Consumer Protection

		In monoply and other economically regulated markets, the PUC was considered a one-stop shop for consumer protection -- guardian against price abuse, implementing social policies and resolving ratepayer complaints.
		As more utility services are provided by competitive markets the PUC will be unable to protect consumer interests in the variety of legislative, administrative and judicial arenas where they will be defined.
		In competitive utility markets, the State will need to ensure that consumer interests are expertly represented in the various venues where those interests are at stake.

Consumer Protection

Finding 12: In competitive markets, as public decisions may be diffused, residential and small business customers may not be well-represented in a number of regulatory, legislative, administrative and judicial venues.

Stripped to its core, the original purpose of the PUC was to protect consumers in the absence of a functioning market. The State's new strategy is to facilitate the market wherever possible -- policing those industries as it does others for antitrust behavior and consumer fraud. Where remnant monopolies remain, regulations should be maintained.

The transition from monopoly to market has sparked considerable debate about how to best protect consumers. A significant portion of the debate has focused on how consumers are represented in policy venues -- and in particular the role of ratepayer advocacy at the PUC and whether that function should be placed outside the Commission or whether it should continue at all.

Another aspect of consumer protection comes in the form of government actions. As competitive utility markets develop, the PUC intends to transform itself from regulator to marketplace guardian.

That strategy has raised questions of whether the Commission has the jurisdictional authority, the cultural understanding and the expertise to meet the new challenges. That decision also neglects the role already performed by other state agencies, most notably the Attorney General.

The PUC as Consumer Guardian

The Public Utilities Commission divides its consumer protection duties into three categories -- customer services, to help customers resolve complaints against regulated utilities; public advising, to help members of the public who want to intervene in Commission proceedings; and ratepayer advocacy, to argue the interests of ratepayers in Commission proceedings.

Of the three functions, ratepayer advocacy has been the most controversial. Created in the mid-1980s at the behest of the Legislature, the PUC's Office of Ratepayer Advocates -- known until 1996 as the Division of Ratepayer Advocates -- has a national reputation for its ability to scrutinize utility expenditures and ferret out billions of dollars in costs that the Commission ultimately found should not be paid by utility business and residential customers: $6 billion in the Diablo Canyon settlement and $1 billion in the San Onofre settlement. The Division's work also led to a $250 million penalty against Southern California Edison for overpaying independent energy producers belonging to Edison subsidiaries.⁽¹⁴¹⁾

The assertiveness of the PUC's ratepayer advocacy unit has generated criticism from some of the regulated utilities -- who believe the advocates were too antagonistic toward the companies and carried that antagonism with them as they were promoted to key management and advisory positions. The Commissioners responded to those complaints in their Vision 2000 reorganization plan by proposing to abolish the advocacy unit and dispersing that function into the PUC's new industry-based divisions.

The proposal was controversial among consumer groups, who feared the unit's critical voice would be lost. It was similarly controversial among regulated industries, which were concerned that the Commission's staff analyses would become tainted with consumer advocacy.

The debate yielded considerable support for creating an independent consumer advocate -- perhaps in the Attorney General's Office. While some consumer groups preferred to keep the advocacy staff within the PUC, they were afraid that Commissioners would limit its resources and role in Commission proceedings. The Utility Consumers' Action Network (UCAN) described the concern: "This is a division that once worked well and no longer does. It is understaffed, overworked, depleted of talent and devoid of leadership."⁽¹⁴²⁾ The utilities, meanwhile supported the idea of shifting the function outside the PUC to clearly delineate advocacy before the Commission from advisory to the PUC.

The Legislature responded to the debate in its 1996 Commission reform measure. SB 960 (Leonard) re-established the advocacy function within the PUC as a separate division, with a budget to be separately determined by the Legislature and with a director appointed by the Governor and confirmed by the Senate.

