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overview
This page provides an introduction to 'utilicoms' - gas,
electricity or water utilities that leverage their infrastructure
to provide connectivity such as internet, cable television
and phone services.
It covers -
The
following page profiles particular initiatives in Australia
and overseas. Other pages on this site explore issues
such as broadband powerline communication (BPL)
and municipal wireless
projects.
introduction
The emergence of utilicoms is a reflection of deregulation
in the telecommunication, energy
and water sectors in Australia and overseas. It is also
a reflection of perceptions that providing connectivity
(landline phone, mobile phone, internet access and cable
television) offers greater revenue growth - and even substantially
better profit margins - than providing gas, electricity,
fresh water and wastewater services to organisations and
households.
Expansion from traditional utility services into connectivity,
with US and Australian electricity companies for example
exploiting rights of way to roll out cable networks, was
a feature of the telecommunications and dot-com bubbles.
Enthusiasts characterised connectivity and energy/water
provision as "a natural fit". Utilities were
able to spritz up share prices or merely buff their corporate
profile through announcements that "your stodgy gas
company" would soon delight its customers - and shareholders
- by providing households with broadband, phones and even
cable tv.
Visions of the utilicom have generally been founded on
a utility leveraging its infrastructure and right of way,
its maintenance staff and its substantial cash flow to
deploy fibre or copper cable alongside existing electricity,
gas and water lines or even to establish wireless networks.
Some bolder spirits have envisaged modification of existing
electricity grids to enable Access BPL, a basket of technologies
that - as discussed elsewhere on this site - are commercially
problematical because of the investment needed to alleviate
serious radio frequency interference problems.
Much of the enthusiasm has faded and the utilicom has
failed to become the dominant model for utility operators.
Reasons for that failure vary from jurisdiction to jurisdiction,
market to market. Many operators have discovered that
the 'natural fit' is illusory. Others have discovered
that investors are wary about diversification into what
is often a far more competitive market than energy or
water. Regulatory concerns, commercial realities and the
absence of clear successes has inhibited uptake of BPL
(and will presumably do so in future).
Much utilicom activity has accordingly centred on delivery
of bandwidth to corporate rather than residential customers
or has involved utilities exploring partnerships with
connectivity specialists rather than providing all services
inhouse.
background
Information handling costs and the shape of infrastructure
have meant in the past that most utilities have been natural
monopolies and have accordingly enjoyed a special legal
status that typically involved restrictions on revenue/profit
growth.
With rare exceptions it has not been economical - or even
conceivable - to supply a household (or many businesses)
with water from competing water providers, to provide
two sets of gas mains, competing municipal steam heating
lines or offer a choice of electricity providers.
Choice, and thereby some degree of competition, in energy
supply has accordingly involved types of supply. For cooking
and heating consumers have typically had a choice of electricity
or electricity + gas, rather than choosing between two
electricity suppliers.
One US utility executive thus gleefully advised JP Morgan
in 1911 that
We
own the grid so we own the customer. Where are they
going to go?
Outside
the US much of that infrastructure was owned by municipal/regional
and provincial governments. Along with postal
banks and publicly-owned telegraph/telephone services
it was an embodiment of 'gas & water socialism' in
market economies. Government utilities typically operated
on a universal service basis with substantial subsidisation
of infrastructure (eg constructing lines to locations
where there was insufficient demand to commercially justify
investment) and cross-subsidisation of service delivery
(enabling access by poorer members of the community).
The non-US regimes, including Australia, changed significantly
during the final third of last century, with corporatisation
of utilities often being followed by full/partial privatisation
and by break-up of some of the more monolithic organisations.
During the same period deregulation - particularly in
the US - and easy access to capital resulted in major
merger and acquisition
activity across the globe, with entities such as EON,
Duke Energy, Vivendi, Suez and TXU absorbing local operators
and buying major utilities or plant in other nations.
That M&A activity was often disappointing, with critics
for example commenting that combining two monopoly distribution
systems does not boost market share because each generally
have 100% of customers and might reduce rather than create
value if regulators require divestiture of key assets
such as power plants and transmission.
Those entities also diversified - most spectacularly in
the case of Vivendi (the sewers, mobile phones, cable
tv, film studio, music label, theme park and book publishing
conglomerate) - and invested heavily in new infrastructure,
including switches, fibre and pipelines.
Just prior to dot-com crash some observers reported that
the US energy market and water market had been growing
at around 1% per year, in contrast to telecom sector growth
of around 8% and forecasts that demand for bandwidth would
continue to increase.
