Resale Energizes Power Company Entry into Retail Telecom Markets

By Khali Henderson

Posted: 03/1998

By Khali Henderson

You probably heard about energy giant Williams Companies’ splashy January 1998 re-entry
into the telecom business. But, you probably haven’t heard about Delmarva Power &
Light Co.’s entry into local and long distance services businesses in Delaware and parts
of Maryland, New Jersey and Pennsylvania.

Last fall, the company’s subsidiary, Conectiv Communications Inc., signed resale
agreements with Bell Atlantic Corp. and Sprint Communication Co. to make its telecom debut
possible. Although Conectiv already has 600-plus miles of fiber in its region, it is one
of many energy company ventures that is using resale as an entree into the telecom retail
business.

On an order of magnitude, the Williams 11,000-mile fiber network makes the Conectiv
operation look paltry, but the impact these two companies will have on the competitive
landscape may not be a result of size but of strategy. Following its WilTel roots,
Williams will be courting resellers as yet another source of cheap transport. Prior to
deregulation of the energy and local telephone service markets, wholesale service had been
the prevailing entry strategy for energy companies into telecom businesses. They have
infrastructure–rights-of-way and extensive private networks–that can be leveraged easily
through leases to telecom carriers. (Even the relatively small Conectiv is leasing use of
its network to MCI Telecommunications Corp. and other long distance companies.)

Conectiv, on the other hand, is seeking end users. It is the first to offer consumers
in Delaware a choice of providers for local telephone service as well as bundled long
distance. The company’s long-term strategy is to provide facilities-based local service to
its customers. This year Conectiv will add 200 miles of fiber and another switch, and will
co-locate in 13 Bell Atlantic central offices. Although Conectiv is servicing some clients
through a direct connection, a majority of its target–an estimated 1.2 million electric
service subscribers served by its parent Delmarva Power (soon to be renamed Conectiv
Corp.)–are provided service through Conectiv Communication’s resale arrangement with Bell
Atlantic.

Despite its bias toward facilities, Conectiv has resale to thank for its early market
entrance–a proven success strategy for other telephone companies. The first to offer
bundled local and long distance service in Connecticut, Southern New England Telephone
(SNET) captured 40 percent of the state’s long distance market in just three years. (It
also captured the attention of SBC Communications Inc.: The Texas-based Bell company
announced in early January 1998 its plans to purchase SNET for $5.66 billion in stock and
assumed debt pending regulatory approval.)

Resale Strategies

Conectiv’s entry into the telecom market is just one strategy on a complex continuum
that includes resale, facilities and investment in varying degrees. (See table: Energy
Company Telecom Strategies.) Like Conectiv, 65 percent of energy companies plan to have
developed their telecommunications assets as a separate business, according to a recent
survey of energy company executives by the Yankee Group, Boston. According to Brad
Bradshaw, director of the energy research and consulting unit for the Yankee Group, there
are a few resale strategies emerging to put energy companies in the retail phone business:

Reseller/Agent: Some energy companies are entering agreements with local, long
distance and wireless carriers to resell service. The obvious advantage here is speed to
market and low risk. In some cases, a co-brand with a national telco name may be a plus.

Competitive local exchange carrier (CLEC): The approaches most energy companies
are taking as CLECs are to offer a suite of voice and data services either to clusters of
high-volume users in a multiple dwelling unit (MDU) or to consumers in a broad geographic
base. The latter option does not require facilities, but offers significant financial
rewards when facilities can be built out, says the Yankee Group.

Virtual services supermarket: Another prominent strategy, says the Yankee Group,
is offering customers a broad set of energy, telecom, security and other related services
on a purely resale basis. The primary advantages here include the ability to greatly
expand the customer base beyond regulated boundaries and to enhance revenues and retention
through additional services.

Integrated broadband services: With this approach, the energy company uses
dedicated facilities to bring multiple broadband services, such as local, long distance,
Internet access and cable television, to a highly concentrated customer base as found in a
MDU such as an apartment building. The Yankee Group cites lower customer acquisition costs
and greater network usage as advantages of this strategy.

"The problem in telephony is the options are varied and there are very few
patterns–no patterns, really," says Bradshaw. "Basically, the strongest
opportunity for energy companies is the CLEC opportunity. They are offering a full range
of services on a resale basis until their own facilities are available. The return is
phenomenal from a financial standpoint."

Bradshaw also notes that it makes sense according to customer buying preferences. A
1997 Yankee Group survey showed that customers would rather buy local phone service from
their power company than from their cable television or wireless service providers.

The Wholesalers’ Opportunity

Perhaps it is customers’ trust in their energy company that is the reason many
telephone companies are actively pursuing power providers as a distribution channel.
Certainly, the larger providers are already filling up their dance cards (e.g. AT&T’s
agency deal with EnergyOne, a UtiliCorp United/PECO Energy joint venture serving
Pennsylvania, and MCI’s deal with KN Energy).

On the other end of the spectrum are start-up companies such as Omniplex Communications
Group (OCG), St. Louis, which offers energy companies a full-service local and long
distance distributorship complete with turnkey marketing programs for existing residential
customers. With officers hailing from Access America Telemanagement, a pioneer bundled
service provider, OCG is experienced at interfacing with the incumbent local exhange
carrier (ILEC), relieving its energy customers of that often onerous responsibility.

For a company such as OCG with no retail brand awareness, the choice to use an
established distribution channel to reach consumers is clear. But it also is the impetus
for Frontier Corp.’s recent allocation of resources to developing energy companies as a
primary channel. In summer 1997, Frontier established its energy services team, which
includes a director and eight full-time salespeople. The company says it is has a unique
approach to the channel.

"Utilities have options to partner, invest, resell, etc. We wanted to give them
(flexibility) to begin as an agent and move to a pure reseller if they want,"
explains Dan Harper, Frontier’s president of specialized markets. Frontier is offering
long distance services but plans to add toll-free, Internet and paging services in the
near future.

The company has announced an agency agreement with Wheeled Electric Power Co., a New
York-based gas and electric company, and is expected to announce two more agreements in
second quarter. Harper says within six months the company will know if its approach to the
market is successful. "I think we are taking the right approach," Harper says.
"No one (at Frontier) is saying do it one way or another. They (energy companies) are
optimistic when we tell them we can take them through the process."

A frequent contributor to PHONE+, Khali Henderson is a principal with Marcom Support
Services, a Phoenix-based firm providing marketing communications services to
telecommunications companies. She can be reached at [email protected]

Energy Company Telecommunications Strategies