IV. Pricing Issues

A. Parties' Positions

Parties disagree concerning the manner in which prices for third-party attachments to facilities of utilities should be determined. Pricing includes (1) the one-time charge for any necessary rearrangement of facilities performed by the utility to accommodate the additional attachment of the requesting telecommunications carrier and (2) an annual recurring fee for the cost of providing the ongoing attachment to poles, supporting anchors, or other support structures of the utility. In addition, utilities' charges may also include out-of-pocket costs associated with any work done by the utility to respond to third-party requests concerning the availability of space for an attachment. Parties generally agree on the pricing for the one-time costs of rearrangements based on actual out-pocket expenses incurred. Parties' pricing disputes focus principally on the proper basis for the pricing of the recurring charge for attachment to poles and other support structures of the utility.

The Coalition argues that attachments to poles, anchors, and other support structures for telecommunications services should be priced on the basis of historic or embedded costs of the utility less accumulated depreciation, under the same formula as is required for cable services under PU Code § 767.5(c)(2) in order to ensure nondiscriminatory treatment among all telecommunications carriers.

PU Code § 767 (which generally covers all public utilities) prescribes no specific formula for fixing the annual recurring fee for pole attachments for telecommunications services such as is found in PU Code § 767.5(c)(2) (which covers only cable corporations). Section 767 generally authorizes the Commission only to "prescribe a reasonable compensation and reasonable terms and conditions for the joint use" of facilities in the event parties fail to negotiate an agreement. The Coalition believes, however, that there is no legislative prohibition on the Commission's adopting the cable television formula (when it acts pursuant to § 767) for fixing the rate for pole attachments generally by all telecommunications carriers. Moreover, the Coalition argues that such an approach is mandated by nondiscrimination principles. Since the Commission cannot, by statute, vary from the pricing formula set forth in PU Code § 767.5(c)(2) ¹⁰ when it sets pole attachment rates applicable to cable television systems, the Coalition argues that all telecommunications carriers, including those that are not cable operators, must be given the same nondiscriminatory rate treatment. The Coalition claims that access to utility support structures and ROW for telecommunications carriers must therefore be set at the same rates, and on the same terms and conditions, as are afforded to cable companies pursuant to PU Code § 767.5. The Coalition claims that competition would be severely skewed if one type of telecommunications provider, (i.e. cable companies or their affiliates acting as telecommunications carriers) enjoyed access to utility ROW and support structures on more favorable rates, terms, and conditions than other telecommunications carriers.

The Coalition denies that any clear distinctions can be made between the services of a cable provider which are considered cable-only versus those which are considered telecommunications. The Coalition argues that cable operators are rapidly expanding their use of coaxial cables, optical fibers and other facilities attached to utility structures to offer both telecommunications and traditional cable (video) services. The Coalition claims that cable operators (or their telecommunications carrier affiliates) already are or soon will be using their pole attachment rights, originally obtained for the purpose of disseminating cable television programming, for provision of competitive telecommunications services. Therefore, the Coalition does not believe it is valid to charge cable television operators different rates for pole attachments depending on what services they offer.

Pacific objects to the use of the statutory formula in § 767.5 for pricing of telecommunications carrier pole attachments and believes that the Commission is under no obligation to apply the statutory formula for cable television services to all attachments by telecommunications carriers in order to ensure nondiscriminatory access. Pacific claims that § 224(e)(1) of the Act prescribes a different pricing formula to be used to develop rates for attachments by telecommunications carriers and cable companies providing telecommunication services than the one currently used for cable-only attachments.

Pacific proposes that any pricing methodology prescribed by the Commission should permit use of forward-looking costs, consistent with the methodology approved for pricing Pacific's other services in the Open Access and Network Architectural Development (OANAD) proceeding. Pacific has used Total Service Long Run Incremental Cost (TSLRIC) to cost the ROW and support structures within its own retail services, and argues that access to ROW and support structures by telecommunications carriers should be priced to at least recover TSLRIC. Pacific proposes that the Commission consider using the formula found in §§ 224(e)(2)and (3) of the Act, which requires attaching parties to pay their share of the costs of the common portion of any support structures.

