Section 10. Investigation of promotional allowances and practices of public utilities

Opinion, BY THE COMMISSION:

This proceeding was instituted by order of the Commission on April 12, 1966. The order instituted an investigation to determine:

(a) What promotional allowances are offered, made or given to anyone or what promotional practices are used or followed with respect to anyone by the public utilities which are parties to this proceeding in connection with the furnishing or the offer to furnish in this State of either electric energy or gas for heat, light or power;

(b) Whether any such promotional allowances or practices are in violation of the laws of this State; and,

(c) What action should be taken by the Commission in the public interest with respect to any such promotional allowances or practices.

This Commission has had jurisdiction over such matters since its creation as the governmental agency regulating public utilities. Also, utility companies have engaged in promotional practices, including the giving of promotional allowances and similar inducements to the use of their service, for many years. The Commission has received no complaints from consumers in connection with such promotional practices, and in fact no formal complaint has ever been filed with respect to such practices except to the extent that the testimony, arguments and briefs of the parties in this proceeding constitute such complaints.

In the 1966 Session of the Virginia General Assembly representatives of the fuel oil dealers were responsible for the introduction of a bill which would have made unlawful promotional allowances and practices of the types engaged in by many utility companies. This legislation was not passed by the General Assembly, but in its place there was enacted a provision directing the Commission to investigate the promotional allowances and practices of public utilities and take such action as such investigation may indicate to be in the public interest.

On February 7, 1966, prior to the introduction of this bill, the Commission directed each electric and gas utility operating within the State of Virginia to furnish to the Commission a copy of the sales promotional programs which they had in use. This was done by the utilities, and these promotional programs are the subject of this proceeding.

Pursuant to the order of April 12, 1966, a hearing on this matter was held on June 20, 21 and 22, 1966. The electric utilities, the gas utilities and the fuel oil dealers appeared and were represented by counsel. The electric and gas utilities presented a great deal of frequently repetitious evidence in support of their positions. The fuel oil dealers, however, did not offer any evidence, stating that it would only be repetitious of that presented by the gas utilities. Opening briefs were filed by the electric and gas utilities on September 1, 1966, and reply briefs were filed on September 21, 1966.

At the hearing and in their briefs the electric utilities concentrated on justifying their promotional allowances and practices and did not concern themselves with the allowances and practices of their competitors. Conversely, the gas utilities concentrated on challenging the allowances and practices of the electric utilities and made no attempt to justify their own, other than as being necessary to compete with the practices of the electric utilities.

The basic position of the electric utilities may be summarized generally as follows: promotional allowances and underground wiring programs are desirable and in the public interest because they stimulate the growth of use of electricity and this growth is necessary to keep electric rates low; the uses of electricity which are promoted in this fashion are uses which have high revenues in relation to costs and therefore are desirable uses from the utility's point of view; the allowances and underground wiring practices are not discriminatory because the benefits of them are available to all customers who meet the objective requirements which have been established; the size of the allowances and costs of other promotional practices are not large enough to impose a burden on customers in other classes and are recovered in a reasonably short period of time; and it is in the public interest for utility management to be flexible and imaginative in promoting increased sales of electricity. In opposition to this, the contentions of the gas utilities may be likewise generally summarized; promotional allowances and underground wiring programs are unjustly discriminatory in that they confer benefits upon some customers and deny those benefits to others within the same general classification of service; the practices of the electric companies are in violation of their filed tariffs; the revenues generated as a result of the challenged promotions, when all the costs of generating those revenues are taken into account, are insufficient to permit the electric companies to recover those costs in a reasonable time and therefore there is discrimination against other customers; and the public interest requires that all cash allowances and similar inducements be prohibited and that underground electric service be furnished only upon payment of the additional cost of such service by the person who benefits from it.

At the outset the electric utilities also defended certain promotional programs which guaranteed to electric heating customers that their heating bills would not exceed certain amounts or that they would be satisfied in every respect with such electric heat, and the gas utilities likewise opposed these programs. During the hearing the Commission, in an interim ruling which is hereby reaffirmed1, declared that such programs were unlawful and had to be discontinued, and the electric utilities have not pursued this matter any further.

The principal questions to be determined in this proceeding are whether utility promotional allowances and practices constitute "unjust discrimination" in violation of § 56-247 of the Code of Virginia, and what action is necessary to eliminate or prevent such unjust discrimination.

