IV. Protecting Ratepayers, Aligning Shareholder Risks
and Rewards, and Providing Ratepayer Benefits
In the OIR we stated that "the Commission intends to encourage BPL deployment in a manner that does not harm ratepayers." (OIR, p. 2.) The OIR also proposed that BPL projects should only be financed with shareholder or third party funds and that all financial risks and rewards from BPL projects should accrue to the shareholder or third party investors. (OIR, p. 10.) We reiterate and implement these policy objectives.
I. Protecting Ratepayers
As several parties acknowledge, the ultimate commercial success of any particular BPL deployment is uncertain. SCE, for one, notes the "very real potential [cable modem, DSL, and wireless broadband technologies] have to preempt BPL technology from ever developing into a new source of price and service competition." (SCE Reply Comments, p.3.) Also, even before commercial deployment, BPL faces technological challenges. Investors in BPL will face these competitive and technological risks. If BPL is commercially unsuccessful, a BPL company could lose significant sums of money. To the extent ratepayers pay for the incremental costs of deploying and operating a BPL network, ratepayers are assuming these financial risks.
As a matter of policy, however, we do not believe ratepayer funds should be invested in BPL. For this reason, ratepayer funds should not be used to research, develop or operate a BPL system unless the expenditures can be justified solely on the basis of utility benefits. Any BPL expenditure that has any other purpose, such as delivering commercial broadband service, must be financed entirely by utility shareholders or third parties.30
J. Aligning Shareholder Risks and Rewards
Shareholders or third parties will not assume the risks of pursuing BPL deployment without some expectation of rewards. Since it anticipated that BPL projects would only be financed with shareholder or third party funds, the OIR therefore, held that all financial risks and rewards derived from BPL project should accrue to the shareholders or third party investors. (OIR, p. 10.) We adopt that approach today.
Utility shareholders need a financial incentive to pursue BPL projects. Even if utility shareholders are not investing money in the BPL system itself, shareholders still incur a variety of financial risks related to "developing, negotiating or performing its obligations under any contract with a BPL vendor." (PG&E Opening Comments, p. 9.) Utility shareholders would seem unlikely to incur even these risks without some expectation of financial reward.
One way to provide utility shareholders an incentive to pursue BPL projects is to allow the utility to charge the third party BPL company for access to the utility's wires, and to apply a mechanism by which utility shareholders receive a share of these access fees. To this end, the OIR proposed that a percentage allocation be defined that shares access fees between shareholders and ratepayers. The OIR goes on to state that "the allocation should provide shareholders a strong incentive to pursue BPL projects while also providing direct financial benefits to ratepayers." (OIR, p.10.)
Upon further review, we conclude that access fees may be a useful way to provide incentives to shareholders, and, we do not want to preclude the electric utility from receiving access fees.31 Monetary compensation from the BPL company to the electric utility may or may not be a component of the contractual relationship between a utility and a BPL company.
We conclude, however, that we should not require BPL companies, whether affiliated or unaffiliated, to pay access fees to a utility. We do not agree with Current's proposal that we adopt a rule similar to that adopted by the Texas legislature, which would restrict utilities from receiving compensation beyond pole attachment fees. (Current Opening Comments, p.19, citing Texas Public Utility Regulatory Act Sec. 43.102(b).) Current believes that pole attachments fees are adequate to compensate the utility for use of its structures. We view the issue differently. We want to allow the utility and BPL company to agree to appropriate access terms in a manner that gives utility shareholders an incentive to enter into negotiations with potential BPL developers, and accordingly we will not circumscribe the scope of outcome of those negotiations.
K. Providing Ratepayer Benefits
DRA has suggested that the Commission's BPL regulatory framework should focus on providing direct financial benefits to ratepayers. We recognize, however, that BPL may provide consumer benefits beyond financial ones. Indeed, significant consumer benefits of BPL likely will come in the form of utility applications and increased broadband competition and access. The issue we must address, therefore, is how we should attempt to maximize overall ratepayer benefits.
After considering this issue, we conclude that a regulatory policy will ultimately be unsuccessful if it seeks to maximize the flow of dollars to ratepayers by asking utility shareholders or third parties to assume the
incremental financial risks while apportioning the financial rewards to electric ratepayers. Shareholders and third parties will not put dollars at risk for someone else's benefit, and the ratepayer benefits will never materialize. If BPL does not enter the marketplace, neither the public nor the ratepayers will see any benefit, financial or otherwise.
1. Revenue Sharing
Previously we stated that we would not determine whether access fees or other revenue should be paid by the BPL provider to the utility. Nevertheless, to provide certainty and to avoid future conflicts, we will determine how any such potential additional fees that a utility receives should be divided between utility ratepayers and shareholders. These additional fees at issue in this section do not include standard pole attachment fees, which always flow through to ratepayers.