GTEC argues that the current rate for cable television attachments has no applicability to CLCs generally, and that its current tariffed access rate of $2.92 for cable television attachments is below cost and cannot be sustained for CLCs. GTEC believes this cable access rate was established solely for cable television service prior to the entry of CLCs to reflect policy goals of an earlier era to foster cable television attachments and correspondingly, the viability of that industry. GTEC states that once its cost studies are adjudicated through an arbitration, nondiscriminatory treatment of carriers will result in a uniform rate for pole attachment for all carriers. It is only the make-ready costs, which must take into account the specific circumstances of poles and the surrounding terrain, which will vary depending on the particular poles to which a carrier desires to attach.

GTEC notes that in the past, Pacific has negotiated attachment rates with cable television and other carriers, resulting in a rate that was several dollars higher than GTEC's rate. Section 252(a) of the Act provides for such negotiation of attachment and access rates, and GTEC states that it is currently in the course of such negotiations with several carriers. Under § 252(b), if parties are unable to agree to a rate, then the Commission may determine the rate through arbitration. GTEC proposes that the rental rates for pole and conduit/duct space should be based on TSLRIC plus a contribution to common costs. All other charges for provision of space (e.g. make-ready, audits, field surveys, record check) should be reimbursed by the requesting CLC based on the actual labor and material costs incurred, according to GTEC.

Edison believes that the pricing of access should be market-based as determined through negotiations between the parties. As long as the utility's cost structure can support a negotiated rate lower than the cost for the carrier to construct an alternate path, Edison argues, both will have an incentive to negotiate a mutually agreeable access price. In those instances where the market is unable to support a negotiated rate greater than or equal to the utility's cost, Edison proposes that the utility's after-tax cost should become the price. Edison argues that a floor price of the utility's after-tax cost will protect the utility from subsidizing the communications industry. Edison believes utilities should recover the fully allocated costs associated with permitting, implementing, and maintaining attachments, and costs associated with facility modification or make-ready work. In some cases, there are also subsequent costs incurred due to temporary or permanent relocation of third party facilities as a result of mandatory reconfigurations of the electric utility system to meet safety and reliability needs or changing rules and regulations. Edison believes the costs of these necessary activities should be borne entirely by the parties seeking access to the facilities. Edison also argues that the utility should be allowed to contractually require telecommunications carriers (and their contractors or sub-contractors) to maintain appropriate insurance and to indemnify the utility from all costs due to damage or injury to persons or property resulting from the carriers' installation, maintenance or operation of telecommunications equipment.

PG&E likewise argues that the cable television formula fails to provide fair and just compensation for telecommunications carrier's access to its distribution poles.¹¹ PG&E opposes the use of historic embedded cost pricing, arguing that such pricing does not recognize the utility's ongoing financial obligation to keep the distribution poles fit for service. PG&E advocates the use of market-based pricing through negotiation, but believes that principles such as replacement cost new less depreciation should be incorporated into the development of distribution pole pricing if market-based pricing is not allowed. At a minimum, PG&E seeks to recover fully allocated costs for the use of its ROW support structures. Anything less would raise serious constitutional questions, in PG&E's view, including the taking of property without just compensation.

B. Discussion

Utilities should be allowed to recover their actual costs for make-ready rearrangements performed at the request of a telecommunications carrier, and their actual costs for responding to requests for space availability and requests for access, including preparation of studies, maps, drawings, and plans for attachment to or use of support structures. We recognize that such types of costs are specific to the demands of a particular attachment and cannot be set at any standard rate. We shall therefore prescribe that telecommunications carriers reimburse the utility for such reasonable costs based on actual expenses incurred.

