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

Following an extensive process of discovery and evidentiaryhearings triggered by a Dec. 1, 1997 complaint by Aurora NaturalGas, the Division found PGC made unauthorized changes in itsunbundling pilot program that significantly benefited its affiliatewhile negatively impacting firm ratepayers and other retailmarketers.

“Most revealing,” according to Division Hearing Officer StephenT. Scialabba, “is that while the above incidents occurred anddecisions were made, the company was simultaneously engaged in thefollowing activities:” 1) joint marketing of PGC, parent companyProvidence Energy Co. and affiliate Providence Energy Services(PES), 2) joint management of PGC and PES operations, 3) corporatebranding of PGC, PES and other affiliates, 4) providing marketsensitive information to PES, 5) tying compensation to the seniorPGC personnel responsible for the rate unbundling policy andimplementation to the financial performance of PES, and 6) creatinga corporate structure where both PGC and PES personnel hadreporting responsibility to the same person.

“The totality of the evidence in this proceeding demonstrates asystematic pattern of behavior whereby the company’s unregulatedgas marketing affiliate benefited substantially, and firm salesservice customers were potentially harmed.,” Scialabba said in hisdecision.

Calling it a precedent-setting case, Jim Horton, Aurora’s vicepresident of retail marketing, said he hopes it “sends the messagethat you can’t share information just to benefit and reregulateyour organization.” Horton said it was clear to him long ago thatthe utility was providing its affiliate with information aboutchanges it intended to make long before it let other marketers knowof the changes. In addition, he said they “bent their tariff. Theybroke their tariff. And therefore they incurred costs that wouldhave to be paid by the ratepayers for the benefit of transportationcustomers and for the benefit of Providence Energy Services.”

“Although endusers may not know about it, I hope it sends amessage to customers that you know, golly, competition is real, andpeople that can compete through technology or tenacity oraggressive marketing, the customer wins by that. Where a customerloses is when an affiliate uses their leverage to lock outcompetitors in the marketplace.”

PGC Senior Vice President James DeMetro, who also was a directorat PES until March of this year, disputes every fact in theDivision’s finding, however, and said the utility “intends toappeal every aspect of this case.” According to DeMetro, there wasno evidence of the utility provided to its affiliate advanceknowledge of the changes it intended to make in its unbundlingprogram and no evidence of any preferential treatment for itsaffiliate.

One of the more significant violations cited by the Divisioninvolved PGC making an unauthorized last minute removal in Novemberof a requirement that customers who select FT-1 service buy,install and have tested telemetering equipment. FT-1 service is anunbundled transportation service with a daily metering requirement.FT-1 marketers have to purchase third-party storage and peakingservices. In November, the utility was overwhelmed by the job oftesting and making operational all the telemetering required toperform daily metering for the FT-1 customers and decided to waivethe telemetering requirement. The result was that the utilityestimated daily meter reads and provided the free daily balancinginformation to FT-1 marketers. Significantly, 82% of the FT-1customers who benefited from the last-minute removal of thetelemetering requirement were being served by PGC’s affiliate.Meanwhile, customers selecting FT-2 service, a monthly meteredservice with PGC assigned and controlled storage and peaking, hadto continue paying for their balancing information and bundledback-up supply from storage.

In addition, Aurora charged PGC with providing its affiliatewith advance knowledge that it intended to change the telemeteringrequirement on FT-1 service. Aurora supported its claim withallegations that PES representatives made statements to customersthat “reflected a knowledge that telemetering requirements wouldchange.” Aurora also pointed to the large number of customersign-ups that flowed in one day prior to PGC’s announcement aboutthe program changes.

Providing advance information on program changes would”represent a significant violation of the commission regulations.,”Scialabba said. “However, no competent evidence of advanceknowledge of that decision by PES has been presented forexamination.” In fact, Aurora made no response to Division requestsfor evidence until long after the hearings concluded. At that time,Aurora submitted a list of names of customers who could testifyabout PES’ advance knowledge of the changes. No affidavits werefiled with that list, however, and the Division gave it no weightas a result.

Nevertheless, Scialabba found evidence of rate discriminationand ordered the utility to pay a $1,000 fine for treatingdifferently FT-1 and FT-2 marketers, which the Division concludedwere similarly situated. Scialabba also ordered the utility to payeach marketer serving FT-2 customers the amount they were chargedfor storage and peaking services and another $300 per month foreach month from Dec. 1 through the effective date of the order tocompensate for differences in what they were charged and what otherFT-1 marketers had to pay. Through the end of July, that amounttotaled about $293,000.

The refund is “absolutely unjustified and we believe based onour review of the order that it is in violation of the law,” saidDeMetro. “And we will appeal it. In our view it is nonsensical.”

