California is learning the hard way that yet another earlyoffshoot of more competitive energy markets is the arcane world oftrying to police the activities between state-regulated utilitiesand their unregulated affiliates operating in the gas and electricmarkets. Nearing the end of its first year of dealing with thisissue, California is experiencing, at best, an uneasy peace betweenstate regulators and the state’s three major investor-owned utilityholding companies.

The highest profile issue is the required disclaimer thatunregulated affiliates must use in promotional materials, includingbusiness cards, when their affiliated utility’s logo and/or nameare used. The application of the regulator-approved disclaimerlanguage is what has gotten some of the utilities in trouble. Sofar, Pacific Gas and Electric Co. is appealing a $1.68 million fineassessed for rules violations, newly affiliated Southern CaliforniaGas Co. and San Diego Gas and Electric Co. are consideringappealing several specific rules, and Southern California EdisonCo. is awaiting further clarifications but has no present plans toappeal. All three utilities are in the midst of auditing of theirfirst year of operations under the rules.

The CPUC still must establish final statewide rules on thename/logo issue, the process for airing complaints and the monetaryfines/penalties that will be employed longer term.

In the wake of the PG&ampE penalty, which the California PublicUtilities Commission made clear was a signal the affiliate rulesare being taken seriously, a CPUC source indicated Sempra Energy’soperations also are being looked at for the possibility of allegedmisuse of the disclaimer rule related to a natural gas earthquakevalve product it offered earlier this year. Of more concern toSempra, however, are restrictions on its quest to acquire andcreate a network of local distribution utility companies in otherstates and its ability to share equipment and technical adviceamong its utility and nonutility affiliates.

Sempra Energy Utility Ventures, the company overseeingdevelopment of utilities outside of California, is treated as anunregulated affiliate in California, meaning that the head ofSempra’s utilities, Warren Mitchell, cannot be an officer or boardmember of the Utility Ventures’ operations.

For the SoCalGas and SDG&ampE utility operations in California,the new affiliate rules prohibit joint procurement of pipe andrelated equipment with unregulated affiliates, and the sharing oftechnical advice or recommendations on unregulated energy services.Sempra’s California utility operations are considering appealingeach of these prohibitions. In the meantime, SoCal and SDG&ampEwere ordered by the CPUC to resubmit their earlier compliance plansby Dec. 5.

Each of the major CPUC-regulated, investor-owned Californiautilities has created work units to do nothing but oversee therespective companies’ compliance with the affiliate rules, all ofwhich were established early in 1998 to help assure thatunregulated utility affiliates don’t have access to utilityinformation that would give them an unfair advantage in the newlyemerging competitive energy markets in California.

“They’re pretty stringent rules and we’re operating incompliance with them,” said Bill Doebler, one of several managersat SoCal Edison assigned full time on affiliate transaction rulescompliance. Each of the utilities have retained outside auditors tohelp comply with the requirement for annual audits beginning in’98. The audits are due to CPUC by May 1, 1999.

Doebler said Edison made some organizational changes based onthe affiliate rules early in the year. But since then, there hasbeen no impact on how the large utility has organized from theaffiliate rules standpoint.

Richard Nemec, Los Angeles

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