III. Utility Affiliate Participation

F. Summary

Our primary goal in this proceeding is to speed the deployment of BPL technology. In order to permit energy utilities to deploy BPL in a variety of ways, we will allow the participation of utility affiliates in the provision of BPL services. This decision, however, recognizes that limits should be placed on affiliates' provision of BPL services, so that we ensure there is no cross-subsidization from ratepayers to the utility affiliates.

Based upon the state of the record in this proceeding, policy and law indicate that the Commission's existing Energy Affiliate Transaction Rules set forth in D.97-12-088, as modified by D.98-08-035, do not apply to transactions between a BPL affiliate and its regulated electric utility affiliate since the BPL affiliate does not offer "energy-related" products or services as currently defined by those rules. This conclusion is consistent with the preliminary intention stated in the OIR that the Energy Affiliate Transaction Rules do not apply.

G. Nature of BPL Provider

As a threshold question, we need to determine who is allowed to provide BPL services. The possibilities that have been raised in this proceeding include third parties, utility affiliates, and the energy utilities themselves.

The provision of BPL services by an independent third party has sometimes been referred to as the "landlord-tenant" model, with the energy utility acting as the landlord and owner of the facilities (i.e. the power lines), and the third party actually providing the BPL service. The utility and third party BPL provider would negotiate a contractual arrangement by which the BPL provider would obtain access to the necessary utility infrastructure in exchange for some form of value flowing to the utility.²¹ The OIR clearly contemplated this as a possible model, the non-utility BPL providers (e.g. Ambient and Current) clearly prefer this model, and there was widespread support for this model.²² For example, SCE states: "We also agree with the Commission's decision to promote a "landlord" model for electric utilities. At this point, SCE lacks the personnel and expertise to become a BPL provider itself. . . The "landlord" model allows SCE to concentrate on its core business activities and shift responsibility and risk from the company to third parties." (SCE Opening Comments, p. 1.)

As TURN points out, the landlord-tenant model offers a number of advantages, including alignment of ratepayer and shareholder incentives, access to BPL providers' technical and marketing expertise, true arms-length contract negotiations, minimizing the need for regulatory oversight, and providing the greatest potential ratepayer benefits. (TURN Opening Comments, pp. 5-8.) Accordingly we will allow BPL services to be provided by independent third parties.

The question of whether BPL services should be allowed to be provided by utility affiliates was more contentious. The energy utilities generally appear supportive of allowing affiliate participation, although SCE indicated that it was not currently interested in having an affiliate provide BPL services. (PHC Transcript, p. 5.) PG&E and SDG&E, while responding to the OIR's call for comments on which affiliate rules should apply (see, e.g. PG&E Opening Comments, pp. 6-7; SDG&E Opening Comments, pp. 15, 23), also stated that they did not currently have plans to offer BPL services through affiliates, but would evaluate their options in light of what the Commission decides in this proceeding. (PHC Transcript, pp. 8-9.)²³ As Current put it, "[B]ased upon the comments filed by the utilities in this proceeding, it is not clear that any BPL deployments will involve affiliate transactions." (Current Reply Comments, pp. 3-4.)

On the other hand, concerns about utility affiliate provision of BPL services were advanced by TURN, UCAN, DRA, Disability Rights Advocates, Time Warner Telecom, and CISPA. Most of these concerns are rather generalized. Although TURN argues that if the BPL vendor was a utility affiliate, that the "incentive compatibility between ratepayers and shareholders" that exists under the landlord-tenant model would be lost. According to TURN, this is because "[t]he utility would lack the financial incentive to make the best possible deal in terms of maximizing lease payments, because those payments would have to be shared with ratepayers, while profits remaining with the affiliated BPL vendor would flow directly to the shareholders of the parent holding company." (TURN Opening Comments, p. 8.)

TURN may be correct, but the possibility of "financial shell games" of this sort is not unique to the provision of BPL, but rather is inherent in the context of a parent company consisting of both a regulated utility and unregulated affiliates. In the past, the Commission has chosen to allow regulated utilities to have unregulated affiliates, and to address concerns about the relationship between the regulated and unregulated sides via affiliate transaction rules. Accordingly, it is more consistent with Commission practice to allow participation of utility affiliates in the provision of BPL, subject to our affiliate transaction rules, as opposed to prohibiting an unregulated affiliate from engaging in a particular kind of business.

Given that BPL is a nascent technology we simply do not know whether the landlord-tenant or the utility affiliate approach will best expedite the rapid deployment of BPL. Despite the utilities' apparent ambivalence toward offering BPL via affiliates, it may ultimately prove to be the fastest way to deploy BPL, and we do not want to preclude that possibility. Accordingly, we will allow the participation of utility affiliates in the provision of BPL services.

