It's Now or Never for Power Line Broadband
Can utilities make a credible play for power line communications?
The mood near the end of the first day of the Power Line Communications Association (PLCA) meeting last December was upbeat. High-speed Internet through the electric socket seemed tantalizingly real. The day had started with a video from Ameren, showcasing a few of the 50 or so households who were part of a power line communications (PLC) trial in Missouri. These consumers were thrilled to the gills about PLC.
A plethora of presenters had thrown up a frenzy of PowerPoint slides about commercial PLC deployment in Europe and the dozen or so trials in the United States. The technology was no longer the problem; it was simply a question of finding the money for the build-out. Representatives of EarthLink declared that PLC had real potential to be the third major broadband technology in America. The biggest hurdle, the speakers all indicated, was time: PLC needs to happen now, before cable and DSL have achieved unstoppable market share-two or three years from now.
But then Tim Frost, director of corporate planning at Consolidated Edison, took his turn at the podium. "[There is] an ominous lack of participation by utilities" in PLC, and the broadband business is not making money at the gross margin right now, he said. At the end of his presentation, there was dead silence.
What, exactly, is the business case for PLC in the United States? It's a question without a clear-cut answer, but if the experts are correct, potential PLC players must figure out that answer very quickly, or lose out altogether.
The Appeal of the Last Mile
What makes PLC so attractive, in some circles, is what it doesn't have: a need to lay miles of wires, fiber-optic or otherwise. Instead of building out to every single residence, PLC technology runs either to, or around, a transformer.
Contrast that to cable, which requires an upgrade installation to every residence. Or to DSL, which is simply not available to many households, despite the fact that nearly every American residence has a phone line (or two or three).
Brian Wenger, principal research engineer at EarthLink, sees the need for a "truck roll" to a residence as the Achilles' heel of both broadband cable and DSL. One of the reasons for the high adoption rates of dial-up Internet service was that consumers could serve themselves-they didn't need to wait around for a representative from their Internet service provider (ISP).
PLC holds the same promise, Wenger believes-if the industry moves quickly to adopt an open standard on the PLC "modem." The cable industry is quickly reaching that point. Cable modems can be purchased at many computer stores and online, and more than 90 percent of DSL is now self-installed. Wenger says that PLC modem manufacturers and utilities do not have the luxury of time to fight over proprietary standards.
The European Herring
Commercial PLC deployments are under way in Austria, Germany, and Sweden, and trials are ongoing in Brazil, Finland, France, India, Indonesia, Norway, Peru, Poland, the Netherlands, and Spain, according to Joe Marsilii, president and CEO of Reston, Va.-based Main.net-Power Line Communications. But that doesn't mean PLC will be commercially successful in the United States.
For starters, there's the issue of transformers. Transformers on the 220-volt European grid serve an average of 100 to 250 households, compared with the five to 15 households served by each transformer in the United States. The higher density of the European grid translates into lower capital expense for build-out of a PLC network.
In addition, a larger share of the European network is underground and uses shielded cable-factors that tend to minimize signal leakage problems in Europe.
And the incentives for upgrading a network to PLC can be vastly different. As part of ConEd's own PLC pilot, Frost has looked closely at the Italian business case for deploying PLC. For Italian utility Enel, he says, deploying PLC makes sense. In addition to enabling broadband communications, PLC can also enable automated meter reading (AMR), energy management, and real-time pricing, as well as provide a tool to control power theft and deal with uncollectables. These tools can make a real difference for Enel, which reads meters once a year, and has high theft and uncollectable rates. In fact, Frost says that Enel estimates it will save $25 annually per customer by deploying low-voltage PLC. In other words, Enel expects a four-year payback on PLC deployment-a pipe dream for most U.S. utilities.
The Regulatory Conundrum
Regulatory uncertainty also clouds the business case for PLC. Asset ownership, cost sharing, radio frequency (RF) emissions, access, and common carrier issues all must be sorted out before PLC stands a chance of commercial deployment in the United States.
The regulatory problems straddle two distinct agencies-the state public utility commissions (PUCs), which utilities are accustomed to dealing with, and the Federal Communications Commission (FCC), which they are mostly not.