In retrospect some of that optimism was misplaced. We
have noted the problematical foundations of claims that
11-14% rates of return in the energy sector would continue
to trail returns in the telecommunication sector of up
to 30% and that internet traffic would relentlessly double
every hundred days without any glut in capacity.
Illfounded expectations and corporate hubris resulted
in offloading of many acquisitions, writedown of much
new infrastructure (including international cables and
hosting facilities) and the demise of many market entrants.
Stock market exuberance, irrational or otherwise, had
seen some of those entrants score a capitalisation far
larger than "old fashioned" water and energy
providers.
Utilities in turn had sought to enhance their profile
by claiming strengths that would allow them to rival dominant
connectivity providers through expansion into fixed line
and mobile telephony, cable television, broadband and
internet support services (eg providing online billing/payment
systems for SMEs). Such claims have resurfaced since the
collapse of the teco and dot-com bubbles.
Australian guru Paul Budde,
associated with the UtiliTel consortium discussed later
in this note, commented that
Power
utilities around the world are recognising the natural
competitive advantage they have in telecommunications.
This comes from the use of infrastructure they have
in place (ducting, building access, poles), their systems
(billing, call centres), a strong relationship with
and an understanding of a large customer base, and a
core competency in network management and maintenance.
It is a natural extension of business activity for a
power company to enter into telecommunications.
Critics
have sometimes been more cautious, or noted that other
entities have in the past been touted as having an innate
competitive advantage or embodying a true 'natural fit'.
In the US for example railways (with enviable long-distance
rights of way, experience in data transmission and network
maintenance resources) were also touted as serious competitors
for incumbent telecommunication companies. Observers pointed
to Philip Anschutz's
acquisition of major long distance bandwidth through takeover
of railways (subsequently offloaded) before he went on
to acquire what is now Qwest.
Others questioned whether utilities had the mindset, technical
resources or merely grit to successfully expand into unfriendly
environments.
Some utilities had not followed through after upbeat initiat
announcements. Some found that non-utility competitors
were more nimble. Others found that enthusiasm for breakthrough
solutions such as BPL was misplaced or simply that it
was necessary to focus on core business activity to sustain
revenue. For many provision of connectivity has come to
seem less compelling, something that might best be undertaken
through alliances rather than wholly inhouse.
Others found that diversification created assets that
could be unloaded when management and investment fashions
changed, or that distracted management attention in periods
of regional consolidation. Netherlands utility Essent
for example announced in 2006 that it would sell its Essent
Kabelcom NV business to private
equity groups Cinven and Warburg Pincus for €2.6
billion, enabling it to move on competitor Nuon in 2007.
Both groups had trialled but abandoned BPL schemes.
basis and issues
The uncertainties reflect disagreements about market opportunities
and capabilities.
In essence, the utilicom vision is predicated on sustained
exploitation of a utility's supposed fundamental advantages.
At its simplest, the vision regards all networks as the
same: the attributes required for success in gas, water
or electricity are the same as those for success in providing
connectivity and are readily transferred.
Advocates for utilicoms typically argue that utilities
can leverage the following advantages -
-
financial strength (low debt, strong cash flow) and
consequent corporate recognition
-
strong customer base (large number of captive consumers),
along with a positive profile among existing and potential
buyers of connectivity
- extensive
rights of way
- existing
data networks and experience in their management
-
management and technical capability - customer relationship,
infrastructure development and network maintenance units
of appropriate scope and scale
There is, however, disagreement about the weight to be
given to those advantages, the nature of disadvantages
and competitive positioning.
Some observers have claimed that the key advantage is
financial strength, with utilities enjoying
lower financing costs (and greater access to additional
capital) than telecommunication or cable television counterparts
because of their stable cash flow or because they are
conservatively financed.
The significance of that advantage must be assessed on
a case by case basis.
Some utilities are tightly restricted by regulation from
adventures outside their core business and expansion into
provision of connectivity may involve protracted negotiations
to rework a corporate charter. Others have strong cash
flow but low margins or are inhibited by debt from past
adventures, for example absorbtion of local competitors
and overseas expansion highlighted here.
In practice the true comparison may be with undercapitalised
new entrants rather than with established telephone and
cable companies.
A point of contention has been whether utilities, particularly
in the more regulated markets (including parts of the
US), can pass on all costs to consumers (and to all consumers,
rather than merely to those who buy connectivity). Moves
by TXU to introduce BPL in Texas, for example, resulted
in comments
that
where
consumer and industry groups part ways is on how Texas
should get there -- and who should foot the bill. Many
detractors believe that the new technology is being
oversold and -- despite the limited pilot projects --
remains largely unproven.
