EVERYONE'S GOT AN OPINION ABOUT MARKETING affiliates. In the natural gas industry, a fierce debate has emerged, as rules are proposed to govern the relationship between utility and affiliate.
Affiliate transactions are already among the most regulated activities in the gas industry. According to the 1995-96 Compilation of Utility Regulatory Policy produced by the National Association of Regulatory Utility Commissioners, every state, except Nebraska, has jurisdiction over affiliate transactions involving a private- or investor-owned gas utility. Moreover, every state prescribes special accounting and reporting requirements for utility transactions with affiliates. Some states, such as Virginia and Pennsylvania, require specific state approval of transactions between a utility and its affiliates. In addition to this state regulation, certain affiliate transactions are subject to regulation by the Federal Energy Regulatory Commission. Registered holding companies also must deal with the Securities and Exchange Commission.
Retail competition has sparked a new regulatory wave. In the last 18 months, 17 states have adopted or are considering adopting new standards to govern transactions between a utility and its marketing affiliate. And it appears that this new wave has not yet crested - indications are that other states will join this effort over the next several months.
Companies that compete against the marketing affiliates of utilities are among the leading advocates of these codes of conduct. It is therefore not surprising that many of the provisions that are being proposed for such codes have more to do with protecting these companies from undesired competitors than with promoting the development of true retail competition in the gas industry.
States have a legitimate interest in ensuring that all suppliers of gas are subject to the same rules, have access to the same information and are treated equally by the utility and its employees with respect to the distribution of gas. Inequitable treatment by the utility could suppress the growth of competitive markets.
However, codes of conduct should protect competition by preventing abusive conduct - not by favoring market competitors who are not affiliated with the local utility. Any provision that deviates from this focus should be suspect, and likely should be discarded. Four proposed restrictions follow with reasons why they should be rejected.
Common Names and Logos
One restriction frequently proposed for codes of conduct would bar the marketing affiliate from using names or logos already identified with its affiliated utility. Proponents of this rule argue that common names and logos permit the marketing affiliate to "trade upon" its affiliation with the utility, confusing customers into believing the affiliate may receive preferential treatment. They contend that common names and logos allow ratepayer subsidization of the marketing affiliate unless the utility receives compensation for the use of the common name and logo.
These arguments are false. It is well-established that ratepayers have no legal or equitable interest in the utility's name or logo. Numerous courts and public service commissions have concluded that the utility's name and logo are corporate assets that belong to the utility's shareholders, not its ratepayers. This finding is supported by the fact that intangible assets, such as corporate names and logos, are not included in calculations of the utility's cost of service for utility ratemaking purposes. Intangible assets do not belong to the ratepayers.
The other argument is that "customers will be confused" into making an incorrect assumption of favoritism. There is no evidence supporting this argument. Further, to avoid such confusion, marketing affiliates could be required to disclose that they will not receive any preferential treatment from the utility. Giving more information to the customer, not less, is the appropriate cure for this concern.
Customers are entitled to know which marketing companies are affiliated with the utility so they can consider their past experiences in deciding whether they want to do business with an affiliate of the utility. Of course, this cuts both ways. Customers who have had a positive experience with their utility may want to do business with an affiliate of that utility. But customers who have had negative experiences with the utility may make the opposite decision.
Regulators in other industries have rejected restrictions on common names and logos between regulated and unregulated affiliates. In telecommunications, when local exchange carriers received cellular licenses, they used a common name for both their monopoly wires businesses and their competitive cellular businesses. Today, as the local phone companies branch into long-distance service, they fully expect to use a common name for their local and long distance businesses. Similarly, in the financial services industry, the concern arose that customers would become confused when banks with customer deposits insured by the FDIC were allowed to affiliate with companies offering uninsured products. After considering the issue, the regulators recognized that consumers are smart - if given more information, not less, they can manage their own affairs. As a result, we can now open both an uninsured mutual fund account through Citicorp Investment Services, for example, and an insured bank account in Citibank.
Others have proposed rules to bar marketers from advertising themselves as a utility affiliate. The arguments supporting such a restriction parallel the complaints against common names and logos: cross-subsidization, customer confusion and the expectation of preferential treatment. And these arguments are just as wrong in this context. But there is an additional fatal flaw for this proposed prohibition - it is unconstitutional.
