Utility Marketing Affiliates: A Survey of Standards on Brand Leveraging and Codes of Conduct

Fortnightly Magazine - November 15 1998

No clear consensus has emerged. Should regulators hold to a hard line?

Regulators have wrestled for decades with transactions between vertically integrated monopoly utilities and their corporate affiliates.

Most problems have usually involved a shifting of costs, risk, or profit, as when an electric utility buys coal from a subsidiary. On the telephone side, AT&T's equipment dealings with Western Electric and Bell Labs were always a worry for regulators. The concern, of course, was whether ratepayers (all were essentially captive then) were paying too much and bearing improper risks, while providing profits actually higher than the allowed rate of return, masked by accounting mischief.

Now comes an old issue in a new guise (em whether and how to regulate a new breed of transaction that in the course of industry restructuring may allow incumbent utilities to raise barriers against competition, favoring their affiliates and actively disadvantaging others. Two such concerns are (1) the leveraging of established utility brand names and logos, by extending their use to affiliates, and (2) wider dealings that may deter competitors, such as when the distribution company loans its technical staff and senior management to the affiliate, providing inside information on customers.

To counter these problems, state public utility commissions are embracing "Codes of Conduct," but the questions they face are anything but straightforward. Some "tough calls" are required. This paper considers the efficacy of these efforts, urging strict commission oversight of transactions with affiliates in three sectors (em telecommunications, natural gas, and electricity (em each now involved in restructuring.

Learning from Telcos

Branding has emerged as a contentious issue in telephone industry restructuring, appearing as a major obstacle in over one-third of the roughly 90 arbitration decisions in the data bank of the National Regulatory Research Institute. Some 24 state PUCs have tackled the issue during their arbitration and mediation activities under the Telecommunications Act of 1996.

The central question in the branding debate is whose company name and logo will appear on resold service (em the incumbent carrier that originates the service or the new competitor that resells it? Understandably, the competitor is looking for a toe-hold in the market. It wants to "rebrand" everything to spread its name around, or at worst make the incumbent "unbrand" it. All resellers argue that to do otherwise would allow the incumbent to foreclose viable entry into the new market.

As of last fall, in 73 arbitration decisions in which AT&T was involved, PUCs had allowed Ma Bell to use its brand name in 45. The incumbent local exchange carrier was allowed to use its name in three instances. In 13 cases both carriers were prohibited from doing so. %n1%n

In telephone cases, the branding issues have been of two types: (1) operator and directory assistance services, and (2) direct customer contact services, like installation and repairs. %n2%n Vermont and New Hampshire have taken a strict line, requiring NYNEX to unbrand all these services (including its own). New York, however, decided that unbranding all services is not desirable, saying it would lead to confusion. Michigan said unbranding would violate