Advocate Summary

Issue:  Affiliate Relationships 
Advocate:  NiSource, Columbia Gas Transmission – Carl Levander and Sharon Royka
Date of Interview: 6/27/02

Basic Background
Affiliate relationships is the topic right now in the industry, going back about ten years probably interstate pipelines were required to stop selling gas to their customers, and we unbundled services and became strictly a freight hauler if you will. So we moved the gas that belonged to someone else what developed is that people set up companies to do the buying and selling of gas where there was an opportunity to make a profit on the difference and many of those were affiliated with pipelines originally and so there was a concern at the FERC (Federal Energy Regulatory Commission) that the pipeline which is deemed to be a monopoly by virtue of the physical configuration, barriers to entry and all that stuff, was able to somehow transfer its market power to a non-regulated industry which would be buying and selling gas, and if those people became to prominent in the market place, the price of gas, which is not regulated, unlike the price of pipeline services, could be unduly influenced by this market power. And so the commission came out with a set of rules to govern the relationship between the pipeline people and the people that are buying and selling gas. And the entities were called “market affiliates” and it became known as market affiliate rules, order 497 was the specific commission order that still gets referenced. So we’ve had a set of rules out for about 10 years now, that basically say we can’t pass certain types of commercial information to our marketing affiliates and we can’t favor their requests for service over non-affiliates and the basic stuff. In the meantime the commission has started on the path of restructuring electric service, and the FERC also has jurisdiction over whole sale electric as well as whole sale gas. And the same kind of issues came up, well can the electric companies do things with their affiliates that would be inappropriate and there were a set of affiliate regulations derived for the electric side.  And now the gas and electric companies are all getting together, the markets are become more closely aligned, and there’s concern that A: the two sets of regulations should have some commonality to them and B: that since the market has developed, it’s not just the merchants that are buying and selling the gas or electricity but it is the people that are doing financial transactions and other things that are not purely commodity based and there is an opportunity to reap an undue benefit from the market if they had access to certain information or whatnot. Now they say with the recent events that are going on in the energy industry, that’s gotten a lot of attention. So the commission began an initiative about a year ago to revamp it’s affiliate regulations which have been in place for about 10 years on the gas side, and come out with something, that in their view is more appropriate for today’s market. And they’ve done an initial public conference where they brought a bunch of people together across the industry to kind of speak on the issue, there were some written comments following the conference. Nothing happened for a long time, we’ve had actually a couple changeovers in chairmen of the commission with administration changes. So these issues have been around for about a year they picked it up recently, had another conference had more papers filed, and they are on the verge of probably issuing another rule this summer so one of the big debates in the industry has been how to shape the parameters and types of restrictions that the rule would put on, as companies are regulated by the FERC. 

Some say if you define the people too restrictively you’ll leave out people that could create harm, once they have access to information they’ll pass it along to other. [So it’s almost like insider trading?] Basically, yes, it is very similar to insider trading. The concern would be that the pipeline has a access to certain knowledge of its own system, and there are certain pieces of knowledge which if put in the hands of someone else who participates in the market place before others in the marketplace know it, they could gain a competitive advantage in some fashion, so it’s exactly like insider trading. 

For the distributors it’s a question of which of them are affiliated with pipelines, because one of the things this rule did was that it would regulate the relationship of distribution companies with pipelines and for example, for the Columbia companies, we have distribution companies in a number of states that we serve, so it would potentially put additional restrictions on our ability to deal with those people, so anyone in our position that has a distribution company affiliate their affiliate would also be concerned with this rule. So depending on the current structure of the company and how the affiliates relate to one another, that could be a big thing or a small thing depending on the company. For instance for us, we already have a fair amount of structural separation in place with our distribution companies for other reasons, so for us the rule would not severely change the way we deal with our distribution affiliate companies, but other corporate families, where those entities are very much inter twined, separating apart would have a much bigger impact on them. So how people read the rule has a lot to do with how the structure is today.  

When the regulations come out they will be defined in a common set of terminology, transmission providers under the electric and the gas side. They want to standardize them because they are separate right now. And it is a very fundamental issue, just as you define the terms in a more generic sense, you can loose a lot of the nuances in the current regs, which have very specifically defined meanings and 10 years of case law tells you what this term or that term means and now it’s being crafted into something different.  

Prior Activity on the Issue 
See above.

Advocacy Activities Undertaken
We participated in the conference, I was one of the panelists at the conference, and we’ve submitted written comments on the next regulation we will be submitting written comments. So those are the formal channels. Some level of discussion with staff, though not as much as what some other people are investing right now. Working through the trade associations with NiSource with the pipeline distribution companies. Sharon and I participated, and we’ve got counter parties that participated in the AGA discussions, trying to get consistent themes from the companies in those trade groups. And this is one where the devil’s in the details you’ve got to get all the definitions right for everything to work, so we don’t normally do this, but we went to the level of actually investing a fair amount of time in drafting the regulation. We’ll be submitting something to the Commission saying look if you adopt this language you’ll accomplish all of these policy objectives that we think are valid, instead of saying adopt these policy objectives and then leaving it to them to draft the regulations, which is not good to do. So we’ve been working on that. And we’ve done some outreach to other groups. And there’s probably been more back and forth with other groups on this issue then is normally the case.  Usually people just sort of draw a line in the sand and wait and see what happens. 

