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Providence Gas Fined for Affiliate Favoritism; Refunds Ordered

Providence Gas Fined for Affiliate Favoritism; Refunds Ordered

In one of the first major affiliate abuse decisions to go against an unbundling gas utility, the Rhode Island Division of Public Utilities and Carriers last week fined Providence Gas Co. (PGC) $23,000 for violating its affiliate, tariff and numerous other regulations, and ordered the utility to refund to retail gas marketers nearly $300,000.

Following an extensive process of discovery and evidentiary hearings triggered by a Dec. 1, 1997 complaint by Aurora Natural Gas, the Division found PGC made unauthorized changes in its unbundling pilot program that significantly benefited its affiliate while negatively impacting firm ratepayers and other retail marketers.

"Most revealing," according to Division Hearing Officer Stephen T. Scialabba, "is that while the above incidents occurred and decisions were made, the company was simultaneously engaged in the following activities:" 1) joint marketing of PGC, parent company Providence Energy Co. and affiliate Providence Energy Services (PES), 2) joint management of PGC and PES operations, 3) corporate branding of PGC, PES and other affiliates, 4) providing market sensitive information to PES, 5) tying compensation to the senior PGC personnel responsible for the rate unbundling policy and implementation to the financial performance of PES, and 6) creating a corporate structure where both PGC and PES personnel had reporting responsibility to the same person.

"The totality of the evidence in this proceeding demonstrates a systematic pattern of behavior whereby the company's unregulated gas marketing affiliate benefited substantially, and firm sales service customers were potentially harmed.," Scialabba said in his decision.

Calling it a precedent-setting case, Jim Horton, Aurora's vice president of retail marketing, said he hopes it "sends the message that you can't share information just to benefit and reregulate your organization." Horton said it was clear to him long ago that the utility was providing its affiliate with information about changes it intended to make long before it let other marketers know of the changes. In addition, he said they "bent their tariff. They broke their tariff. And therefore they incurred costs that would have to be paid by the ratepayers for the benefit of transportation customers and for the benefit of Providence Energy Services."

"Although endusers may not know about it, I hope it sends a message to customers that you know, golly, competition is real, and people that can compete through technology or tenacity or aggressive marketing, the customer wins by that. Where a customer loses is when an affiliate uses their leverage to lock out competitors in the marketplace."

PGC Senior Vice President James DeMetro, who also was a director at PES until March of this year, disputes every fact in the Division's finding, however, and said the utility "intends to appeal every aspect of this case." According to DeMetro, there was no evidence of the utility provided to its affiliate advance knowledge of the changes it intended to make in its unbundling program and no evidence of any preferential treatment for its affiliate.

One of the more significant violations cited by the Division involved PGC making an unauthorized last minute removal in November of a requirement that customers who select FT-1 service buy, install and have tested telemetering equipment. FT-1 service is an unbundled transportation service with a daily metering requirement. FT-1 marketers have to purchase third-party storage and peaking services. In November, the utility was overwhelmed by the job of testing and making operational all the telemetering required to perform daily metering for the FT-1 customers and decided to waive the telemetering requirement. The result was that the utility estimated daily meter reads and provided the free daily balancing information to FT-1 marketers. Significantly, 82% of the FT-1 customers who benefited from the last-minute removal of the telemetering requirement were being served by PGC's affiliate. Meanwhile, customers selecting FT-2 service, a monthly metered service with PGC assigned and controlled storage and peaking, had to continue paying for their balancing information and bundled back-up supply from storage.

In addition, Aurora charged PGC with providing its affiliate with advance knowledge that it intended to change the telemetering requirement on FT-1 service. Aurora supported its claim with allegations that PES representatives made statements to customers that "reflected a knowledge that telemetering requirements would change." Aurora also pointed to the large number of customer sign-ups that flowed in one day prior to PGC's announcement about the program changes.

Providing advance information on program changes would "represent a significant violation of the commission regulations.," Scialabba said. "However, no competent evidence of advance knowledge of that decision by PES has been presented for examination." In fact, Aurora made no response to Division requests for evidence until long after the hearings concluded. At that time, Aurora submitted a list of names of customers who could testify about PES' advance knowledge of the changes. No affidavits were filed with that list, however, and the Division gave it no weight as a result.

Nevertheless, Scialabba found evidence of rate discrimination and ordered the utility to pay a $1,000 fine for treating differently FT-1 and FT-2 marketers, which the Division concluded were similarly situated. Scialabba also ordered the utility to pay each marketer serving FT-2 customers the amount they were charged for storage and peaking services and another $300 per month for each month from Dec. 1 through the effective date of the order to compensate for differences in what they were charged and what other FT-1 marketers had to pay. Through the end of July, that amount totaled about $293,000.

