Telecom alliance opportunities are plentiful

Tami Cissna

Associate Editor

Utilities are increasingly creating for themselves key roles in the telecommunications revolution. Many are beginning to invest heavily in various areas of the industry, and in some cases, providing service themselves. The goals, either directly or through alliances, are to obtain new sources of revenue, improve relationships with customers and gain increased efficiencies.

The telecommunications industry itself is growing rapidly. Frost & Sullivan predicts the industry will experience a compound annual growth rate of 7 percent, compared with an rate anticipated growth rate of 1.1 percent for the electric power industry over the next several years.

Electric utilities possess many competitive advantages making them promising candidates in telecom. Most have extensive customer bases and reputations for providing reliable and high-quality services. They also have widespread name recognition and billing mechanisms already in place. Many utilities delving into telecom hope to provide bundled energy, telecommunications and other related services as part of a “one-stop” shopping service to residential and small business customers.

“With a rush of new entrants, including well-established utilities, telecommunications companies will be facing unprecedented competition,” said Brian Cotton, Ph.D., Frost & Sullivan telecommunications industry manager. “Utilities who take a proactive approach to competition by leveraging their strengths and diversifying outside their core markets will likely succeed. Those who take on a more casual approach will find their market share eroding as new players step in.”

Many electric utilities pursue this opportunity through alliances. Innovative partnering is critical to capturing the potential value. Partnering allows utilities to reduce network development costs and accelerate time-to-market, Cotton said.

Several major electric utilities have announced telecommunications alliances just in the last few months. AEP Communications, a subsidiary of American Electric Power (AEP), and American Tower Corp. announced plans to jointly build communications towers and offer build-to-suit services throughout the Midwest. AEP Communications, which already has 175,000 existing structures, formed in 1997 to provide fiber, wireless and information services to wholesale and retail customers.

Entergy teamed with Hyperion Telecommunications in January to offer local telephone exchange services to commercial customers in three major cities in the middle south region-Little Rock, Ark., Baton Rouge, La., and Jackson, Miss. The new alliance, Entergy Hyperion Telecommunications, plans to provide a full range of local exchange services.

Enron Corp. unveiled its first major Internet venture through a partnership with RealNetworks Inc. The alliance will offer high-quality video to corporations and Internet service providers over a nationwide fiber optic network Enron has been building. Enron plans to have about 15,000 miles of fiber line laid by year end, stretching from Portland, Ore., south to Los Angeles and east to Miami.

Many roads

Several different types of alliances could be beneficial to each electric utility, said Tom A. Kutscher, project manager in Black & Veatch`s electric and telecommunications division. If the utility`s strategy involves a multi-purpose network or a full-service network, it is usually necessary that an alliance be formed with one or more telecom or entertainment service providers. The further away from its core electric service business that the electric utility wants to move, the more likely that an alliance with a telecom or entertainment service firm becomes advantageous. Alliances can sometimes be beneficial for utilities with dedicated-networks, but they are less essential than for multi-purpose or full-service networks, he said.

The table above includes a few examples of electric utilities` alliances with one or more firms.

The examples of alliances listed depict the wide diversity of alliances between electric utilities and telecom firms, Kutscher said.

Arizona Public Service partnered with Electric Lightwave to install and maintain fiber optic cable, and is leasing fibers and ROW to third parties. Baltimore Gas & Electric leases fibers to long distance service firms and in a partnership with Metropolitan Fiber Systems. This partnership provides services to selected high-traffic users, such as credit card companies.

Central Maine has major equity interest in FiveCom, which is developing the New England Optical Network (NEON). NEON will provide service to long distance (LD), Regional Bell Operating Companies, cellular and other phone services.

Houston Light & Power leases fiber to several firms and has acquired three cable TV firms. Public Service Co. of Oklahoma created Metrolink, a fiber optics system that provides LD competitive access. Union electric granted ROW to FiberNet, which provides capacity in its fiber optics system for Union Electric.

Capital requirements

Innovative partnering and customer-agreement strategies help reduce network development costs and accelerate time to market, said Yankee Group`s “Carriers` Carrier Opportunities for Energy Companies” report.

One such strategy is putting long-term customer contracts in place in advance of construction. These pre-construction agreements help defray capital requirements for the construction of the networks. Quest, for example, establishes several agreements prior to construction that result in cash payments, which buy down the construction cost of the route.

Another major tactic to reduce network costs is for the utility to engage in fiber swaps and barter fiber for equity with other carriers. This helps accelerate network deployment, expand network coverage and reduce capital requirements, the report said.

Another strategy is the layered-services approach. The layered-services approach recognizes that many different services can be offered-ROWs, dark fiber, switched unbranded minutes, and many bandwidth-related services in between.

More choices

In addition to gaining new revenues, utilities providing new telecommunication services will benefit through increased satisfaction of its core business customers, Kutscher said. The enhanced communications can result between the company and its customers in the form of real-time energy information, energy savings through demand side management and increased customer awareness, remote billing and payment, and other customer automation services.

The growth rate in demand for telecommunications services greatly exceeds the growth of traditional electric utility service. As this trend continues, electric utility partnerships with telecom firms will increase in popularity.

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Williams, a carriers` carrier in the telecommunications industry, remains focused on wholesale services, while some other energy companies move further down the value chain and provide retail telecommunications services. Photo courtesy of Williams.

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Principal events creating telecom opportunities

– Telecommunications Act of 1996. The Telecom Act of 1996 introduced local competition, let energy companies establish exempt telecommunications companies, created a new class of cable companies termed open video systems providers, and allowed companies to sell multiple services.

– New Entrants. Competitive local exchange carriers (CLECs) have established market positions in multiple geographic areas and are now seeking to route traffic out of and between market beachheads. The expanding number of Internet service providers (ISPs) is also creating demand for carriers` carrier services, seeking economies in gathering and concentrating Internet traffic to ISP routers and to the Internet points-of-presence.

– Internet and Data Communications. New services and capabilities associated with the Internet and data communications are expanding geometrically the need for bandwidth. Corporations are putting intranets, extranets, and virtual private intranets in place to facilitate implementation of ubiquitous desktop voice, data, and video communications capabilities. Wider market acceptance of video-based applications-including video mail, desktop videoconferencing, and video streaming-will cause a thousand-fold leap in the demand for bandwidth.

– Wireless Communications. The penetration and services associated with wireless communications are also expanding the need for fixed radio systems with landline backbones and terrestrial network connectivity. The market penetration of voice communications and the expansion of mobile and fixed wireless data applications will contribute to significant growth in the need for wireline bandwidth.

– Third-Generation Networks. The conversion of today`s public switched-telephone network, private networks, and cable television systems to an Internet protocol-based broadband network-integrating voice, data, and video-is creating significant demand for new networks.

Source: The Yankee Group

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