Do Utility Players Have the Power?

Author:
Publish date:
Updated on

It may be too early to tell whether the utility industry
will pose a major competitive threat to cable operators, but it's not to early to
start asking.

Already, the lobbyists in each state are taking up the
battle.

Cable interests want to make sure utility companies
don't enjoy any unfair competitive advantage while consumer advocates support any new
competition as a way to promote lower programming prices and faster technology upgrades.

Widespread competition might still be years away, but
already cable operators from coast to coast are beginning to face challenges from electric
companies interested in overbuilding their service territories.

In Tacoma, Wash., a start-up telecommunications division of
Tacoma City Light, the municipal electric company, vows to launch a cable service
"that will knock your socks off" against Tele-Communications Inc. this summer.

And in some Boston area markets, Cablevision Systems Corp.
is battling a partnership between a Boston Edison subsidiary and Princeton, N.J.-based RCN
Corp.

But analysts note that power companies are not the
operators' biggest worry.

"It's not their number one concern right now.
It's always been something off on the back burner," said Tom Rhinelander, an
analyst in the People and Technology Division at Forrester Research Group.

Local and regional power companies are looking at
cable's core businesses -- television, Internet and telephone delivery -- as possible
added-value services to keep their own customers loyal. Giving their customers something
beyond a monthly gas and electric bill is a growing objective to many as they face
competition for the first time, thanks to industry deregulation.

"Offering cable TV service gives customers a reason to
stay with this electric company," said Steve Klein, superintendent of Tacoma City
Light, who made the "knock your socks off" comment.

Some power companies are upgrading fiber networks --
originally constructed to monitor energy use -- to deliver data, voice and video.

DBS DEALS

Others are striking deals with direct-broadcast satellite
companies to market and distribute DBS to their customers.

DirecTv Inc., for example, is testing such an arrangement
with three large, regional power companies that sell the DBS service to their customers,
said John McKee, vice president of special markets for DirecTv.

"We believe it could be an opportunity to catch people
as they move," McKee said.

EchoStar Communications Corp.'s Dish Network DBS
service is also sold through utility companies, said Jim Spreitzer, sales director for
telecommunications and energy at EchoStar.

"Usually, we're part of a package that includes a
combination of Internet, home energy management, cellular, security and telephone,"
Spreitzer said.

Utility companies want to offer entertainment packages not
just to keep the customers they have, but also to get new ones as the energy market is
deregulated. And what sets DBS apart, Spreitzer said, is that a utility company can market
it throughout the U.S., not just locally.

CAN THEY MARKET IT?

But many pundits are asking whether utility companies have
the expertise to do consumer marketing at all.

"Utilities have never been in a competitive
business," said Steve Effros, president of the Cable Telecommunications Association.
"Electricity is a product everybody needs."

"Utilities don't typically have customers -- they
have ratepayers," said Victor Chayet, director of communications for en.able, which
offers marketing support, as well as new consumer products and services, to utility
companies on a wholesale basis. One of its clients, KN Energy of Lakewood, Colo., has had
particular success with Dish Network, he said.

Chayet said it's critical for utility companies to
develop marketing and customer-service skills before their own territories are
deregulated. He added that offering products such as DBS or telephone service gives a
utility company "additional hooks into the customer," so the customer has fewer
reasons to change utility companies later.

Another way for power companies to gain marketing
experience is to link up with a company that already knows the cable business. Observers
predict more partnerships between experienced communications players and the unregulated
spin-offs of power companies.

"The wisest decision we made was partnering with a
company that already has cable and telephone experience," said Jim Conroy, a public
affairs spokesman for Boston Edison. "Trying to start this up ourselves would be
incredibly difficult."

TACOMA HAS THE POWER

But that's just what Tacoma City Light appears to be
doing. Klein said when the company was not able to partner with a local cable provider,
"we decided to launch a lot of healthy competition into the market" with its own
cable overbuild.

Tacoma City Light recently chose General Instrument Corp.
to build its interactive set-top box, which Klein said will offer digital picture and
sound quality as good as DBS, plus a few bells and whistles not yet found elsewhere. He
suggested that consumers may be able to read their electric meters and pay their electric
bills over their televisions with the new service, a promise subscribers have been hearing
for years.

Klein said he doesn't anticipate a prolonged
beta-testing phase for the new service because "people call us every day to see when
we're going to be out there."

