High-Powered Fiber

Utilities hang on to telecom dream

The Telecommunications Act of 1996 was supposed to push a particular group of companies onto the telecom scene: power utilities.

Much like the natural gas and oil utilities before them, these enterprises own rights of way and, often, dark fiber along critical long-distance routes and in most major cities. In the early years of deregulation, petroleum pipeline giant Williams Pipe Line made history by selling its fiber network unit, WilTel, to an ambitious start-up, and in the process provided a major stepping stone toward telecom dominance to the carrier now known as WorldCom.

But power utilities are still feeling their way along, selling dark fiber and doing joint ventures in their regions.

Being regional is both the greatest advantage and disadvantage of networks built by utilities. On the one hand, they can snake fiber into every nook and cranny of their territories. But to offer national coverage would require interconnect agreements with other companies. National coverage is important, since the customers that can afford expensive fiber links are typically based in major cities and have satellite offices in smaller towns. Still, experienced executives are often frightened by second-tier market dreams.

"Who is going to buy 432 strands of fiber in Mobile, Ala.?" asks David Diaz, CEO of metropolitan backbone provider International Wire Communications. "One OC-48 [2.5 gigabit-per-second line] would probably take care of the whole market. How does that company laying the fiber recover its costs?"

The opportunity is there, say executives at the carrier confederation AFN Communications, which operates a growing regional network of fiber owned by major U.S. utilities.

"We are seeing a lot of people move from thinking about building to being more apt to lease capacity, in particular in the second- and third-tier markets," says Gordon Martin, president and CEO of AFN.

Launched a year ago, AFN aims to offer telecommunications services over the fiber-optic assets of its member companies. AEP Fiber Venture, a subsidiary of American Electric Power; Allegheny Communications Connect, a subsidiary of Allegheny Energy; Fiber Venture Equity, a subsidiary of FirstEnergy, and GPU Telcom Services, a subsidiary of GPU, own about 90 percent of AFN. The rest is owned by nTelos and EDS/A.T. Kearney.

Although Martin would not talk about ongoing negotiations, some of the most promising customers for AFNs network are the regional Bell companies looking to expand beyond their traditional boundaries.

Most of the existing networks, such as those built by Global Crossing, Level 3 Communications and other major players, have been centered around 50 major cities in the U.S. and along major geographic routes, leaving only AFN as a viable alternative for the Bells.

"Despite the financial markets disciplining our industry in 2001, demand is still spectacular," Martin says. But since utilities have not yet made a big play in the telecom market, its unclear whether they can unlock the value of their fiber assets. Seth Libby, an analyst at The Yankee Group, says Touch America and Williams Communications have done the best at tapping that revenue stream.

That may change soon, as changes in federal accounting rules make it less attractive for utilities to sell dark fiber. "New accounting rules really force you to recognize revenue over the life of the asset, so the days of being able to book $100 million in fiber revenue from a dark-fiber sale are really gone," Martin says.

Now this revenue has to be amortized over the life of the asset — about 20 years, in the case of fiber. This deprives multibillion-dollar utilities of the ability to "flip" dark fiber after completing a large construction project and to account for the sale in quarterly revenue. So, opportunities to participate in telecommunications through a coalition company such as AFN becomes increasingly attractive.

"As deregulation continues to accelerate, despite what happened in California, more of them will turn to telecom in one form or the other," Libby says.

Utilities will be more interested in looking for partners in tapping telecom, supplying dark fiber, transport, and, surprisingly, data center and colocation facilities.

The notion of a data center run by a utility that can guarantee the cost of its power supply is not so far-fetched, Libby says."Some utility companies believe that whether they partner with somebody or build it themselves, they are in the unique position to guarantee not necessarily unlimited power, but to design, build and maintain a power grid supporting a data center better than any sort of commercial colocation provider," he says.