cover story

BRANCHING OUT or out on a Limb?

BY ARIELLE EMMETT

It's not accidental that power companies are fueling the nationwide appetite for high-bandwidth data and fiber-on-demand. Deregulation of both energy companies and telecommunications is driving utilities to try new ventures in communications.

"There is still uncertainty about where deregulation [of utilities] is going," says Jeffrey Sheldon, vice president and general counsel for the United Telecom Council (formerly the Utilities Telecommunications Council, Washington, DC). "Energy companies are uncertain whether restructuring will be driven by the federal government or states, or whether companies will be split into separate generation, transmission, and distribution networks in a retail marketplace. Companies are preparing for eventualities and diversifying into businesses related to telecom with the thought of making up revenue that will be lost when energy competition eats away market share. Telecom is viewed as a natural opportunity to diversify, without going too far afield from the core energy [infrastructure] business."

"Utilities are engaging in lots of different strategies for revenue by leveraging communications," observes Brad Bradshaw, director of energy and communications for the Yankee Group. Reengineering toward a high-growth, diversified model is one strategy energy companies like Enron (Houston) are using. By the same token, the Williams Companies sold their telecommunications subsidiary, WilTel, four years ago to Worldcom, which evolved it into a nationwide carrier. "Now Williams' noncompete clause has opened up and they've bought a telecom customer premises equipment group, a network group, and they're rebuilding a national telecom network," Bradshaw says.

Other utilities are engaging in partnerships, developing fiber-wholesaling strategies to become carrier's carriers, and spinning off subsidiary deals. For example, Koch, a pipeline company, has a 50-50 joint venture with PF.Net in Texas to build a nationwide wholesale communications network. Florida Power & Light is aggressively building out fiber networks in Florida in a joint deal with IPC Deltacom. Duke Power & Light of North Carolina has built DukeNet, a wholesale communications network for carriers to lease capacity.

The variety of activity illustrates how utilities have become an influential force in the bandwidth marketplace, while generally moving in the cautious way one associates with monopolies. Yet, while the energy industry as a whole has appeared content to remain in the shallow end of the telecommunications pool, an increasing number of utilities have swum into deeper waters.

Certainly most utilities have taken a conservative approach to the telecommunications marketplace. "The biggest area of activity is when utilities become the 'carrier's carrier,' " Sheldon says. "When it comes to leasing dark fiber, the regulatory issues are less of a concern. Market and operations support is less. It's not the truly competitive telecommunications service arena that retail telecom is."

For example, Montana Power & Light has an unregulated subsidiary, Touch America Inc., which is a fiber-optic carrier's carrier specializing in long-haul fiber capacity wholesaling (see Figure). "We sell dark fiber, capacity, Asynchronous Transfer Mode (ATM), dim fiber, lit fiber, and frame relay," says Mike Meldahl, president of Touch America. "We don't have the expertise or infrastructure to do retail... But what's growing fastest is capacity sales. Everything linked to those services is good; they're Internet and data driven."

Touch America has recently announced it will interconnect its 15,000-mi fiber network with that of New Century Energies in Denver, another utilities company. "They're trying to build a fiber network that will have greater coverage," says Rick Nicholson, vice president of energy information strategies at The Meta Group. "The more-aggressive companies are laying additional fiber, either to do business themselves or to sell dark-fiber capacity, to become a bandwidth wholesaler, a carrier's carrier."

The majority of utility companies active in telecommunications today is involved in such wholesale bandwidth and fiber leasing. In the West, Southern California Edison built an extensive Synchronous Optical Network (SONET) fiber network five years ago with roughly 1700 route-mi in place. Originally used for internal data circuits only, the network now feeds the telecommunications food chain throughout the Los Angeles basin. The utility spun off Edison Carrier Solutions (Rosemead, CA) and began dark-fiber leasing in 1996. "We then got into fiber construction for other companies as well, utilizing rights-of-way and transmission towers, and building out fiber for ourselves," says Corey Ford, vice president and general manager of Edison Carrier Solutions.

"Last year the company decided to go up the food chain," he reports. "We got into the business of providing circuits for other carriers off of our network—from dark fiber to circuit-based services. The Southern California area has target access points where many customers want to terminal traffic...so we're in the process of co-locating our facilities in a number of PacBell and GTE central offices." The company has obtained clearance from the Federal Communications Commission to offer interstate wholesale services, including interconnection and switching. Southern California Edison has also obtained certification from the California Public Utilities Commission to enter the local telephone market as a "provider's provider," the first utility in the state to do so.

