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Ready for Reddy Megabit?
March 2, 2007

Should electric utilities be permitted to enter digital communications without rate-of-return penalties?

If you search distant memories -- or search the Web if you are under 30 -- you may remember a very interesting marketing character, Reddy Kilowatt.

Created in 1926 by Alabama Power Executives, I am not really sure what Reddy stood for -- most likely reliable energy delivered over electric lines.

Based on the recent activity by power companies in the digital-services industries, maybe it’s time for Reddy to resurface as a symbol for broadband services over the same power lines.

Delivering tremendous amounts of digital content and communications to consumers could make Reddy Megabit an instant success -- especially with the Nickelodeon generation.

If a sponge named Bob can talk, then a lightning bolt should be able to represent the regeneration of broadband services growth. In fact, the U.S. needs a “shock” to regain international leadership in broadband penetration.

The 500 largest electric utilities in the country serve over 107 million customers. This number includes investor-owned companies with millions of customers, as well as cooperatives like Tri-County Electric in Michigan, Licking Rural in Ohio and Medina Electric in Texas that have 20,000 customers.

Electric companies getting into content-oriented businesses is not a new thought -- all utilities have pondered the possibility of enhancing enterprise value by capturing a larger digital market share within their service territories.

One issue driving this line of thinking is that utilities are also faced with the emergence of a chilling new energy landscape. This new landscape includes two types of companies: those that measure and control power, and those that sell power to customers based on time of day and functional use of the energy.

The latter of these two types of companies, called power marketers, use the existing distribution of electric utilities to deliver power to end-users. Ironically, these two challenges -- market entry and market defensibility -- require billion-dollar investments.

The competitive landscape for energy companies will necessitate tremendous capability in information technology. Utilities have the monumental and expensive task of creating systems that can charge different rates for generating TV, phone and Internet services versus heating and air-conditioning kilowatts. Justification for these systems may rest on the ability of energy companies to sell additional “digital services” to the homes they serve.

As electric companies pursue broadband-over-power-line, fiber-to-the-home and wireless-broadband initiatives, Reddy will likely run into regulators. Then, the question becomes: Should electric utilities be permitted to leverage rate-payer assets to compete with the likes of cable and telephone companies without the prospect of rate of return penalties?

While at a minimum, this question will fuel the employment ranks of regulatory and public-policy lawyers, it also raises a broader issue for local communities.

First, let’s consider the issue of competition versus the doctrine of universal service (phone and broadband). Today, for all practical purposes, cable television and incumbent telephone companies are the two predominant providers of voice and broadband services to consumers. Voice-over-Internet-protocol service providers, which must use the infrastructure of these larger entities, are protected by the Federal Communications Commission; while the largest cellular companies are owned by telcos.

According to the FCC’s recent Trend in Telephone Service Report, in 1995, customers spent $100 per month for wireless and wireline communication services. In 2005, the average number was $122. More interesting is that local telephone service on average increased from $30 to $36, while wireless service increased from $46 to $74. Are these signs that competition is working?

In 1983, approximately 7.4 million American households did not have telephone service. This represented 8.6% of the market. Today, 6.3 million homes still do not have access to telephone service. As of October 2003 (the most current data in the report), only 62% of U.S. households had a computer and only 20% had high-speed-Internet access.

These data prove that the “Digital Divide” persists. More than $50 billion of rate-payer money has been spent on specific initiatives to provide service to rural or low-income areas since 1990. At least 80% of these funds were directed to telephone and wireless providers.

The answer is obvious: Electric utilities should not only be permitted to enter these critical businesses; they should also be encouraged to do so.

As the U.S. falls further behind in the quest to become digitally connected, regulators should create incentives that encourage utilities to utilize their assets in order to create new wireless and fiber networks in order to promote IPTV, VoIP and high-speed broadband services.

Electric utilities are the only provider with the infrastructure and regulatory muscle required to add competition in these multibillion-dollar industry segments.

The regulatory objective is simple: Ubiquitous Internet and VoIP access for less than $20 per month, and IPTV bandwidth capable of high-definition-television delivery for $10 per month. Video-content providers should be afforded the chance to directly market to utility customers. Optionally, utilities should have the right to perform a billing and collection function. Electric utilities should be required to use these high-bandwidth channels to read electric meters, turn off high-energy devices during peak load conditions, offer energy-management services and monitor transmission networks in real-time.

Posted by Dwayne Goldsmith on March 2, 2007 | Comments (0)