IV. Protecting Ratepayers, Aligning Shareholder Risks and Rewards, and Providing Ratepayer Benefits
In 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.
A. 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.) 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 the Commission or the utilities we regulate should treat ratepayers' wallets like venture capital funds. Ratepayer dollars should not be invested in highly risky emerging technologies. 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 expenditures that have any other purpose, such as delivering commercial broadband service, must be financed entirely by utility shareholders or third parties.30
B. Aligning Shareholder Risks and Rewards
Shareholders or third parties will not assume the risks of pursuing BPL deployment without some expectation of rewards. Therefore, the OIR proposed that because the BPL projects should only be financed with shareholder or third party funds, 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.
Before a BPL system is even installed, there are steps that must be taken to pave the way for that installation. While likely less costly than the actual deployment and operation of BPL technology, such steps are not without cost. Accordingly, 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. We believe an adequate revenue sharing mechanism will provide sufficient shareholder incentives. As an emerging technology with tremendous promise, the potential revenue and savings from BPL, when coupled with a fair revenue sharing mechanism should provide necessary incentives to utility shareholders.
One way to provide utility shareholders an incentive to pursue BPL projects under this scenario 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 went 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.)
We are not as a policy requiring that BPL companies, whether affiliated or unaffiliated, pay access fees to a utility, but we also do not want to preclude the electric utility from receiving such 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 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).) Rather, 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.
C. Providing Ratepayer Benefits
ORA has suggested that the Commission's BPL regulatory framework should focus on providing direct financial benefits to ratepayers. However, as we have already discussed, the principal benefits of BPL seem to be most likely to come in the form of utility applications and increased broadband competition and access. While insulating ratepayers from financial risk is an essential objective, providing direct financial benefits to ratepayers is only desirable to the extent that shareholder incentives to pursue BPL are not significantly weakened.
A regulatory policy that 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 will ultimately be unsuccessful-shareholders and third parties will not put dollars at risk solely 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.
One benefit to the broadband market that this Commission advocates is nondiscriminatory access to the content of one's choice on the Internet. This ratepayer benefit, without significant incremental cost to consumer or the BPL provider, ensures that California's BPL networks deliver content regardless of the relationship between the network owner, the ISP, and the content provider. If a BPL provider or an ISP utilizing those facilities makes prioritization of packets available, it must do so for all like packets, consistent with federal and state law.
1. Revenue Sharing
Parties have proposed various mechanisms for allocation of "access fees" or other revenues received by the utility from the BPL provider. How exactly this will play out in practice remains to be seen, as we have one utility arguing that pole attachment fees are insufficient compensation for BPL use of a utility system (PG&E Opening Comments, p. 8), while another argues that pole attachment fees are the only compensation that a BPL provider should pay (SDG&E Opening Comments, p. 21). Similarly, one BPL provider expresses some willingness to pay additional fees (Ambient Opening Comments, p. 6), while another is opposed to additional fees ( Current Opening Comments, pp. 18-19).
Nevertheless, to provide certainty and to avoid future conflicts, we will allocate any potential additional fees received by the utilities from BPL providers (in addition to the standard pole attachment fees, which 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, however we find that the limited onetime and ongoing investment requirements for BPL merit a calculation of the investment as "passive" for revenue sharing purposes.
2. SCE's Proposal
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 sharing mechanism replaced the utility's Performance-Based Ratemaking (PBR) mechanism for OOR.
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 states that the framework "insulates the ratepayers from all liability associated with Edison'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 seventy 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. The exception is when the profit margin is slim, in which case the thirty percent of gross revenues going to ratepayers could substantially reduce or even eliminate what would otherwise be shareholder profits.
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 all electric utilities for the treatment of any access fees that the utilities receive in the context of BPL deployment.
We considered allowing each utility to use its own individual proposal, but we had concerns that the proposals of PG&E and SDG&E were not as good at protecting ratepayers from financial risk and aligning shareholder risks and rewards as the SCE proposal.
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.) This up-front disavowal of intent to seek additional revenue from a BPL provider is puzzling, unless SDG&E has already determined it is going to offer BPL service through an affiliate, rather than by contracting with a third party.
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.) Owing to the incremental shareholder investment being predominantly obligatory legal work consistent with contracting generally, the shareholder investment in BPL is not inconsistent with "passive" investment. Additionally, the waiver of 851 requirements envisioned by this order is consistent with a small scale, or "passive" contribution by shareholders.
