Telecommunications may provide lower risk opportunity for electric utilities

Tami Cissna

Associate Editor

With the passage of the Telecommunications Act of 1996, many U.S. electric utilities are increasingly investing in the telecommunications industry.

Utilities` participation in telecom services, either directly or through alliances, can open new sources of revenue, improve relationships with customers, increase efficiencies and discourage electric power competition.

Two energy giants recently announced plans to join the growing throng offering telecommunication services. Southern California Edison (SCE), the nation`s second largest investor owned utility (IOU), said in late December it had cleared its last significant regulatory hurdle to become a telecommunications service provider. SCE will be a “carrier`s carrier,” supplying wholesale high-volume voice and data carrying capacity, high-capacity switching, maintenance, construction and network design and operation services. The utility has no immediate plans to offer retail dial tone service.

In January, diversified energy company 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 (ISP) 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.

The ISP market is $8.4 billion, currently growing at 35 percent per year. It consists of more than 6,000 ISPs providing consumer and business customers access to the Internet, according to the Yankee Group.

Competitive leverage

Electric utilities` assets provide them unique leverage for competition in the telecommunications industry. These assets include above- and below-ground rights-of-way (ROWs), inner city conduits, pole and tower space for communications, microwave communications systems, communications networks, network operation centers, communications engineers and operators, and a mobile work force with supporting equipment, vehicles and depots.

Another appeal is the field`s growing opportunity. Frost & Sullivan predict the telecommunications industry will experience a compound annual growth rate of 7 percent-compared with the 1.1 percent growth rate anticipated for the electric power industry-for the forecast period of 1996-2003.

Within the telecommunications industry, the carriers` carrier market is one of the fastest growing segments. According to the Yankee Group, the carrier`s carrier market is expected to grow from a $1.2 billion market in 1997 to $12.3 billion in 2002-rep-resenting a compound annual growth of 60 percent. Some see this area as a first step in a continuing campaign to launch a more aggressive entry into telecommunications.

An RKS Research & Consulting survey indicated residents and small business customers are open to packages of telecommunications-related products and services from their energy provider. Overall, they assume combining products and services in a package over a single brand would add value and create economies of scale.

Residential respondents favor AT&T as the provider of the telecommunications package. However, the local electric utility is a close second, ahead of such national brands as MCI and Sprint.

“Based on the response of the customers we sampled, a combination of a respected energy provider, linked up with a credible national brand to offer discounted telecommunication services, would be a potent entrant in these emerging markets,” said Charleen Heidt, RKS vice president of residential research.

Electric utilities` assets that bring value to a telecommunications business include the following:

– extensive ROWs and poles, ducts, conduits, and physical assets for routing cables;

– substantial space in substations and other properties for new equipment and towers;

– space on existing towers, masts, and poles for addition of new antennas;

– maintenance operations, including vehicles, personnel and associated expertise;

– established customer relationships and a direct link with every potential telecom customer;

– billing and customer information systems;

– reputation for reliable service and associated brand name recognition;

– telecom technology experience for their own purposes (in general); and

– fiber optics installation, operations and maintenance experiences in many cases.

Telecom covers the entire spectrum of wireless, broadband, wireline, and satellite technologies and all forms of analog and digital traffic, including voice, data, video, audio and other communications and entertainment services. A utility may be involved in several areas of telecommunications infrastructure or services or only one or two, said Tom Kutscher, project manager in Black & Veatch`s electric and telecommunications division.

“All U.S. electric utilities must transform themselves into electric-telecom utilities to some extent,” Kutscher said. Many have executed major telecommunications upgrades to improve customer communications, enhance customer data gathering, provide additional demand side management services and to improve overall processes.

Prior to strategy development, each utility must determine which telecom business it wants to be in, and to what level of involvement. It also must clearly identify the telecom businesses and entertainment business that it wants to avoid, he said.

Multiple strategies

An EPRI report, “Business Opportunities and Risks for Electric Utilities,” documents strategies for electric utilities` partici-pation in the national information superhighway (NIS). These strategies include all aspects of the telecom industry, as well as entertainment providers such as cable and satellite TV. They are not limited to only the Internet. The report described five strategies electric utilities can pursue (see table).

The waiting strategy allows a utility to observe mistakes and false starts of other utilities and sort out technological questions. However, in the mean time, competitors may erode business opportunities, and the utility may lose pole space to other telecom providers. Waiting also prevents valuable learning experience resulting from prototype telecom projects. EPRI called this strategy “very risky” and not a valid choice for most U.S. electric utilities.

A leased network offers the following advantages: low telecom capital investments; possibly low operating expenses depending on existent competition; and low personnel and training costs. However, this strategy yields only minimal opportunity to participate in the telecom revolution. It offers very limited new revenue potential. The utility loses hands-on control of telecom channels to other firms. Also, the company may likely experience loss of pole space and ROW to other firms.

This may be a good temporary solution for some electric utilities while new telecom infrastructure is being built, according to EPRI. However, as a long-term strategy, it lacks major potential for new non-electric services, and allows the company to be dependent on other firms for essential electric-related telecom needs. Worse, it may have no other company provide cost-effective channels for AMR and customer automation.

A dedicated network, which is relatively low risk, gives utilities complete control over telecom needs. A broadband backbone can be a revenue generator by the leasing of fibers, channels or bandwidth to others. This strategy can also evolve into multi-purpose or full service networks strategies.

A dedicated network involves capital costs and O&M costs, and there may be relatively little potential for new large revenue and profit streams. This is a relatively safe strategy, but not recommended for utilities that want to maximize new business and revenue opportunities, the report said.

A multi-purpose network essentially requires either a broadband wireline network to reach most or all customers, or a combination of broadband wireline with wideband or narrowband wireless. Either way, it is an extensive physical network that goes well beyond what most electric utilities have in place at present.

A multi-purpose network provides many NIS opportunities for new revenues and profits. It is much less risky than a full service network since high-end services are provided by alliance partners. This strategy can much more easily evolve to a full service network than can a dedicated network. Also alliances of some type are nearly certain to be formed, and they can bring many synergistic benefits.

This strategy is expensive. Also, competition by other new broadband networks and new telecom service is increasing, and it is uncertain whether the network will have a reasonable return on investment.

A full service network offers the highest potential for new revenue and the highest profit potential. This strategy enhances utility`s ability to fight off electric competitors, and allows the greatest relationship building with customers.

A full service network is the riskiest of the five strategies. It has the highest capital costs, the highest O&M costs and the steepest learning curve. It also is the most vulnerable strategy to new forms of competition. It has the greatest degree of legal and political challenges and greatest regulatory impact.

This strategy is not for the faint of heart, but it could have tremendous revenue stream and profit potential for some utilities, EPRI said.

Electric utilities have long used telecom equipment and services for their own purposes-for production and distribution of electric power and associated operations and maintenance activities. With the growing necessity for utilities to grow outside of their core business, telecommunications services may provide a lower-risk entry point than the fanfare of retail business opportunities available.

Next month: Utility implementations of telecommunications services.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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