broadband planning for electric utilities rev 2 20151216kentuckywired.ky.gov ›...

Broadband Planning for Electric Utilities

December 17, 2015

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Agenda

u Broadband technologies & drivers u Common myths vs. realities u Financial analysis structure u Consumer services & margins u Common mistakes in financial analysis u Consumer density impact to model u Funding considerations u Partnerships considerations u Potential approach

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Broadband Technologies & Drivers

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Benefits to Pioneering Gig Communities u  Bond rating improvements?

Fitch cited fiber as one reason for increasing rating of Kansas City, KS

u  Documented impact in attracting and retaining businesses, workers, and graduating students (anecdotal thus far, given early stage)

u  Documented increase in home values and rental rates

u  Only a handful of gig communities to date, all of which have had extensive press coverage and host international visitors

Chattanooga, TN

u  Amazon.com 2,000+ jobs and growing

u  HomeServe new call center

u  Volkswagen & Claris Networks expanding in Chattanooga

u  Startup Activity Retickr, Lamp Post Venture Capital, The Company Lab

Common Myths

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Common Myths vs. the Reality

u Deployment of fiber is an economic development strategy u Fiber is a tool, part of the overall strategy which

includes training, utilities, financing, taxes, and other tools

u A “large” pent up demand exists for broadband access u Marketing is critical. Must create demand by showing

value it delivers to consumers. u Unlike electricity, consumers have an option of not

purchasing broadband

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u Cable television service has substantial positive net margin u Often is a “break-even” in competitive markets needed

to increase broadband penetration

u Rural consumers not “hooked” on by bundling

u Advertising offers a modest revenue stream u Websites, search engines, Facebook, and others have

eroded the opportunity

u Opportunity varies market-by-market, need to find niche

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u Wireless will offer the long-term solution for broadband u Wireless will play a role, but requires fiber access

u Wireless has a 5 to 7 year depreciation cost vs. 20-plus for fiber (need to compare total cost of ownership)

u Wireless has limits on supported service speeds

u Advanced Metering Infrastructure (AMI) will pay for FTTP u AMI can be enhanced with fiber, but does not require it

10

Financial Analysis Structure

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Financial Statements u  Income Statement

u  Revenues

u  Allocations

u  Expenses

u  Depreciation

u  Interest

u  Taxes

u  Cash Flow Statement u  Implementation capital

u  Allocations

u  Equipment replenishments

u  Sources and uses of funds

u  Debt service

u  Balance Sheet

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Key Inputs Beyond Revenue u  Depreciation & replenishments

u  Electronics (5 year, 7 year, and 10 year) u  Fiber (20 plus years)

u  Expenses (partial) u  Staffing u  Contracted services u  Churn u  Sales and marketing u  Locates u  Electronics (license and annual maintenance) u  Network operations center (NOC) u  Content (Internet access, programming, dial-tone)

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Consumer Services

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Consumer Services

u Data (Internet and transport)

u Telephone

u Cable television

u Advertising

Which service has the greatest revenue potential?

Which service offers the greatest “net” revenue potential?

Which service has the lowest threat of substitute products?

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Data

Trends in Broadband Speeds & Price

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$17.00

$1.00

0

10

20

30

40

50

60

70

80

90

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Monthly Fee ($) Speed (Mbps) Cost ($ per Mbps)

17 http://www.forbes.com/sites/niallmccarthy/2015/02/27/the-great-decline-of-the-landline-infographic/

Cable Television Contribution Margin as a Percent of Revenue

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-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

19 http://www.businessinsider.com/cable-tv-subscribers-plunging-2015-8

20 http://www.fool.com/investing/general/2014/07/28/2-factors-leading-to-the-demise-of-cable-tv.aspx

Streaming Video

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Streaming Music & Audio IP Telephone

Internet of Things

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Common Mistakes

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Common Mistakes

u To account for “inflation”, add a multiplier for expenses and revenues u This approach will greatly overstate margins in the out-

years (uses “inflation” to increase net margins)

u A flat model is more appropriate u Do not inflate any revenues or expenses except maybe salaries

and cable programing

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Common Mistakes

u Add churn – with a consumer payment for connection fee greater than the cost of acquiring a new customer u This approach makes churn a contributor of revenue,

rather than a loss u Churn needs to be included, but as a net cost

u Using the same depreciation & replenishment period for fiber and electronics u This approach overstates cash flow projections in out-

years since electronics need replenishment every 5 to 7 years

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Common Mistakes

u Underestimate the “value” of buying power

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32.32%% 32.18%% 33.84%% 32.53%% 32.87%% 33.81%%

48.85%%52.98%%

64.55%% 63.73%%67.13%%

72.03%%

0.00%%

10.00%%

20.00%%

30.00%%

40.00%%

50.00%%

60.00%%

70.00%%

80.00%%

2003% 2004% 2005% 2006% 2007% 2008%

Percent'of'Programing'Expenses'to'Cable'Revenues'

Comcast% NCTC%Muni%

Impact of Consumer Density

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Capital Cost Recovery

Example only – actual results will vary from market to market. Based on a 20 year fiber life and 3 percent annual interest rate. Cost does not include network equipment, consumer electronics. Cost also assumed 100 percent overhead with no make-ready costs.

