Advocate Summary

Issue:  Affiliate Relationships
Advocate:  American Gas Association – Jane Lewis
Date of Interview: 8/13/02

Basic Background
The Commission, several years ago now, held an open technical conference to examine a number of general issues including affiliate relationships between interstate pipelines and their unregulated affiliates and that includes marketing affiliates, it includes regulated state distribution companies – so the ones that are regulated by the state, power marketing companies, power generators, the whole range of affiliates. At that time we didn’t expect anything formal to come out of the process, we just though we were having an open forum to discuss the issues. And then I think, frankly, events outside the gas industry started unraveling, you had the California crisis, you had some issues on some of the larger pipelines leading into California that there was alleged affiliate abuse, and then you had everything else spill out. And then FERC issued their proposed rule making, comments were do in December, so they must have issued it last fall in October. And that proposed rule actually combined all the regulations that addressed the electric industry standards of conduct with their affiliates and the gas industry’s standards of conduct and rolled them into one. For us, I represent Local Gas Distribution Companies, so companies like Washington Gas, or CNG, or companies like that. They are regulated by their state commissions they take service off interstate pipelines, and some of them are also affiliated with those interstate pipelines.  
	So we saw the proposed rule as troublesome in a number of respects. As you probably know there are standards of conduct currently in place at FERC, that govern interstate pipelines’ relationships with their marketing affiliates, those rules provide a specific exemption for local distribution companies when they are performing their traditional retail function – getting gas to homeowners. The new proposal did not included that exemption and specifically there are statements that specifically say “we’re not continuing that exemption – we’re reaching out to bring in affiliated companies.” But also the proposed rule was written very broadly and for that reason other distribution companies own very small, like ten mile, interstate lines that connects them to a storage facility in another state, but it is interstate commerce and it is overseen by the commission, but this rule was written so broadly that they’re brought in and they are brought in in some troublesome ways because the other aspect of this broadly written rule is that it is sort of this broad restriction on information sharing between the affiliates but they are owned by the same corporate head. And we are troubled that that is going to have negative implications on what we call corporate governance issues – the ability of a CEO and the VPs that are over the entire enterprise, they have to have information from all its subsidiaries to address things like credit risk, risk exposure, financing new construction projects, that kind of thing, and if they can’t get that information, what implications does that have? Or because they knew that information, if the rule was implemented the way it was proposed, they would have to very substantially restructure their corporation. And so we think sort of by default, the rule will, if the commission doesn’t change it, will impose structural divestiture on companies and they’ll have to have parts spin off and stand alone.

Prior Activity on the Issue 
[Active on the issue several years ago – see above.]

Advocacy Activities Undertaken
And so we think sort of by default, the rule will, if the commission doesn’t change it, will impose structural divestiture on companies and they’ll have to have parts spin off and stand alone.
And so for that reason we have gone in and asked for a continuation of the exemptions that relate to local distribution companies. The first one being, continue the current exemption. The second, allow for exemptions of LDCs that own small facilities that can’t operate on a stand alone basis, but that are interstate commerce. And the third one is there is something known as a master limited partnership, where a bunch of different companies will come together to form a separate entity in order to build a large pipeline project, that takes a lot of capital so a lot of LDCs will put money toward that type of venture and this will encompass that so we asked for that exemption. And then the fourth thing we asked for was for the commission to fix the corporate governance issues.  So generally we go through the formal process, submitting and filing comments. The commission has fairly strict ex parti rules that don’t allow parties to directly talk to anyone at the commission but on rule making procedures they are much looser and you are allowed to talk to people, because they need to take into consideration people’s views and have discourse, in fact the current chairman has said that he would prefer to operate through rule making as much as possible so he can talk to people in the industry. So written comments, and meetings with the chairman and the commissioners and taking our CEOs in just to explain the corporate realities and how they see this rule as impacting their business. And I should say too, that we’re not opposed to the entire rule, there is a lot of parts of the rule that we think work, and that the commission should be looking at there probably are some affiliate abuses going on that shouldn’t be. But because we are separately regulated by our state commissions and we serve a different function then a power marketer or a generation facility that might be owned by an interstate pipeline, you know – we serve that retail function of getting gas to homeowners, we just feel that we need to be carved out. So anyway I digress, so you go over and you meet with commissioners and you meet with staff. The commission held a technical conference after the first set of comments and that gives you a good opportunity to meet with everyone in the industry as a whole and have discussions. But beyond that there’s not a whole lot you can do. 

