Power Play - Utility Companies Are the Dark Horse In the Telecommunications Race
By BILL RICHARDS
The Wall Street Journal Interactive Edition -- September 21, 1998
In the converging world of telecommunications, cable television and the Internet, a dark horse -- the electric-utility industry -- has joined the race for the "last mile."
Long sidelined by regulatory restrictions, electric utilities have the nation's
third-largest telecommunications infrastructure. More than 40,000 miles of
fiber-optic cable, much of it unused up to now, links power plants with
substations and other energy control points. Only telephone and cable
companies have larger systems. The utilities also have ample reason to
diversify as deregulation begins to siphon away customers from their
traditional power-supply markets. So far electric utilities in 18 states are
competing for a piece of the telecommunications prize.
"Virtually everyone is getting into something new," says John Castagna, a
spokesman for the Edison Electric Institute, an industry trade organization.
Most utilities are selling their unused fiber capacity wholesale to established telecommunications partners like AT&T Corp. and MCI WorldCom Inc. But others have formed their own telecommunications companies.
When Warren Patrick, controller of the discount tire chain Tire-Rama, Billings, Mont., makes a long-distance call to one of the chain's stores in the state, he uses Touch America, a subsidiary of The Montana Power Co., Butte, Mont. The unit offers long-distance and other telecommunications services to customers across Montana Power's 107,000-square-mile electric service area.
Denver-based U S West Inc. still has the local service market wrapped up.
Across the country, Lee Bryan, chief executive of One Room Systems Inc., uses his Internet hookup to send his company's new interactive math
textbook to the Durham, N.C., school district from One Room's Research
Triangle Park, N.C., base. Mr. Bryan's Internet access provider: Interpath
Communications Inc., a unit of Carolina Power & Light Co., Raleigh,
N.C., one of more than 100 electric utilities offering Internet access these
days.
Tire-Rama's Mr. Patrick says that when he shifted to Touch America from
AT&T last year, it seemed odd at first to be getting long-distance
telephone service from an electric utility. But he says he was lured by the
Montana Power unit's competitive long-distance rates and the utility's local
presence. "They do a little tire business with our stores," Mr. Patrick adds.
"And all their employees have cars and trucks, and they buy tires too."
For the moment, physically stringing their fiber all the way to the consumer
and competing head-to-head with other providers of local phone service
remains too expensive for most power companies. But some industry
experts say the electric companies are well-positioned to make that
challenge eventually. They have all those miles of fiber already in place,
they have billing systems and service people and, perhaps most important,
they have a massive customer base.
'Valuable Relationship'
"Every month the customer opens his electric bill and reaches for his
checkbook," says Victor Chayet, a spokesman for en.able, a
telecommunications billing system jointly owned by PacifiCorp of Portland,
Ore., and KN Energy Inc., Lakewood, Colo. "That's a very valuable
relationship."
For now, municipal utilities, which are less profit-driven than
investor-owned utilities, are among those moving fastest on providing local
access. In Cedar Falls, Iowa, tiny Cedar Falls Utilities started stringing
cable-television lines to some 6,000 customers two years ago. So far, the
municipally owned utility has spent $8.3 million hooking the lines to its
existing 50-mile fiber optic network. The project won't show a profit until
next year, says Kenneth Alberts, Cedar Falls Utilities director of planning
and development.
"This is driven by economic development and quality of life, not quick
profit," says Mr. Alberts. "If we were an investor-owned utility we might
not be going in this direction."
American Electric Power Co., Columbus, Ohio, has taken the more
traditional approach. AEP has three million customers and more than 600
miles of fiber-optic cable across the Midwest. The company expects to
expand its fiber-optic system to 1,000 miles by the end of this year. Its
AEP Communications subsidiary is already leasing the system's unused
fiber-optic capacity to wholesale customers for as much as $100,000 a
month.
Montana Power's Touch America telecommunications subsidiary has
teamed with two big gas utilities, Houston-based Enron Corp. and
Williams Cos. of Tulsa, Okla., to lay 8,000 miles of fiber-optic line across
17 Western states. The partnership expects to have its fiber-optic
backbone extended to 12,000 miles by the end of the year, linking
communities from the Canadian border to Los Angeles.
"We are as diverse as any company in America," says Jack Haffey,
executive vice president of Montana Power's energy and communications
services division. In addition to its long-distance telephone service, the
utility offers Internet connections to customers in Seattle.
"We expect this [Touch America] to be one of, if not the, major growth
vehicle for the entire corporation," Mr. Haffey says.
Slow to Arrive
The entrance of electric utilities into the telecommunications scramble has
come slowly. Most large investor-owned electric utilities were prohibited
from engaging in nonelectric activities by the 1935 Public Utility Holding
Company Act. Smaller utilities not covered by the act, such as Montana
Power, began moving into telecommunications when the 1992 Energy
Policy Act eased regulation. Four years later, Congress opened the door
still wider for full industry engagement when the Telecommunications Act
encouraged the Federal Communications Commission to assist electric
utilities to diversify.
Within months of the passage of the 1996 act, 15 electric utilities had
signed up with the FCC to form their own telecommunications companies.
Most of the utilities already had substantial amounts of fiber that was going
unused when the regulations were eased. This so-called dark fiber
stemmed from overbuilt internal networks. Simply put, utilities laid excess
fiber because regulators usually base electric rates of return on a utilities'
asset base, says Philip Dunklin, president of Chartwell Inc., an
Atlanta-based electric-utility consultant.
"The bigger the asset base, the more money they were allowed to make,"
Mr. Dunklin says. "An awful lot of that capacity was dark fiber. It was a
dormant asset."
By and large, the electric utilities are proceeding cautiously.
Toronto-based Northern Telecom Ltd. is testing a system in Britain in
which fiber-optic cable links up with home hookups via neighborhood
transformers. The problem with adapting such a system for U.S. electric
utilities, experts say, is that utilities here have far fewer customers attached
to a single transformer than in the U.K., thus limiting the economies of
scale for telecommunications use.
No Sleepless Nights
"There is some activity in this area," says Jeffrey Sheldon, vice president
and general counsel for the Utilities Telecommunications Council in
Washington D.C. "But I don't think the Bell companies are staying awake
nights worrying about the electric utilities taking away their customers."
Electric utilities have begun to tap another underused asset -- their
power-line rights of way. When the FCC began auctioning off PCS
wireless licenses, for example, Dallas-based Texas Utilities Co.'s newly
formed TU Communications Inc. telecommunications unit bought 20% of
PrimeCo Personal Communications L.P., Dallas. Together they used the
utility's high-voltage transmission towers to speed PrimeCo's expansion of
PCS service.
The Edison Electric Institute's Mr. Castagna says electric utilities aren't
likely to compete for local access until Congress completes deregulation of
the electric industry and states clear away local regulatory obstacles.
"We're not going to see that this year, but it could happen in another year
or so," he says.
Meanwhile, some companies are already moving forward. Montana
Power's Mr. Haffey says his utility is deciding whether to add
more-profitable local-access service, tying its trunk fiber network, the
"superhighway" of sorts, to the more profitable last mile.
In North Carolina, CP&L's Interpath unit is also exploring similar options.
Laird Levison, Interpath's executive vice president and chief technical
officer, says the unit expects tenfold revenue growth over the next four
years as its telecommunications network expands.
"There's a tremendous amount of attention being focused on the last mile,"
Mr. Levison says. "Unless the electric company has a local-exchange
telecommunications network, they're just not in it." |