The evidence in this proceeding, particularly the report of Ernest M. Jordan, Jr., Assistant Engineer of the Commission (Exhibit No. 1), shows a variety of promotional allowances and practices by the utilities. The principal challenge (other than with respect to those guarantees of cost and satisfaction which have already been held to be invalid) has been to the payment of cash incentives for the installation of certain electric appliances and to the furnishing of underground distribution at partial or no cost to customers who make certain uses of electricity.

In general the payment of cash allowances or incentives was not shown to be illegal or contrary to the public interest in this case. The programs under which such payments are made do provide for varying treatment of customers within residential, commercial and industrial classifications. However, these classifications are not exclusive, and reasonable subclassifications may be made. In general, the classifications made by the electric utilities in their promotional programs are those based on the amount and character of the consumption of electricity: Gold Medallion homes, homes with electric heat, homes with electric water heaters, homes with certain other electric appliances. The evidence showed that the uses of electricity promoted tended to improve the utilization of the installed plant of the utilities and thereby improve the annual load factor of those utilities. Moreover, it was shown that the additional revenues generated by the uses of electricity promoted was sufficient to enable the utilities to recover those costs within a reasonable period of time - generally speaking, less than a year on the basis of gross revenues and less than two years if gross revenues are reduced by application of the system operating ratio. We believe this effectively prevents any discrimination against other customers and actually operates to the benefit of all the customers. The weight of decided authority from other States is to the same effect. See, for example, Gifford v. Central Maine Power Co., 217 A. 2d 200 (1966); Rossi v. Garton, 60 PUR 3d 210 (1965); Re Delaware Power & Light Co., 56 PUR 3d 1(1964); Re Savannah Electric and Power Company, 45 PUR 3d 88 (1962).

It would be against the public interest to hamper the growth of a utility's business for the purpose of enabling an unregulated industry to make more money. The fuel oil dealers object to letting the utilities offer inducements to increase the consumption of their products. But if the utilities could not attract new business their customers would have to pay higher rates, so that the economic consequences of the fuel oil dealers' proposal would be the same as if they were demanding that utility rates be increased to the point where nobody could afford to heat his house with gas or electricity. That would not be in the public interest.

In recent years the gas companies have been taking business from the oil companies, and, still more recently, the electric companies have been getting a small percentage of the heating business. The gas companies find themselves in much the same predicament that the railroads found themselves in when their former customers began to prefer to travel by bus or plane. The principle involved is that the public interest requires that the public be allowed to choose between competing public service companies the service that it prefers.

Motor buses have put the trolley lines out of business. In Petersburg, Hopewell and City Point Railway Company v. Commonwealth, 152 Va. 193, a trolley-car line was rendering perfectly adequate service between Petersburg and Hopewell, but the Commission nevertheless issued a certificate to a motor bus carrier to parallel the car line. The court said (p. 202):

"The State is under no obligation to protect the car line, or to see that its operations are financially successful."

And at page 205:

"When people generally wish to travel in this way, they should be permitted to do so, and it is no sufficient answer to say that other carriers, in other ways, stand ready to give the necessary service."

It is the duty of the managers of a utility to do all they can to reduce costs. Every year the electric companies, for example, are buying bigger and more economical generators, they are building plants in the coal fields (which hurts the railroads), they are developing nuclear power plants (which hurts the coal industry), they are installing transmission lines of higher voltages, and they seek to persuade governments to lower their taxes. When their costs are reduced the savings inure to the benefit of the consumers in lower rates. The promotional allowances of gas and electric companies are likewise designed to reduce unit costs by increasing consumption.

Although the general concept of promotional allowances for certain uses of gas or electricity is not unlawful, several applications of it revealed by the record are. Virginia Electric and Power Company (Vepco) gives an allowance of $20 for an electric range when it is installed at the same time as an electric water heater (the water heater installation brings $40) but an electric range otherwise installed entitles the owner to no allowance. There is no rational basis for this distinction, and therefore it is discriminatory. Vepco's gas department gives allowances for conversion to gas from all fuels other than electricity. It is understandable that Vepco does not wish to pay to induce an electric customer to become a gas customer, but if it is to offer allowances for conversions to gas it must do so uniformly and not discriminate against customers who convert from electricity.

In contrast, Washington Gas Light Company pays up to four times as much for conversions from electricity as it does for conversions from coal or oil. This discriminates against the consumers who receive the smaller allowances.

