VI. Aligning Investor Risks and Rewards

Third parties or shareholders will not assume the risks of pursuing BPL investment without some expectation of rewards. Since we stated above that we will allow BPL projects to be financed only with third party or shareholder funds, we, therefore recognize that all financial risks and rewards derived from a BPL project should accrue to the third party or shareholders investors. This section addresses these financial "rewards" and determines if and how value should flow from a BPL company to an electric utility.

A. Access or Lease Fees

Parties disagree about whether a utility should be permitted or required to charge a BPL company additional fees beyond pole attachment fees. PG&E, SCE, and TURN all argue that a utility should be encouraged to negotiate access or lease terms with a BPL company and should be permitted to charge additional access or lease fees. PG&E asserts that an adequate sharing mechanism is an essential component of encouraging utilities to enter into BPL transactions. (PG&E Reply Comments, p. 8; SCE Reply Comments, pp. 14-15; TURN Opening Comments, pp. 6-10; PG&E Comments on Alternate Draft Decision, p. 2.)

Current and SDG&E, in contrast, argue against allowing a utility to charge additional fees beyond the cost-based pole attachment fees. (Current Reply Comments, pp. 4-8; SDG&E Reply Comments, pp. 25-26.) SDG&E focuses on the need for a BPL company to clearly understand costs up-front. It maintains that leaving additional fees up for negotiation is a source of uncertainty.

SDG&E also highlights the regulatory risk that arises if the Commission grants the utilities discretion to negotiate access or lease fees. SDG&E predicts that this discretion could subject a utility's agreement with a BPL company to a prudence review. To protect itself against a General Rate Case disallowance, a utility might impose such high fees that a utility and BPL company will be unable to agree to access terms. The end result will be no investment in BPL. (SDG&E Opening Comments on Draft Decision, pp. 5-7.)

Current gives several reasons in support of its argument that we should prevent a utility from charging additional access or lease fees. First, it contends that permitting the utility to charge these fees could hamper the development of BPL and prevent the realization of important ratepayer benefits, such as those provided through "smart grid" utility applications. (Current Opening Comments, p. 5.) Second, Current emphasizes that BPL's use of the wires imposes no additional cost on the electrical system, and the electric utility has already fully recovered the cost of the electrical system through rates. (Id. p. 3) Third, Current observes that a no-additional-fees regime may encourage investment in BPL. It notes that recent legislation in Texas prohibited a utility from charging fees beyond the pole attachment fees. Shortly after that legislation was signed, a major utility in that state announced a commercial BPL rollout. (Current Opening Comments on Draft Decision, p. 5.)

Given the polarization of views on this point, it appears unwise to dictate one access fee approach over the other. Indeed doing so may inadvertently discourage those BPL projects which will succeed under one approach but not the other; this will undercut our goal of creating an environment that fosters BPL deployment.

We believe the better public policy allows the utility a choice in its dealings with BPL companies (whether affiliated or unaffiliated). In such circumstances, we believe a utility should be free to decide whether to charge the pole access fee or to negotiate access fees which exceed the pole attachment fee. If it chooses to charge only the pole attachment fee, it will not be subject to further reasonableness review by the Commission. If the utility opts to charge an access fee exceeding the pole attachment fee, it is completely free to do so under a shareholder/ratepayer revenue sharing mechanism as discussed in the subsequent section.

B. Shareholder / Ratepayer Sharing of Access
or Lease Fees

Several parties proposed potential sharing mechanisms to be applied to lease payments or access fees received by a utility from a BPL company. We discuss the merits of parties' revenue sharing proposals in this section. The additional fees at issue in this section do not include standard pole attachment fees, which always flow through to ratepayers.

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, p. 9.) The decision that previously adopted this sharing mechanism also provided that "[s]hareholders would bear any losses resulting if these net revenues are negative."³⁰

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." 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 p. 63.)

DRA proposed a mechanism that would set shareholders' share of BPL-related revenues at 10% of net revenues. (DRA Opening Comment, p. 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, p. 6 and TURN Opening Comments, p. 7.)

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 states that "[t]he allocation should provide shareholders a strong incentive to pursue BPL projects while also providing direct financial benefits to ratepayers." (OIR, p. 10.) On balance, we find PG&E's proposed revenue sharing mechanism to best satisfy this criteria.

PG&E's proposed 50/50 after-tax net revenue sharing mechanism provides a utility with a strong financial incentive to enter into negotiations with potential BPL companies. First, a utility will have an opportunity to recoup expenses it incurs when negotiating a BPL access arrangement and performing its obligations under such a lease. Second, the mechanism offers the potential for shareholder rewards. PG&E states that its sharing mechanism would provide the utility "adequate incentives" to pursue BPL deployment (Opening Comments, p. 9.). PG&E's mechanism also would provide direct financial benefits to ratepayers through the sharing mechanism if after-tax net revenues are positive.

SCE's OOR mechanism also provides for potential shareholder rewards. By providing shareholders with ninety percent of gross revenues from "active" non-tariffed products and services, shareholders would receive a large fraction of revenues in return for the incremental risks they incur. For products and services classified as "inactive" shareholders would receive seventy percent of gross revenues, so the incentive would be weakened. Ratepayers would also receive direct financial benefits as long as gross revenues are greater than zero.

However, since the utility shareholders would also be liable for expenses associated with the leases, if the profit margin is slim, the ten or thirty percent of gross revenues going to ratepayers could significantly reduce or even eliminate shareholder profits.

We do not believe that the proposals of DRA, Ambient and TURN sufficiently align shareholder risks and rewards. DRA's proposed sharing mechanism does not provide utility shareholders a strong incentive to pursue BPL projects. Ambient's and TURN's graduated sharing mechanisms introduce unnecessarily complexity and misalign shareholder risks and rewards by reducing shareholder rewards over time.

We find that PG&E's proposed sharing mechanism best balances our policy goals by providing shareholders a strong incentive to pursue BPL projects while providing direct financial benefits to ratepayers. We, therefore, adopt this mechanism for the treatment of any access of lease fees that any electric utility receives from a BPL company.

³⁰ D.99-04-021, 1999 Cal. PUC LEXIS 228, 6 (Cal. PUC 1999).