III. Utility Affiliate Participation
A. Summary
Our primary goal in this proceeding is to speed the deployment of BPL technology. In order to allow for the most possible ways in which energy utilities might choose to deploy BPL, we will allow the participation of utility affiliates in the provision of BPL services.
Based upon the state of the record in this proceeding, policy and law indicate that the Commission's existing Energy Affiliate Rules should be applied to energy utility affiliate participation in the provision of BPL services. This represents a change from the preliminary intention stated in the OIR that we would apply the Telecommunications (Telco) Affiliate Rules, but the comments and further analysis have convinced us that the Energy Affiliate Rules are more appropriate. While new, custom-tailored rules may be theoretically more desirable, there is little or no record support for new rules. In our upcoming technical workshop we will consider whether we should develop new, BPL-specific affiliate transaction rules, or continue to use the Energy Affiliate Rules.
B. 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.20
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.21 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.)22 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, ORA, 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 destroyed. 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 very well 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. (See, e.g. D.02-0-039, as modified by D.02-07-043.) 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.
Finally, 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. Again, we will not preclude direct utility provision of BPL, as it may prove to be effective, but it 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 basis, it should seek Commission approval to do so under the appropriate conventional Commission procedure, such as a general rate case.23
C. Choice of 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. BPL has potential applications for both energy and telecommunications, resulting in a range of possible choices. The Commission could potentially choose to use the existing Energy Affiliate Rules, or the existing Telco Affiliate Rules, 24 or come up with a new set of rules specifically designed for BPL.
At present, the record in this proceeding is inadequate to support the development of new, BPL-specific affiliate rules, so our choices are limited to the existing Energy or Telco Affiliate Rules. Use of the Telco Affiliate Rules, as proposed in the OIR, is supported by SDG&E and Ambient, while use of the Energy Affiliate Rules is supported by PG&E and SCE.25
PG&E and SCE argue that as energy utilities, they are familiar with the Energy Affiliate 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 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.)26
Based on the record of this proceeding, it has become clear that BPL is potentially a service that relates to the use of electricity. As Current states, "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.)27 Accordingly, under the express language of our Energy Affiliate Rules, the Energy Affiliate Rules apply.28 The OIR's conclusion to the contrary was erroneous.
From a policy standpoint, applying the Energy Affiliate Rules also makes sense. The utilities who may be offering BPL services through affiliates are all energy utilities, are already subject to the Energy Affiliate Rules, and have proven they can operate under those Rules. As SCE and PG&E point out, they already have systems set up to ensure their compliance with those rules. Finally, the Energy Affiliate Rules were litigated, analyzed, and promulgated by the Commission taking into consideration the business and regulatory context of the energy utilities.
SDG&E, on the other hand, argues that applying the Energy Affiliate 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 (who are presumably subject to the Telco Affiliate Rules). (SDG&E Reply Comments, pp. 20-21.) According to SDG&E, for there to be a level playing field in the broadband market, energy utility affiliates should be subject to the Telco Affiliate Rules. (Id.)
SDG&E's policy argument is not well founded. Telecommunications utilities are not only governed by the Telco Affiliate Rules, but are also subject to other substantive rules (such as FCC rules, or company-specific rules promulgated in individual proceedings) that apply to telecommunications utilities but not to energy utilities. Applying only the Telco Affiliate Rules to an energy utility would actually result in that energy utility being subject to less regulation than a competing telecommunications utility. In other words, applying only the Telco Affiliate Rules to a BPL affiliate of an energy company has the potential to give that affiliate a competitive advantage in the broadband market.
In addition to looking at the nature of the regulated utility, it is also worthwhile to consider the nature of the service to be provided, as we did in the OIR, bearing in mind that the market, rather than the regulator, should make the ultimate determination of what that service is. Based on our record, it appears that BPL has elements that are both telecommunications and energy related. It can provide a pipe for internet, voice, and other non-energy-related telecommunications. On the other hand, it can also provide for advanced metering, distribution system monitoring, and other uses to support and enhance electric service quality and reliability.
At this time, our crystal ball does not provide us enough information to predict the balance between the telecommunications aspects of BPL and those related to the energy platform, but we do not see this determination as particularly relevant. We are not convinced that the energy utilities, the broadband market, or California consumers benefit in any way from unique treatment under the telecommunications affiliate rules. Moreover, categorizing this Commission's handling of energy utilities as telecommunications utilities because of their offering of BPL is akin to giving the FCC regulatory control over automobile emissions because all cars have radios.
The existing affiliate rules and the nature of the regulated utilities indicate that the Energy Affiliate Rules should apply to BPL affiliates. The rules and the balance of policy support the application of the Energy Affiliate Rules as the most appropriate choice.29
SDG&E, in response to a question from the assigned ALJ at the pre-hearing conference, identified one specific concern regarding the use of the Energy Affiliate 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.)
It is not clear from the very limited record before us if SDG&E's fear of a particular interpretation of the affiliate transaction rules is justified. Nevertheless, we see no reason to bar the transfer of the fruits of shareholder-funded development of BPL to a utility BPL affiliate. We have the authority to interpret our own affiliate transaction rules, or to create exceptions to those rules. SDG&E's particular concern does not present an obstacle to the application of the Energy Affiliate Rules. We suggest that SDG&E, in its comments on the draft decision, suggest a process by which it can identify the shareholder-funded benefits it may wish to provide to an affiliate, and how those benefits would be transferred to an affiliate.
The Energy Affiliate Rules were developed through a lengthy and thoughtful process, do not appear to have hindered the formation or operation of affiliates, and their use is supported by the two largest of the three major energy utilities. The Energy Affiliate Rules provide regulatory certainty in the initial development and deployment of BPL, and their adoption is supported by the record in this proceeding, and is consistent with our previous decisions. If parties are interested, we will consider developing BPL-specific affiliate transaction rules at our upcoming technical conference.
20 The parties disagreed as to what an energy utility could reasonably expect in return in addition to pole access fees.
21 Greenlining does not support the landlord-tenant model. (PHC Transcript, p. 21.)
22 SDG&E does, however, appear to be in interested in the possibility of providing BPL service through an affiliate. (PHC Transcript, pp. 35-37.)
23 If an energy utility wishes to offer BPL service on a non-tariffed basis, that offering would be governed by our existing Energy Affiliate Transaction Rules.
24 The Telco Affiliate Rules, cited in the OIR as being embodied in D.93-02-019, are more of the nature of reporting requirements than actual rules governing behavior, but the practice in this proceeding has been to refer to them as "rules," and that convention is continued here. These rules apply to all electric, gas, and telephone utilities. The current Energy Affiliate Rules supplement the Telco Affiliate Rules, and are contained in Appendix B to D.98-08-035.
25 ORA, TURN, and Current also question the OIR's preliminary determination that the Telco Affiliate Rules would apply to BPL.
26 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.
27 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.)
28 SCE points out that even if the OIR were technically correct, it is well within the Commission's authority to change the applicable definition to expressly include those affiliates that provide BPL (SCE Opening Comments, p.8), and PG&E agrees. (PG&E Reply Comments, p. 15.)
29 If ultimately it turns out that BPL is used only for telecommunications purposes, we have the ability to alter this determination.
