Public utilities owning electric transmission and distribution lines and/or owning natural gas pipelines and distribution facilities are natural monopolies. They had the ability to exploit consumers in the early 1900s, and in some instances did so, which is precisely why state commissions across the nation have been regulating them ever since. See General Motors Corp. v. Tracy (1997) 519 U. S. 278, 288-92 & nn. 5-7. Although changes in regulatory laws have led to increased entry into the wholesale natural gas and electric power markets, utilities owning or controlling transmission or distribution facilities still enjoy a natural monopoly, which they can exploit to favor their own sales or sales from their unregulated affiliates and exclude or burden their competitors. See, e.g., Cal. Independent System Operator Corp. v. FERC (2004) 372 F.3d 395, 396.
With their control of public utilities, parent holding companies can require unreasonable fees from their utility subsidiaries, preferential treatment for their affiliates, or otherwise affect adversely the accounting practices and the rate and dividend policies of the utility subsidiaries. These were among the reasons why Congress enacted PUHCA in 1935, as well as why this Commission promulgated its Affiliate Transaction Rules. See North American Co. v. SEC (1946) 327 U. S. 686, 701-02; see also Southern Union v. Missouri PSC (8th Cir. 2002) 289 F.3d 503, 507-08.
The Commission has issued decisions approving the formation of holding companies for each of the largest California energy utilities: PG&E Corporation1, Edison International,2 Enova Corporation3, and Sempra Energy (merger of parent companies of SDG&E and SoCalGas).4 When the Commission approved the Utility Respondents' applications to form holding companies or for the merger of their parent companies into a new holding company, the Commission's concerns about potential abuses in the relationship between the holding company and the utility subsidiaries led to the imposition of certain conditions, including the condition that the capital requirements of the utility must be given the first priority by the holding company and the utility. (First Priority Condition). See PG&E Corp. v. PUC (2004) 118 Cal.App. 4th 1174, 1183-84, 1201. Although the Parent Holding Companies all challenged the Commission's jurisdiction to enforce these conditions, the Commission's jurisdiction was upheld. See id. at 1201, 1223.
With the repeal of PUHCA and any resulting increase of activities by affiliates or parent holding companies of the California public utilities, the Commission's responsibility to protect the ratepayers remains paramount. For example, without the constraints under PUHCA, the holding companies may be exploring other business opportunities or possible mergers with or the acquisition of other companies. To do so, they may rely upon the capital they receive from the California public utilities without fully taking into account the present or future capital needs of the utilities. This could substantially undermine the present attempts by the Commission to ensure resource adequacy.
The Commission has the power and the obligation under Article XII, section 6 of the California Constitution and sections 451, 701, and 761 of the California Public Utilities Code to actively supervise and regulate natural gas and electric public utilities in California and to do all things which are necessary to ensure adequate and reliable public utility service to California. ratepayers at just and reasonable rates. See Camp Meeker Water System, Inc. v. Pub. Util. Comm'n (1990) 51 Cal. 3d 850, 861-862; Sale v. Railroad Comm'n (1940) 15 Cal.2d 607, 617. Pursuant to this authority, as well as the First Priority Condition in the holding company and merger decisions5, the Commission will review the 2006-2010 capital budget plans of Utility Respondents and the Parent Holding Companies to see how these plans may meet California's energy needs.
After completing this review, additional rules and regulations may be proposed to address the potential conflict of interests between the utilities' public service obligations to their customers and their obligations to their common shareholders of their parent holding company and affiliates.
1 See D.96-11-017, 69 CPUC2d 167 (Nov. 6, 1996) (PG&E I); D.99-04-068, 194 P.U.R.4th 1 (April 22, 1999) (PG&E II).
2 See D.88-01-063, 27 CPUC2d 347 (Jan. 28, 1988) (Edison/EIX).
3 See D.95-05-021, 59 CPUC2d 697 (May 10, 1995) (SDG&E I); D.95-12-018, 62 CPUC2d 626 (Dec. 6, 1995) (SDG&E II); and
4 See D.98-03-073, 79 CPUC2d 343 (March 26, 1998) (Sempra Merger).
5 See PG&E I, Ordering paragraph 17, 69 CPUC2d at 201; Edison/EIX, Ordering paragraph 12, 27 CPUC2d at 376; SDG&E II, Ordering paragraph 6, 62 CPUC2d at 651; see also Sempra Merger, Ordering paragraph 2c & Attachment B(IV)(A)(5), 79 CPUC2d at 431, 447.