On the PUC side, it is far from clear whether commissions will require utilities to seek approval to use regulated assets (transmission wires) for an unregulated business. Cases in California suggest that the PUC would need to approve such use, while cases in Indiana point in the other direction, according to Richard Keck, an attorney with Troutman Sanders.
Even if utilities can get over the regulated assets hurdle, the more pertinent business question concerns access and common carrier issues, intertwined with cost sharing. In other words, if utilities begin offering PLC, will they be required to open their transmission networks to competitors? And if so, what rates will they be permitted to charge?
Keck says that PUCs may draw an analogy to the regulations dealing with ISDN lines. Before passage of the 1996 Telecommunications Act, phone companies allocated zero costs for use of telephone lines to their unregulated affiliates offering ISDN service. After passage of the act, which forced telcos to unbundle the local loop, regulators required the local carriers to charge the same cost to competitors that they charged their own affiliates-nothing.
But PUCs might not require utilities to act as common carriers. Keck points out that neither dial-up Internet service nor cable broadband service has been treated as regulated services.
The worst thing, according to Keck, would be PUCs requiring utilities to offer a transfer price for wire access that makes offering PLC uncompetitive. And the overall regulatory uncertainty does not bode well for PLC. As Keck says, "If you want into this business, you don't want entry barriers."
Then there are RF electromagnetic fields or emissions issues, also known as the FCC Part 15 regulations. One of the obstacles that has surfaced in trials in the United Kingdom, Germany, and the United States is RF emissions that exceed permissible limits. The problem is that at the higher frequencies required for broadband communications, current travels through the soil, rather than through the neutral wire, according to Larry Carmichael, project director at the Electric Power Research Institute. In the United Kingdom, he says, the metal light poles began acting as antennas. PLC affected the frequencies used by the British Broadcasting Corp. and the emergency broadcasting system, according to other reports.
If PLC cannot meet RF emissions criteria, it could spell doom for PLC. According to a utility executive who did not want to be identified, asking for a waiver on RF emissions from the FCC is untenable. "If we ask for relief, we open the Pandora's box of every intervenor [coming out of] the woodwork. … It would drag on forever," the executive predicts. "We can't go forward with a commercial business unless we have met the FCC limits."
The Price To Beat
"The technological possibility for power line communications is reasonably certain, but the business case is going to be the rub," says Karen George, principal and director of customer insight at Primen, a Madison, Wis.-based research and consulting firm.
The cable industry has spent $75 million to upgrade their networks for broadband service to 65 million subscribers-amounting to around $900 per household. That build-out required cable companies to equip every home passed. On the other hand, to build out a PLC network, utilities need only equip, essentially, every transformer. So, the anonymous executive points out, utilities can share the cost between the number of homes per transformer. "The bottom line is our costs are going to be lower on a capital cost basis. So we should be able to have competitive pricing advantage against what cable modem service has, for example," he argues.
Others, though, question whether most utilities can provide PLC broadband service at even an equivalent rate to current DSL and cable prices. In Europe, the build-out cost approaches $400 per residence, according to Primen's George. Based on research Primen conducted in the fall of 2001, George estimates that build-out costs for most U.S. utilities will fall somewhere in the range of $700 per residence.
Even if the installation cost per residence is closer to the $400 mark, George questions whether PLC service can compete profitably with DSL or cable. Assuming a $400 installation cost, with the customer paying $100 and the remaining $300 amortized, utilities would need to sell $500 in service over three years to recoup those costs. That translates into a rate of $42 per month, George says-a rate that includes a gross profit of 20 percent, but no operating costs or net profit figured in. When operating costs and net profit are added to the calculation, she says, utilities will have to charge customers around $80 to $100 per month to offer the service profitably-much more than DSL or broadband cable. Even if there are additional services that only utilities can offer-for example, energy management-George questions whether customers will be willing to pay the premium price to get broadband plus those services. Entertainment, communication with family members, home networking-those are the interests that consumers have in broadband, George says.
But others directly involved with building out PLC say the capital expense is much less than even $400/residence. Main.net's Marsilii says that his costs are closer to $160 per residence passed. Main.net is involved in nine of the 12 current PLC trials within the United States, and its Israeli parent company, Main.net Communications Ltd., is involved in another dozen trials or deployments worldwide.
