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. Nearing the end of its first yearof dealing with this issue, California is experiencing, at best, anuneasy peace between state regulators and the state’s three majorinvestor-owned utility holding 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 is appealing a $1.68 million fineassessed for rules violations, newly affiliated Southern CaliforniaGas and San Diego Gas and Electric are considering appealingseveral specific rules, and Southern California Edison is awaitingfurther clarifications but has no present plans to appeal. Allthree utilities are in the midst of first year auditing.

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&E 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. Of more concern to Sempra arerestrictions on its quest to acquire and create a network of localdistribution utility companies in other states and its ability toshare equipment and technical advice among its utility andnonutility 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&E 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&Ewere 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.

“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.

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