The FPC previously had authorized Pacific Power & Light to guarantee loans for financing extensions of electric and water service lines to new customers, wiring modifications or improvements, and the purchase of electric equipment or appliances which require wiring modifications. This authority was granted by the FPC in October of 1963, for an initial 2-year period and was extended in October of 1965, for 5 more years. The latest FPC action in this matter extends the authorization to cover related equipment such as storm windows, insulation, and other items considered necessary to assure maximum efficiency of electric space heating systems. Pacific's application to the FPC was opposed by the National Oil Jobbers Council and by the Pennsylvania Petroleum & Fuels Association. The two groups indicated that they were opposed to the overall program as well as similar promotional programs of all electric and gas utilities. The FPC, however, said that the proposed amendment is consistent with its previous orders. The FPC said also that the State regulatory commissions of California, Idaho, Montana, Oregon, Washington, and Wyoming-the States in which Pacific provides servicehave approved the proposed amendment. Since the States having direct concern and jurisdiction over Pacific's retail service have approved the program, the FPC said it could see no reason for precluding the company from using its credit for this purpose. NARUC Bulletin No. 49-1967, page 12. This brief summarization of the relevant activities of the above 27 State commissions plus the District of Columbia and Federal Power Commissions are accurate to the best of our available information in this rapidly developing field. The situation in Illinois, which I will describe momentarily, raises the report on the State commissions to 28. Undoubtedly, many of the remaining 22 State commissions have also devoted various degrees of attention to promotional practices and related matters. Apparently, the States where the more intense problems have arisen are the ones whose commissions have afforded the more extensive consideration in seeking regulatory solutions. In general, the decisions, of commissions which have adjudicated complaints of unfair competitive practices have approved most of the promotional practices requiring only that they be uniformly granted to all customers in similar circusmtances without undue preference or discrimination. The decisions of commissions, where they have not been bound by legislative enactment, have approved allowances for costs of installing electric heating, have permitted gas companies to place free piping within the customer's house, have allowed the granting of cash payments for installing electric ranges and heaters, have permitted the utility to increase the entrance service capacity without charge to the customer, and have allowed cash discounts for the purchase of appliances. The approvals given for these allowances, payments, and discounts are based upon the premise that the payments are reasonable, made with the expectation that such outlays would bring profitable returns, and would not be burdensome on the ratepayer. Recently, however, there is indication that commissions are taking a more restrictive view. In the summer of 1966, the Illinois Commerce Commission became increasingly concerned about the promotional practices of electric and gas companies, particularly in the Chicago area. Of most concern were the practices of some of the utilities of making nonuniform allowances in large amounts to builders and architects on a competitive basis, in making loans to builders, in purchasing equities in high-rise buildings, in paying for their engineering and architectural services, and in contributing to their advertising. Consequently, the Commission, in September 1965, sent a questionnaire to all electric and gas utilities in Illinois requesting information as to the promotional practices being engaged in or promotional allowances being granted and requesting the basis, the total amount, the necessity for, and other information concerning the practices and allowances. A review of the answers to the questionnaires submitted convinced the Commission of the need for a full-scale investigation of promotional practices. The Commission then requested supplemental information from the utilities and on July 13, 1966, issued its citation order for electric and gas utilities to show cause why the promotional practices they were engaged in should not be prohibited. NARUC Bulletin No. 43-1966, page 6. Hearings began on August 1, 1966, and have continued since that time. All of the utilities have now introduced testimony and produced economic feasibility studies to justify the promotional practices they were engaged in. In the meantime, the Commission has engaged consultants to review the studies of the utilities and make their own economic feasibility studies for the Commission. In July 1967, the Commission came to the conclusion that there were certain promotional practices of the electric and gas utilities that should be prohibited in the best interests of the public utilities and their customers. Consequently, on July 12, 1967, the Commission issued its interim order prohibiting electric and gas utilities from- 1. Making any loans, guarantee of loans or grants to any corporation, group, or