Electricity Business Can Learn from Telecom Evolution

Oddly enough, local electricity generation by businesses and homeowners exposes a key problem for electricity supplier economics. Traditional pricing assumes energy consumption is equal to grid usage. 

But distributed generation breaks that assumption. Essentially, customers remove themselves, at least partially, from the system, but retain the optionality of using the grid for reliability, backup, and peak load balancing. 

But fixed costs stay embedded in the price of per-kiloWatt hour charges, so rates will rise as sales fall. At the same time, new demand driven by high-performance computing and associated data centers increases the need for new investments in transmission infrastructure as well as generation, increasing the fixed costs. 

The basic problem is a combination of high fixed costs; low marginal costs per additional kWh and the impact on ability to cover fixed costs when demand is reduced by local generation. 

Since fixed costs do not decline proportionally with local generation, all remaining sales must cover more fixed cost per kWh consumed. 

This pushes per-kWh rates upward for customers who still rely heavily on the grid. 

But the network still must be designed for peak load, sized to serve customers when solar output drops (night, winter, clouds). So self-generation reduces energy delivered, not the need for the grid.

Share of Customers with On-Site Generation	Utility Retail Sales (as % of original)	Fixed Cost Recovery per kWh	Average Retail Rate Impact for Non-Solar Customers
0% (baseline)	100%	$0.10/kWh	Baseline
10%	93%	$0.108/kWh	+8%
25%	82%	$0.122/kWh	+22%
40%	68%	$0.147/kWh	+47%
60%	52%	$0.192/kWh	+92%

What’s really happening is a decoupling of value from volume, something that also happens in other infrastructure contexts. 

The grid’s value is optionality and insurance, but it’s priced like a commodity pipeline. Distributed generation exposes that mismatch.

So what might be done to fix this problem? Fixed monthly connection charges are one way of “socializing” grid costs. Time-of-use pricing and demand charges also can help. But as with mobile and fixed telecom networks, “access” to the network might be more important than usage charges. 

So reframing the product might be conceptually necessary. The “product” electrical utilities sell is reliability, capacity, and load balancing, not just energy. 

Energy is a commodity that is part of the service, but grid access becomes the actual “product.” 

Beyond all that, perhaps more explicitly cross subsidies are needed, as once was the case for communications services, where business user profits subsidized consumer usage. Perhaps business customers and self-generators must subsidize customers unable (for financial or physical reasons) to participate in self generation. 

Until pricing reflects capacity and availability, not just kWh, rising self-generation will continue to raise rates for those most dependent on the grid.

This reminds me very much of how economics of the “telecom” business changed with competition. 

Both electrical grids and telecom networks have the same core traits:

• Extremely high fixed costs

• Very low marginal cost per additional unit of usage

• Peak demand, not average usage, drives capital investment

• Universal-service expectations layered on top of commercial economics

Historically, both industries solved this with implicit cross-subsidies. But widespread technology changes and deregulation changed the telecom business model. 

Traditionally, high prices for business customers (especially long distance calling) provided the profits that allowed affordable service for consumers. 

This worked as long as high-margin users couldn’t easily bypass the network and suppliers had pricing power. 

Self generation in the electricity business has the same dynamics. When high-value customers (commercial, industrial, affluent residential) can self-generate, electricity providers lose the profits that allow them to serve mass-market customers reliant on the grid with affordable rates.

The cross-subsidy that once flowed invisibly is exposed. The analogy with telecom after deregulation, mobile substitution for fixed voice, embrace of internet protocol and reliance on internet access as a core service for the fixed network illustrate the issues. 

Dimension	Traditional Telecom Access	Electric Grid (Emerging)
Core asset	Nationwide access network	Transmission & distribution grid
Cost structure	High fixed / low marginal	High fixed / low marginal
What drives capex	Peak simultaneous usage	Peak demand & reliability
Primary pricing unit	Minutes / lines	kWh
Implicit subsidy source	Business & long-distance margins	High-usage / high-income customers
Subsidy recipient	Residential & rural users	Low-income & non-solar customers
Bypass mechanism	VoIP, wireless, OTT apps	Rooftop solar, storage, microgrids
Resulting problem	Access prices no longer cover costs	Volumetric rates no longer recover fixed costs
Regulatory response	Access charges, USF fees	Grid access charges, demand charges (emerging)
Political constraint	Universal service obligation	Universal service + decarbonization goals

The problems are similar. Neither industry can simultaneously have volume-based pricing; high fixed costs; widespread abandonment of the core network and stable rates for mass-market customers. 

The telecom industry adapted by shifting its revenue model. Today,  customers do not primarily pay for minutes or megabytes anymore. They pay for “access to the network.” Think of it like Wi-Fi access. One pays to be connected, not for usage (bytes consumed or time connected or bandwidth provided). 

The analogy is a mobile phone service plan offered at a flat fee per month that includes “unlimited” data usage; “unlimited” national calling and text message. 

The customer pays for the ability to use the network, not consumption in a strict sense. 

Today’s electrical energy service problem is that self generation reduced kWh sales while fixed costs remain. As rates rise to cover fixed costs borne by fewer customers, there is more incentive to defect. 

So an access-fee model more effectively recovers shared fixed costs. So self generation no longer erodes fixed cost recovery. And the grid stays healthy.

What is the Value of a Copper Access Line That Cannot be Upgraded to Optical Fiber?

