treatment, avoiding customer confusion, and preventing cross-

subsidization should be clearly independent and distinct obligations. Conformance to all of these

requirements should clearly be necessary before an LDC is permitted to share credit with its affiliated

operations.

The transition of the electric utility industry from the relative security of a regulated, monopoly market to

the more uncertain competitive market creates additional risks for ratepayers and stockholders alike.

I+rnings volatility, new and unproven investments, the potential for mergers (such as the failed Allegheny

and DQE attempt), significant changes in capital structure, and other factors can all increase risks for a

utility. One of the direct consequences of increasing risk to a utility can be an increase in its cost of

14

capital. If the allowed cost of capital (rate of return) is set to a higher value as a result of increased risk,

utility rates can increase. It is the Commission which has ultimate authority over rates generally, and the

rate of return specifically, and which will be called upon to increase the rate of return should risky

investments or cash outflows result in higher capital costs If the Commissions fails to increase the rate

of return (and rates for consumers) LDCs may have an incentive to avoid or postpone necessary

investments thereby allowing the system to slowly deteriorate, ultimately affecting the quality of service

and safety.

Beyond the questions of system reliability and rates, NECA is particularly concerned about the potential

for cross-subsidization with respect to loans and credit sharing arrangements. The potential for abuse in

this area is considerable, difficult for private sector firms to overcome, and difficult to detect.

Unregulated operations affiliated with an LDC may enjoy preferential access to capital as a direct result

of their relationship with the regulated LDC. If the LDC lends its credit rating to the affiliate or borrows

on its behalf, a competitive advantage arises. If the unregulated affiliate borrows with recourse to the

LDC’s assets, the LDC is essentially providing an insured debt premium. The difference between an

insured and insured debt on the cost of borrowing represents a subsidy.

‘IO address the problems of system reliability, rates, and prevention of cross-subsidies, the following

additional requirements should be incorporated into the Commission’s final rule:

A) A LDC shall not issue a loan or guarantee the debt of an affiliate if it creates a

reasonable likelihood that the LDC’s cost of capital, credit worthiness or ability to provide

regulated services will be adversely affected.

B) Loans shall be from retained earnings only. Retained earnings shall be used only

when the LDC is assured that its ongoing required investment in essential distribution and

15

transmission operations and related assets will be maintained at a sufficiently high level to

assure continued safe, reliable and economical electric or gas service for its customers.

C) Loans shall be arranged on an arm’s length basis, shall be set at fair market rates,

shall include standard terms and conditions, and shall contain standard penalties for failure

to repay the loan consistent with the stated terms and conditions

D) LDCs shall exercise prudence iqestablishing a credit rating for its affiliates and shall

annually tile with the Commissions a statement that identifies which affiliates have credit

guarantees or sponsorship and to what degree that exists

Further, the Commission should retain the right to order an LDC to restructure its debt or refinance in

order to control capital costs and to order an LDC to cease any and all financial transactions with the

holding company or any affiliates or to consider further financial or legal separation.

Prohibition Against Preferential Treatment (15.3)

An effective code must include prohibitions against preferential or discriminatory treatment by an LDC.

However, NECA again raises objections to the use of the ambiguous descriptive terms “undue” and

‘Xrnduly.” Use of such terms would create more confusion and result in additional burdens for the

Commission. Language such as “undue” implies that some level of preference or discrimination is to be

tolerated. However, there is no clear way of determining in advance what level of preference would be

acceptable or unacceptable. This would seem to engender a continuing argument over each act which

might convey some level of advantage and would not necessarily prevent all cross-subsidization,

information sharing, or preferential treatment between a LDC’s regulated and unregulated operations and

services. The Commission would be called upon numerous times to first determine if an act was

16

preferential and then whether the level of preferential conduct amounted to something which was

‘<undue.” In any event, matters will have to be settled on a case-by-case basis. Thus, the Commission

would be in a better position if it did not use the terms “undue” or “unduly”and may actually reduce its

oversight burden if it simply prohibited preferential conduct.

Further, any such determinations by the Commission would be after-the-fact. In such cases, damage to

non-affiliated firms would have already taken place and may be difficult, if not impossible, to remedy.

With respect to affiliate transactions, many state codes have declined to qualify their prohibitions against

preferential or discriminatory treatment.