individual for building construction; or engaging in any way in the investment in or financing of any nonutility property; 2. Making any promotional allowance to any corporation, group, or individual for any promotional, advertising, or publicity purpose; 3. Making any payment, or extending any other consideration, to architects, engineers, builders, subdividers, or others for work done on property not owned by the electric or gas utility; and 4. Purchasing or acquiring for the purpose of leasing or renting to others, or making loans to others, for the purchase of, any electric or gas equipment, appliances or facilities, the cost of which exceeds $1,000 for each specific location without first having obtained the approval of the Commission. The order required that any promotional practices the utilities continued to engage in must be on a uniform basis, be not unlawfully discriminatory and not in violation of any antitrust laws; and limited the utilities' promotional practices to those that they were engaged in at the time the interim order was issued. NARUC Bulletin No. 32-1967, page 19. On March 13, 1968, the Illinois Commerce Commission issued its second interim order which permitted any electric or gas utility serving the same area to grant the same promotional allowance, and permitted utilities distributing both electricity and gas to engage in the same promotional practices for both. NARUČ Bulletin No. 18-1968, page 7. The investigation in Illinois is predicated on issues of unjust discrimination, uniformity of application, economic feasibility, burden on the ratepayer and legality. In my opinion, one legitimate purpose of promotional practices is to aid in the acquisition of new business or to retain the amount already acquired. These practices should be incentives to prospective customers to induce purchases. The most intense competition seems to exist in the space heating and water heating areas of the market. Practically all of the suppliers of fuel grant incentives to increase sales. In order to obtain a fair share of the prospective customers, it may be necessary to offer inducements to attract and acquire new business. The kind and amount of the inducement offered depends upon the type, kind, and amount being offered by competitors. The utility industry, both gas and electric, contends that it is the right of every company to make all necessary and needful steps to promote the sale of its product and thus insure its survival and continued growth. If market conditions require the granting of incentives to buyers, then properly regulated promotional activities may be a legitimate means of meeting competition. There is undoubtedly competition between gas and electricity with other forms of fuel, such as oil and sometimes coal. Under such circumstances, within the limits of reason, promotional practices are necessary to foster normal growth. A successful sales promotional program results in an increased demand for a large amount of energy, both gas and electricity. The market created as a result of this increased use allows the electric and gas companies to construct larger facilities capable of producing energy at a lower unit cost and smooth its peak loads. The reduction in cost by such improvement is passed on to the consumer. In order to continue this policy of rate reduction, an incentive program which accelerates growth may be necessary. Consequently, the giving of reasonable incentives may redound to the benefit of the customer of today in the form of lower rates and insure the customer of tomorrow a higher quality of service, at a still lower price. The regulated gas and electric industry defends the giving of sales inducements on the grounds that increased use of gas and electricity in seasons where the load is usually low will help to fill the valley of demand and will provide a more uniform annual charge. This uniform demand level benefits the customer by permitting the companies to purchase electricity and gas at a lower cost and then pass the savings on to the customer. Those who institute complaints with commissions and seek legislative protection against the promotional practices of the regulated utilities have been for the most part customers of the utility who just happen to be engaged in a competing business and are not generally the ordinary customers. The cases indicate that almost every complaint against promotional practices of a regulated utility was instituted by an unregulated competing company. We find very little evidence of complaints of promotional practices by ratepayers themselves. 