Tacoma City Light has done extensive consumer research on
its programming lineup, said Klein. "It's based on what the customers
wanted," he said, rather than ownership interests in the programmers.

Before the company developed its cable business, Tacoma
City Light planned to build a hybrid fiber-coax broadband network to provide two-way
communications with its electric customers for billing and energy consumption monitoring.
The network was originally designed to allow the utility to offer discounted pricing to
customers who switched energy usage to off-peak hours.

Klein said studies found there was very little incremental
cost in upgrading the network to allow other telecommunications applications, such as
telephone service, high-speed Internet delivery and even video. Tacoma City Light decided
to go with the upgraded plant.

Not everyone is convinced that utility companies really
needed to develop such sophisticated networks on their own.

"Utility companies could have leased the telephone
lines," said Effros. "They didn't need to spend millions to read power
meters."

BOSTON POWER PLAY

The question of who pays to construct those valuable fiber
networks --and who has access to them once they're built -- has led to a heated
debate in Massachusetts.

At issue is RCN's 63-year exclusive rights to Boston
Edison's fiber network. The Massachusetts Department of Telecommunications and Energy
is investigating the matter. Cablevision Systems Corp. claims that RCN underpaid for those
rights, leaving Cablevision at a disadvantage and Boston Edison ratepayers footing the
bill.

"We must see that [electric] ratepayers are not paying
for a utility's entry into the communications business," said Lisa Rosenblum,
senior vice pres ident of legal and regulatory affairs for Cablevision's Digital
Services Division. "There's no way to compete with a subsidized company."

Conroy insisted that Boston Edison ratepayers had not
subsidized the company's partnership with RCN.

"The money that was used to build the fiber was paid
for by shareholder funds," he said. "It was not paid for by ratepayers.
Period."

According to Carol Mann, director of cable and satellite
research at The Strategis Group, utility companies could face some market advantages.
Electric companies aren't burdened by pole attachment costs, and municipalities
don't have to apply for a cable franchise or pay franchise fees.

"We welcome competition and always believe competition
is beneficial to our customers," said Sharon Becker, senior vice president of
TCI's northwest region. But in Tacoma, she added, "We're competing with the
very people who are regulating us."

Becker praised the city of Tacoma for doing "an
exceptional job of trying to make sure the playing field stays level."

THE OUTLOOK

"While utility companies may enjoy some
competitive advantages, they face most of the same challenges that any overbuilder does.

Klein said that in trying to start up a competing service
against a cable incumbent, "It isn't always a clean fight." Some incumbents
try to sway programmers from dealing with the competition, for example. "We
don't have any problems right now," Klein added.

The Strategis Group plans to release its Cable Overbuild
Competition study at the National Show this week in Atlanta. The study includes a category
on municipalities and public power companies.

"My research has shown that typically, the overbuilds
from municipalities are not financially viable," said Mann, adding that
"typically" is the key word.

"You love [overbuilds] as a consumer,"
Rhinelander said, "but as a new competitor, how do you differentiate yourself and
offer something that local companies aren't already giving?"

Klein believes that the threat of competition has already
prompted TCI to upgrade its plant.

"With TCI improving and us coming in," Klein
said, "everyone will benefit."

Becker admitted that although TCI had been planning digital
upgrades, including high-speed Internet access, throughout the region, "we may have
moved a little faster" in Tacoma. "There's nothing like a little wake-up
call."

While competition can help stimulate the market and even
attract new subscribers who had not taken cable before, unchecked entry by powerful
players could cause more harm than good, some claim.

Rosenblum said that while the vision of the
Telecommunications Act of 1996 was to promote increased competition and lower prices, it
did not anticipate the types of predatory pricing that could come about if ratepayers from
utility companies subsidize a new cable business.

"In the short-term, that might be superficially
attractive," she said, "but in the long-term, it could scare off other potential
competitors."

When asked if she saw utility-company competition as an
industrywide threat to cable, Rosenblum replied, "It totally depends on the terms of
entry. If it's head-to-head, we have no doubt we can compete. If they can enter on
preferred terms and don't have to finance on risk as cable operators do, then
there's an issue."

In the grand scheme of things, utility-company overbuilds
are a smaller concern to cable than finding ways to pay for their own digital upgrades or
facing competition from DBS, said Rhinelander.

"This is not the thing looming on the horizon
that's going to kill cable," he said, adding that cable operators should keep an
eye on utility companies in their own areas.

Related