Future Advocacy Activities Planned
No specific activities identified.

Key Congressional Contact(s)/Champions
Not applicable.

Targets of Direct Lobbying
None mentioned.

Targets of Grassroots Lobbying
None mentioned.

Coalition Partners: Names/Participants
We came up with something like this [their position on the issue], there’s an outfit called Dominion Resources which is DTI Transmission is the pipeline, they look a lot like us in that they have local distribution companies, exploration companies, marketing companies, electric affiliates, a lot of the kinds of relationships that we do within our corporate families. So we’ve done some work with them generally in developing the position and going so far as to write regulations for the Commission’s consideration. And then try to shop that around to the broader set of people. 

The conversation about this particular position has gone through the trade associations, and the pipelines have a trade group called the Interstate Natural Gas Association of America so there were a number of conversations within the trade organization about this and then there have been individual conversations about this with other trade organizations that represent segments of the industry; the producers, the distribution companies and whatever else. So there’s been a number of kind of one on one conversations with people as well as conference calls and meetings with people who are interested in the issue and maybe have spoken at one of the conferences or maybe have otherwise expressed a level of interest. So there have been a number of different discussions. 
[Where there key associations?]
I guess the American Gas Association, the distribution company trade group. To cut to the chase, at the end of the day, this is a very divisive issue that different companies read differently, depending on what their specific business activities are and how they are organized, so at the end of the day there really was not a lot of endorsement for the proposal by any of the trade groups and probably not by individual companies, although we will know Friday - when the next round of papers are due at the commission, how many people are going to react favorable to this. There was a lot of discussion and I think there have been some modifications to the proposal as a result but it’s not something that you’re going to have a huge coalescence of a coalition around, that’s going to go to work and try to do something with it. 

So NGSA, National Gas Supply Association, which is the producers, Process Gas Consumers, PGC – they’re the industrial end users, they’ve not been as active on this, EPSA – Electric Power Supply Association, which are the electric generators, EEI – Edison Electric Institute, which are the sort of investor owned utilities. The electric side hasn’t been as active which is surprising because of the retail sale side of it. 

One of the issues that comes up in the affiliate thing is the impact on the ability of corporate offices to access information. One of the concerns is if you have a marketing group and a pipeline group at what level do you have a person that has access to information from both of those groups, and what do they do with the information once they get it. And the corporate governance issue has taken on a lot of emphasis here. Especially when you see some of the proposals coming out now, where there’s actually more emphasis on more accountability of corporate officers and an understanding of what’s really behind the numbers. I Several of the trade organizations have come together and said this is actually an issue that we agree on, that you shouldn’t be insulating the corporate officers from the real world details, and they are going to hire a law professor to sponsor some testimony to the Commission on these are the kinds standards that officers have and that you should not be interfering with in whatever regulations you put together.

Other Participants in the Issue Debate
At FERC the folks involved are Enforcement, Enforcement is still within Energy officially, but also if you look at this from a corporate perspective I guess we’ve had interaction at the commissioner level too. The Office of the General Counsel which is the legal office within the commission, currently has the responsibility for the people that do enforcement of the regulations, so they’re the people that have a lot of interest in rewriting the regulation. So there’s the legal staff if you will, there’s also a group that are sort of policy advisers within the Commission who have done some work on this, the Commissioners themselves have not really been the ones really pushing this, but we have had discussions with their staff.

Ubiquitous Argument(s) and Evidence
I guess no rule would have been an optimal one but, at one point there were a number of people that argued well look FERC if you really need to do anything you don’t need to do it right now, that’s politically not feasible right now, given Enron and everything else. So basically the position we’re taking, let me back up a step, the position that the commission staff, or certain people in the commission staff would take is that rather than simply regulate market affiliate relationships, FERC should regulate relationships between a number of affiliates within their corporate families. So people who are engaged in the production of gas, people who are distributing gas, people who are marketing and brokering gas, people who are strictly financial traders, all those entities should be regulated in more or less the same fashion as the marketing commodity sales people are today. That’s one point of view. For those of us who are in companies that operate across those industries, with a number of different entities involved in a number of different parts of the industry, that’s problematic because there’s a whole long list of people out there that we’ve got to be careful because of the structural remedies in play and we’ve got to be careful of who talks to whom and what they say and all that, so that’s not a good outcome for us. The approach we’ve been advocating is that instead of looking at individual companies, look at individual companies who are potentially the source of problems. And to put the same kind of restrictions which are in place today with the marketing sales people, in place for people that meet a certain functional test if you will, wherever they may be in an organization. 

