Last Mile THIS! Utilities Join the Internet-Access Business
August 3, 1998
By MATT RICHTEL
There's a new power in the Internet access business: your utility company.
A growing number of electric companies -- once slow-moving,
government-regulated monopolies -- are getting into one of the most rapidly
changing businesses. At least 100 utility companies offer Internet access, including
more than 30 of the nation's biggest electricity providers, and dozens of others may
follow suit.
At the larger end are the likes of Arizona Public Service, whose Phoenix-based
subsidiary, Cyber Trails, has grown into one of the top 10 Internet service
companies in the state. At the other end of the spectrum is Plumas-Sierra Rural
Electric Cooperative, a power provider nestled in the Northern Sierra Nevada
mountains that also serves about 2,000 dial-up Internet customers.
Large or small, electric companies are moving into the Internet business because of
utility deregulation. Eighteen states have opened their power industries to some form
of competition, and most others are expected eventually to do so as well. That
means the utilities not only have to learn to compete, they have more reason to seek
new sources of revenue.
Moreover, many power companies already have the telecommunications
infrastructures that their Internet subsidiaries could use to serve outside customers.
So more than 100 utilities have turned to telecommunications, including
long-distance, wireless and local phone service, cable television access, home
security systems and, now, Internet access.
"We have another business in this building, another way to pay rent," said Robert
Marshall, general manager of Plumas-Sierra and its Internet access subsidiary,
Plumas-Sierra Local Net. "It will help us hold our own in the big wide world when
electricity deregulation hits."
The power companies are joining a host of other businesses in trying to own a piece
of the ground floor of cyberspace. Aspiring Internet access providers range from
mom-and-pop operations to giant long-distance carriers like AT&T, MCI
Communications and Sprint, and radio and cable television stations. Even while there
has been some consolidation among large and regional Internet service providers,
their overall number has exploded to 4,850 from 1,500 in the last five years,
according to Boardwatch Magazine, an industry trade journal.
The growth and diversity of Internet service providers means "you can't even
recognize what an ISP is anymore," said Jack Rickard, editor of Boardwatch.
For their part, power companies say providing Internet services is a natural move for
them. Across the country, many of the 180 large, investor-owned utilities own large
fiber-optic networks that they built for internal communication across states and
among power plants and field offices. They used only a portion of the capacity,
however, eventually leasing it out to telecommunications businesses. Now, they are
developing their own telecommunications businesses, including Internet access, said
John Castagna, a spokesman for the Edison Electric Institute, an electric industry
trade group.
Castagna said 30 to 40 major utilities were offering Internet access and others were
considering it.
Further, the power companies say they understand other crucial aspects of the
Internet business: billing, customer service and computer networking.
"You already have expertise on the communications and you already have expertise
on the computer networking," said Ben Preusser, business manager for Cyber Trails
in Phoenix. "All you need to do is drop a line to the Internet."
Of course, it is not quite that easy. Since the utilities themselves are regulated, any
costs from the Internet business cannot be passed on to power customers in the form
of higher rates. So the Internet subsidiaries must pay fees for using the utilities'
telecommunications infrastructure, and the start-up costs are the responsibility of the
utilities' parent companies and their shareholders, not the utilities' rate payers.
Arizona Public Service invested more than $2 million to get its Cyber Trails
subsidiary up and running, Preusser said. This involved buying modems, routers --
which route Internet traffic to the proper destination -- and establishing a high-speed
line into the backbone of the Internet. Cyber Trails also leases data lines from US
West and from Arizona Public Service.
Cyber Trails, which began offering Internet access in March 1997, has 6,000 dial-up
customers, adds 20 new ones a day, and has one of the 10 largest subscriber bases
in the state, Preusser said. He said the company had marketed aggressively, going
after rural areas that national Internet service providers had ignored, and also had
contracts to provide access to several Indian reservations.
Preusser said the new business was helping Arizona Public Service learn about the
challenges of moving into a new business in a competitive marketplace -- knowledge
that should prove beneficial as the utility heads into a deregulated and much more
competitive electricity marketplace.
"It's a different set of skills," he said. "It turns out that just leveraging your existing
technology doesn't work all that great."
Carol Heiberger, an energy and telecommunications consultant in Philadelphia, has a
similar view, noting that the relatively low cost of offering Internet access gives
utilities the chance to experiment with a new business model. "They're practicing
running a competitive business to see what it looks like," she said.
But Ms. Heiberger, who has written extensively on the efforts by utilities to offer
Internet access, said there was no guarantee that power companies could succeed in
this business. On the one hand, she said, they have infrastructure, marketing, brand
recognition and customer service experience; on the other, they are not accustomed
to the fast-moving world of technology.
Still, the potential problems did not discourage Carolina Power and Light, which
serves 1.1 million residences with electricity, from entering the Internet business. In
January, it acquired Interpath Communications, a company that provides consulting,
Web page hosting and design, and Internet access to 4,500 businesses in North
Carolina, as well as surrounding states.
The experience of Carolina Power and Light also highlights an approach taken by dozens of utility companies entering the telecommunications business: Rather than building from scratch, as in Arizona, they are buying existing Internet companies or signing joint ventures with major telecommunications providers. A year ago, for example, a subsidiary of Potomac Electric Power Co., which serves Maryland and the District of Columbia, pledged to spend $150 million to develop long-distance, cable television and Internet services in partnership with RCN Corp., a major telecommunications provider.
There are other reasons some utilities turn to the Internet. Warren Dunn, director of communication for National Rural Electric Cooperative Association, said that at least 60 of the nation's 1,000 rural cooperatives offered Internet access, in part because they consider it part of their charter to serve their communities.
Marshall, the general manager of Plumas-Sierra, said the utility cooperative felt it had a responsibility to provide Internet access in a region others were ignoring.
Before the electric company started its Internet subsidiary in the fall of 1995, residents of the area had to place a long-distance call to get Internet access.
"We felt advanced technology would not be available unless we stepped up to do the job," Marshall said.
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