For example, 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-

dffiliated competitors. This includes providing leads JO affiliates, soliciting business on behalf of affiliates,

+quiring and/or providing information to affiliates. I3

Arkansas has a code section entitled “Preferential Treatment Prohibited” which, among other things,

&-ovides that a utility shall not provide any preference to its competitive affiliates or customers of those

affiliates. I4

13 R 12-2-1617(D)

Re: In the Matter of A Generic Proceeding To Establish Electric Affiliate Rules, Regulations, for Functionally Separated

Business Activities and Standards of Conduct, Docket No. 99-279-R, Order No. 16, June 6.2000, Attachment A, p.4

(Rule 2.01.A (2).)

17

California, in its code section on nondiscrimination states that there shall be no preferential treatment

regarding services provided by the utility and that the utility shall not provide its affiliates or their

customers with any preference over non-affiliated suppliers.

Texas has several distinct provisions in its code. A utility’s products and services are to be made available

on a “non-discriminatory basis”, the same holds for discounts, rebates, fee waivers, or alternative tariff

t,kxms and conditions, there is to be nondiscriminatory availability of aggregate customer information, as

hell as no preferential access to transmission and distribution information. I5

In its code section entitled “Preferences Forbidden”, Maine provides that a utility may not act in

preference to its affiliate or affiliates in providing access to utility facilities or services or in influencing

utility customers to use the services of its affiliates. I6

lllinois provides that there shall be no preferential treatment or advantage and that a utility shall not

discriminate 17; Connecticut states that there shall be “no preferential treatment” ‘* and Nevada provides

that utilities “shall not discriminate.” ”

NECA also objects to the limitation of the Commission’s Code provisions (15.3.a) to only those instances

involving the processing of customer requests for retail electric power. A utility should not provide any

preference to its competitive affiliates or customers of those affiliates regardless of the type of business

in which the affiliate may be engaged.

$5 See, Project 20936, Code of Conduct for Electric Utilities, Final Rules Adopted by the Public Utility Commission of Texas, Nov. 18, 1999. Rules 25.272 (f)(l), and (2) relate lo nondiscrimination in the provision ofproducts and

s&ces; 25,272(g)(2) d&s with information; and, 25.272(g)(3) addresses transmission and distribution.

;;; 65407 C.M.R. 820.8(c). 83 I.A.C. Ch. I(c) $450.20and450.30.

‘! $16.244@)(3) Rules of Con”. St. Agencies. ” 704 NW Admin. Code $4 2.70.7901-7909, 7913.

18

$imilarly, NECA objects to the same limitation contained in 15.3.e which would restrict application of that

proposed Code provision to only non-affiliated CES providers. If an LDC offers its customers or the

customers of its unregulated affiliates any products or services, then such products and services should be

made available to other competitors on an equal and non-discriminatory basis, in a timely fashion, and on

comparable terms.

MCA suggests that the Commission revise its proposed rules at 15.3.a and 15.3.e to require:

15.3.a An LDC may not give any preference to its unregulated affiliate(s) or customers

of its unregulated affiliate(s) in providing regulated utility services. The LDC shall treat

all similarly situated competitors and their customers in the same manner as the LDC

treats its unregulated affiliate(s) or the customers of such unregulated affiliate(s).

15.3~ An LDC must offer the same goods, services discounts, rebates, fee waivers, or

penalty waivers or other special provisions to all similarly situated non-affiliated

competitors or customers that it may offer its unregulated affiliate(s) or customers of its

unregulated affiliate(s).

NECA agrees with the Commission’s objective in proposed rule 15.3.i regarding the prohibition on

identification of potential customers. However, this language should be clarified to indicate that it applies

to all affiliates and not just those engaged in the provision of electric power. NECA suggests that the

language in the first sentence be modified to read “An LDC shall not identify potential customers within

its service territory for any ofits affiliates.”

Provision of Information (15.4)

19

mCA is especially concerned about the provision of customer and customer site information, either in the

aggregate or specifically related to individual customers, which may be obtained by an LDC in the course

Of conducting its regulated functions. This includes energy monitoring services to the extent the LDC

employs such service in connection with its distribution or transmission functions. Such information can

include outages, customer site equipment load profiles (which may indicate potential equipment failures),

usage patterns, energy audit data, or hook-up and connection requests. NECA members have

experienced instances where customer requests for plans and other information were passed on to

unregulated affiliates of the regulated affidavits which made subsequent calls on the customer to promote

unregulated services in direct competition with NECA members.