The telecommunications carrier shall also pay for the costs of required engineering studies. The carrier should not, however, be required to pay for redundant, or unnecessary studies. Where a request for access includes an engineering review that has been performed by qualified CLC personnel, such a review does not need to be completely re-performed by the electric utility or ILEC personnel, but merely checked for accuracy. To protect CLCs from being forced to incur unnecessary expenses, the Coalition proposes that the Commission (a) require electric utilities and ILECs to publish in advance the criteria by which they would determine whether a CLC's engineering study has been performed by professional engineering personnel and (b) specify that electric utilities and ILECs should not require CLCs to pay for redundant engineering studies where a check for accuracy discloses no errors. We find these measures reasonable, and shall adopt them in order to avoid duplicative costly engineering analyses which could undermine the economic advantages of building a carrier's own facilities.

We shall direct the electric utilities and ILECs to publish objective guidelines within 180 days of its order, so that CLC personnel or third-party contractors used by CLCs can quickly and efficiently establish their engineering qualifications to do pole loading and sizing calculations. Any party seeking access should be allowed to employ its own workers which meet criteria established by the utility. In secured areas where safety or system reliability concerns are an issue, however, the utility should retain the discretion to require its own escort to supervise the work of CLC agents. When working in public, unsecured areas of a utility , the CLC should not be charged for a utility escort.

By contrast, the basic cost of attachment per pole or per linear foot of conduit usage are examples of charges which can be more readily standardized based upon the costs of each incumbent utility. We shall prescribe standards for the pricing of overhead pole and underground conduit as set forth below. As previously noted, we will not require the tariffing of these charges. Our prescribed standards are not intended to create a disincentive for parties to negotiate their own arrangements tailored to individual circumstances, but rather are intended to provide default prices and terms in the event parties fail to reach agreement. For example, a carrier may agree to pay a higher attachment rate if acceptable concessions are made in the other terms and conditions offered through negotiations.

The parties' principal controversy over pricing centers around the rates which should be charged for attachments to poles and other support structures. The beginning point for resolving the dispute over pricing principles applicable to utility pole attachments and support structures is to identify the underlying rights, interests, and obligations of the respective parties. The incumbent utilities have a right to be fairly compensated for the use of their property. Their interest is in obtaining the most favorable rates and terms possible in order to maximize the wealth of the firm. Their obligation is to provide access to their poles and support structures at reasonable terms and prices.

The CLCs have a right to obtain access to utility poles and support structures at reasonable terms and prices which do not impose a barrier to competition. Within the bounds of what may be considered fair terms, the incumbents will seek the highest prices and the CLCs will seek to pay as little as possible. In a competitive market setting, the relative bargaining between a willing buyer and willing seller produces a market clearing price which is acceptable to both sides. We must therefore consider whether the relative bargaining power of the incumbent utilities is balanced in relation to CLCs. We conclude, that by virtue of their incumbent status and control over essential ROW and bottleneck facilities, the local exchange carriers (LECs) and electric utilities have a significant bargaining advantage in comparison to the CLC with respect to ROW access. While theoretically the CLC could seek an alternative to attachment to utility support structures, the practical alternatives are frequently limited or cost prohibitive. For example, municipalities often resist the installation of any additional utility poles on public streets. The municipalities also are often unreceptive to repeated reopening of street surfaces for installation of new conduit systems. In such instances, CLCs would be forced to deal with the incumbent utilities for access to the utilities' facilities and would not be readily able to seek an alternative if the incumbents proposed unreasonable terms.

Once facilities-based competition becomes more established, the ROW infrastructure might evolve to where the present incumbent utilities will not be in control of bottleneck facilities. Yet, since we are only in the nascent stages of facilities-based competition, a truly competitive market for providing alternative means of access to support structures for CLCs does not yet exist. Therefore, we cannot presently rely exclusively on the negotiation process to necessarily produce reasonable prices for ROW access. Given the inherent bargaining advantage of incumbents, the next question is what pricing basis will promote a more competitively neutral outcome.

