1. UTC Telecom 2000 Conference—Phoenix, Arizona June 26, 2000Fred A. Joyce
Why Utilities Should NOT Get into the Telecom Business
In recent yea rs, much ha s been written a nd discussed a bout the bra ve new world
of telecommunica tions, a nd the significa nt opportunities a va ila ble to utilities in
entering this highly competitive a nd complex a rena . Wha t ha s not been a s widely
publicized a re the downsides fa cing utilities in entering the telecom business.
It a ll sounded a nd a ppea red like such a n excellent revenue opportunity for the
utility to become a telecommunica tions ca rrier. La ter, a fter millions were
invested, sta ff wa s hired a nd tra ined, a n extensive fiber optic network wa s
deployed, however the expected revenue strea m never rea lly ma teria lized.
What went wrong with their telephony business plan?
Did the utility have the in-house telecom carrier expertise necessary to become a
common carrier?
Did others, including high paid consultants (not JTG), over-value the utility rights-
of-way, or other assets such as existing fiber, conduit or duct space?
Were the projected revenues from telecom far too optimistic?
Ma ny utilities ha ve a ttempted, a nd fa iled in their a ttempts to become competitive
telecom ca rriers. We ha ve purposely omitted the na mes of the va rious utility
enterprises, a nd ca rriers in order to protect the innocent, a nd potentia l future
consulting enga gements for JTG.
Our resea rch indica tes tha t a rela tively sma ll number of electric utilities ha ve
moved beyond providing pole, or tower spa ce to other ca rriers, including CLEC,
a nd IXCs for the deployment of fiber networks. Ma ny utilities ha ve become
telecom "la ndlords" working with va rious ca rriers to develop "win-win" da rk fiber
a greements, fiber swa ps, a nd revenue sha ring a rra ngements.
Further, others ha ve utilized utility a ssets such a s power poles a nd towers for the
deployment of wireless infra structure for cellula r a nd PCS a ntenna s in excha nge
for significa nt monthly rent for these cell sites.
The ma jority of utility telecom involvement ha s been in the "la ndlord" a rena , for
the lea se of towers, poles, ducts, etc. for the deployment of fiber optic networks
by other ca rriers. In ma ny ca ses these a greements a re considered a "win-win"
situa tion with the utility ga ining both revenue a nd fiber, plus the ca rrier obta ins a

2. low cost a lterna tive to direct bury, or directiona l boring under roa ds, or other
pubic rights-of-wa y.
In our 1995 pa per a nd speech to the UTC, we discussed "Moving Beyond the
Pole Attachment Agreement." Toda y, five (5) yea rs la ter our perspective ha s
evolved, just a s the utility-telecom ca rrier ma rketpla ce la ndsca pe ha s a lso
tra nsitioned, a nd perha ps ma tured over the yea rs.
We've a ll listened to, a nd investiga ted powerful presenta tions over the pa st
deca de or so, from va rious big telecom equipment vendors, a nd the over priced,
but genera lly well respected consulting compa nies, seeking revenue from deep
pocketed utilities, just like yours. They wa nt to "a dvise" or "sell you" their product
a nd consulting services so tha t your utility ca n enter the sometimes cutthroa t,
a nd super competitive world of loca l, a nd/or long-ha ul telecommunica tions.
Since 1990 (or so) there ha s been a n a bunda nce of discourse in the electric
power a nd utility a rena in genera l a bout diversifica tion, a nd moving into new
revenue genera ting opportunities. However, wha t we ha ve found is tha t ma ny
times, utilities ha ve been ill prepa red to enter the highly competitive world of
telecommunica tions, a s a ca rrier.
With very few, but nota ble exceptions, utilities ha ve experienced significa nt
difficulties, not to mention hea vy fina ncia l ra mifica tions in their effort to reinvent
themselves a s telecom service providers. Some ha ve been successful, but
significa ntly more utilities ha ve fa iled in their a ttempts to become telecom
ca rriers, competing with the existing a nd thoroughly entrenched pla yers such a s
the ILECs, CLECs, IXCs, a nd the ISPs.
So when we sa y "entering the telecom business" we a re indica ting a non-pa ssive
or non-la ndlord a pproa ch, such a s a ctua lly setting up a n unregula ted telecom
subsidia ry, providing provisioned loca l a nd long dista nce telephony services, in
direct competition with the incumbent loca l excha nge ca rriers, such a s US West
here in Arizona . These utility enterprises a lso compete with the CLECs, a nd
oftentimes the IXCs, a nd even the Ca ble TV fra nchisee.
These competitors of the former loca l phone monopoly (ILEC), a re now referred
to a s CLECs. Currently these competitive loca l ca rriers represent just 5-6% of the
$100+ billion loca l telecom ma rketpla ce (loca l a nd LD voice da ta , ISP, video,
DSL, etc.). These nimble a nd a ggressive pla yers such a s Nextlink, ICG, ELI,
KMC, a nd Intermedia ha ve more tha n likely a ttempted to develop pole
a tta chment, or duct spa ce lea se a greements with utilities just like yours. Now,
they could become your worst nightma re a s you a ttempt to compete with them in
your loca l telephony ma rketpla ce.