One factor that can drive up the capital expense cost is the backhaul cost-the cost of connecting PLC traffic to the Internet. Making that backhaul connection requires either fiber optic cable or a T1 line. Both can be prohibitively expensive. The retail cost of a T1 is between $1,000 and $1,200 per month. But it is possible to get T1s at a much less expensive rate, according to one utility executive involved in a PLC trial, who asked not to be identified. "Depending on how telecom-savvy [utilities] are, and whether they've got good telecom partners, they're either having to pay this really high price for backhaul, or they're not. To the extent you are paying that high price, yes, your price has to be up there [$50-$60 per month] to make your numbers work." On the other hand, he says, if utilities can keep their backhaul costs contained, they will be able to offer a lower service cost to customers while still making a profit.
The key to making PLC economical is good partnering on the telecom side, according to this executive. "The whole name of the game is getting the price point down to where people say they are willing to buy in great numbers. They have already shown that they are not willing to buy [broadband] in great numbers at $40 for cable or $50 for DSL."
In fact, broadband right now is in the dumps. Although close to 80 percent of U.S. homes have access to at least one form of broadband service, the number of actual subscribers is far lower than was predicted two years ago. While around 50 percent of U.S. homes have Internet access, only between 10 and 15 percent of households subscribe to broadband service.
But many experts believe that consumers are willing to buy broadband at lower price points.
In countries like South Korea, Japan, and Canada, the cost of broadband is much lower than in the United States. According to a recent study by the Florida Public Service Commission (FPSC), consumers in South Korea pay less than $23 per month for broadband service-roughly comparable to the cost of dial-up in the United States. South Korea's broadband penetration rate clocks in at around 50 percent, compared with the United States' anemic 10 to 15 percent broadband penetration rate. And these numbers have little to do with the availability of broadband. Approximately 100 percent of households in South Korea have broadband availability.
Europeans also exhibit similarly price-motivated broadband adoption rates. The FPSC report notes that in Europe, the average broadband price is about $40, "but consumer perceived value of broadband is only $30."
Main.net's Marsilii says that the key to the U.S. broadband market is a price point about $20 over dial-up costs-just under the monthly cost of a second phone line.
If Not Now, Then When?
"Every day without deploying PLC equals customers signing up for DSL or cable." That was the grim assessment of David Kelly, president of PPL Telecom, at the PLCA conference.
"Time-to-market is critical if PLC is to prevail," says Zoltan Fekete, vice president at Credit Suisse First Boston's London office. The business fundamentals for PLC are right, he believes-if companies can find the financing for the build-out. It's a big if.
As Fekete points out, the utility sector index from May 2001 to November 2002 dropped a whopping 55 percent, based on information from Datastream. But the telecom sector wishes it had such bad luck-the fixed line part of telecom had dropped 67 percent in the last two years. ISPs are in even worse shape, with their index down 86 percent since November 1999.
These are not promising numbers upon which to go looking for financing. But they are the numbers utilities must work with. Fekete says that despite the utility and telecom doldrums, opportunistic investors might be interested if companies can show commercial deployments-not trials-paying customers, and actual cash flow. Or, as Steve Byrd, vice president at Morgan Stanley puts it, those wanting to jump into PLC "need a fully baked business model."
With all the uncertainties, why should utilities think about investing in PLC? For ConEd's Frost, it's a combination of potential profits, and perhaps more importantly, a chance for utilities to improve their overall reliability and performance.
"Right now, the only way we know there's an outage is when a customer calls us," he says. PLC deployment can make the entire grid smarter. "It's a little like the invention of the laser," he says. In other words, PLC probably has possibilities that no one has yet explored. Frost says that utilities tend to underestimate the business costs of outages and other reliability problems, which PLC could help address. He also says that PLC could help deal with uncollectables, through the use of AMR. For example, to appease regulators concerned about disconnecting users during the winter, PLC technology could allow a low amount of kilowatts into designated dwellings-enough for lights and heating, but not for stereos, computers, and other non-necessary appliances.
As Kelly says, right now there is a window of opportunity that the power industry shouldn't let pass by. "It's such an exciting new technology, we've got to find a way to get there sooner."
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Can utilities make a credible play for power line communications?