In general, NECA’s objections to the Commission’s proposed language concern the failure to recognize

tit the type of information which is the subject of the proposed Code in 15.4 is of equal use to both and

LCD’s CES affiliates as well as an LCD’s affiliates engaged in operations other than the provision of

retail electric power. The provision of such information to non-CES affiliates of an LDC creates as many

problems for competition and generates as many opportunities for cross-subsidization, cost shifting, and

preferential treatment as it does when provided to CES affiliates.

The impact of deregulation extends beyond the narrow confines of retail electric power sales. Affiliated

CES providers are only one example of a multitude of diversified and unregulated business lines into

which utilities have begun to operate. In order to protect ratepayers, preserve competition, and prevent

consumer abuse, codes of conduct must apply to all an LDC’s affiliates, regardless of the type of business

in which they are engaged. The Commission should be concerned with preventing the provision of

confidential information to any unregulated affiliate, not merely CES affiliates.

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All such customer and customer site information should be treated as confidential by the LDC and should

not be passed on to its unregulated, competitive affiliates. For this reason, the proposed language of

15.4.b is deficient in that the scope of its protection is limited to non-affiliated CES providers.

The Commission should strike the limitation to CES providers from the language of 15.4. a and 15.4.b. In

the alternative, NECA suggests the Commission incorporate a more general prohibition, such as the

following:

Except upon the informed, written consent of the customer, an LDC may not disclose

any customer-, or customer site-, specific information, or market information, obtained in

connection with the provision of regulated utility services.

Name and Logo (15.5.d.)

The use of the LDCs name and logo (intangible goodwill) by unregulated affiliates of the LDC should be

prohibited.

There are two primary concerns regarding the use of an LDC’s name and logo: customer confusion and

cross-subsidization. The significant problems with respect to enforcement and detection, and the

inadequacy and untimeliness of appropriate remedies suggest that the only effective solution is a ban on

such use by an LDC’s unregulated affiliates.

A) Inadequacy of Disclaimem

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The FTC has frequently commented on the problems associated with name and logo use. There is a

justifiable concern regarding the effects on consumers and competition of the use by unregulated affiliates

of the logo of the regulated LDC. 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 logo. 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 government-franchised 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. 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.

l&en with the strictest disclaimer requirements, there is bound to be some customer confusion about the

relationship between a similarly named affiliate and the LDC which has been providing that customer’s

service for years. Indeed, regardless of corporate intent, a similarity of business names between the

affiliate and the LDC will tend to cr-eate the false impression that the affiliate has all of the attributes of

the regulated utility merely by virtue of its corporate affiliation.

No amount of disclosure can overcome the misimpression given to consumers by an affiliate’s use of the

regulated LDC’s name or logo in its advertising and promotional materials or in connection with its highly

visible use of trucks, vehicles, and unifomxd employees in the performance of services on behalf of its

umegulated affiliates. Since regulated LDCs are to operate separately from affiliates, the LDC’s

reputation for reliability, experience and quality of service has no relevance to the operation of the

affiliate. When an affiliate uses the LDC name or logo it does so to create the impression that its

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relationship with the parent utility is a relevant fact for consumers to consider when selecting an electric

provider or another of the LDC’s unregulated affiliate services. If such a relationship is not relevant, then

it is misleading to refer to it in advertising and promotional materials.

When affiliates use the LDC’s name and logo 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. Again, the

information me brand conveys may not even be accurate or relevant. This is because the LDC’s

reputation, a result of a monopoly energy business, will not necessarily produce the same quality under

different market conditions and in different markets requiring different expertise.

No amount of customer education or disclaimers can undo the security that many customers will associate

with a name they recognize and from which they received reasonable service from over the years.

Details of functionally separate corporate relationships cannot be explained succinctly and effectively in

disclaimers, especially by the LDC and its unregulated affiliates in whose interest it is to keep the

$ECA has had experience of the very type of confusion which is at issue. On several occasions, utilities

in West Virginia have used uniformed personnel, utility company trucks and vehicles in providing

unregulated services in competition with NECA members. In these cases, the utility was providing such

services in order to perfomr contractual obligations entered into by an unregulated affiliate. It is clear that

the confusion which results from the use of the regulated utility’s vehicles, company uniforms, logos, and

personnel only reinforces the public’s perception that the regulated entity and its unregulated aftiliate are

one and the same. Permitting regulated and unregulated entities to share the same name identity and logo,

especially with respect to highly visible service work, amounts to a joint promotion of regulated and

tiegulated services. This is in direct opposition to the Commission’s intent and he language of the

proposed Code in sections 15.5.a and 15.5.a.2. which prohibit joint promotional communications and

advertising.

