News

State Raps Boston Edison on Cable Deal

6/06/1999 8:00 PM Eastern

Boston Edison has flagrantly violated the terms under which
the state allowed the utility to expand into related businesses, officials in the office
of the Massachusetts attorney general said, and the utility should be fined and compelled
to divest its telecommunications business.

That judgment was in a brief released after 19 months of
investigation into the activities of Boston Edison's nonutility, wholly owned subsidiary,
Boston Energy Technology Group.

Part of the subsidiary is in a venture with RCN Corp. to
provide cable, Internet and telephone services.

George Dean, assistant attorney general and chief of the
Regulated Services Division of the Public Protection Bureau, wrote the document.

In 1993, Boston Edison petitioned the state Department of
Public Utilities (now the Department of Telecommunications and Energy) for permission to
invest in noncore businesses.

Against the objections of Cablevision Systems Corp., the
New England Cable Television Association and, ironically, RCN, the DPU gave the utility
permission to invest a maximum of $45 million in new businesses.

Further, the docket stipulated the permissible areas of
exploration: demand-side management, electric generation and electric vehicles.

Boston Edison argued that there was a "clear and
strong nexus between electric services and telecommunications." But the attorney
general's office said the company was wrong when it moved outside of the three specified
areas.

According to the accounting by state attorneys, the utility
more than doubled the state-mandated investment cap. Dean said the utility invested $25.2
million in cash, then transferred property to the cable unit, BeCoCom, at below-market
rates and provided financial guarantees, all of which totaled more than $45 million.

But according to the brief, the support extended even
further, as Boston Edison had another support agreement with the cable operation that the
attorney said constituted a below-market-value transfer.

Reilly's findings echoed complaints by the competing cable
operator, Cablevision. That company was denied intervenor status by the state Supreme
Court in December. Cablevision wanted to participate in the docket that examines the
transfer of ratepayer money to unregulated businesses. A Cablevision spokesman said the
company declined comment on the state attorney's report.

Even if the utility subsidiary was involved in permissible
activities, the attorney general's office called into question the way the utility and its
subsidiary swapped properties.

For instance, Boston Edison transferred 888 fiber miles to
BeCoCom in return for 552 fiber miles, but the transaction was not recorded. The utility
responded that the plant it swapped was booked in error as utility plant, so it was a
mistake to call it a swap.

The state disagreed and said some of the fiber miles
swapped are necessary for the provision of utility service.

To rectify the violations, state attorneys told the DTE
that Boston Edison should be required to divest itself.

Alternatively, the utility could retain interest in
BeCoCom, but allow an objective third party to bid on the fiber portion of the plant. The
difference between BeCoCom's "book" value of the telecommunications plant and
true market value would be returned to ratepayers.

In the opinion of the attorney, neither remedy would impair
the continued viability of RCN as a supplier of competitive cable, Internet and telephone
services.

Attorneys and regulators who have been following the
Massachusetts dispute said they haven't had time to analyze the brief, so they could not
comment on whether the opinions from the attorney general's office would have any impact
elsewhere on other license proceedings involving RCN and utilities.

It is now up to the Massachusetts DTE to act on the state
attorney's findings. The attorney said Boston Edison should be fined to "deter
improper behavior in the future," but did not suggest an amount.

RCN did not comment on the criticism of its partner, but it
did announce that it has expanded its business area surrounding Boston. The company signed
an agreement to provide bundled phone, cable and Internet service to the Boston suburb of
Belmont.

RCN already serves Belmont's neighbor, Arlington. It will
launch in another neighboring town, Waltham, later this month, and in Watertown and
Lexington by year's end.

With the Belmont deal, RCN has licenses in 16 Boston-area
communities, 12 of which are geographically linked.

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