3. Further, to the best of our knowledge, none of the current CLECs have reached
profitability, or break even on their extremely capital intensive, infrastructure
based business. Only MFS and TCG, both of which were acquired several years
ago by WorldCom and AT&T, managed to obtain profitability or break even. And
these early local competition pioneers from the mid to late 1980s also had
attracted the best talent in the telecom industry, including guys like me.
Today, in many markets such as San Francisco or Boston, hundreds of CLEC
are registered with the State Public Utility Commission to provide local telecom
services. This situation further complicates the marketplace for new entrants, as
you will be required to sort out and identify all the potential competitive threats,
including the big cable TV MSOs, such as AT&T, who are retrofitting old (TCI)
coaxial infrastructure and building fiber to the neighborhoods. Then we have the
cable TV "over builders" such as Wide Open West (WOW) based in Denver, who
are competing against the existing cable companies such as Adelphia and Time
Warner.
The landscape for local telephony services has become increasingly complex
and difficult to follow, let alone enter as a participant. However, we are not saying
that it can't be done. We are indicating that entering the telecom carrier
marketplace as a carrier is extremely risky, and wrought with potential pitfalls that
should be studied, and thoroughly analyzed before even considering a telecom
carrier play.
Arguments Against Utilities Entering the Telecom Carrier Arena
In the course of developing this paper and speech for the UTC Telecom 2000,
we discussed our topic with many utility executives seeking specific examples of
various utilities entering the telecom business, and then failing.
So why did they fail?
Most of the examples sited by our sources indicated that the business plan(s)
were indeed flawed, and not well conceived. Market research was oftentimes
based on "we believe there is a market." Or, "we feel that providing telecom
services to our community would be beneficial."
True, but can you generate enough revenue to cover the cost of the new telecom
infrastructure? Is this utility telecom venture an economic development tool, or a
real business, which will become self sufficient in a reasonable period of time,
like 3-5 years.
One example was of a very small rural cooperative electric utility that was
desirous to bring in high speed telecom services to this relatively remote western
plains community. The network was built with miles of new fiber optic cable along

4. rural highways and roads. So far so good, right? But then they realized that they
had neglected to contact many end-customers, and "sell" these services to the
local schools, libraries, hospitals, and government facilities.
Clearly a market assessment was not formulated, or their perspective of the
market was based on the view from 10,000 feet, and not based on a ground level
view which the CLECs generally pursue prior to network design and deployment.
Now, the projected telephony venture revenue numbers are skewed, and
significantly more fiber will be required to provide connectivity to all these
additional key locations.
Other small town examples include cities that have built what we refer to as
"island networks." These are local community based networks which link schools,
and government locations, but are not connected to the outside world via long-
haul IXC fiber. Great local connectivity, but as far as providing connectivity to the
Internet, or the nationwide long distance backbone, this town was, for the most
part still "off-net." I assume that the locals realized that building a fiber ring
around town would be beneficial, but what about the "back-haul" to the nearest
major market for connectivity to the rest of the world?
Most importantly, utilities have worked in a virtual monopoly environment for the
last 100 years or more. Things are changing now, but the telecom business is
extremely different, and has become super competitive since the divestiture of
AT&T and the Bell System in 1984, and the Telecom Act of 1996.
Massive amounts of capital have poured into this brave new world of telecom,
and continue to do so today. Mergers and acquisitions make it extremely difficult
to stay on top of the numerous players. And we should expect this situation to
continue, as the USA leads the rest of the world in the deregulated telecom
market for advanced services.
So what's a utility to do?
We recommend that you thoroughly research the market you are considering to
attack. Do the required homework, including market research and assessments.
Utilize highly qualified, experienced outside telecom consultants. Obtain market
and competitive intelligence on your existing and potential competitors. Leave no
stone unturned before deploying any resources for a telecom venture.
Hire the best possible people for the new unregulated subsidiary, and think exit
strategy. Who can we sell this enterprise to in 3-5 years? What will be the long
term benefits of this type of high risk venture? Is it worth the potential downside
of going it alone, or are there partnership, or joint venture opportunities
available?

5. Better yet, stick with the "landlord" option, and work with all the existing and
future potential carriers entering the local market you continue to serve. Be
creative in your approach, and avoid the pitfalls of overvaluing the asset, and
missing the window of opportunity, as many utilities continue to do.
Overall, the future looks very bright for the creative and progressive utilities, and
somewhat bleak for those who neglect the critical homework, such as market
assessments, and competitive intelligence.

6. Better yet, stick with the "landlord" option, and work with all the existing and
future potential carriers entering the local market you continue to serve. Be
creative in your approach, and avoid the pitfalls of overvaluing the asset, and
missing the window of opportunity, as many utilities continue to do.
Overall, the future looks very bright for the creative and progressive utilities, and
somewhat bleak for those who neglect the critical homework, such as market
assessments, and competitive intelligence.