"People want to terminate traffic from large office buildings, points of presence (PoPs), and wireless sites, and it makes a lot of sense to take backbone fiber networks and start extending them to the target access points to provide DS-1 and DS-3 services," Ford says. "There is also a tremendous demand for dark fiber and dedicated circuits in the Los Angeles metro area among interexchange carriers, competitive local exchange carriers (CLECs), cable-TV companies, and Internet service providers." Although Ford will not reveal exact figures, he says additions to the Edison Carrier Solutions' fiber plant will constitute hundreds of miles. "A lot of work is going on in the last mile, including cell services, cable, coax. We're providing metro-area backbone connections to bridge the two [long haul and last mile] off of our fiber."

Austin, TX-based C3 Communications began its life as CSW Communications Inc., a deregulated and wholly separate subsidiary of CSW Corp., a large energy company with utilities throughout Texas, Oklahoma, and the South. C3 is also a carrier's carrier, providing DS-1 circuits and whole-fiber leasing over a network more than 900 mi long and completely separate from the power company's fiber network.

CSW has 13 years of experience in microwave, fiber, and telemetry, plus joint-telecom ventures, including a CLEC business with ITG in Texas, and a competitive access provider (CAP) business in Tulsa called Metrolink. "The company disbanded its joint venture because CSW was more interested in the long-haul business," explains Katheryn Spargur, C3 Communications director of sales and marketing. C3 now has an aggressive fiber build-out strategy, investing $50 million to reach a 1650-fiber-route-mi goal within a year and 2700 mi by 2001. C3 is also the only long-haul wholesaler in Texas that boasts a fully diversified fiber ring in the Austin, San Antonio, McAllen, Harlingen, Corpus Christi, Victoria, and Houston areas. "No other carrier has that redundancy," says Spargur. "That's one of our strengths."

In Florida, demand for telecommunications services is booming. Progress Telecommunications Corp., a subsidiary of Florida Progress Corp., the parent company of Florida Power, is taking advantage of upgrades to 400 mi of fiber to wholesale to long-distance carriers, Internet service providers, and other telecommunications companies. (Progress also leases tower attachment space to wireless carriers and government agencies.) Progress is upgrading its 1000-route-mi fiber network to include major Florida markets in Tallahassee, Orlando, St. Petersburg, and Tampa Bay—the central part of the state up to the Georgia border, according to Ron Mudry, a vice president and general manager.

"Florida Power began its own internal telecom networks in the '50s," Mudry says. "We started to deploy fiber throughout most of its territories, as well as an extensive microwave network, and the company began leasing excess capacity going back almost 15 years."

Dark-fiber leasing began in 1990, and after passage of the Telecom Act of 1996, the company began expanding its telecommunications efforts. Unlike C3 Communications, though, Progress Communications considers itself to be part of the Florida Power utility. "We're an unregulated subsidiary, but we benefit from the existing infrastructure and experience Florida Power gained in telecom," Mudry explains. Fiber assets have been transferred to the new company. "From a fiber capacity perspective, we offer 50,000 fiber mi," he says. "By 2001, it will double. Some expansions are needed to support power companies in rapidly growing areas, but there is a strong demand for telecom capacity as well." The company considers itself an "alternative access vendor," providing broadband capacity and transporting traffic (but not switched voice traffic); data circuits range from DS-1 to OC-48 and OC-192.

While most utilities appear content at the moment to serve a supporting role to carriers, some have decided to leap into the competitive waters of telecommunications service provision. Interestingly, the utilities likely to become aggressive players in retail telecommunications are generally the smaller ones in geographically circumscribed markets, Sheldon observes. For example, a number of municipal utilities in Iowa are developing fiber and hybrid fiber coax (HFC) systems to offer competitive dial tone and Internet services to local residents. Pioneer Holdings, in Dakota Dunes, SD, is developing competitive network offerings in 30 different states; Pioneer has MCI, Northwest Power Iowa Cooperative, and Long Lines as part owners.

"Smaller utilities are better able to take advantage of competitive demand because HFC networks are very costly to build out," Sheldon says. In Washington, DC, Potomac Electric Power Company (PEPCO) has a partnership with RCN to build out an HFC competitive telecom network. The company will start out wiring multitenant buildings, providing cable TV, Internet access, and local dial tone.