“We were not providing [FT-1 customers] daily balancing forfree,” said DeMetro. “What we said was that.until we get the actualmeter reading equipment in place we will use as a proxy our ownestimate of what the customer is going to need. That was the onlydifference. That FT-1 marketer had no access to any storage of thecompany, no access to any peaking facilities of the company.” andtherefore, was not similarly situated as the marketers servicingFT-2 customers. DeMetro said he sees no possible reason why theutility should have to refund FT-2 marketers for storage gas theyalready sold to customers when FT-1 marketers never received anyfree storage gas.

Greater Affiliate Separation Recommended

In addition to the fines and refunds, Scialabba recommended theRhode Island Public Utility Commission restrict PGC from makingchanges in its transportation service during an enrollment periodand require greater separation between utility and marketingaffiliate operations.

Scialabba fined PGC $13,000 for 13 separate instances ofregulatory violations in which market-sensitive information andindividual customer information was provided to a marketing officerof PES. The Division also fined the utility $1,000 for providingPES with weather service data while not making it available toother marketers. PGC was fined $3,000 for joint marketing of theutility and affiliate, $2,000 for a PGC marketing employee beinginvolved in PES activities, and another $2,000 for two instances ofshared use of PGC’s logo by PES and PEC.

“All we did was identify the affiliation at the bottom of ourads.,” DeMetro responded in disbelief. “And that logo appeared nextto the corporate name. It appeared nowhere near the marketingaffiliate’s name and thus there is no use of the corporate logowith the marketing affiliate and there is no document in the caseor otherwise that shows that. I don’t understand it.”

The evidence of sharing market-sensitive information with PESwas provided primarily by current Aurora employee and former PGCemployee Craig Peterson. He testified that when at PGC he wasinstructed to pass sensitive market information to another employeewho worked for PGC and was a marketer for PES. In testimony, theutility responded that its affiliate restrictions only apply toutility operating personnel and the employee in question neverperformed operational-level gas functions. In addition, PGC said,the information he obtained was never passed along to another PESofficer. Scialabba responded, however, that he found “littlecomfort” in the suggestion that the employee did not pass along theinformation, considering he had a marketing-related role with PES.

Regarding the issues on sharing of personnel, DeMetro saidduring his interview with NGI that PGC’s regulations specificallyallow use of shared employees “as long as you have filed a masterservices agreement that outlines what those shared services willbe. We have done that in compliance with the regulation. We flatlydeny that there is any violation of the regulations with respect toshared employees.”

Despite PGC’s claim there was no evidence of abuse of affiliateregulations, Scialabba noted that DeMetro served until March 1998as both a senior vice president of PGC and a director of PES. “Whenqueried regarding why he removed himself as a director of PES.,DeMetro testified that his action was related to ‘the problem ofhaving direct responsibility of the utility marketing as well hasdirect responsibility over the marketing affiliate, the perceptionwas it’s probably not a good idea to continue to do that.'” DeMetroand another employee of both companies also was directly involvedin hiring PES’ president, yet PUC regulations specify that a”utility employee may not hire employees on behalf of a gasmarketer.”

Edwards Sees Precedent

Katherine Edwards, a Washington, D.C.-based attorney whorepresented Aurora in this case, said there were so many placeswhere the record was “cloudy” that even if there wasn’t outrightproof of a violation “they certainly looked pretty bad. You knewsomething didn’t smell right.” She said the overwhelming amount ofallegations indicated “this thing just wasn’t playing out in a fairand an evenhanded way” and led the hearing examiner to the rightdecision. “It just kept pointing to the benefit of the affiliatewith everything that was done.” Whether any one of the allegations was the straw that broke the camel’s back, it’s hard to say, saidEdwards.

“I was pleased with the outcome,” she added. “I do think thatthis case is precedent-setting for state unbundling proceedings asan example of not only the need to monitor against affiliate abusebut also when it’s discovered to penalize it so that there will bea clear message sent out throughout the industry that these typesof discriminatory actions just won’t be tolerated.”

One observer who also represents marketers in regulatoryproceedings said “this stuff is going on in a lot of states. Thisdecision hopefully will be a wake-up call. It’s the separation offunctions that’s just impossible to accomplish in such a way thatthere really is an arms-length relationship between the affiliateand the pipeline or the affiliate and the LDC. While the FERCpasses rules that say there’s a Chinese wall and you can’t shareemployees and you can’t share information, I just think that it’san impossible thing to ensure that those rules aren’t violated. Youcan’t monitor every time someone picks up a telephone.”

The affiliate always gets “the first call on stuff,” saidanother observer. “They get the first call on excess capacity. Thishappens on pipelines, but the problem is these things are very hardto prove up.” Another problem, he said, is even though someone mayknow of unfair dealings they don’t want to come forward. “It’s thewhistle-blower concept. There are fears of retaliation.”

Because of the difficulties in recovering information, it’sessential for the state agencies to be “proactive in investigatingand monitoring the unbundling process,” said Edwards.

Rocco Canonica

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