Consumer protection has a second facet beyond advocating the consumer cause in proceedings: to actively resolving consumer-related issues. The PUC, to a large degree, has done both over the decades that utility services have been provided by monopolies. While its advisory and advocacy units provided information, the Commissioners used their authority to set and enforce regulations intended to balance the economic needs of captive customers and sole producers.

As competitors have entered the markets, the PUC has expanded that role to police unfair business practices. The Commission, for example, has aided thousands of customers who have been victimized by "slamming" -- tricked into changing long-distance telephone service -- and subjected to other aggressive marketing ploys. Similar tactics can be expected as competition gets underway in the electricity market.

The impact is reflected in the statistics recounted in the PUC's annual reports. In 1993-94, the Commission responded to 48,340 complaints and required $531,072 to be refunded to customers. In 1994-95, it responded to 60,127 complaints and refunded $2.1 million. Most of that increase can be attributed to the telecommunications industry.

The Commission believes it has responded swiftly and assertively to close the door on abuses. But consumer representatives, such as UCAN, are concerned that the PUC lacks the resources to respond to complaints and enforce rules while at the same time setting policies and scrutinizing the crush of applications to provide service. The PUC in 1996 had 10 employees to respond to consumer complaints -- down from 19 people in 1992, according to UCAN. The consumer group said the Department of Insurance's Consumer Complaint Bureau has 43 people answering telephones. During 1995, UCAN said, the PUC installed an automated telephone answer system that "precludes all but the most ingenious customers from talking to a real person."⁽¹⁴³⁾

The Legislature, in addition to reconstituting a ratepayer advocacy unit, affirmed that at least in the near term the Commission will have a significant role in consumer protection. It provided for the PUC to register new entrants into energy markets and established procedures to prevent overaggressive marketers from switching a consumer's electricity service without consent. But the Legislature recognized that aggrieved consumers also have the ability to file civil actions directly against the offending company.

The debate over how to best provide consumer advocacy and protection did not begin with the emergence of competitive energy market. And the experience of other states is helpful in rethinking California's long- term strategy for meeting these needs.

The Model of Other States

California is not unique in having established a voice for ratepayers. Virtually every state has a utility consumer advocate to represent that class of ratepayers who combined have a huge interest in the outcome of proceedings, but individually have such a small interest that it is not worth their time to participate.

But California stands almost alone in housing the ratepayer advocate within the Public Utilities Commission. In 47 other states, advocates for utility customers are outside of the agency regulating utilities. In 17 of those states, the advocate is part of the State Attorney General's office; in 16 states the advocate is a separate government entity and the rest are situated in a consumer affairs office or a related agency. The California Research Bureau reports that in states having this structure various administrative arrangements are made to prevent conflicts of interest among the attorney general's clients.

The separate agencies are routinely funded by the same fee that public utility commissions use to fund their activities. Many of the offices rely on a multi-disciplinary team of analysts, economists and attorneys to review proposed policies, regulations and utility applications and determine the consequences those actions will have on consumers. Records from the National Association of State Utility Consumer Advocates (NASUCA) show that of 44 states with separate consumer advocates, 39 employed attorneys, 19 employed economists, 18 employed financial analysts and 17 employed rate analysts.

The PUC's ratepayer advocates unit, incidently, has not been able to join NASUCA, which provides a monthly exchange on the problems experienced in other states and the solutions being employed. The association requires members to be separate from the regulatory commission. California consumers are represented in this forum instead by California-based nonprofit organizations.

Maintaining an advocacy unit inside the Commission provides the staff with the opportunity to be privy to information developed by the advisory staff and enhances the ability of advocates to build a relationship with Commissioners. But the advocates also suffer from limits on how aggressively they can pursue particular positions and have no standing to represent consumers outside the Commission.