Meanwhile, Wilmington, DE-based Conectiv Corp., created Conectiv Communications, a deregulated CLEC subsidiary, in 1997. Conectiv Communications provides full-service, retail voice and data to 25,000 residential and business telephone customers in Delaware, Maryland, South Jersey, and Pennsylvania.

"If you look at utility companies, either they decide to use their fiber to provide some network services, such as wholesaling dark fiber or leasing circuits, or they can take an aggressive approach," asserts Jeff Allen, Conectiv Communications president. "For example, we had the fiber assets and wanted to be a full-service telephone company. We have the interface with the customers, plus SONET and ring-fiber architecture for survivability and reliability."

Once a telecommunications strategy was devised, Conectiv Communications began adding some 300 mi to its existing fiber network, upgrading to OC-48 and, in some instances, OC-192 electronics to handle increasing volumes of network traffic. The company also announced a partnership with Frontier, a nationwide long-distance carrier, to provide such retail services as enhanced 800 calling, smart cards, digital subscriber line, Internet access, frame relay, and high-speed dedicated connections to residential and business customers.

In the Gainesville, FL, area, the site of University of Florida, Gainesville Regional Utilities (GRU) is involved in an aggressive telecommunications services race. The utility is using a Marconi platform to deliver fiber-to-the curb data services to residents, businesses, and most importantly, the University of Florida campus and surrounding residential areas. The Marconi digital loop carrier solution, DISC*S, extends fiber-optic capabilities to within 500 ft of subscribers (with Marconi copper reaching to actual customer premises). The utility can now deliver high-speed (10-Mbit/sec Ethernet) transmission to provide broadband services. GRU bills itself as "one of the first utilities in the nation" to provide broadband to residential subscribers.

High-speed Internet access is the business driver for the utility, especially on the University of Florida campus, says Ed Regan, strategic planning director for GRU. "We were starting to see advanced applications going into other areas that our residents couldn't get access to," he says. Seventy percent of Gainesville homes have personal computers (compared to 50% nationwide), and many subscribers want direct access to university computing resources. "Because Gainesville is considered a third-tier community in telecom, it fell behind in terms of [other telecom companies'] investment priorities," Regan says. This was deemed an extraordinary opportunity for GRU, a municipally owned company, which decided to provide four lines of services: towers and antenna space leasing; transport and wholesale fiber and capacity leasing; high-speed Internet access; and public-safety radio and wireless data.

The utility has 130 mi of fiber in the area ("All the new capacity in town," Regan says), offering SONET (heading toward ATM) reliability to interexchange carriers, LEC, and CAPs that need capacity. And it has honed in on a profitable third-tier niche strategy that puts electrical, water, wastewater, natural gas, and telecommunications under the umbrella of a single company.

"For our fiber backbone, we got the plain vanilla stuff," Regan says. "Our backbone is OC-48, and we provide Internet and Ethernet clouds for people—both access and backbone. We are an ISP, and also have dedicated and dial-up data services, selling Internet all the way from OC-3 to 56K." Major medical centers and state services areas are hooked to GRU's fiber network, and GRU is testing the residential data services in a single development of attached homes.

The populous Northeast is also seeing a diversification of utility-fostered fiber services. Becocom, the wholly owned, unregulated subsidiary of Boston Edison, wholesales transmission-backbone capacity on singlemode fiber. "We've got up to 1000 mi of fiber, and when we evaluated some business opportunities within the telecom industry, we concluded that we could build advanced fiber-optic networks for other carriers to use and that should be the business we're in," says Richard S. Hahn, president of Becocom. The company decided as early as 1994 to develop a capacity business. "We sell to the large household names in telecommunications," he says. "Utilities are good at building, operating, and maintaining networks, and new competitors to telecom markets often have no experience."

Regardless of the strategy they use, utilities are in a good position to increase their telecommunications leverage. Currently, energy companies nationwide have 50,000 route-mi of fiber installed, and the route- miles are growing by as much as 10,000 to 15,000 route-mi per year, according to Yankee Group surveys. Power companies have used their fiber in the past for internal communications, data circuits, and telemetry networks controlling their own energy systems. But now, "the large energy companies like Williams and Enron are driving significant fiber build-out rates," Bradshaw notes. "Fiber optics are used as a secure, reliable replacement for aging microwave networks, and utilities are reducing their costs by leveraging assets—whether crews, rights of way, billing systems, or fiber."

Arielle Emmett is editorial director of Fiber Exchange's sister publication, Wireless Integration.