Advertising, otherwise known as commercial speech, is protected under the First Amendment to the Constitution. The Supreme Court has determined that restrictions on commercial speech, unlike political speech, are not always subject to strict scrutiny, and thus the state is permitted to regulate commercial messages to protect consumers from misleading, deceptive or aggressive sales practices. The state may also require disclosure of beneficial consumer information. However, as the Supreme Court stated last year in 44 Liquormart Inc. v. Rhode Island, rigorous review of state action is required when the state "entirely prohibits the dissemination of truthful, non-misleading commercial messages for reasons unrelated to the preservation of a fair bargaining process."
This rigorous review has led the court to hold that a state's "paternalistic assumption" that the public will use truthful, non-misleading commercial information "unwisely" violates the First Amendment. Rejecting the "offensive assumption" that the public will respond "irrationally" to the truth, the court stated that "[t]he First Amendment directs us to be especially skeptical of regulations that seek to keep people in the dark for what the government perceives to be their own good."
In expressly applying this doctrine to commercial speech, the court advised that the "commercial marketplace¼ provides a forum where ideas and information flourish. Some of the ideas and information are vital, some of slight worth. But the general rule is that the speaker and the audience, not the government, assess the value of the information presented. Thus, even a communication that does no more than propose a commercial transaction is entitled to the coverage of the First Amendment."
Sharing Information With Competitors
Still others have proposed that a utility should be prohibited from disclosing any information to a marketing affiliate unless that same information is communicated contemporaneously to competitors. The assertion is that to do otherwise would afford the affiliate a competitive advantage.
In fact, such a proposal places the marketing affiliate at an express disadvantage.
Utilities possess vast quantities of data, not all of which is well-organized. Determining what data is useful and how to manipulate it will become an element of each marketing company's strategy. Some companies will prove more adept at "reading the numbers" than others, allowing them to develop marketing plans that take advantage of opportunities that may not have been visible to competitors. Marketers are likely to target different market segments, requiring specific information to support the targeted market. Even if marketers choose to compete for the same class of customers, each marketer may seek different data to develop its marketing strategy. By disclosing the specific information sought by the marketing affiliate, a utility could be revealing its marketing plan or results of data research that should rightly be considered commercially sensitive.
Mandatory sharing would reveal commercially sensitive information to every marketer - the antithesis of what is needed to develop competition. Rather, the utility should not disclose the specific information sought by any marketer, including that sought by its affiliate, so long as the entire body of information is equally available to all marketers that request it.
Joint Sales Activities
Some marketing competitors have proposed rules that would restrict the activities of a utility's marketing affiliate but not its competitors. For instance, prohibitions on joint sales calls by the marketing company and the affiliated utility have been proposed. So have restrictions on joint promotions between the utility and its marketing affiliate, such as the inclusion of flyers for the marketing company in the utility's bills.
Such prohibitions violate the principle that utilities must provide equitable treatment for all marketers. Not only should the utility offer services to its affiliates in the same manner as for competitors, but the converse is true as well: The utility should be required only to provide to its affiliate's competitors the same products and services that it is allowed to provide to its marketing affiliate.
There is every reason to believe that the utility would be willing to conduct joint sales calls or offer joint promotions with a non-affiliate. If the utility can work with a marketer - any marketer - to bring a new customer on the system or increase the gas usage of an existing customer, throughput is increased. And increasing throughput is the bottom line: That is how the utility earns its revenue.
Some may argue that if the utility can go on joint sales calls or offer joint promotions with an affiliate, the utility will not undertake such efforts with competitors to the affiliate. The solution to that problem, however, is not to require the affiliate to be treated worse than its competitors. Placing the affiliated marketer at a competitive disadvantage, by making it the only marketer with which the utility cannot conduct joint sales efforts, does not promote competition. It merely favors non-affiliated competitors.
Clearly, joint sales calls and promotions should be permitted, so long as the utility is willing to take the same steps with non-affiliated marketers. Moreover, any proposed prohibition that applies to an affiliate of a utility without applying equally to other marketing companies should be considered suspect.
The purpose of retail unbundling is to provide consumers with more choice at lower prices. If codes of conduct exist, they should ensure that abusive affiliate relationships do not undermine the goals sought through this process. States must guard against attempts by marketers not affiliated with local utilities to draft codes of conduct to gain a competitive advantage by crippling marketing affiliates of utilities.
Sharon Heaton is deputy general counsel to the Columbia Gas System.
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