Energy Presents New Frontier for Telcos

When PAETEC (PAET) said last week it had acquired U.S. Energy Partners, a small electricity distributor in New York state, it sounded like a curious reversal on a business model that has been tried many times before: the convergence of energy and telecom.

The acquisition of U.S. Energy Partners, a privately-held company that sells electricity to more than 3,500 customers in western New York State, will allow PAETEC to provide complementary services to its communications customers.

This alluring combination has been tried repeatedly, usually in the other direction: over the last two decades a series of electric utilities, convinced that selling megabits is not that difference from selling megawatts, have crossed over to provide telecommunications services, often with mixed results. The question now is, with electricity prices climbing upward, states deregulating their power markets, and telecom investment flattening, is the reverse move likely to work out any better?

The most notable cautionary tale of an attempt to combine energy and telecom services is the story of Williams Communications Group, the subsidiary of oil and gas pipeline giant Williams that flourished, briefly, in the dot-com boom of the late 1990s.

Foreseeing a huge surge in demand for fiber-optic transport as the Internet took hold, Williams began laying fiber in decommissioned pipelines in the mid-80s, becoming one of the first energy companies to enter the telecommunications industry. By 1995 it was the nations fourth-largest carrier of long-distance traffic, and in 1998 the communications unit, saying it had $1 billion in long-term revenue commitments, said it would build a new next-gen fiber network.

Many of those commitments evaporated in the telecom crash of 2000-01, though, and in 2002 Williams Communications filed for Chapter 11 bankruptcy.

Now, though, executives from both telcos and power utilities see a series of developments that have brought the talk of convergence to the fore. One is technological: The push to create a smart grid to allocate resources and distribute power in more intelligent and efficient ways has forced energy suppliers to become more and more like networking companies.

Megabits are very similar to megawatts, said Vince Bradley, CEO of World Telecom Group, which itself has formed an energy subsidiary, Energent. Theyre both basically a metered product.

The second development is the ongoing state-by-state deregulation of electricity markets. Unlike telecom, which was essentially deregulated nationwide by the Telecommunications Act of 1996, energy markets are being freed up one state at a time. In announcing the U.S. Energy Partners deal, PAETEC said it will expand its operations as an Energy Service Company into all of the 14 markets that have deregulated to date.

The third force is the economics of energy. Briefly, rising energy prices are forcing companies to seek ways to conserve power and slash their electricity budgets, even as advanced IP networks and data centers consume larger amounts of power. That, in theory opens up new opportunities for telecom providers to add electricity, and integrated billing, to their bundle of services.

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