$44.80

$120.80

$22.40

$60.40

$-

$50.00

$100.00

$150.00

$200.00

$250.00

34.38 32.65 24.98 21.04 18.99 18.49 18.32 14.81 9.39 9.37 8.76 7.06 7.01 6.42 6.29 6.02 5.64 5.56 4.63 3.50

Meters per Feeder Mile

Fiber Passing Cost (per meter per month)

100 Percent Take Rate 50 Percent Take Rate 25 Percent Take Rate

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Funding Areas

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Funding Sources u  Subscriber revenues u  Federal programs

u  Health connect

u  E-rate

u  Grants u  Capital

u  Ongoing O&M

u  Bonding u  Internal loans u  Consumer payments u  Electric utility allocations

u  Capital

u  Ongoing O&M

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Partnership Considerations

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Framework for Understanding Options

Balance risk, benefit, and control u Municipal broadband u Incumbent upgrade u Partnerships

u Model 1: Private risk & investment u Model 2: Public risk & private execution u Model 3: Shared risk, investment

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Framework for Understanding Options Balance risk, benefit, and control

u Municipal & Cooperative broadband u Incumbent upgrade u Partnerships


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u Risk, reward, and control all at maximum

u Established strategies

u Electric utility confers huge benefits

u Example case studies u Ninestar, IN

u Chattanooga, TN

u Longmont, CO

Municipal & Cooperative Model

Framework for Understanding Options Balance risk, benefit, and control u Municipal & Cooperative broadband

u Incumbent upgrade u Partnerships


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u Largely catalyzed by prospect of competition (100% overlap with Google Fiber builds)

u Easy upgrade path for some cable operators—will deliver solid speed and good competition for FTTP

u Telco upgrade path typically more challenging, requires significant investment

Incumbent Upgrade

Framework for Understanding Options Balance risk, benefit, and control u Municipal & Cooperative broadband u Incumbent upgrade

u Partnerships u Model 1: Private risk & investment u Model 2: Public risk & private execution u Model 3: Shared risk, investment

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u City facilitates private investment u Leading private entity is Google Fiber

u Strong interest by smaller companies

u Reduced risk, no control, potential benefit

u Facilitation can expand to tax benefits, other economic development incentives

u Beware entities seeking benefits without offering investment

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Model 1: Private risk, public facilitation



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u Variation on traditional municipal ownership u All risk, benefit, and full control

u Emerging innovation makes use of the traditional P3 structure used in Europe and increasingly in US u Leverages private sector strengths

u First time applied to broadband in US

u Guaranteed revenue stream to private partner u Financial risk

u Political risk

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Model 2: Public risk with private execution

u Macquarie Capital team—very viable partner team

u Midst of complex process with range of Utopia member communities

u Turn-key private financing, deployment, operations, and revenue-sharing

u Guaranteed public funding in the form of a utility fee to all residents u  In some communities, will not be a politically viable

model (this has been true with some in Utah)

u  In others, can be strong model for buildout 40

Model 2 Case Study: Utopia



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u Extraordinary opportunity for innovation u Plays to strengths of both parties u From the standpoint of a locality, risk is shared

but 100% of public benefit realized u Public benefit does not show up on financial

statements

u Private partner gets financial benefit

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Model 3: Shared Risk

Model 3 case study: Westminster MD

City near DC, Baltimore

City will own fiber only; lease to partner to operate on open access basis

Ting Internet selected as partner

Partnership Summary

u Collaboration can enable scale u Buying coops analogous to the G&T

u Partner with your counterparts and peers u Other cooperatives, including telephone

u Municipals

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A Few Cautions

u Be skeptical of rosy projections u Be sure that risk as well as revenue are

shared u Be aware of dependencies and control u Avoid snake oil (remember BPL?)

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u Balance reward, risk, and control u Potential priorities include:

u Ubiquity u Consumer choice/competition u Community competitiveness u Control over infrastructure u Control over pricing u Residential sector u Small business sector u High tech sector

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Seeking Understanding of Priorities & Goals

Fiber Deployment – Potential Phases

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Create Backbone

Connect Transmission Substations (SCADA, Tie-

Point Metering, Video Monitoring)

Connect Distribution Substations (SCADA,

VoIP, Video Monitoring)

Connect Electric Utility Facilities (Network

Operations and dispatch)

Create Foundation for Electric Distribution Operations


48

Create Backbone







Distributed Generation

Provide Distribution Automation

Support

Industrial Consumers

Motor Operated Switches Reclosers


Expand Backbone to serve distribution assets and distributed generation -


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Create Backbone









Support


Medical (Hospitals and Clinics)

Private Schools

Public Schools

Connect Community

Anchor Institutions



Connect institutions and public facilities



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Create Backbone









Support



Private Schools

Public Schools

Connect Community

Anchor Institutions





Wireless ISP’s

Cellular Providers Connect Wireless

Towers

Support Wireless (Mobile and Broadband)


51

Create Backbone









Support



Private Schools

Public Schools

Connect Community

Anchor Institutions




Office Complexes Deploy FTTP

Multiple Dwelling Units

Consumers

FTTP for delivery of broadband services


Wireless ISP’s

Cellular Providers Connect Wireless

Towers

Support Wireless (Mobile and Broadband)

Thank you! Tom Asp

CTC Technology & Energy 847.922.3978

[email protected] www.ctcnet.us

broadband planning for electric utilities rev 2 20151216kentuckywired.ky.gov ›...

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