Local Distribution Company Marketing Affiliates And State Public Utility Commission Regulatory Oversight

NATURAL GAS SUPPLY ASSOCIATION

805 15th Street N.W., Suite 510
Washington, D.C. 20005

POSITION PAPER: Local Distribution Company Marketing Affiliates And State Public Utility Commission Regulatory Oversight

Overview

The Natural Gas Supply Association (NGSA) developed this paper to provide its perspective on the matter of the relationship between local distribution companies (LDC's) and marketing affiliates they might establish after they have unbundled gas sales and transportation services.

As unbundling occurs, state regulatory policy should incorporate standards and safeguards to ensure uniform and fair treatment for all parties that use LDC services. Regulatory policy should guard against LDCs engaging in anticompetitive practices or providing preferences to affiliated companies. Because consumers cannot realize the benefits of gas market competition if any participants are given undue preferences, the regulatory environment needs to ensure that a market exists which is free of such faults.

The following standards are recommended as a minimum framework of regulatory policy applicable to the relationship and conduct of the LDC in dealing with a gas marketing affiliate and nonaffiliated users of LDC services:

Equal treatment for all users of LDC unbundled services.
No subsidization of LDC marketing affiliates.
Confidential handling by the LDC of information gained from nonaffiliated gas marketers.
Contemporaneous release of any information disclosed to all users of LDC services.
Independent functioning of the LDC and its marketing affiliates.

Background

A similar scenario to unbundling of LDC services existed when interstate pipelines became transporters of gas and largely exited the sales service business during the late 1980s and early 90s. The current discussion of LDC unbundling is the logical extension of the same desire to create market choices for consumers that drove pipeline restructuring actions.

During the transition to the present industry role for interstate pipelines, unregulated pipeline marketing affiliates were formed and began to compete for gas sales. Without rules in place to guide the conduct of pipelines, many believed that anticompetitive practices, which advantaged the pipeline affiliates at the expense of marketing competitors, were creating distortions in the market place.

Perceived and actual abuse motivated the Federal Energy Regulatory Commission to govern the conduct of the pipelines in their dealings with affiliated marketers. The goal was a reasonable set of rules which obligated the regulated pipeline to provide the same services, information, and pricing terms to all customers, regardless of corporate affiliation. NGSA recognizes that the rules have served a valid purpose.

NGSA believes there is a similar potential for conflict of interest between the local distribution company's role as a monopoly provider of services to all parties competing for natural gas sales, and its ownership of one of those competitors.

Discussion NGSA suggests appropriate rules governing the LDC and affiliate relationship are necessary to ensure a vital and functioning competitive market for merchant sales. Such oversight should include, as a minimum, the five standards previously cited and amplified below:

1. Equal treatment. LDCs must apply and strictly enforce tariff provisions for transportation or distribution services without regard to whether the customer is a utility affiliate, its competitor, or an end-user. Affiliates must not receive preferences on any matter including, but not limited to, scheduling, balancing, transportation, distribution, storage, speed of service, or curtailment of similar services.

2. No subsidies. Tariffed services provided to the affiliate should be charged at the tariff rate or a rate not less than that available to all users. The cost of other services provided the affiliate should represent the total actual cost of the LDC. The cost must be free of any subsidies and include the actual or imputed cost of staff, facilities, equipment, third party services, corporate overhead, and any other allocated or assigned costs to the LDC for providing the service.

3. Confidentiality. LDCs must not disclose confidential information to marketing affiliates received from non-affiliated users of the LDC's services.

4. Contemporaneous disclosure. LDCs must contemporaneopusly disclose any information provided to their affiliates to all potential users of the LDC's services. Examples include gas transportation or distribution, sales or other service or market information. Such information should be provided through an electronic bulletin board format (where possible) to ensure all market participants obtain the data simulltaneously.

5. Independent functioning. Operating and marketing employees of regulated LDC must be separate from, and function wholly independent of, utility affiliate employees. There should be no common or shared employees that preferentially enhance the ability of the marketing affiliate in competing against third parties.

Conclusion

Once a public utility commission has decided to pursue the goal of LDC unbundling, a regulatory code of conduct governing the relationship between LDCs and their marketing affiliates must be implemented and enforced. NGSA believes a utility has the ability and motivation to provide a wide variety of preferences to it affiliate. If unchecked, these preferences are simply too great for non-affiliated marketers to overcome. As a result, competition is stifled and the position of the consumer is damaged.

The potential appearance of impropriety is damaging in and of itself. NGSA believes that state commissions should proactively address this issue at the earliest possible point. Equality of marketing opportunity is the vital element for providing consumers the competitive alternative which is the avowed goal of LDC unbundling and restructuring. Decisive action will serve to provide a level playing field and remove any perception that anti-competitive behavior will be allowed.

March 1996

This page was last updated August 31, 1997.