Electric, gas companies light up communications

Touch America, the communications subsidiary of Montana Power, today announced it will buy a portion of Qwest Communications International's long-distance voice business for about $200 million.

Qwest is required by federal law to divest itself of long-distance voice assets within US West's 14-state region as part of its acquisition of the highly regulated local phone company. The deal gives Touch America access to Qwest's customer base and sales force, as well as certain physical assets.

"They needed a growth strategy because the growth in their core business is very slow. It's mature with eroding (profit) margins," said Brad Bradshaw, senior director for energy industry research at The Yankee Group.

The move marks the latest effort by the utilities to break into the communications industry, a result of the largely stagnant energy business and the red-hot growth of telecommunications.

The growth rates in the energy industry pale in comparison to the communications industry's explosion, which has been driven by low-cost voice calls and high-speed Internet access.

With their ample cash flow and right-of-way access in metropolitan areas, the power companies are embracing newfound fiber-optic strategies. Some are testing technologies that could transform their power lines from conduits for electricity into lucrative pipes reaching millions of consumers' homes.

Analysts say many utility companies already held significant fiber-optic and wireless assets for their own far-flung internal needs, so exploiting and expanding those assets is logical.

"They have the rights-of-way, and they have a large customer base, so they have some real natural advantages to cross-selling telecommunications services," said Scott Cleland, a telecommunications analyst and managing director at Legg Mason's Precursor Group.

First formed in 1983, Touch America is building a 26,000-mile nationwide fiber-optic network--12,000 miles have been completed so far--as well as fixed wireless and cellular systems.

"The energy business is a decent business, but it really didn't show the growth potential that telecommunications did," Montana Power spokesman Cort Freeman said.

As a result, the company is not alone in its quest for communications profits.

Enron Broadband Services, a subsidiary of Houston-based energy giant Enron, is building a massive nationwide fiber-optic network. Williams Communications has its roots in the energy industry, having installed fiber optics along the rights-of-way of the Williams Companies, its natural gas and oil pipeline parent.

Dozens of other regional power utilities also have adopted communications service strategies.

For example, Reliant Energy, formerly Houston Lighting & Power, operates a competitive local phone business and owns fiber-optic assets, while Avista Communications, a unit of Pacific Northwest energy company Avista, offers local phone service and wholesale fiber capacity.

RCN, an upstart fiber-optic carrier, has struck an alliance with Southern California Edison, a large regional power company, and formed joint ventures with Potomac Edison and Boston Edison.

Progress Telecom, an affiliate of Florida Power, was formed in 1998 and offers fiber-optic capacity and wireless services in Florida and the Southeastern United States.

International power companies also are getting into the act. Japan's regional electricity companies own a major nationwide fiber-optic network and Tokyo Electric Power Company, the country's largest utility, now offers Internet access.

Investors, thus far, approve of the strategies, having sent shares in Enron, Williams, Montana Power and Avista significantly higher in recent months.

Analysts believe the energy utilities could be considerable competitors, but it will take a serious commitment to overcome the steep learning curve.

"We're finally getting to the point where power companies are beginning to understand communications. They will be significant entrants but are unlikely to be real big players anytime soon," Legg Mason's Cleland said. "It's a different core competency so it won't be easy."

Separately, Williams and Enron are poised to play an even greater role in the future of communications with the bandwidth exchanges the two have proposed. The ability to buy and sell excess communications capacity as a commodity, an idea that isn't new to energy companies, could profoundly impact the industry. Already, the Federal Communications Commission is considering a similar plan for wireless spectrum.

And, many of the power utilities are quietly testing new power line technologies that could allow them to deliver local voice service and high-speed Net access over their electrical systems. That possibility could mean the electricity companies are sitting on an untapped gold mine, though many analysts and industry observers are extremely skeptical of the chances of success for the power line technology.