The PUC's ratepayer advocates had no voice, for example, in the legislative hearings on the Commission's plan to restructure the electricity industry -- even though that plan determined how billions of dollars in utility expenses would be passed on to the public. The advocates similarly had no voice when the Legislature took on reform of the Commission itself. In both of those instances, the interests of California's 33 million consumers -- virtually all of whom will be affected by those events -- were represented by nonprofit organizations that were outnumbered and out-financed by the market players.

The benefit of a utility consumer voice outside the regulating commission was demonstrated in the Pennsylvania case, Duquesne Light Co. vs. Barasch. In Duquesne, the U.S. Supreme Court found that excluding the costs of a canceled plant from the utility's rate base did not constitute a taking by the regulatory commission even though the commission had originally approved the plant and found the costs reasonable. The case, brought by Pennsylvania's independent consumer advocate, effectively struck down the unwritten regulatory compact between the commission and the utility that committed ratepayers to paying 100 percent of the costs incurred by a utility -- whether that investment was lost because of bad management or "stranded" by the advent of competition. The case challenged the assumption of that state's public utilities commission -- and the assumption of other commissions across the country -- that utilities were entitled to recover all costs regardless of the reason for the expense.

Such a case could not have been brought in California in recent years, because here the consumer advocate has had no authority to act outside Commission proceedings.

In the rapidly unfolding telecommunications and electricity markets, these limitations will become an increasing impediment to representing consumer interests wherever and however they need representation.

Consumer Needs in Competitive Markets

Consumer protection in a monopoly market requires scrutinizing utility expenses and decisions to make sure that ratepayers are getting a good deal. But in a competitive market, government intervention often results in higher, not lower prices. Consumer protection is just as important -- but rather than focusing on the quality of service or the price, the concern is whether companies are engaging in consumer fraud or antitrust behavior.

The desired outcomes also are different: In a monopolistic market, where companies receive a franchise for exclusive service in exchange for regulation, the public has an interest in the company's long-term health. But in an open market, the public benefits from suppliers competing to offer the best services at the lowest prices -- regardless of the effect on existing companies.

The debate over consumer protection has revealed that Californians will need government to play both roles for some time: Where competition is emerging, the government can best protect consumers by policing the market to prevent fraud or market abuse. Where remnant monopolies remain, so must monopoly regulation.

During the transition, consumer advocates maintain that extra diligence will be required to ensure that incumbent companies segregate their monopoly services from their market-based enterprises. A former director of the PUC's Division of Ratepayer Advocacy warned: "Utilities have and still strive mightily to transfer costs from competitive services to captive customers."⁽¹⁴⁴⁾

In competitive markets, consumer protection will begin with solid information that allows consumers to make wise decisions and avoid problems. When problems occur, consumers will need a place to take their complaints. These functions do not naturally follow the Commission's expertise of economic regulation. A former PUC division chief testified:

Protecting consumers from fraud and abuse in a competitive market matches neither the PUC's core business nor its core competency. Increasingly faced with the sort of consumer protection issues common to competitive markets, but unfamiliar to an agency grounded in traditional monopoly regulation, the PUC finds itself forced to resort to ad hoc measures, cobbling together resources and engaging in regulatory triage.⁽¹⁴⁵⁾

Similarly, the Center for Public Interest Law at the University of San Diego warned that Californians should expect to see an a "panoply of abuse" by competitors engaging in price discrimination, price fixing and predatory practices. And try as the PUC might, the Center was unconvinced the Commission could adequately respond to the new challenges.

The PUC has little record as an effective detector or prosecutor of competitive sector antitrust violations. It has a good record in detecting sales deceptions, service failures and related monopoly power abuses. But the two are very different kinds of offenses.⁽¹⁴⁶⁾

As competition in the telecommunications industry unfolds, with new technologies, new services, billions of dollars at stake and hundreds of new market players -- most of them not under the PUC's regulatory authority -- the needs of consumers will be rapidly spinning beyond the Commission's expertise and its jurisdictional reach.