In considering the proper compensation for pole attachments, we address the dispute over whether the statutory formula for pole attachment rates in § 767.5 for cable television corporations applies to all services for which the pole attachment is used, including telecommunications services. CCTA argues that the statute dictates that cable television corporations are, by law, entitled to the same pole attachment rate whether the attachment is used for telecommunications or cable television service. The statute defines "pole attachment" as "any attachment to surplus space...by a cable television corporation for a wireline communications system...." The defining characteristic of the statute, however, is that it applies to wire communications used by a "cable television corporation." The cable pole attachment statute was enacted in 1980, years before the telecommunications markets were opened to competition. No provision in the statute nor elsewhere in the PU Code indicates that the rate for pole attachments was intended to apply without limitation to any future service that a cable corporation might conceivably offer, other than cable television programming. Instead, PU Code Section 215.5 defines a "cable television corporation" as "any corporation or firm which transmits television programs by cable to subscribers for a fee." We find no basis to read into the statutory definition additional provisions which are not there.

Although § 767.5 does not legally require that the pole attachment formula prescribed for cable television service must be extended to every other service which may be offered by a cable corporation, neither does it prohibit the Commission from exercising discretion to apply the same pole attachment rate to other regulated services offered by a cable corporation, where appropriate, based upon public policy considerations. For the reasons discussed below, we conclude that such a policy is the most appropriate one, and we shall adopt such a policy.

We acknowledge that the FCC has prescribed a phased-in rate differential for cable operators' pole attachments based upon whether or not they also offer telecommunications services in its implementation of the provisions of the Act.

In reference to applicable rates for pole attachments, § 224(d)(3) of the Act states that:

"This subsection shall apply to any pole attachment used by a cable television system solely to provide cable service. Until the effective date of the regulations required under subsection (e), this subsection shall also apply to the rate for any pole attachment used by a cable system or any telecommunications carrier (to the extent such carrier is not a party to a pole attachment agreement) to provide any telecommunications service."

Under Subsection 224(e), the FCC is to prescribe new regulations within two years after enactment of the Act for pole attachments for carriers offering telecommunications services. These new regulations, however, would not apply to pole attachments used by cable operators exclusively offering cable television service. Therefore, in implementing § 224 (e) of the Act, the FCC explicitly applies different rate provisions to cable operators depending on whether they offer cable television service exclusively or whether they also offer telecommunications services.

Notwithstanding these federal actions, we are not bound by these FCC rules. Moreover, we find no convincing rationale justifying the adoption of different pole attachment rates for cable operators depending on whether or not they offer telecommunications services.

Since the opening of the local exchange market to competition, various cable corporations now offer telecommunications services over those same connections used for cable television service. There is generally no difference in the physical connection to the poles or conduits attributable to the particular service involved. In many cases, a cable operator may not be able to delineate exactly what particular services are being provided to a customer at a given time because the customer can use the connection for various services, depending on the equipment attached to the connection at the customer's premises. In such instances, it would be difficult and impractical to police how a given pole attachment is used to provide separate services offered over the same pole connection, or to delineate what portion of the usage was attributable to telecommunications versus other services offered by a cable corporation. Yet, under § 767.5, the statutory formula must apply, at least to the extent that the pole attachment is used for cable television service. Accordingly, to avoid the problems involved in separately measuring different types of data transmission services over the same connection, we conclude that the rate prescribed by the § 767.5 for cable television pole attachments should apply where a cable corporation uses its pole attachment to provide telecommunications services. By applying a consistent rate for use of cable attachments, including provision of telecommunications services, we will avoid protracted disputes over how particular attachments are being used or how separate rates may be prorated based on different volumes of transmissions over the same connection. Moreover, such an approach promotes the incentive for facilities-based local exchange competition through the expansion of existing cable services.

