CPUC considers crippling electric utilities’ competitive fiber business

by Steve Blum • , , , ,

Dark fiber owned by private electric utilities in California could be more strictly regulated by the California Public Utilities Commission. A proposed decision, due for a vote by commissioners at next week’s meeting, would rewrite the rules that have governed Southern California Edison’s dark fiber business for the past twenty years. It only applies to one particular transaction for now, but it has serious implications for Pacific Gas and Electric’s telecoms ambitions in northern California, and for communities and competitive broadband providers that need an independent source of dark fiber, particularly for long haul, inter-city connections.

SCE is asking the CPUC for permission to sign a master fiber lease agreement with Verizon. Usually, SCE has to submit new lease agreements for approval one by one. But because Verizon, like other mobile carriers, is anticipating a rapid expansion of its network, the thinking was that overall terms could be established by a master contract, and then individual point-to-point fiber leases added as needed. That’s not a controversial idea, but rookie commissioner Clifford Rechtschaffen decided to take the opportunity afforded by the application to revisit the way the CPUC accounts for electric utility-owned fiber, and how the revenue it generates is split between company shareholders and customers.

Up until now, CPUC decisions required SCE to give 10% of gross fiber revenue back to electric ratepayers, leaving 90% to go toward expenses and, ultimately, profits to shareholders. The new draft decision would flip that formula, sending 75% of gross revenue to ratepayers and leaving only 25% for the business and shareholders.

The rationale is that SCE doesn’t use very much of its total fiber capacity to support its electric operations, even though those operations, and consequently electric customers, paid for it. The problem with that argument is that when a fiber cable is installed for a particular purpose – to monitor a substation, for example – the cost is pretty much the same regardless of how many strands it contains, as SCE explained in comments it filed in response to the proposed decision…

Once SCE decides that a particular fiber optic facility is needed for utility operations, the vast majority of costs associated with that facility stem from its siting, construction, and installation, which do not vary based on the amount of fiber optic capacity that SCE chooses to install. Increasing the installed fiber optic capacity involves only de minimis additional costs.

Private electric utilities are monopolies, which is the justification for the CPUC’s micromanagement. But when they run a telecoms business they are competing against incumbent carriers with unregulated, monopoly-centric business models, in a market the CPUC has declared to be “highly concentrated”.

On that basis alone, the same rules and rationales should not apply. It’s true that SCE’s excess fiber capacity was paid for largely by electric customers. As it stands, those customers are receiving a double benefit: the electricity that SCE’s fiber helps deliver and a more competitive telecoms market. Trying to turn that into a triple benefit by skimming three-quarters of the money off the top will kill SCE’s fiber business model, and ultimately harm Californian consumers and businesses who need both affordable electric and broadband service.

Proposed decision approving and adopting 25/75 revenue allocation for revenues under the master dark fiber lease agreement between Southern California Edison Company and Verizon Wireless, 9 January 2018

Comments of Southern California Edison Company, 29 January 2018

Comments of the Utility Reform Network, 29 January 2018

My clients include Californian cities that have municipal electric utilities with fiber interests. I am not a disinterested commentator. Take it for what it’s worth.