A diversity of actions in a variety of venues will need be taken -- to counter unfair marketing practices by seeking administrative or judicial remedies, to recognize potential market power abuses and initiate antitrust actions; to keep abreast of new technologies; to keep the Legislature informed about needed policy changes, and to educate consumers about market developments and potential fraud so they can make informed purchasing decisions.

Many of these functions are already being carried out by the Attorney General in a number of arenas.

California's Attorney General has broad authority to protect the public interest in antitrust and market power issues and to act against companies that engage in unfair business practices and collect civil penalties.⁽¹⁴⁷⁾

The Senior Assistant Attorney General for Consumer Law testified: "The Attorney General's office has a long history of cooperating with other agencies to solve consumer problems." It works with county district attorneys, city attorneys and the attorneys general in other states. It works with state agencies -- including the PUC and the Department of Consumer Affairs -- to collect information and take action through the appropriate venue.⁽¹⁴⁸⁾

The Attorney General's Consumer Law Section already has been involved in utility-related disputes. It has filed actions against cellular phone sellers, inter-exchange carriers, aggregators, resellers and other telecommunications companies for a range of unfair and unlawful practices including slamming, false billing, fraud and unfair collections methods. Similarly, the Attorney General's Antitrust Section already has investigated independent power producers and has advised the PUC on the laws governing the marketplace. It has assessed proposed utility company mergers for their potential effects on competition. The Senior Assistant Attorney General for the Antitrust section said the role of the Attorney General naturally expands as market forces replace monopolies:

An important goal of regulation is to cause the utility to act as if it were constrained by competitive forces. In contrast the goal of antitrust is to induce competitive behavior in markets where such behavior is feasible.⁽¹⁴⁹⁾

But this broad experience and reach also has a critical shortcoming. The Attorney General's existing consumer-related staff is comprised largely of generalists, juggling competing priorities to police the actions of various industries.

The utility consumer advocate for Nevada -- one of 17 states where that function is housed in the Attorney General's office -- said that as the markets transition, the advocacy staff will work more closely with the Attorney General's market-oriented enforcement units, providing them with the expertise to watch for potential market power abuses.

Similarly, California's consumer advocates -- and the State's larger role in consumer protection -- will need to be effective in both monopoly and competitive arenas. The success of the State's policy to give the market the chance to work will depend in part on effectively gauging when and where consumer interests are best protected. An environmental and renewable energy advocate described the balance this way:

Market power is a terrible thing to waste. And if you fail to remove it in the beginning, you will need to intervene. You may not want to micro-manage the market, but you have to make the market responsive to public and environmental considerations.... Where customers are hurt is where they don't have a choice and some customers won't get it in electricity for a long time. The more competition, the less regulation. But saying you have competition isn't the same thing as having it.⁽¹⁵⁰⁾

The California Attorney General has maintained that regulatory advocacy should remain at the Public Utilities Commission, with the Attorney General's office fulfilling a complementary role. The Legislature followed that model in its SB 960 reform legislation, by reconstituting advocacy within the PUC.

But the ability of the PUC's advocacy unit will increasingly shrink while the Attorney General's complementary role already is growing. This transition will be smoother if the resources and expertise that once were dedicated within the PUC were gradually shifted to the Attorney General.

Recommendations

Recommendation 12: The Governor and the Legislature should create within the Attorney General's Consumer Law Section an office of utility consumer protection. The office should represent consumer interests in legislative, administrative and judicial proceedings.

The Attorney General already has the standing to fill this role, but in the past has relied more on the full-service regulatory strategy of the PUC to protect utility consumers. And as the monopolies give way to the market, the Attorney General's role would naturally increase in this arena. To encourage cooperation, prevent duplication, and provide effective consumer protection, resources and expertise should be shifted over time to enable the Consumer Law Section to better fill this role. The legislation should specify that the unit will employ a combination of attorneys, engineers, economists and policy analysts and will be funded by reallocating a portion of the existing user fees assessed to fund the Public Utilities Commission and the California Energy Commission.