They also complain that under the deal that TXU and
some utilities want -- the plan as outlined in the initial
Fraser bill -- power companies could get into this very
risky venture at no risk to themselves.
Rather, the utilities could pass on 100 percent of the
upgrade costs to their electric customers, and then
reap 60 percent of the profits. Electric ratepayers
would receive the remaining 40 percent through a credit
on their bills.
Other observers have pointed to the large and captive
customer base enjoyed by utilities, with substantial
brand recognition and perceptions that the local utility
although arrogant is more solid than a start-up. One contact
quipped that a major advantage is customers will open
letters from the utility, if only because it might contain
their electricity/gas bill or revised terms of service.
Critics, however, note that although consumers may be
captive for electricity, gas or water they might seek
other providers for connectivity, particularly if the
utilicom's pricing isn't lower than that of competing
telcos and new market entrants.
Utilicom proponents often refer to a customer-centric
mindset that is important for providing connectivity services.
That has been questioned by sceptics who, as noted below,
argue that customer support in an ISP may be quite different
to billing households for gas or electricity or that utilicoms
are likely to be more effective dealing with corporate
customers rather than individual consumers.
Most proponents agree that a key utilicom advantage is
the utility's rights of way, which provides
opportunities to 'overlay' connectivity infrastructure
(wire, fibre, BPL, wireless) alongside existing long distance/local
electricity, gas or water networks. In practice much utilicom
activity has involved exploitation of that advantage by
establishing long distance fibre networks for wholesale
markets or for major corporate customers rather than rolling
out fibre, BPL or copper to homes and SMEs.
The upside of rights of way is that a utility has ready
physical access: typically it owns facilities or has a
licence to use/traverse locations in maintaining its grid
and thus does not need to invest in property acqusition/leasing
or in negotiations that would hobble new entrants.
The downside is that regulators, property owners and consumers
sometimes do not see that access as open ended. Negotiation
about new uses may be required, particularly in cities.
Although it is common to encounter comments that new entrants
face a "bureaucratic and financial nightmare"
in securing approvals, rights of way may act as a conceptual
straitjacket, with utilities (and established telecommunication
providers) having difficulty thinking outside their grid.
Through a mixture of institutional inertia and fiscal
prudence ('we have the infrastructure so we have to use
it') some may be locked into yesterday's solutions for
the retail market.
Investment in ways of thinking and organisational structures
may be reflected in ownership of existing connectivity
infrastructure, with regional electricity providers in
particular having rolled out fibre during the past decade
for network management purposes or in the hope that it
would one day prove useful for retail/wholesale purposes.
There has been substantially less rollout at the local
level, ie within rather than to/from cities. Presumably
utilicoms would encounter the same daunting costs for
'last mile' materiel acquisition and deployment that face
telcos contemplating upgrading of traditional copper with
fibre to the home (FTTH).
Finally, proponents of utilicoms have generally noted
that utilities have substantial management and
technical capability.
That capability encompasses infrastructure development,
construction and maintenance, with observers for example
arguing
a
utility could provide telecom services with only incremental
enhancements to its existing service organization rather
than a complete system overhaul or 'ground-up' build-out.
It
also encompasses customer relationship management, including
services difficulties & fault support, media liaison
and billing.
Assessment of such claims is dependent on the circumstances
of the individual utility/utilicom and its business model.
Providing whlesale bandwidth - a basic network for a handful
of large enterprises or ISPs - would appear to be much
less complicated than providing a wider range of services
on a retail basis (eg providing fixed and mobile phones,
broadband internet and cable television to a large number
of individuals, households and SMEs).
Retail may involve skill sets that utilities find challenging,
including negotiation about content rights (quite different
to the engineering-driven mindset of some utilities) and
ISP help desks. Some utilities, as noted below, have accordingly
sidestepped problems by licensing use of their infrastructure
to connectivity specialists.
Observers have also questioned claimed competitive advantages
in the form of billing centers and maintenance crews,
noting that although some utilities (like incumbent telecommunication
providers) have inhouse construction units and maintenance
fleets others have outsourced much activity. A competitor
might acquire the same access to subcontracted expertise/labour
or, indeed, might benefit through lower costs and fewer
management rigidities.
