Can Tacoma make electric customers pay for a bigger, better Click?

Just before Tacoma Public Utilities board members voted on Click Cable TV’s expansion into internet and phone service last month, former TPU attorney Mark Bubenik sent a letter threatening to sue if electric ratepayers weren’t held harmless.

The reasoning in Bubenik’s letter has been echoed by board chairman Mark Patterson and board member Monique Trudnowski, among others, who have questioned the legality of having Tacoma Power customers — essentially a captive audience — fund Click, especially since not all of them can subscribe to Click. They’ve argued Click’s network doesn’t play enough of a role in providing electricity to Power’s 170,000 residential, industrial and commercial customers, making it improper for electric rates to fill in when Click’s revenues fall short.

Bubenik cited state law and the city charter as prohibiting the utility from making gifts and loans of public funds, and from using power revenues to pay for anything but the operating expenses required to supply utility services to customers. By phone last week, Bubenik said he wasn’t rushing to the courthouse just yet, and wants to get the City Council “moving in the right direction. ... I don’t want to create animosity, all these people are good people and they’re well intended.”

But, he said, “utility funds are sacred and they have limited use only for the betterment of the utility and reducing rates, and the television, internet and phone service are outside the city’s electric utility’s basic function. State law, the city charter, also the state constitution ... prohibits the city from making a gift, and here it’s a gift to the television users and internet users of Click.”

On the other side of the debate are members of the TPU board and the City Council who say Click’s wires are vital to running the power utility. Board member Karen Larkin said TPU’s attorneys have advised that using rate revenues to fund Click is “legally defensible.”

“We’ve established sufficient benefits to electric ratepayers, both past, present and potential future benefits, to support electric ratepayers continuing to fund a small portion of the telecommunications system,” Larkin said. TPU’s 15,000 smart meters — which TPU began to deploy years ago but gradually abandoned as industry technology changed — run on Click’s coaxial wires. Tacoma Power also uses the fiber optic network to communicate between its substations, “so that part is not surplus to our needs,” Larkin said.

Still, there is ongoing disagreement about how much of a benefit Click provides to Tacoma Power — and, as coaxial wire used to run the smart meters is phased out, for how long. A 2015 TPU analysis recommended Click shoulder 94 percent of the costs associated with its commercial operations, and that 6 percent be allocated to power-related expenses. Before that, Click was only bearing 76 percent of the cost to maintain and operate the fiber and coaxial cable network.

That debate played out in dueling proposals the five-member TPU board considered at its Sept. 28 meeting: That night, it voted 3-2 in favor of using ratepayer funds to help Click move into a new business model of becoming a municipally owned and operated service that sells retail internet, cable and phone service directly to customers. The proposal that failed would have required the city’s general fund, which pays for a range of services from police and firefighters to libraries, to kick in more and more for Click over the next nine years as TPU’s contribution phased out.

The City Council is expected to take up the successful proposal this month. Passage would authorize Click to get between $6 million and $10 million per year from Tacoma Power’s electric revenues for operations, maintenance, taxes, debt and capital costs — including the cost of upgrading the system to gigabit internet service speeds, which board members have said will increase Click’s marketability. Being able to compete against the likes of Comcast and CenturyLink with fast internet speeds will help add customers to Click’s ranks and decrease the need for subsidies from ratepayers, the argument goes.

Keeping Click publicly owned and operated also gives the City Council the ability to provide affordable, public internet and bridge the digital divide for lower-income Tacoma residents. In December, the City Council voted to reject a proposed 40-year lease of Click’s wires to Kirkland private internet provider Wave. Mayor Marilyn Strickland and members of the council have said broadband internet is a public utility necessary in today’s world.

THE CASE AGAINST RATEPAYER FUNDING

Click began as the outgrowth of a fiber optic network built by Tacoma Power in the 1990s to improve maintenance and efficiency of the power grid. Tacoma Power still uses the network for that, but most of the costs are for providing the cable service that city leaders launched in 1998 to counter a local cable monopoly’s limited offerings and spotty service. In the past, Click internet service has been sold wholesale to internet service providers that lease space on its wires and deal directly with customers.

But as cable customers have left in recent years, Click has been losing millions of dollars per year, according to TPU management. Enter Wave, the private company that offered last year to lease Click’s infrastructure for 40 years. That proposal sparked a political movement to save Click and keep it public. From there emerged a business plan known as the all-in model: Click would be municipally owned and operated and would expand its offerings to phone, high speed internet and cable, sold directly to customers.

No one expects that a diversified Click will operate in the black, at least not initially. And so the debate has become where to find the money Click needs to update its system and get a foothold in the broadband internet market.

Before the utility board voted, Trudnowski pointed to a state Supreme Court ruling from 2003 about whether the city of Seattle could charge Seattle City Light’s ratepayers for the operation of street lights, which had previously been paid for by the city’s general fund. The Seattle case had been cited by city attorney Elizabeth Pauli in a memo she wrote to the City Council and utility board last year.

In Okeson v. The City of Seattle, the court ruled unanimously that operating street lights was a general government function and not directly related to providing electricity to power customers. The city had unlawfully imposed a tax upon the ratepayers, it found.