Finally, it is possible that the regulated energy utilities could themselves provide BPL services, either as a tariffed (above the line) or non-tariffed (below the line) service. The tariffed utility service approach is supported by Greenlining, but there otherwise appears to be little interest in the utility itself being the BPL provider, and the OIR did not address it. Accordingly, the record is scant on direct utility provision of BPL services. Direct utility provision of BPL will not be governed by the approach we adopt in this decision. Rather, should a regulated energy utility wish to provide BPL service on a tariffed or non-tariffed basis, it should seek Commission approval to do so under existing Commission procedure.

H. Affiliate Rules

Since we are allowing utility affiliate participation in the provision of BPL services, we need to determine which affiliate rules are most appropriate. In the OIR that created this proceeding, we indicated our preference regarding how affiliated relationships of the utility and the BPL provider should be treated.

"To ensure that transactions between a utility and its affiliate do not harm ratepayers or subsidize BPL affiliates to the detriment of broadband competition, utility transactions with BPL affiliates would be subject to the same rules as a telephone utility's transactions with a DSL affiliate, as set forth in D.93-02-019. Transactions between the utility and its BPL affiliate would not be subject to the Affiliate Transaction Rules governing conduct between energy utilities and their energy affiliates since BPL is a communications platform that does not provide products that use electricity, or services that relate to the use of electricity.^24,25 (OIR at 11.)

The rules adopted by the Commission in OIR 92-08-008 and D.93-02-019 are rules governing the reporting of transactions between electric, gas, and telephone utilities and their affiliates, and would apply to transactions between a utility and an affiliate engaged in communications-related businesses.

The OIR's preliminary conclusion that the Energy Affiliate Transaction Rules would not apply to a BPL affiliate is supported by SDG&E and Ambient, while applying the Energy Affiliate Transaction Rules is supported by PG&E and SCE.²⁶ PG&E and SCE argue that as energy utilities, they are familiar with the Energy Affiliate Transaction Rules, have employees trained to comply with those rules, and have compliance and reporting systems in place under those rules. (See, e.g. PG&E Reply Comments, pp. 13-14.) They also disagree with the conclusion of the OIR that the Energy Affiliate Transaction Rules are inapplicable because BPL is a communications platform, and is not a service "that relates to the use of electricity." (SCE Opening Comments, p.8; PG&E Reply Comments, p.14.)²⁷

Based on the record of this proceeding, it is clear that the Commission was correct in its assertion that BPL is a communications platform that does not provide products that use electricity, or services that relate to the use of electricity. While it is true that BPL uses the electric lines to send information from one point to another, this is different than a service that relates to the use of electricity. In its comments, Current states that, "In the area of utility applications, BPL enables utilities to implement enhanced power distribution services such as automated meter reading, automated power outage and restoration detection, power quality monitoring, load management and demand side management." (Current Opening Comments, p. 2.)²⁸ These are utility applications that are made possible by the communications network that BPL will provide and are undoubtedly different than providing electric service to retail or wholesale customers.

SDG&E argues that applying the Energy Affiliate Transaction Rules to a potential BPL affiliate would place that affiliate at a competitive disadvantage in the broadband market, as it would be not only a new entrant, but would also be subject to different rules than DSL providers. (SDG&E Reply Comments, pp. 20-21.) According to SDG&E, for there to be a level playing field in the broadband market, BPL affiliates should not be subject to the Energy Affiliate Transaction Rules. (Id.)

SDG&E's policy argument is well founded. Telecommunications utilities are not governed by the Energy Affiliate Transaction Rules. Providers of DSL that are affiliated with telecommunications utilities are not subject to the Energy Affiliate Transaction Rules and we see no reason to apply a different set of rules solely because the regulated company that is affiliated to BPL is an energy company.

SDG&E, in response to a question from the assigned ALJ at the PHC, identified one specific concern regarding the use of the Energy Affiliate Transaction Rules. Counsel for SDG&E stated:

SDG&E has spent and is spending several million dollars of shareholder money upon on a pilot. Now at this point in time, that's a risky thing to do because the rules are uncertain. Under some interpretations of the affiliate transaction rules that apply in the energy industry, the investment that is now being made by shareholders within the utility, the fruits of that investment could not be utilized by a BPL affiliate if the Commission decides to authorize such a business endeavor. (PHC Transcript, pp. 35-36.)