We’ve also discussed our position in open forums like conferences where AGA staff is invited to speak or I’m there outlining our position for others in the industry or for whoever is there. And reaching out to state commissions, especially when you are talking about the state distribution companies. One of the things is that it will raise costs to consumers and state commissions are very concerned about that. So providing them with the information on the rule so that if they believe it is in their interests to file comments they have the background material to do so. And several of the state commissions did file comments. 

Usually when we make comments at FERC we also issue a press release, because the press release gives you the headline coverage, that frankly you know is going to be the first thing that staff and FERC know about from the file, because they’re not going to go into a pile of comments and read everything word for word, and so often the press release might be the only thing they see, and they have to rely on staff to provide the summary of everyone’s arguments and not everyone can read everything that was ever filed or they’d never leave the building, so we always issue a press release the same day comments are filed so that people at FERC and people in the industry know our positions.  

Future Advocacy Activities Planned
There has been some talk about hiring, having an affidavit submitted, by a professor of corporate law because the commission knows how to implement the statues given their jurisdiction the natural gas act, the federal power act, to the extent they have responsibility under PURPA and PUHCA, the public utility holding company act, the interstate commerce act from long ago that gave them jurisdiction over the oil pipeline but then there is general corporate law, so we have talked about going out to a professor to get some information on the record with regard to the corporate governance issue, as to why we have these concerns. And that is something that is a little different in these proceedings than others I’ve been involved with because it has the potential to have these broad implications. We’ve also discussed it for that reason with the Office of Management and Budget because who in the government has responsibility if we view one agency implementing regulations that would make it hard to comply with regulations that another agency is implementing and who has responsibility then to be watching the total. And I think right now, when there is a frenzy of concern over corporate improprieties, there’s that potential for people to have a real knee-jerk reaction without taking a step back and looking at the whole.  

Key Congressional Contact(s)/Champions
Not Applicable.

Targets of Direct Lobbying
FERC

Targets of Grassroots Lobbying
None mentioned. 

Coalition Partners: Names/Participants
We’ve coordinated work with two other trade associations the Natural Gas Association of America, and the Edison Electric Institute, EEI. We had more of a formalized process where we’ve been on conference calls regularly especially on the corporate governance issue and NGAA supports us going for the other things, as does EEI but we’ve been really trying to coordinate our efforts on the corporate governance issue because that’s going to have the widest ramifications for the industry as a whole. 

Other Participants in the Issue Debate
And then in addition we’ve met with other groups more informally that maybe don’t share our positions but just to discuss views with them and see where everyone is coming from, and that would include the Natural Gas Supply Association NGSA, and the Independent Producers of America Association or something like that – IPAA, there’s too many acronyms in this business, and beyond that I don’t think we’ve met with anyone else.

