Fortnightly Magazine - December 1997
EES North America

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