Of course, any promotional allowance that is not uniformly applied among the customers meeting its requirements is unjustly discriminatory. Both Appalachian Power Company and Natural Gas Service Company have adjusted bills or furnished free service in certain instances where heat was required to dry out a newly constructed house. The record showed other instances where incentives had been negotiated on a case-by-case basis. This is clearly unlawful. All of these specific discriminatory allowances are hereby disapproved.

The second major area of contention in this proceeding has been the development by the electric companies of underground distribution plans. These plans vary in detail considerably, but the basic concept is that a customer or builder desiring underground service must pay the average difference between underground and overhead construction cost to obtain it unless the residence or development is Gold Medallion or All-Electric, in which event all or part of the difference in actual cost will be absorbed by the electric company.

The public is becoming more and more interested in underground distribution of electricity, and it is in the public interest to encourage such underground distribution. However, so long as the cost of underground is substantially more than the cost of overhead, the customer who receives the underground service must, in one way or another pay for it, regardless of whether underground distribution is voluntarily chosen or required by local ordinance. Otherwise, there would be an unjust burden on customers who are served by the less expensive but less desirable overhead method. There are a number of methods by which the customer can be required to pay for underground service. It can be done through cash payment of the actual difference in cost between underground and overhead, payment of the average difference in cost between underground and overhead, the establishment of a separate rate for underground electric service, the addition of an underground surcharge to existing rates or a credit based on anticipated revenues. So long as the method of repayment selected by the utility company is reasonable and not unjustly discriminatory, the method should be determined by the company and not by the Commission.

The underground distribution plans considered in this proceeding are, in general, combinations of the "average difference in cost plan" and the "credit for anticipated revenue plan." However, the credit is not given on a pure revenue basis, but rather is tied generally to the total electric concept, and this is what the gas companies find objectionable. In the future, beginning with the year 1967, we will require such plans to be based primarily on a pure revenue basis.

This proceeding has revealed that whereas most of the promotional allowances and practices of the electric and gas utilities are lawful and nondiscriminatory, not all of them are, and it appears that without adequate supervision in the heat of competition there is substantial opportunity for discriminatory concessions to be made. For these reasons we consider it to be in the public interest for the Commission to be fully and constantly aware of the promotional allowances and practices which the utilities have in effect in order that it may insure that none of them are unlawfully discriminatory and that none of them are administered in an unlawfully discriminatory way. To this end, henceforth each utility shall file a description of its promotional allowances and practices with the Commission.

1. Each utility shall, before January 1, 1967, file with the Commission new schedules giving in detail the terms and conditions governing charges for underground wiring or governing construction on the customer's side of the meter, and giving in detail all allowances of any kind. The schedules shall define each class of customer and each charge and each allowance so specifically as to leave no room for bargaining between the utility and the customer. The new schedules shall be effective on and after February 1, 1967, and shall supersede the schedules heretofore filed. Thereafter, no change in any such schedule shall become effective until thirty days after it has been accepted for filing by the Commission.

2. A utility may not, directly, or indirectly through a third person, promise that a customer will be satisfied with the cost of service. If it gives estimates of costs it must make it perfectly clear that an estimate is an estimate and not a guaranty or warranty.

3. A utility that sells appliances can guarantee that they will work properly and that it will take them back if they do not. It cannot guarantee that the customer will be "satisfied" in the sense that the customer can get his money back merely by saying that he is dissatisfied. Such a promise would enable the customer to get his money back if the costs exceeded the estimate and would give the estimate the force of a promise. For the same reason a utility may not agree to reimburse in whole or in part an independent contractor who gives a guaranty that the utility could not give.

4. Allowances against charges for underground wiring must be based on estimated consumption and not on specified kinds of appliances used by the consumer.

5. An allowance given to any person for installing or procuring the installation of an appliance must be the same whether or not the appliance is substituted for an appliance already in use. If the appliance is substituted for an appliance already in use, the allowance must be the same regardless of the fuel used in the appliance already in use.

6. An allowance given for the installation of two or more appliances must be the sum of the allowances given for the installation of each of the appliances separately.

1There is no objection to a reasonable guarantee of satisfaction so long as it excludes satisfaction with respect to cost of the electric or gas service.

Historical Notes

Derived from Case No. 17889, eff. October 17, 1966.

Statutory Authority

§§ 56-235.2 and 56-247 of the Code of Virginia.