Ubiquitous Argument(s) and Evidence
Our biggest concern is that it will raise costs to consumers. Some of our companies have looked at implementation costs and it is 30 million dollars in the first year and 15 million every year thereafter. And we have hit hard at the commission you know that it does impose significant costs, or it will or has the potential to, and they have not shown a significant benefit from the rule. So we’re pushing hard on the old cost benefit analysis that we just don’t think that they’ve done. The harm is speculative, they haven’t been able to specify anything, they’ve very much are making broad allegations and speculation and in fact when you talk to people about it, when you ask “what is the harm you are trying to avoid when you talk about local distribution companies?” we have a hard time, I still have a hard time articulating what it is they are trying to stop or what it is they think might be going on. I mean I know there are a few examples I can get my arms around but just a few. And then our other argument is more sort of legalistic administrative procedures act stuff, that they haven’t met the burden, they haven’t set forth a reasonable basis for this rule to apply. They just haven’t stated with any specificity what they are trying to correct. When you argue these things you sort of have to take a dual track approach; at the same time you are really trying to work with the regulators and staff to make them understand your position and so you want to be cooperative, you don’t want to be too combative but at the same time you want to let them know that you are serious and if they can’t fix it or they refuse to fix it you are going to have legal grounds to appeal it to the court. And so you have to make sure that you are building a record to give you the grounds to appeal at the same time you are trying to be collaborative and provide alternatives – not just “we hate it take it off the table.” You have to see what’s good about it, what works, that you think they should implement and where there are problems and where they could fix it. So it’s a bit of a challenge because you are playing two roles at the same time. 

Secondary Argument(s) and Evidence
And I should say too, that we’re not opposed to the entire rule, there is a lot of parts of the rule that we think work, and that the commission should be looking at there probably are some affiliate abuses going on that shouldn’t be. But because we are separately regulated by our state commissions and we serve a different function then a power marketer or a generation facility that might be owned by an interstate pipeline, you know – we serve that retail function of getting gas to homeowners, we just feel that we need to be carved out.

Targeted Arguments, Targets, and Evidence
None mentioned.

Nature of the Opposition
Well the commission. The commission seems to want to move forward with what they’ve proposed or at least the staff does, it’s hard to say where the commissioners themselves will come out, I don’t think that they’ve turned their full attention on it yet, it’s just not time for them to do that yet. It bubbles up from the staff level. Then there are some companies, some large independent marketers out there that have been asking for these types of rules and they’ve opposed the exemptions we’ve requested, not for any specific reasons but just because they feel that the more exemptions there are in the rule, the exemptions end up swallowing the rule and make it not very enforceable. Dynegy is the main one, they’re the largest independent marketer our there. And I’m trying to think, there is a marketers association, the National Energy Marketers Association it’s called, run by a guy by the name of Craig Goodman, but I don’t recall that they submitted comments after the technical conference, I don’t remember. Maybe they did but they didn’t address this issue specifically. There is an industrial group, Process Gas Consumers, they’re represented by a law firm, the general counsel in Dina Wiggans and they oppose having LDCs exempt. And their major complaints stem from things that are not under FERCs jurisdiction but are regulated under state commissions or state jurisdiction, and so we feel they are raising sort of red herrings that FERC doesn’t have any say over. And in fact the points that they’ve raised at the state commission level and even gone up to the courts and they’ve lost. And then the other group is IPAA, they just are very much in favor of very strict affiliate relationships across the board, and for that reason don’t want any exemptions. But for their specifics they have pointed pretty much solely to very old issues that the commission used to justify the regulations that are currently in place, they’ve really come up with nothing new out there. So we feel like the current standards were put in place to deal with the examples IPAA is using and so we don’t need to go further than that. In fact the courts have upheld the current standards and use the same examples, so they are sort of trying to take the old stuff and bootstrap on new, more stringent regulations. And that’s really it, it’s really just Dinogy, PGC and IPAA.

Ubiquitous Argument(s) and Evidence Articulated by the Opposition 
They just want strict regulations, their primary argument is that you need tight affiliate regulations, and maybe more PGC and IPAA, from the gas side, but that you need tight affiliate regulations to govern how interstate pipelines interact with sister companies because the financial incentive is there for them to skirt the rules because the financial incentive is to increase the bottom line of the corporation as a whole, and so anything that they can do, they will. And so they take it as like disciplining a child, do you lock them in their room so they can never get into any trouble, or do you address situations as they arise. And we think the commission has been able to address situations as they arise and that’s certainly the way’s it’s worked with the current standards – where you have some blanket rules and then they’ve had some cases over the years where people have violated those rules and were able to address it, and we think that is the right approach, more of a rifle shot than a shot gun. 