It is sporadically claimed that utilities have an advantage
through familiarity with state and local government regulatory
regimes. In practice that advantage seems to be overstated;
new entrants with deep pockets (or merely desperation)
can buy the best advice and advocacy available and may
even benefit from being seen as an alternative to a large,
predatory and complacent utility with imperial ambitions.
business models
Much of the enthusiasm for utilicoms among reflects perceptions
that a delivery of broadband by a utility will
- provide
meaningful competition for incumbent telecommunication
operators or new telecommunication service providers
at the wholesale or retail levels
-
be cheaper than the incumbent, as the utility has infrastructure
in place and for example with BPL supposedly will not
charge 'line rental' (or even other fees)
- enjoy
sufficient efficiencies that it can cut charges to consumers
while sharing revenue with service providers
- not
face threats from incumbent telcos (ie they will not
price their services at less than the utility's costs).
That is not necessarily the case. Some observers have
accordingly asked 'whose network?'. Should there be a
'must carry' or 'open access' requirement that is similar
to unbundling of the PSTN local loop. Others have doubted
that utilities will forgo revenue opportunities.
As noted in the discussion of BPL we can broadly identify
three models as utilities head towards the 'triple play'
(fixed line, broadband and television) or 'quadruple play'
(fixed line, broadband, television and mobile phone).
In the first, the utility operates as a full service provider.
It builds/owns and operates the energy and/or water network.
It also serves as a telecommunications provider, offering
'last mile' access to the internet and the PSTN. It may
offer film and other content through a cable televison
service. It does not allow competitors to use its network.
In the second model the utility builds/owns the infrastructure,
allowing access to that network by one or more service
providers and using the connectivity services of those
providers.
In the third model, often labelled the 'dark cable' model,
the utility licences to a service provider the responsibility
for funding and deploying hardware along its right of
way, eg BPL devices on an electricity network. The service
provider is also responsible for connectivity services
and has essentially leased a 'right of way'.
Reported rationales for entry by utilities into the telecommunications
market vary by jurisdiction, organisation and circumstance
(eg opportunism in announcing developments to boost share
prices or corporate profiles).
Overall, expansion into the wholesale market is sometimes
defended on the basis that
- only
a few corporate customers are required to justify the
expenditure
- by
operating as a wholesaler (eg selling long distance
bandwidth to ISPs or to a few government agencies) the
utility will not face the problems associated with the
retail market (eg higher customer support costs, greater
competition from other retailers)
- activity
in the wholesale market offers a low risk platform for
long term expansion into retail
- the
utility has (or could deploy) appropriate infrastructure
for wholesale customers, eg because it has unlit fibre
as part of its network management systems
-
there is a 'best fit' between the wholesale market and
the utility's management structure, ethos and engineering
capability
- becoming
a "carriers' carrier" requires smaller capital
investment and substantially few human resources than
retail
-
it may be more attractive to regulators who are skittish
about incumbent telecommunication operators or about
the utility's dominance (particularly if an electricity
provider has expanded into gas and/or water)
Claimed
rationales for activity in the retail market - whether
through provision of broadband/dialup internet, cable
television or mobile telephony - include
- perceptions
that higher risk and investment requirements will be
offset by much greater returns than on wholesale
-
scope for bundling services (with economies in back-end
processing or merely 'capturing' customers)
-
assessment that the utility has substantial brand recognition
and can effectively leverage existing cutomer support
and engineering capabilities
- belief
that the telecommunications market will experience greater
growth than the wholesale and will be less regulated
than the utility's core business
studies
There have been few major studies of utilicoms as such.
For the ancien regime and deregulation see Aynsley Kellow's
Transforming Power: The Politics of Electricity Planning
(Cambridge: Cambridge Uni Press 1996), Power System
Economics: Designing Markets for Electricity (New
York: Wiley-IEEE 2002) by Steven Stoft, Electricity
Economics: Regulation and Deregulation (New York:
Wiley-IEEE 2002) edited by Geoffrey Rothwell & Tomás
Gómez, Making Competition Work in Electricity
(New York: Wiley 2002) by Sally Hunt, Understanding
Electric Power Systems: An Overview of the Technology
and the Marketplace (New York: Wiley-IEEE 2003) by
Jack Casazza & Frank Delea, Richard Hirsh's Power
Loss: The Origins of Deregulation & Restructuring
in the American Electric Utility Industry (Cambridge:
MIT Press 1999), Sharon Beder's spirited Power Play:
The Fight to Control the World's Electricity (New
York: Norton 2003), Charles Jacobson's Ties That Bind:
Economic & Political Dilemmas of Urban Utility Networks,
1800-1990 (Pittsburgh: Uni of Pittsburgh Press 2000)
and The
Politics of Power: Inside Australia's Electric Utilities
(Carlton: Melbourne Uni Press 1988) by Stephen Rosenthal
& Peter Russ.
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