Some of us used to wonder what many telcos were going to do as they phased out their copper access facilities, since many are still covered by older laws mandating they provide service to any customer who asks for it. The problem is that those telcos must still have the means to provide service, even if they cannot use copper or optical fiber facilities. 

Wireless, in some form, always has been the only realistic alternative. Whether that is satellite service, mobile phone service or fixed wireless, untethered platforms might always be the only way to provide universal service in areas where a fixed network using cables is impractical. 

The latest advances allow standard mobile phones to communicate with low earth orbit satellites without any extra gear or software. 

Which still leaves us with the problem of how to value stranded copper assets, which are declining in value, especially when they cannot be upgraded to optical fiber, and as consumers continue to migrate away from use of fixed networks for voice services. 

Many potential fixed network “home broadband” assets owned by smaller telcos must use a blended valuation approach, as such firms generally own a mix of copper access lines that cannot be profitably upgraded to fiber-to-home; copper lines that can be upgraded as well as existing fiber lines that are operational.

Each asset has distinct valuation characteristics, with built fiber lines being the most valuable, non-upgradable copper lines the lowest valuation. 

The big U.S. telcos arguably always have grown more from acquisitions than from organic growth. Verizon, AT&T, Charter, Comcast and T-Mobile, for example, have done so. In the FTTH business, which always is capital intensive, there also is a “time to market” advantage. 

Building lines takes time. And even when built, take rates might remain in the 40-percent range. In other words, up to 60 percent of the assets are essentially stranded, with no revenue produced. So buying lines that do produce revenue (have subscribers on them) has lots of value. 

If building FTTH lines costs between $800 and $1200 per location, and we assume 40-percent take rates, the cost per subscriber can range from $2000 to $3000. 

If we add in marketing and acquisition costs, the full cost of provisioning a line with a customer on it can range from $2350 to $3700, assuming sales and marketing cost between $200 and $400 per sub, plus installation costs between $150 and $300 per subscriber. 

Scenario	Cost per Passing	Take Rate	Cost per Subscriber
Low Cost	$800	40%	$2,000
High Cost	$1,200	40%	$3,000
Average	$1,000	40%	$2,500

If that is the case, then it often makes sense to pay a premium to acquire customers and facilities rather than build them, if “buying rather than building” accelerates cash flow and also allows some additional economies of scale. 

When copper access lines are upgradable, there is additional upside. And even dwindling copper access revenues provide some amount of revenue and cash flow, even if they are declining assets. For providers who own mobile network assets, there additionally is the potential to serve former copper customers with fixed wireless access as well, as a longer-term alternative to using copper access. 

Eventually, that also will change the valuation of access network assets.

Revenue Often Does Not Drive FTTH Value

It often is hard to determine when it is worthwhile to upgrade copper access facilities to fiber-to-home platforms, in large part because competitive dynamics, customer density and total investment (own copper and upgrade to fiber; buy copper and upgrade to fiber) costs vary so much. 

In many cases, the financial upside comes not so much from operating revenue results but from equity value increase.

Fiber networks generally command higher valuations compared to copper networks. For example, while copper access lines from Lumen were acquired by Apollo Global in 2022 for about $1,154 per passing, the estimated value post-fiber upgrade ranged from $2,154 to $2,654 per passing.

The value of fiber assets can increase dramatically with higher customer take rates. A network with a 40% take rate may be worth roughly twice as much as one with a 20% take rate.

As a rule, the “average” cost of upgrading a telco copper access line to fiber is roughly $1,000 to $1,500 per passing (location), assuming 50-80 homes per mile, a suburban density. 

Costs arguably are lower for urban densities and higher for rural passings. Financial return often hinges on population density and competitive dynamics, however. Assuming the presence of at least two competent internet access providers, the fiber upgrade of owned assets might assume revenue from half to less than half of passed locations, since the other competent competitor will roughly take half the market share. 

For such reasons, many independent ISPs choose to build only in parts of any metro area, while many incumbent asset owners will tend to follow suit. In other words, it might generally make sense to upgrade in urban and suburban areas (often focusing on single-family residences) while delaying or finding different platforms for rural and ex-urban areas (fixed wireless, mobile substitution, satellite). 

But the key point is that the financial opportunity is to rebuild networks for fiber access and boost take rates for those assets. 

The cost per passing is one figure, but even after spending the money to upgrade to fiber, if take rates climb, the value of the assets still exceed the cost of acquisition and upgrade.  

For Apollo Global, for example, the acquisition of “mostly” copper access lines from Lumen in 2022 was about $1154 per passing. Once upgrade for fiber access (boosting per location investment to between $2154 and $2654), and assuming take rates can be boosted to 40 percent, the financial value of the assets still grows.

Year	Seller	Buyer	Assets	Valuation	Notes
2022	Lumen	Apollo Global	Mostly copper access lines	$1,154 per passing	Acquisition cost before fiber upgrade
2022	Lumen	Apollo Global	After fiber upgrade	$2,154 - $2,654 per passing	Estimated value post-upgrade
2023-2024	Various	Various	Fiber networks	$2,000 - $3,000 per passing	Typical range for suburban areas1
2023-2024	Various	Various	Copper networks	$500 - $1,000 per passing	Estimated range based on industry trends

Beyond those considerations, incumbent owners of copper access assets have other values to consider. Any telco that does not upgrade from copper to fiber likely cannot survive long term in the market when competitors do so. 

So irrespective of the actual business case, any access provider that wants to remain in business must consider fiber upgrades. “You get to keep your business” is the strategic rationale, not “higher revenues, lower costs and higher profits.”