The refund is "absolutely unjustified and we believe based on our review of the order that it is in violation of the law," said DeMetro. "And we will appeal it. In our view it is nonsensical."

"We were not providing [FT-1 customers] daily balancing for free," said DeMetro. "What we said was that.until we get the actual meter reading equipment in place we will use as a proxy our own estimate of what the customer is going to need. That was the only difference. That FT-1 marketer had no access to any storage of the company, no access to any peaking facilities of the company." and therefore, was not similarly situated as the marketers servicing FT-2 customers. DeMetro said he sees no possible reason why the utility should have to refund FT-2 marketers for storage gas they already sold to customers when FT-1 marketers never received any free storage gas.

Greater Affiliate Separation Recommended

In addition to the fines and refunds, Scialabba recommended the Rhode Island Public Utility Commission restrict PGC from making changes in its transportation service during an enrollment period and require greater separation between utility and marketing affiliate operations.

Scialabba fined PGC $13,000 for 13 separate instances of regulatory violations in which market-sensitive information and individual customer information was provided to a marketing officer of PES. The Division also fined the utility $1,000 for providing PES with weather service data while not making it available to other marketers. PGC was fined $3,000 for joint marketing of the utility and affiliate, $2,000 for a PGC marketing employee being involved in PES activities, and another $2,000 for two instances of shared use of PGC's logo by PES and PEC.

"All we did was identify the affiliation at the bottom of our ads.," DeMetro responded in disbelief. "And that logo appeared next to the corporate name. It appeared nowhere near the marketing affiliate's name and thus there is no use of the corporate logo with the marketing affiliate and there is no document in the case or otherwise that shows that. I don't understand it."

The evidence of sharing market-sensitive information with PES was provided primarily by current Aurora employee and former PGC employee Craig Peterson. He testified that when at PGC he was instructed to pass sensitive market information to another employee who worked for PGC and was a marketer for PES. In testimony, the utility responded that its affiliate restrictions only apply to utility operating personnel and the employee in question never performed operational-level gas functions. In addition, PGC said, the information he obtained was never passed along to another PES officer. Scialabba responded, however, that he found "little comfort" in the suggestion that the employee did not pass along the information, considering he had a marketing-related role with PES.

Regarding the issues on sharing of personnel, DeMetro said during his interview with NGI that PGC's regulations specifically allow use of shared employees "as long as you have filed a master services agreement that outlines what those shared services will be. We have done that in compliance with the regulation. We flatly deny that there is any violation of the regulations with respect to shared employees."

Despite PGC's claim there was no evidence of abuse of affiliate regulations, Scialabba noted that DeMetro served until March 1998 as both a senior vice president of PGC and a director of PES. "When queried regarding why he removed himself as a director of PES., DeMetro testified that his action was related to 'the problem of having direct responsibility of the utility marketing as well has direct responsibility over the marketing affiliate, the perception was it's probably not a good idea to continue to do that.'" DeMetro and another employee of both companies also was directly involved in hiring PES' president, yet PUC regulations specify that a "utility employee may not hire employees on behalf of a gas marketer."

Edwards Sees Precedent

Katherine Edwards, a Washington, D.C.-based attorney who represented Aurora in this case, said there were so many places where the record was "cloudy" that even if there wasn't outright proof of a violation "they certainly looked pretty bad. You knew something didn't smell right." She said the overwhelming amount of allegations indicated "this thing just wasn't playing out in a fair and an evenhanded way" and led the hearing examiner to the right decision. "It just kept pointing to the benefit of the affiliate with everything that was done." Whether any one of the allegations was the straw that broke the camel's back, it's hard to say, said Edwards.

"I was pleased with the outcome," she added. "I do think that this case is precedent-setting for state unbundling proceedings as an example of not only the need to monitor against affiliate abuse but also when it's discovered to penalize it so that there will be a clear message sent out throughout the industry that these types of discriminatory actions just won't be tolerated."

One observer who also represents marketers in regulatory proceedings said "this stuff is going on in a lot of states. This decision hopefully will be a wake-up call. It's the separation of functions that's just impossible to accomplish in such a way that there really is an arms-length relationship between the affiliate and the pipeline or the affiliate and the LDC. While the FERC passes rules that say there's a Chinese wall and you can't share employees and you can't share information, I just think that it's an impossible thing to ensure that those rules aren't violated. You can't monitor every time someone picks up a telephone."

The affiliate always gets "the first call on stuff," said another observer. "They get the first call on excess capacity. This happens on pipelines, but the problem is these things are very hard to prove up." Another problem, he said, is even though someone may know of unfair dealings they don't want to come forward. "It's the whistle-blower concept. There are fears of retaliation."

Because of the difficulties in recovering information, it's essential for the state agencies to be "proactive in investigating and monitoring the unbundling process," said Edwards.

Rocco Canonica

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