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There are two terms you need to know when researching the trend of electric utility companies offering internet service using power lines:
PLC: Power Line Communications
BPL: Broadband over Power Lines
There is one term that best describes anyone that invests heavily in this technology: riverboat gambler.
Con Edison of New York, a subsidiary of Consolidated Edison (ED), was incorporated in New York State in 1884. Described as a ‘wires and pipes’ energy transmission company, Con Ed could, one day, also be called an ‘internet service provider’. To be sure, thanks to improvements in PLC technology Con Ed is expanding its PLC Pilot Project. One of the ‘benefits’ of PLC is a “comprehensive, high-speed communications back bone that can also be utilized to provide low cost Internet service.”
How do you value a company like Con Ed that yields over 5%, has a stable balance sheet, is trying to raise rates for the first time 10-years, and could also offer BPL service to millions of customers with minimal start up costs? You don’t. Rather, if the dream is to become a reality – if Con Ed can smoothly integrate and make available broadband access to current electricity customers – you simply own Con Ed and profit.
But will Con Ed and other utilities ever profit from BPL? I think they eventually will. However, before getting into BPL one caveat is worth mentioning.
Cautionary Tale
While researching BPL I was reminded of PICO holdings. Todd and I spent a great deal of time researching PICO last fall. However, we never mentioned it because when we stopped researching we discovered that we didn’t have much of a better understanding than when we started.
More to the point, PICO could be the most undervalued asset investments in the world today. However, you wouldn’t know this by looking at the outrageous paychecks management cashes, or by studying any of the company’s financials (save a basic P/B test). Rather, PICO has something that is probably going be worth more than it is currently booked as at some point in the future: water rights.
The point to be taken concerning water rights is that unless you are investing for a predictable return you are not investing. Water rights are not predictable – at least not yet. Thus, gamblers need only apply.
This lesson should be remembered when looking at BPL. Why? Because if there is no hard numbers to draw your speculations from your speculations can quickly morph into wishful thinking.
A Little Bit About BPL
BPL technology has been tested for years, but the bugs – which are mostly frequency issues/concerns and transformer issues – have taken a long time to be worked out. And although there remains ample evidence to suggest that many bugs remain, the FCC continues to push ahead the BPL learning curve. Given how accepting the FCC, and President Bush are of BPL, many technically inclined people are speculating that 2005 could be the year for BPL (2003 being the year of Wifi and 2004 the year of Voip).
One of the leaders in the BPL industry is Cisco backed Amperion Inc. A recent write-up from Merrill helps the newcomer better understand the company and the technology. Some others in the field, in no particular order, are Ambient Corporation, Main.net - Power Line Communications, Inc., Current Communications Group, IBEC, Idacomm, and HomePlug. And yes, given that BLP is catching the attention of many utility execs - how can a utility company ignore the fabulous studies made for (and sold to) them? - there will probably be 50 more new BPL related companies tomorrow. Lastly, the PLCA is a trade association representing the interests of electric utilities interested in offering power line communications
A Little Bit About Utilities
For the 1990s utilities investor talk of BPL will undoubtedly bring about déjà vu. After all, many old utility companies spent the late 1990s trying to discover infinite growth possibilities in fields not related to generating and delivering energy and dividends, and many of these experiments failed miserably.
But alas, there is a major difference between BPL and trying to trade and profit from things like weather derivatives: Cinergy Corp already launched the first major BPL roll-out earlier this year to 16,000 homes, and Cinergy is looking to cover 55,000 homes by the end of the year (Voip services are planned for 2005). Apparently a utility company can deliver i-net access and power at the same time. Following numerous other tests, and Cinergy’s launch, other utilities – the latest being Aquila – are arriving on the scene.
A Lot of Confusion
Realizing that one utility has already launched BPL and that many others are on the cusp of launching and/or testing the technology, the question worth asking is how do you value these electric utilities? To reiterate, you don’t. Rather, if BPL technology is successful utility companies could quickly steal customers from traditional providers due to cost advantages. Moreover, many utilities – which are already wired up in places other broadband companies do not have the money to move into – could simply run tiny broadband monopolies. In other words, if BPL works the confusion comes from knowing when to buy.
That said, more confusion comes from the fact that it is impossible to find any utility companies that are talking specifically about BPL costs/future profits. Is BPL profitable? Will it be profitable in the future?
How Many Years Away?
The NTIA recently released a study on BPL. The FCC – eager to see broadband in rural areas and wanting to increase competition – appears to be willing to overlook any potential problems BPL poses. Upset amateur radio enthusiasts will probably not be enough to keep the BPL train from rolling. In short, BPL looks increasingly likely to (re)shape the broadband industry in the years to come. With the FCC estimating that 28.2 million broadband lines existed at the end of 2003, clearly there is room for growth.
That said, there is anecdotal evidence to suggest a BPL reality is not as close as it would seem. To begin with, it is difficult to believe that with a $40 million market cap a company like Ambiant is readying to help change the world of broadband. Moreover, Consolidated Edison owns 35 million shares of Ambiant shares, but does not feel the need finish the job and take the entity over (it goes without saying that Ambiant – which is reportedly pushing 200Mbps - is profitless). As for Ameren Corp – which teamed up with Big River more than a year ago – are they going to start offering BPL to paying customers soon? The company never seems to say a discouraging word about the technology, yet there profitless experiments continue to drag on. What is the hold up?
Jump on the Boat and Wait?
Depending on your outlook on interest rates and/or your willingness to dollar cost average, some of the electric utility companies mentioned may be suitable long-term investments right now. As for trying to hand select the one company that will first reap the benefits from BPL, don’t bother. Rather, chances are that if you invest in a solid electric utilities company that, one day, that company will profit if BPL becomes a success. Using the Ameren case - wherein the company is allowing Big Rock access to its lines but not handling many aspects of the business itself – is a good example of why the investor should stand pat: because years from now utility companies that made no BPL investments could have money thrown at them for use of their lines.
In short, unless the technology becomes more proven/profitable all utility companies should think this prudently (i.e. ‘you do the legwork and take the capital risk, and we will give you access to our power lines). Investors should do the same, and analyze companies based upon what is known.
Conclusions
PICO owns water rights in the driest area of America; a place where droughts are commonplace and States are already beginning to grapple over future water concerns. PICO’s assets could be worth more than they are trading at many years from now…
After having battled with the above wishful thought for some time (old bookmarks for the curious) the conclusion Todd and I arrived at was that PICO was not our type of investment. BPL is not unlike water rights in Nevada: there is a potentially spectacular upside but also the potential for nothing but hot air.
I personally think that BPL will work – that 5-10 years from now utility companies will be reaping some of their profits from this flexible technology. However, I also know that 120-year old companies have 5.5% dividends because they grow as slow as molasses, and that growth prospects hinge on the possibility or customer rate increase approvals, not radio waves.
Cleco Corp has roots dating back to 1914. Like many modern day electricity companies, Cleco originally used electricity run an ice plant: “Ice was necessary long before electric lights, natural gas or running water were considered necessities.
Needless to say, manufacturing and delivering electricity eventually became much more important than making ice.”
A hundred years from now will people look back and say that around the turn of the century companies like Cleco still used broadband lines to run electricity through?
On an ironic and final note, Enron’s Skilling was arguing that the company’s ‘broadband division should be worth a third of the company's $100 billion market value’ in 2001…if Enron’s assets - wherever they end up - end up producing $33 billion in broadband net worth, maybe its time for us all to jump on the boat and start making bets on the weather.
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