B) Prevention of Cross-subsidies

&hough some forms of cross-subsidization may be effectively addressed by transfer pricing rules (which

a/e absent in the Commission’s proposed Code), other forms may be more difficult to assess. The risk of

failing to detect anticompetitive cross-subsidization is heightened if (1) the reputation of the regulated

pfrent utility is effectively embodied or represented by its logo; (2) the regulated parent firm can improve

i$ reputation by incurring costs of the type that regulators would traditionally include in the rate base of !

t$e regulated firm; and (3) the unregulated affiliate can enhance its own reputation among consumers by

u~sing the logo of the regulated parent firm, even if elements of the regulated firm’s reputation do not apply !

ti the affiliate. When these factors are present, a regulated incumbent will have a heightened incentive to

dyerinvest in reputation-building because it can expect to incorporate a greater share of these investments

ilito 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

t$is 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-subsidjzation and existing remedies may be unavailable to

cbmpensate for the damages occasioned.

E/arm to competition may occur because tbe:unregulated affiliate’s access to the logo of its regulated

@rent gives it a cost advantage through potential cross-subsidization that otherwise equally efficient

c$mpetitors cannot match. The anticompetitive results may include (1) higher-than-necessary average

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operating (i.e., non-logo-related) costs for the industry and higher prices for consumers due to the

I {ontinued operation of the affiliate, which can survive with higher-than-necessary costs due to the cross-

4ubsidization; (2) greater market concentration and less competition than would occur absent the cross-

i subsldlzatlon; and (3) discouragement of potential entry that likely would have occurred absent the cross-

$ubsidization, including entry involving innovative products and production processes.

f”ECA notes that the regulated LDC’s name is not a brand that has been developed through competitive

$fforts. Rather, it has been built overwhelmingly (if not solely) on the existence of the monopoly franchise

branted to the regulated utility. The corporate reputation (goodwill) is an asset which has been built

[argely by the company’s status as a regulated utility, and ratepayers have contributed to the value of the

vrporate reputation 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.

Fe fact that goodwill (name and logo) has not previously be incorporated into an LDC’s rate base is not ! $ispositive of the question whether an LDC should be prohibited from extending its use to any of its

qnregulated affiliates. Such use constitutes a cross-subsidy and is prohibited even under the Commission’s

Proposed roles. Goodwill is a valuable asset and should not be provided to competitive affiliates.

4 utility asset should be defined as all utility-owned or controlled property, real or intangible, that would be

saleable in a market. The definition of utility asset does not depend on whether the ratepayers or the

dtility own the asset. Rather, the question is whether the value of the asset is a result of the utility’s

drovision of franchise monopoly services. In that case, affiliates will gain an unfair competitive advantage

ijfthey have access to these assets on terms and conditions that are more favorable than those available to

competitors. Utility assets include not only tangible, physical assets but intangible assets as well, such as

I 25

{ntellectual property created by the utility, any proprietary information, computer data bases owned by the

~ yt&y, and access to utility services such as billing envelope and which exist solely because of the

kxistence of the regulated utility and because of billing functions paid for entirely by ratepayers.

+tellectnal property includes the utility logo and other proprietary materials. Intangible assets, such as

koodwill, can be associated with income and are routinely included on utility balance sheets and may or

I/UY not qualify for inclusion in rate base. 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.

$ECA is particularly concerned that consumers and competitors alike may be harmed if an affiliate is ~ fble to obtain an economic advantage (i.e., through name and logo) that allows it to capture a greater

@rket share than it otherwise would have without providing real value in terms of price or service quality

.i 1~ exchange.

~ C) Royalty Alternative

NECA suggests, as an alternative, fhat if the Commission is unwilling to prohibit the use of an LGC’s

jame and logo by its unregulated affiliates, it should impose a royalty on the use of such assets.

$se of the LDC’s name creates a form of cross subsidy because the brand implicitly confers information

z/bout product quality and is generally associated with goodwill, thereby lowering costs and increasing !

Sales versus competitors. Additionally, it creates an entry barrier if the affiliate is not required to pay for

+e use of the name and logo. No firm would allow another unrelated entity to use its name and logo

~. ythout appropriate compensation.

