July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Electric Utilities: Steering Clear on the Information HighwayJames H. McGrew
One of the most exciting challenges facing electric utilities is the opportunity to participate on the so-called "information highway." Not only is the technology evolving at a dazzling pace, but the opportunities to make or lose money will be staggering. The growth in sales of electricity has been and will be relatively slow compared to the dynamic growth in sales of cable television, information, online, cellular telephone, and other telecommunications services. Most electric utilities have already been traveling on the information highway because they have fiber-optic networks as well as microwave radio and other wireless communications.
Naturally, utilities will want to recover their investment in the communications infrastructure to the extent possible. But cost recovery will depend in part on the scope of communications activity and the manner in which it is undertaken. Any serious entry into telecommunications will probably devolve upon a separate subsidiary for several reasons:
s to establish a wall between the telecommunications business and the utility business
s to avoid allegations of cross-subsidization
s to maximize profits
s to facilitate accounting.
Nevertheless, a utility may wish to invest in telecommunications infrastructure as part of its core utility business. Utilities have for decades used telecommunications technology, including private telephone, microwave radio, land-mobile radio, and other communications equipment for sending and receiving real-time information. Utilities need real-time information to detect malfunctioning equipment, turn generation units on or off, solve transmission problems, and so forth. To the extent that investments in communications equipment are prudent and serve a bona fide utility purpose, there should be no problem in recovering them.
Several utilities (em including Pacific Gas & Electric Co. and subsidiaries of Entergy, The Southern Co., and Central and South West Corp. (em are currently experimenting with demand-side management (DSM) programs that use two-way communications with customers. These experimental DSM programs have focused on a limited number of customers, usually in suburban areas. To my knowledge, they have also been underwritten so far by shareholders. However, many are optimistic that the savings these programs create will exceed the cost of the investment, and that utilities will be able to recover their investments in rates. Some refer to utility investment in the information highway as "DSM-driven" or "DSM-financed."
A regulatory issue arises from the incidental revenue that may be derived from leasing excess capacity from an innovative DSM program. Let's say the DSM program requires only 2 to 5 percent of the capacity of a hybrid fiber-optic/coaxial cable. The utility then has the opportunity to lease the remaining capacity to another company, such as a telephone or cable television company, or use it to provide additional services. The same cable can be used to provide television service, telephone service, computer networking, and other services. We do not know how state commissions (PUCs) will view this excess capacity because the DSM experiments are in their early stages. PUCs may permit utilities to retain the additional revenue as nonutility income; they may require sharing the income between customers and shareholders; or they may require that all excess revenues be credited to ratepayers.