91-056-69-26 Utility managers sometimes complain that when regulatory pressures are applied, they result in the destruction of beneficial promotional programs as well as the harmful discriminatory ones. They also claim that the application of restraints on managerial prerogative is an unwarranted interference beyond the legitimate power of the regulatory commissions. This contention may have some basis however, it is the duty of any commission to see that they are justified. While it is granted that the purpose of regulation is in a way to prevent unjust exactions by public service companies, it is more than that. Regulation is not merely to see that unreasonably high rates are not put into effect by utilities but to see actually that the lowest rate that will provide reasonable return to public utilities is put into effect and to do this, in my opinion, commissions must exercise control over promotional practices and allowances. One of the problems of a commission in considering whether or not promotional programs are warranted is that of obtaining an accurate report of the extent of the expenditures for such purposes. While it is true that the cost of promotional activities is allocated to different accounts, nevertheless in Illinois we believe that we have found a reasonably accurate method of determining the economic feasibility of promotional practices, and in determining the amount actually expended by utilities on them. Funds expended for promotional practices have been charged to sales expense, advertising, construction costs, purchase of equipment, commission paid salesmen, and several other categories. These accounts must be sifted to find the real cost of the promotional practice. The consultants for the commission have now introduced their testimony and exhibits and have been cross-examined by counsel for the electric and gas utilities. It may be that some of the utilities will introduce rebuttal testimony and evidence and will wish to write. briefs. In any event, at the present time, it would seem that our commission might be able to come to a conclusion concerning promotional practices and allowances of the electric and gas utilities in Illinois and issue its order by the end of the year. REGULATORY CONSIDERATIONS When the case is finally marked "Heard and Taken," the real problem of the Commission will begin. I believe that the testimony and evidence in the case will permit the Commission to come to a conclusion as to whether or not the promotional practices or promotional allowances are offered on a uniform basis. Whether or not the promotional practices are unlawfully discriminatory is going to be more difficult to decide, and whether or not they violate any State or antitrust laws, even more of a problem. Economic feasibility on the face of it should be easily determined, particularly if a commission adopts a definition that any promotional practice is economically feasible if the allowance made plus any costs involved can be regained in a period of less than the life of the appliance, the installation for which the promotional allowance was granted. I doubt, however, that this is a true gage of economic feasi bility, for certainly no promotional practice should be allowed unless it can be regained in a period considerably less than the life of the appliance. The problem is, how many years is "considerably less." There are also other factors to be considered in the determination of economic feasibility such as: Is the promotional practice a reasonable business procedure? How much does the practice contribute to the overall benefit of the utility? Does it contribute to the welfare of the public and the utility customers? Does it help to reduce rates? Is it instrumental in introducing a new appliance or a new product that has been developed? Is it necessary to make the promotional allowance to hold business or to obtain new business? Another problem the commission must always keep in mind is how far should and can a commission interfere with managerial prerogatives. The question of promotional practices and allowances, while seeming an apparently minor one in the beginning, has now grown to be a question of major importance throughout practically all of the States and also to Federal agencies and courts. In my opinion, it would be to the advantage of the public, the utilities, and the users of electricity and gas if the State commissions rather than Federal agencies, recognized the problem and exercised their control. The importance of the problem is such that all commissions should and must weigh carefully any decisions they make as to the justification of promotional practices and promotional allowances. In Illinois, before coming to a final conclusion and issuing a final order, our commission shall certainly give full consideration to the following factors: Are the promotional practices or allowances uniform? Are they unlawfully discriminatory? Are they economically feasible? Are they to the best interests of the general public, the utilities, and their customers? Are they necessary to obtain or retain markets for the products of the utilities? Do they contribute to the overall benefit of the utility so that the utility can proceed with greater research, develop new and better means of producing their product with resultant lower rates to their customers? Our task is not a small one and we in Illinois are particularly concerned because our order will probably be the first one issued on the basis of such an extensive general investigation. We are going to do our best to make it just and reasonable to all concerned. CONCLUSION The subject of promotional practices is a fascinating one and clearly illustrates the wisdom of the statement by Commissioner Wallace Burke of the Connecticut Public Utilities Commission to the effect that the promotional activities of the regulated companies are as diverse and varied as the ingenious minds of their managements. can make them. We believe the State and Federal regulatory commissions, through long experience and specialization, are well qualified to find solutions |