We have a wide range of proposals to consider, but the field is narrowed considerably by applying the criteria set forth in the OIR, which are that the sharing mechanism should: (1) protect ratepayers from financial risk, (2) align shareholder risks and rewards, and (3) provide direct financial benefits to ratepayers. Many proposals meet one or two of these criteria, but fail at the remainder.32 On balance, we find SCE's proposed revenue sharing mechanism to best meet all three criteria.
2. Positions of the Parties
Parties proposed a variety of shareholder/ratepayers sharing mechanisms. PG&E proposes to split the after-tax net revenues received by the utility equally between shareholders and ratepayers. (PG&E Opening Comments, pp. 9-11.) PG&E cites a past decision, D.99-04-021, which established that PG&E's after-tax "net revenue" from new non-tariffed products and services should be split 50/50 between ratepayers and shareholders. In the case of BPL, PG&E defines "net revenue" as "gross revenue (not including any revenue from providing service under Commission tariffs such as pole attachment fees) received from a BPL vendor under a contract, net of income taxes and net of incremental costs incurred by the utility in the course of developing, negotiating or performing its obligations under any contract with a BPL vendor" (PG&E Opening Comments, pp.9.)
SCE proposes applying its existing revenue-sharing mechanism for other operating revenues (OOR) as adopted in D.99-09-070. SCE's OOR sharing mechanism would allocate gross revenues based on a 90/10 shareholder/ratepayer split if the non-tariffed product or service is classified as "active," or based on a 70/30 shareholder/ratepayer split if the non-tariffed product or service is classified as "passive."33 SCE's provision of access to a BPL company would be classified as "active" if it involves incremental shareholder investment of at least $225,000. (See, D.99-09-070 at pp. 63.)
DRA proposed a mechanism that would limit shareholders' share of BPL-related revenues to just ten percent of net revenues. (ORA Opening Comment, pp. 12.) Ambient and TURN endorsed sharing mechanisms that are graded over time with a decreasing share of revenues going to shareholders as a BPL project progresses or as time passes following the adoption of this decision. (Ambient Opening Comments, pp. 6 and TURN Opening Comments, pp. 7.) We do not adopt these sharing mechanisms primarily because would not adequately align shareholder risks and rewards
3. Discussion
We agree with SCE that its OOR mechanism protects ratepayers from financial risk. The decision establishing SCE's OOR mechanism states that "the incremental revenues would be subject to the proposed gross revenue sharing mechanism, while the incremental costs would be borne entirely by shareholders." (Id., p. 7.) The decision also clearly holds that the framework "insulates the ratepayers from all liability associated with SCE's product and service offerings, including but not limited to third-party litigation, environmental problems, and the like." (Id., Ordering Paragraph 3(c)). Together, these protections will protect ratepayers from assuming the financial risks associated with SCE's contracting activities with a third party BPL company.
SCE's OOR mechanism was designed to align shareholder risks and rewards in order to "encourage optimized utilization of utility assets." (Id., Agreement A.) By providing shareholders with ninety percent of gross revenues from "active" non-tariffed products and services, shareholders should receive a large fraction of the rewards in return for the incremental risks they incur because the utility shareholder's 90 percent of revenues must cover all costs. Thus, if the profit margin is slim, the ten percent of gross revenues going to ratepayers could substantially reduce or even eliminate any shareholder profit. Finally, SCE's sharing mechanism provides direct financial benefits to ratepayers in all cases in which gross revenues are positive. In sum, SCE's existing OOR revenue-sharing mechanism satisfies our three criteria. We, therefore, adopt this mechanism for the treatment of any access fees that any electric utility receives in the context of BPL deployment. We do not believe that the proposals of PG&E, DRA, Ambient and TURN sufficiently align shareholder risks and rewards.
30 Any use of ratepayer funds for BPL-related goods and services justified on the grounds of utility ratepayer benefit, if not specifically pre-approved, will be subject to reasonableness review.
31 SDG&E, however, has already stated that it believes that pole attachment fees should be the "sole compensation" for use of utility poles and wires for BPL. (SDG&E Opening Comments, p. 21, SDG&E Reply Comments, p. 26.)
32 For example, ORA's proposal protects ratepayers from financial risks and provides direct financial benefits to ratepayers, but does not align shareholder risks and rewards.
33 SCE's provision of access to a BPL company would be classified as "active" if it involves incremental shareholder investment of at least $225,000. (See, D.99-09-070, p. 63.) It appears likely that BPL will be considered "active."
