2. Background and Amended Scope

The Commission opened this OIR to review "the relationship of the major energy utilities with their parent holding companies and affiliates" in furtherance of two over-arching goals.¹ These goals are "to ensure that the utilities meet their public service obligations at the lowest reasonable cost" and "to ensure that the utilities do not favor or otherwise engage in preferential treatment of their affiliates."²

In its 1997 decision adopting the Affiliate Transaction Rules to serve as standards of conduct governing relationships between California natural gas or electric utilities and their affiliates, the Commission explained, "the development of competitive markets would be undermined if the utility were able to leverage its market power into the related markets in which their affiliates compete."³ Therefore, the Commission decided "to adopt rules that generally require more separation between a utility and its affiliate, rather than rules that rely almost exclusively on tracking costs. The fewer the transactions between the utility and its affiliate, the greater confidence we have that the affiliate lacks market power. In an ideal world, the utility would treat the affiliate as it would other, nonaffiliated firms."⁴

At least four factors militate for a further review of the relationships now. First, as the OIR notes, the recent enactment of the Energy Policy Act of 2005 (EPAct 2005), Public Law 109-58, has repealed the Public Utility Holding Company Act of 1935 (PUHCA), 15 U.S.C. §§ 79 - 79z-6. Under PUHCA, state commissions had recourse to the Securities and Exchange Commission (SEC) if state laws proved insufficient to protect utility ratepayers from abuses by utility holding companies. With the repeal of PUHCA, this Commission has lost one of the protections underpinning its approval of the formation of the holding companies that control Edison,⁵ SDG&E,⁶ and PG&E,⁷ as well as a safeguard underlying approval of the SDG&E/SoCalGas merger, which resulted in the creation of Sempra Energy.⁸

Second, the circumstances which create conflicts for the utilities between serving their customers or helping their holding companies and other affiliates are becoming more widespread. The Commission has long recognized such inherent conflicts of interests for each of the California energy utilities and their affiliates.⁹ Since the Commission's issuance of the Affiliate Transaction Rules, the California energy utilities' holding companies and/or other affiliates have acquired or built electric generation plants and pipeline facilities, and currently are constructing liquefied natural gas (LNG) facilities and connecting pipelines, and/or acquiring equity interests in new pipeline proposals.¹⁰ The repeal of PUHCA may result in further acquisitions by the holding companies that control California's energy utilities. It also may lead to an environment in which the holding companies, themselves, become acquisition targets.¹¹

Third, the reports submitted by the utilities and their holding companies in response to the OIR, as well as audits of the utilities and letters from them, suggest a highly integrated relationship among the affiliated entities, with potentially detrimental consequences for ratepayers and competitors.

Fourth, but not at all least, recent changes in state law and Commission policies have altered both utility procurement obligations and the oversight responsibilities this Commission bears. California needs to be on a path to ensure resource adequacy on the supply side through the construction of new power plants, transmission lines, pipelines, and storage facilities to meet long-term needs for reliable energy supplies. These new projects may be built and owned by utilities and by non-regulated entities, including the utilities' affiliates. The Commission's regulation of utility resource procurement must meet statewide goals, including resource adequacy and environmental goals and, increasingly the Commission is utilizing pre-approval processes. It is incumbent upon this Commission to ensure that interactions between and among the utilities, their holdings companies and other affiliates do not circumvent California's energy policies, including the important environmental and competitive goals they promote.

Each of these concerns also calls into question the ability or willingness of the utility holding companies to fulfill their obligations to make the utility's capital requirements a first priority, as the Commission's holding company decisions require (i.e., the first priority condition).¹²

In addition, the comments of the Greenlining Coalition (Greenlining), filed on December 13, 2005, observe that the scope of this OIR necessarily should include review of the impact of executive compensation on utilities and their holding companies. Some of Greenlining's suggestions appear to fall outside the jurisdiction of this Commission. However, we are prepared to consider suggestions within our authority, particularly requirements for more meaningful disclosure of all of the individual components that comprise the total compensation paid to highly compensated executives and employees. Such information is necessary both to ascertain the reasonableness of rates (to the extent monies received from ratepayers fund any part of executive or employee compensation packages, directly or indirectly) and to ensure that the structure of executive/employee compensation does not promote conflicts of interest that disfavor utility concerns over those of the holding company or other affiliate. We recognize that the Commission recently declined to amend GO 77-L to include some of Greenlining's proposals. Now, following the repeal of PUHCA and concurrent with the SEC's movement for greater sunshine on executive compensation, we agree that we should reconsider these issues.¹³

¹ OIR, mimeo., p. 1.

² Id., p. 2.

³ Decision (D.) 97-12-088 (December 16, 1997), 77 CPUC 2d 422, 449, as amended by D.98-08-035 (August 6, 1998) 81 CPUC 2d 607 and D.98-12-075 (December 17, 1998), 84 CPUC 2d 155.

⁴ Id., 77 CPUC 2d at 450.

⁵ See D. 88-01-063, 27 CPUC 2d 347 (Jan. 28, 1988) (Edison/EIX), regarding Edison International.

⁶ See D.95-05-021, 59 CPUC 2d 697 (May 10, 1995) (SDG&E I); D.95-12-018, 62 CPUC 2d 626 (Dec. 6, 1995) (SDG&E II), regarding Enova Corporation.

⁷ See D.96-11-017, 69 CPUC 2d 167 (Nov. 6, 1996) (PG&E I); D.99-04-068, 86 CPUC 2d 76 (April 22, 1999) (PG&E II), regarding PG&E Corporation.

⁸ See D.98-03-073, 79 CPUC 2d 343 (March 26, 1998) (Sempra Merger), regarding Sempra Energy.

⁹ See D.92-07-084, 45 CPUC 2d 241 (July 22, 1992) (SoCalGas/PITCO); D.93-03-021, 48 CPUC 2d 352 (March 10, 1993) (Edison settlement re: Mission Energy); D.97-08-055, 179 P.U.R.4^th 485 (August 1, 1997) (PG&E settlement re: PGT).

¹⁰ See, e.g., Sempra Energy's website at http://www.sempra.com/companies.htm; Edison's website at http://www.edison.com/ourcompany/affiliate_trans.asp.

¹¹ See Energy Law Journal, "PUHCA's Gone: What Is Next for Holding Companies" Vol. 27, No. 1 (2006) at 2.

¹² See D. 88-01-063, 27 CPUC 2d at 376; D.95-12-018, 62 CPUC 2d at 651; D.96-11-017, 69 CPUC 2d at 201, as modified, D.99-04-068, 86 CPUC 2d at 126.

¹³ See the SEC's Proposed Rule "Executive Compensation and Related Party Disclosure" 17 CFR Parts 228, 229, 239, 240, 245, 249, and 274.