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
No.

Venue(s) of Activity
FERC

Action Pending or Taken by Relevant Decision Makers
The commissioners at FERC will make a final decision some time next year. 

Policy Objective(s) and Support for/Opposition to the Status Quo
Working to exempt LDCs from the affiliate relationship regulations in FERCs proposed rules.

Advocate’s Experience: Tenure in Current Job/Previous Experience
I’ve been here for seven years now, I’m an attorney, I was with a law firm in town before I came over, represented distribution companies at the law firm, there was an ad hoc group of western utilities that we represented and then I came over here, we restructured a whole lot over the past seven years, but lately we’ve been stable and we have things in place the way that we need them at least for today and if things change we can, now we are pretty nimble and so that’s good. I am essentially in charge of our FERC advocacy I’m senior managing counsel of FERC advocacy and I pretty much run the advocacy and outreach that we do but I’m guided by a committee of member companies, probably 100 people on the committee, they range from general counsels to VPs to managers and directors of gas supply or gas transportation and it’s a really varied group that brings a good skill set to the table and we meet maybe six times a year or more often if necessary. So when I’m developing comments I’ll come up with an outline, now with conference calls and email, we don’t even need to meet to pull comments together, I’ll have a conference call put something together based on that, do an outline, circulate it, that sort of thing. And it’s worked pretty well. 

Reliance on Research: In-House/External (Code for Organizational Advocates Only)
In-house. We support our positions with legal mainly, and I should say we do have one consultant on retainer that does economic analysis for us and so we use a lot of economic analysis. And we’re member based so we rely a lot on our members, they do the cost benefit analysis for the cost side of it, we can go to our members and say “ok how much is this going to cost” so we talk to our members and ask them to run some numbers for us.

Number of Individuals Involved in Advocacy (Code for Organizational Advocates Only)
Not obtained.

Units in Organization Involved in Public Affairs/Policy (Code for Organizational Advocates Only)
We’re structured a little bit differently, we have a general counsels office that does more of the legal work of the association and then we have a regulatory affairs team, and we do the FERC regulatory advocacy work and a lot of advocacy before a body called the National Association of Regulatory Utility Commissioners which is actually the trade association for the state commissions. And then there is legislative, so the public affairs group is broken down into communications and government relations which has a lot of lobbyists who have spent all year working on the energy bill and then we have our communications team that reaches out to the press and the trade press and actually helps all of us better frame our arguments for more of a general public front, and then there is part of that that is more in charge of our website and video content so about 85 give or take a few. In addition to regulatory and government affairs we have a financial group that does a lot of outreach to wall street for our members there is a big financial meeting or forum every year, where companies come give their presentations and we’ve got an in-house policy analysis division that is very good, they do a lot of reports on the industry, and market outlooks and then we have a fairly large and extensive engineering and operating group, and of course then we all interact with one another, like I rely on policy analysis a lot, I rely on their product and use it a lot to help make arguments and the communications group as well. Usually when we make comments at FERC we also issue a press release, because the press release gives you the headline coverage, that frankly you know is going to be the first thing that staff and FERC know about from the file, because they’re not going to go into a pile of comments and read everything word for word, and so often the press release might be the only thing they see, and they have to rely on staff to provide the summary of everyone’s arguments and not everyone can read everything that was ever filed or they’d never leave the building, so we always issue a press release the same day comments are filed so that people at FERC and people in the industry know our positions.  

Advocate’s Outstanding Skills/Assets (Code for Organizational Advocates Only)
None mentioned.

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

Membership Size (Code for Organizational Advocates Only)

Organizational Age (Code for Organizational Advocates Only)

Miscellaneous