Secondary Argument(s) and Evidence
There are some that are arguing the cost would be large it depends on what level of structural change would result from the order. We have some issues where if the commission would take a very hard line view of things there could be a significant cost, if we had to replicate certain communication systems for example, but I don’t think the commission’s going to go there, so I think the more likely case is that we won’t have a lot of costs to comply. But there are other companies that are very much integrated that who would have to be physically separating people out and duplicating functions that aer currently coordinated, those sorts of things – they will have significant costs, and a number of people on the electric side, which I think potentially has bigger changes coming out of this then we do, would have some significant costs. 

Targeted Arguments, Targets, and Evidence
None mentioned.

Nature of the Opposition
There are a number of people that would like to see a lot of restrictions on the way pipelines operate. Some are the major producers who take a fairly aggressive stance toward pipelines and their ability to have flexibility to do things. There are also large marketers that are in competition with the affiliates with the pipelines. Who either view themselves as being at a disadvantage or some might say see this as a way to gain a competitive advantage vis-à-vis the affiliates to the extent that they could put more restrictions in place. So those are the people that are really vocal on that side.  
[So is there a trade association of the marketers?]
There is, although they’re not, as much, on the advocacy side but National Energy Marketers Association – NEMA, it was actually formed quite recently, it doesn’t have the history as we do. 
The trade association itself has not said anything that I’m aware of, Dinogy is probably the one that has been the most aggressive on this - a large independent marketer.

Ubiquitous Argument(s) and Evidence Articulated by the Opposition 
Well, they’re for structural separation. At the conference they were saying most recently, they were more or less supporting where the Commission was going, which is apply affiliate standards across the board and, they’re main focus is that they would view the efforts of the industry as watering down the original proposal, and their stance is don’t take anything away what you have out there is probably a good idea. 

The pipes and distributors, the people that would be directly impacted, are arguing for less restrictions, the people who are not a part of those corporate families may argue for more restrictions, depending on whether or not that would effect their economics.

Secondary Argument(s) and Evidence Articulated by the Opposition
None mentioned.

Targeted Argument(s) and Evidence Articulated by the Opposition (and Targets)
None mentioned.

Described as a Partisan Issue
None mentioned.

Venue(s) of Activity
Federal Energy Regulatory Commission (FERC)

Action Pending or Taken by Relevant Decision Makers
FERC will release the affiliate regulations. 

Policy Objective(s) and Support for/Opposition to the Status Quo
Support the status quo, are opposed to regulations on affiliates that would restrict interaction between the companies in their corporate family.
Advocate’s Experience: Tenure in Current Job/Previous Experience
Sharon: I have a degree from Michigan State, and moved to this area after I graduated because I was interested in government affairs and was lucky enough to be hired by another energy company in their government affairs office, and I was just doing a lot of assisting the lobbyists and government regulations and doing some hearings and ended up getting an opportunity on the regulatory side and just went in that direction and I helped open a Washington office for a Canadian company that was my next job and then I was hired by Columbia about 5 years ago, and we were acquired by NiSource about a year and a half ago. 

Carl: I’ve been with Columbia about 16 years now, I have a legal background so after I got my law degree I went to work in-house for Columbia. And then moved on to regulatory issues about four years in. So, basically I’ve been doing regulatory work for the majority of my career. 

Reliance on Research: In-House/External (Code for Organizational Advocates Only)
We do both, on this one, this is not what you’d call higher order policy stuff, at the end of the day if you change the rule from this to this what is the impact it will have on business. If this person talks to that person what can they talk about, just looking at the potential impacts, that’s done pretty much in-house. We have, in the past, worked through outside consultants, developing higher order sort of think pieces, white papers trying to influence commission regulations in that way, four or five years ago we were more active on that front. And our trade association, when we work collectively as a group will bring in the outside experts.  Which actually is going to be done for the trade association comments on what is issued in a couple of weeks, will separately have – they hired a professor.    

Number of Individuals Involved in Advocacy (Code for Organizational Advocates Only)
About five.

Units in Organization Involved in Public Affairs/Policy (Code for Organizational Advocates Only)
This is the NiSource – the corporate government affairs office, but within the office we have three different reporting chains, we have our lobbyist who is vice president of government affairs for the corporation and she reports to the special assistant to our CEO, and we have another corporate level employee he is a lawyer, he’s in our corporate environmental group he has a separate reporting chain to our head environmental compliance officer within our corporation, and then our regulatory affairs staff is again, within the pipeline group, which is a separate business unit under the corporate umbrella, that was established some 20 years ago, they decided to have regulatory affairs as part of the pipeline group because they are federally regulated entities of the corporation. There are two full time regulatory affairs staff in this office but we report to Carl, and he’s the vice president for regulatory and strategic initiatives so we’re within his group. 

So we’ve got a group called Regulatory and Strategic Initiatives which is kind of a made up name, they folded together a couple of regulatory functions and the strategic planning area under one group. So we do strategic planning and a couple of groups that do regulatory policy analysis and the more traditional rate derivation and tariff maintenance – all the other things you do as a regulated industry.

Advocate’s Outstanding Skills/Assets (Code for Organizational Advocates Only)

Type of Membership: None, Institutions, Individuals, Both (Code for Organizational Advocates Only)

Membership Size (Code for Organizational Advocates Only)

Organizational Age (Code for Organizational Advocates Only)

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