Having concluded that the statutory rate for cable attachments shall apply to telecommunications services offered by the cable operator, we must next consider whether this same rate should be also be applied to other CLCs, including those not owned by or affiliated with a cable corporation. Since we are committed to ensuring that all telecommunications carriers gain access to utility attachments under nondiscriminatory rates, terms, and conditions, we conclude that all CLCs should be entitled to comparable pole attachment rates as are available to those CLCs affiliated or owned by a cable corporation. The use of the existing cable pole attachment rates for all CLCs will also avoid the need for further protracted proceedings to prepare cost studies and to adjudicate default rates. Accordingly, we will direct that the same pole attachment rate provisions applicable to cable operators providing telecommunications services be extended to all CLCs, including those not owned by or affiliated with a cable corporation.

To be consistent with our treatment of pole attachments, the same principle of embedded cost pricing should apply to underground facilities. We shall accordingly adopt the provisions of § 767.5(c)(2)(B) which prescribe that the rate for attachments to support structures other than poles or anchors shall be equal to a percentage of the annual cost of ownership for the support structure. The percentage is to be computed by dividing the volume or capacity of duct space rendered unusable by the telecommunications carrier's equipment by the total usable duct volume or capacity.

We conclude that the adoption of attachment rates based on the § 767.5 formula provides reasonable compensation to the utility owner, and there is no basis to find that the utility would be unlawfully deprived of any property rights. Section 767.5 provides that the pole attachment rates will be based on the utilities' annual cost of ownership, including historic depreciated capital costs and annual operating expenses. Thus, the rate corresponds to the costs incurred by the utility to provide the attachment. Under the statutory pole attachment formula, the utility is allowed a rate equal to 7.4% of its annual cost of ownership. The 7.4% factor represents portion of the total pole space used to support the one foot for communications space, as typically used by an attaching party. Since the 7.4% allocation applies to the cost of the entire pole, it results in a fair cost apportionment in deriving attachment rates, for either cable or telecommunications services.

The use of the § 767.5 formula constrains the default amount that may be charged for pole and conduit attachments, and to that extent, promotes the emergence of a competitive local exchange market. While the revenues that the utility realizes from pole attachments under the § 767.5 formula may be less than the amount that could be extracted purely through negotiations, there is no reason to conclude that the reduced revenues constitute an unlawful taking of property. The § 767.5 formula has never been found to be confiscatory with respect to pole attachments for cable operators. As previously found by the courts, "[r]ates which enable [a] company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for risk assumed certainly cannot be condemned as invalid, even though they might produce only a meager return on the so called `fair value' rate base." (FPC v. Hope Natural Gas Co. (1944) 320 U. § 591.) Likewise, there is no reason to find that the rate would be confiscatory merely by extending its application to the provision of telecommunications services over the same pole attachment.

Further, the formula does not result in a subsidy since the formula is based upon the costs of the utility. A subsidy would require that the rate be set below cost. The fact that the rate is below the maximum amount that the utility could extract for its pole attachment through market power absent Commission intervention does not constitute a subsidy. The embedded cost formula prescribed in § 767.5 applies to capital costs, net of accumulated depreciation, and also allows for recovery of the annual operating expenses of the utility's poles and support structures. This formula will therefore reasonably compensate incumbent utilities for their ongoing operating expenses related to providing access to their support structures. Lastly, the application of the formula as prescribed herein is reasonable since we have determined that CLCs are in a weaker bargaining position vis-a-vis incumbent utilities. It is our purpose as a regulator of public utilities to protect against anticompetitive pricing by utilities.

The pricing standards we prescribe under our rules should only be triggered, however, in cases where the respective parties fail to negotiate a mutually agreeable pole attachment rate on their own. Parties shall be free to negotiate pole attachment rates which deviate from the standards prescribed under our rules. If they are unable to reach agreement and submit the dispute to the Commission for resolution, we shall apply the rate standards in our rules as the default rate, based upon historical embedded costs, and straight-line depreciation accounting consistent with our findings in C.97-03-019 (CCTA vs. SCE) unless the incumbent utility can show that the facilities being installed occupy more pole space, or otherwise encumber the property, more than do cable television facilities.