“It is illegal. It is illegal. It is illegal,” Trudnowski said. “We can expect lawsuits to start, and where does that money come from? Our general fund, the very fund I was hoping to protect. ... My hope is we can still create a business plan. That’s what we do. We can keep it within the citizens of Tacoma, but it is not legal to continue the subsidization.”

There are parallels between this case and Click, said Dave Jurca, the attorney who argued the case for Rud Okeson, a former Seattle City Light manager, who sued Seattle over the street lights. That’s especially true because only 113,000 of Tacoma Power’s 170,000 customers can get access to Click, Jurca said. Its wires don’t pass by some homes in the southeastern part of the utility’s territory.

“It seems pretty clear to me that this is not a legal use of ratepayer funds,” Jurca said. “Providing cable and internet service is a nice thing. I’m all in favor of providing those kinds of services to citizens, but that doesn’t have much to do with the proper function of Tacoma Power, of the electric utility providing service for people to use in their homes, and the best illustration of that is the ... people who are going to be paying for this TV and internet service that they can’t even access.”

The part of Click’s fiber optic network that is used by TPU can be charged to the utility and paid for by ratepayers, Jurca said, “but to the extent that it is used for the nonutility business of cable TV and internet service, I believe it is inappropriate to charge that to electric utility ratepayers.”

The July 2015 legal memo from Pauli, the city attorney, “was spot on correct,” Jurca said. In an interview, Pauli said the memo is not a legal opinion but lays out relevant state and city laws and case law that “would be applied to any kind of challenge to decisions relating to Click.”

Among other things, the memo points out:

▪ According to the city charter, all TPU revenue can only be used for the necessary operating expenses of the utilities. “Utility revenue shall never be used to make loans to any other utility, department or agency of the city,” the memo says.

▪ The TPU board only has authority to approve “activities that bear a sufficiently close nexus to the purpose of providing electric, water, or rail services to its customers,” the memo says. The TPU board can approve building a telecommunications system if it will enhance utility service (which is how Click came to be in the first place). It also can sell, temporarily or permanently, surplus capacity on that network.

▪ A February 2015 order of the Federal Communications Commission that classified broadband internet service as a public utility doesn’t change the fact that telecommunications services are not considered a public utility under state law, and doesn’t change previous state Supreme Court decisions that ruled telecommunications services provided by a city are not public utilities.

▪ Electric revenues can’t be used to pay for costs directly associated with providing commercial telecommunications to the public “because such services are not sufficiently related to the production or delivery of electric services.” But money from the city’s general fund can be used to offset the costs of those services.

▪ Whenever Tacoma Power no longer needs a portion of the telecommunications infrastructure that the commercial side is still using, the maintenance costs for that part of the system can’t be paid with electric revenues.

Members of the TPU board and the City Council have been briefed by city attorneys during executive sessions (Pauli said those discussions are subject to attorney-client privilege), but opinions still vary about whether it’s appropriate for ratepayers to foot the bill for Click. It seems to come down to personal interpretation of the laws and of what Click’s network means to Tacoma Power.

THE CASE FOR RATEPAYER FUNDING

Mayor Strickland, who has been a champion of the all-in business model, said Click is an inseparable part of Tacoma Power and was built to improve the power system, so it should be funded as a part of the electric utility.

“For me it’s completely legal, because it’s a part of Tacoma Power. It would be like saying police and fire aren’t a part of general government, when it’s part of what we do every day,” Strickland said. “It’s appropriate for me to assume that Click is an entity of Tacoma Power, and I don’t think of them as two separate entities.”

TPU board members Larkin, Bryan Flint and Woodrow Jones supported the Tacoma Power-only funding plan for Click that would not include any subsidy from the city because they said there is enough of a relationship between Click and Tacoma Power for electric revenues to fund it.

Strickland and members of the City Council, for their part, support the plan partly because they want to use the city’s general fund for other purposes, such as adding more police officers and firefighters and keeping libraries open.

Larkin, who considers the current 94 percent allocation model for Click’s costs inherently unfair, said that under the latest plan, Click’s cable, internet and phone subscribers will bear about 90 percent of the costs. She thinks it’s legally defensible for Tacoma Power to bear the other 10 percent, partly because the gigabit technology could possibly be used by the utility.

In the next 10 years, Larkin and Flint have said, bundling phone, internet and cable services and upgrading the network will help Click become more self-sustaining and need less money from ratepayers to be solvent.

Right now, about 3 percent of a Tacoma Power customer’s bill is dedicated to Click funding, utility staff have said. Rates for the next two years have not been set — any changes have to be approved by the TPU board and the City Council — but TPU staff said there likely will be a rate increase because of several factors, including the direction by policymakers to fund an expansion of Click (if the plan passes the council).

“There are clearly costs that are 100 percent cable TV-related, and those clearly shouldn’t be picked up by electric ratepayers because there certainly is no benefit to the provision of electricity through providing cable TV services,” Larkin said. “If we were in a funding level that picked up those types of costs, then I absolutely wouldn’t support it.”

This story was originally published October 8, 2016 at 3:33 PM with the headline "Can Tacoma make electric customers pay for a bigger, better Click?."