The thrust of this decision is to create a regulatory environment that is BPL-friendly. SDG&E is the only utility that is currently engaged in a pilot program for BPL. We do not support the application of affiliate rules that would either send a mixed message to a utility that is looking into BPL as a potential investment as this uncertainty is exactly what we sought to avoid in the OIR. SDG&E's particular concern is valid and one more reason why the Energy Transaction Affiliate Rules are not appropriate for BPL services.

We also do not agree with PG&E and SCE that because they currently have staff trained to comply with the Energy Affiliate Transaction Rules, that these are the more appropriate rules for this service.²⁹ Furthermore, to protect ratepayers from cross-subsidization and prevent anti-competitive behavior, the affiliate reporting requirements need to be coupled with substantive rules that lay out the standards the Commission will apply when reviewing affiliate transactions in the context of a General Rate Case or audit. DRA notes that at the time the affiliate reporting requirements were adopted, the telecommunications utilities were also subject to other substantive affiliate transaction rules contained in utility-specific decisions. (ORA Opening Comments, pp.15). In D.00-06-019, which concluded that the Energy Affiliate Transactions Rules would not apply to transactions between Sempra Communications and SDG&E and SoCalGas, the Commission noted that Sempra Energy would still be subject to affiliate-related conditions in its merger decision, D.98-03-073.

For transactions between a utility and BPL affiliate, we adopt the "fair market value" standard proposed by SDG&E (SDG&E Opening Comments, pp.22). When reporting affiliate transactions pursuant to OIR 92-08-008 and D.93-02-019, utilities shall report the methodology used to calculate fair market value. The Commission will apply this standard when reviewing such affiliate transactions in a General Rate Case.

²¹ The parties disagreed as to what an energy utility could reasonably expect in return in addition to pole access fees.

²² Greenlining does not support the landlord-tenant model. (PHC Transcript, p. 21.)

²³ SDG&E does, however, appear to be in interested in the possibility of providing BPL service through an affiliate. (PHC Transcript, pp. 35-37.)

²⁴ The Commission adopted Affiliate Transaction Rules in D.97-12-088, modified by D.98-08-035, and further clarified by D.98-11-027.

²⁵ This is consistent with D.00-06-019, in which the Commission concluded that the energy Affiliate Transaction Rules did not apply to transactions between a communications utility affiliate and the regulated utility since the communications affiliate did not offer "energy-related" products or services.

²⁶ DRA, TURN, and Current also question the OIR's preliminary determination that the Telco Affiliate Rules would apply to BPL.

²⁷ The applicable language defining the scope of the Energy Affiliate Rules reads:

II.B. For purposes of a combined gas and electric utility, these Rules apply to all utility transactions with affiliates engaging in the provision of a product that uses gas or electricity or the provision of services that relate to the use of gas or electricity, unless specifically exempted below. For purposes of an electric utility, these Rules apply to all utility transactions with affiliates engaging in the provision of a product that uses electricity or the provision of services that relate to the use of electricity. For purposes of a gas utility, these Rules apply to all utility transactions with affiliates engaging in the provision of a product that uses gas or the provision of services that relate to the use of gas.

²⁸ Current expands on this in some detail, and introduces its discussion by stating:

"Electric distribution utilities can use BPL to improve their distribution networks in a variety of ways. For example, BPL will provide for more efficient and reliable distribution networks by enabling electric utilities to obtain information in real time from designated points along their distribution networks (e.g. substations, capacitor banks, switches, transformers and voltage regulators) and to transmit the information to their back-office systems, thus providing an "intelligent" power distribution network. The benefits of such an intelligent network can be enormous. As one investor report explains, "distribution utilities may find that a BPL-enabled grid offers compelling savings in operation, maintenance and construction cost." A second report adds that "BPL offers utilities upside ROI [return on investment] over time in incremental revenue streams, operational savings, efficiencies and productivity from turning `dumb' electrical networks into `smart' digital networks." Utilities are exploring BPL for just these reasons, and the Commission's proposed rules would facilitate utilities ability to develop and deploy in wide scale the BPL applications they desire. The Electric Power Research Institute ("EPRI") estimates that a smart electricity system could increase productivity by 0.7% per year, leading to a $3 trillion increase in GDP by 2025. Indeed, the largest benefits of BPL may very well stem from what CURRENT calls Enhanced Power Distribution Service ("EPDS") functions, some of which are described below." (Id., pp. 10-12, footnotes omitted.)

²⁹ Neither PG&E nor SCE has shown current interest in creating an affiliate to provide BPL services and thus choosing the Energy Affiliate Transaction Rules would be of no consequence on their behalf.