Utility players: Telecom is the new game

Last April, the Clinton Administration issued its Comprehensive Electricity Competition plan encouraging states to implement retail choice for electric power by Jan. 1, 2003. As of January 2000, 19 states had enacted restructuring regulation, and three others had issued regulatory orders for restructuring.

How will the introduction of competition affect public utilities? It is almost certain that competition will take a substantial bite out of future profits, leading many municipal leaders to try to get a jump on private firms and look for additional ways to generate revenue. New offerings may include local and long distance telephone, Internet, cable and wireless services.

Opportunities

The communications industry has experienced explosive growth over the last decade because of the advent of the Internet and wireless phones, and the increased affordability of personal computers. According to the U.S. Bureau of Statistics, there are approximately 280 million television sets in the United States, 80 million of which bring cable into homes.

Additionally, 99.7 percent of U.S. households have telephones. By 2001, the Bureau predicts that 53 percent of all U.S. homes will have PCs, and 48 percent will have access to the Internet.

All of that data represents a huge potential client base for utilities. The average household spends more than $200 per month for electric, local and long distance telephone, cable TV, Internet and wireless services combined (see “General Statistics,” page 36). By providing bundled communications services, along with the electricity that they are already providing to consumers, utilities can dramatically increase their revenue and profit margins.

In order to increase their services, however, utilities must identify their customers’ wants and needs. Recent market analyses have shown that residential customers are looking for reduced costs, improved customer service, the latest technology, more choices and bundled services on one bill. Some would be happy simply to have better service and cheaper prices.

Small business customers also seek multiple services, including technology-based applications, from one provider. Bundled services can help them save time and money and remain competitive in their own fields.

Competition

Many private telecommunications companies that were formed as a result of the deregulation of the telecom industry are offering services — such as long distance telephone, wireless, Internet and cable television — to residential and business customers. Many direct broadcast satellite providers also are in the mix. So how are electric utilities poised to battle their formidable opponents?

Actually, utilities offering communications services to the community have many advantages over private companies or startups:

* They are locally operated. Contracting services from a local source is a strong selling point, especially since the competition often is comprised of national conglomerates or unknown startups.

* They can offer bundled services, which addresses the need for customers to work with one provider. They can go one step further by charging for those services (electric, phone, cable, wireless, Internet) on one monthly bill. And in many cases, utilities can offer those joint services at lower prices than single-service providers.

* They have strong brand identity. Most customers are loyal to their local utilities because they have received excellent service for many years from an established company.

* They already have access to residential and small business customers. Because the service is already established in the home, many customers will not want to change providers. The Electric Power Board of Chattanooga has served its customers for more than 60 years, placing it in a key position to move into data and voice telecommunications offerings.

* They have support in place.

* They have the infrastructure to support the supply of power to the community. In addition, many municipalities have already laid fiber optic wires in anticipation of providing communications services to consumers. In 1996, Cedar Falls (Iowa) Utilities started stringing cable television lines and has recently spent more than $8.3 million to hook those lines to its 50-mile fiber optic network to provide cable.

* They already have rights-of-way. They do not have to go through the hassle of gaining access to certain areas in the community because they already own the rights-of-way.

* They send monthly mailings. Most utility customers currently receive a monthly mailing/bill from their local utility company. That provides a perfect forum for enclosing marketing materials about the company’s new offerings. Utilities also can include the charges for the new services on the existing bill customers receive for electricity.

* They have the advantage of securing government bonds to help finance new projects.

Those advantages position local utilities to gain financially. By bundling communication services with electricity, utilities can increase their annual revenue dramatically. For example, a utility that serves 3,000 households and has annual revenues of $2.7 million has the potential of almost tripling its revenue by offering multi-service packages to its current customer base (see “Why Is There Opportunity?”).

The practice of offering communications services is relatively new to the electric utilities industry, but some utilities are already having some success with it. For example, Cedar Falls Utilities has started to offer telephony, Internet and cable television services to its 37,000 customers. According to the American Public Power Association, Washington, D.C., that utility will “serve as a demonstration model for public power communities across the country interested in becoming the communications utilities of the 21st century.”

Other utilities have followed Cedar Falls’ example and have recently begun offering new services. The Scottsboro (Ala.) Electric Power Board provides cable television and Internet services in addition to electric power; and Easton Utilities in Easton, Md., which has added a full-service cable television department to its services, now offers 57 channels to the municipality’s 5,100 households.

Breaking in

How should utilities get started in new markets? Research is the starting point, and it should include:

* A feasibility study to determine overall costs and profitability;

* A competitive analysis to determine who the competition is, how those companies are offering their services and who is receiving them;

* A market analysis to determine whether customers are likely to purchase those services through their electric utility provider and what the consumer penetration rates will be; and

* A profitability study to examine costs. It should indicate when the utility is likely to break even and when it should become profitable.

Research indicates that utilities can enjoy great success in new business ventures, but the process of breaking into new markets can sometimes be confusing. That was the case in the early days of deregulation, when there were few laws in place supporting utilities looking to offer communications services.

The experience of the Electric Power Board of Chattanooga (EPB) illustrates that point. In 1996, EPB, along with five other municipalities and the Tennessee Municipal Power Association, began a three-year process of lobbying the Tennessee Legislature to pass a bill allowing municipal electric systems to offer telecommunications services. After much quibbling, and several go-arounds with the state legislature, the final laws were passed in 1999 allowing EPB to provide telecommunications, Internet and cable services. EPB finally launched its telecommunications services on March 1, and it is currently conducting a feasibility study for cable and Internet service.

In recent years, however, most states have enacted legislation to allow — and encourage — municipalities to enter the communications marketplace. Washington was one of the first states to enact the necessary laws permitting utilities to offer communications services, the last of which was enacted this year. While more states are actively supporting utilities in their efforts to expand into new markets, it can still be a complex endeavor. Some utilities are turning to consultants who can guide them through the legislative and planning barriers they may encounter, while others are forming subsidiaries or partnering with firms that have knowledge of the industry. For example, last August, Memphis (Tenn.) Light, Gas & Water partnered with locally based A&L Networks to form MLGW Network Services. The new company is providing telecommunications services in Memphis and Shelby County.

Forming a small division to focus on new services also has helped many utilities break into new business. Montana Power’s telecommunications are managed by subsidiary Touch America, while Carolina Power & Light in Raleigh, N.C., formed Interpath Communications to handle Internet access.

Deregulation legislation is not going away. While some may view it as the end of a lucrative era, savvy municipal leaders recognize that deregulation is providing tremendous opportunities for enhanced revenue in the utility industry. Providing one or several communications services to their current client base is a viable and very profitable option for utility companies to meet, and exceed, their revenue goals this decade.

Robert McDermott is director of communications for Network Engineering Consultants, Stoughton, Mass.