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‘$re most recent decision in this area is that of the Maryland Commission, where the issue has been

e+kensively contested. In its most recent holding, the Commission stated:

“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. 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 I ! utility property,,, 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.“. a0

~

l$nther, both the use of a $24-2-12 proceeding or reliance upon cost allocation principles would be

ipppropriate and ineffective in capturing the value associated with te transfer of name and logo.

There is considerable value associated with intangible assets, such as goodwill, which can not accounted

fp in a cost allocation process. The fact that tangible asset costs might be properly allocated through a

fully distributed cost methodology does not mean that intangible benefits are allocated properly. A royalty

20 Re: In the Matter of’h Investigation into Aftiliatrd Activities, Promotional Practices, and Code of Conduct of Rlegulated Gas and Electric Companies, Md. Pub. Serv. Comm’n Order No. 76292, Case No. 8820, July I, 2000, p. 146

21

i$ an administratively cleaner, less costly form of regulation. A royalty results in fair and reasonable

cpmpensation for the intangible and unquantifiable benefits provided to the affiliate when there is not clear

s~ctural separation between the two entities.

yven with the use of a cost allocation manual (CAM), certain costs remain unquantifiable and there is no

&urance that ratepayers are not providing a subsidy. De mininzus amounts may not be included despite

t+e cumulative effect, book values may be used as opposed to market value despite escalation in value !

dver time, and the value of having a guaranteed source of revenue through the regulated entity is not

rFflected. 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 I

+th potential repercussions for ratepayers.

The use of a cost allocation methodology can result in ratepayers paying rates which exceed the cost of

service, in part, because it may overlook intangible and unquantifiable benefits. However, a royalty can

fperate to correctly allocate all costs and expenses so that an accurate cost of service is established. By

etablishing an accurate cost of service, a royalty is helpful in aiding the Commission in implementing just

&d reasonable rates as required by law.

$I addition, there are an expenses associated with developing the name and logo and those costs are

deflected totally in utility rates. The royalty allocates some of the cost to the affiliate. The purpose of a

Fyalty is to allocate costs to the affiliate for the use of intangible assets and for use of shared services

$at would be uncompensated in a fully distributed costing method. In addition, a royalty reflects the

tnherent unreliability of allocations; captures misallocations that are difficult to detect, quantify and prove.

Finally, a royalty provides an administratively efficient way to avoid piecemeal allocations.

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$o summarize NECA’s position, prohibiting affiliates from using the name and logo of the incumbent

I! ~ DC will avoid misleading or confusing customers, avoid creating price or efficiency distortions in the

@iliate market, help prevent cross-subsidization, provide a better solution than trying to mitigate problems I

&ith disclaimers and detailed monitoring, and will allow appropriate development of new competitive

qnergy markets. NECA suggests that if affiliate use of the utility name/logo is permitted, it should be I

4ompensated by a royalty to ratepayers of the utility.

Reporting Requirements (15.6)

In addition to the reporting requirements proposed by the Commission, each LDC should file a cost

allocation manual with the Commission to provide advance notice as to how any allocations may be made.

I.. JPns IS especially true if the Commission retains its proposed rule to utilize a fully allocated methodology I

&ith respect to the sharing of facilities, equipment, employees and other assets and services. 1

~ Audits (15.7)

$ECA agrees that audits are necessary However, any such audits should be performed by an

ipependent accounting firm and not the utility itself. It is hardly likely that a utility would work diligently

tp expose instances of its own mistakes and abuses. Also, the requirement for an independent annual

I +dit should continue as long as the regulated utility has non-regulated affiliates. This action would help to

+sure that the provisions of the code are properly followed by encouraging the utilities to continually

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iexamine transactions for compliance. This mechanism may also enhance the efficiency of monitoring

icompliance by reducing the number of complaints brought to the Commission.

Respectfully submitted

WEST VIRGINIA-OHIO VALLEY CHAPTER NATIONAL ELECTRICAL CONTRACTORS ASSOCIATION By Counsel

FL+HE kQ0 C ’ it01 Street at

TY, SENSABAUGH & BONASSO, PLLC

b. 0. Box 3843 ICharleston, West Virginia 25338-3843

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CERTIFICATE OF SERVICE

I, J. Tyler Dinsmore, counsel for National Electrical Contractors Association, hereby that a copy of the foregoing document, “Comments of West Virginia - Ohio Valley Chapter of

the National Electrical Contractors Association to the Proposed Rulem df the Electric Utility Industry in West Virginia” was served this I

ing Related to Restructuring of September, 2000, by first

class mail, upon each party listed below:

ional Electrical Contractors Association