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News Analysis

Fortnightly Magazine - March 1 2000

electric transmission lines. "In the network industries, we see more similarities than differences," he says.

Exelon Infrastructure provides construction and maintenance services to another PECO subsidiary, Exelon Communications, which has formed partnerships with AT&T and Hyperion (Hyperion PECO). "It's all about return on invested capital," says Murphy.

A No-Risk Business?

The energy companies that have delved into telecommunications in a big way do not keep their names secret. Enron Corp., Williams and Columbia Energy Group fall within that group. However, for an interstate gas pipeline to exploit its rights-of-way, how far must it dive into communications? The risks vary, depending on the scope of commitment.

The easiest and least-lucrative route finds the company leasing its rights-of-way as an undeveloped asset. "Leasing rights-of-way is close to no risk," claims Kraemer.

Then again, the company can make a more substantial investment in its right-of-way by installing dark fiber (fiber optic cable awaiting use). Albert Allen of Allen, Williford & Seale Inc., a real estate appraisal firm based in Houston, has seen this trend firsthand. "It's just begun to happen in the last 24 months," he notes.

Allen says his firm is working on right-of-way projects for all the "big player"companies. He won't reveal specific projects that are still in progress.

"[Installing] dark fiber, of course, requires significant investment," Kraemer notes, but from Moroney's point of view, once that dark fiber is installed on a right-of-way, its value immediately jumps. It's the kind of market climate, Moroney says, where if "I put $1 million worth of fiber in the ground, it's instantly worth $5 million to $6 million."

In a paper he wrote for Hagler Bailly, "The Convergence of Energy and Telecommunications,"[Fn.2] Kraemer describes three "business sectors" of telecommunications involvement. The first is the right-of-way leasing and installation of dark fiber. The next sector involves sending signals through the fiber ("lit fiber"). Kraemer believes the latter effort is not worth much in and of itself - unless a company is planning to go into the final business segment, the telecommunications service business.

"It's a low value-added area," Kraemer says of the "lit fiber" business sector. "Before you know it, you're in the services business." (That's sector No. 3.) Lighting the fiber and trying to stay out of the services business, Kraemer says, is like crossing a busy street and then stopping in the middle of it.

What if a company wanted to just stay in the dark fiber business for the long term without plunging all the way into telecom? Would it get overrun by more aggressive competitors? The answer, Kraemer says, is no. The dark fiber business is virtually no risk, he says, even for the long term.

In fact, even in a worst-case scenario, if a telecom company leasing a right-of-way from an energy company happened to go out of business, the asset would just be taken over by another company in need of rights-of-way. And the dark fiber and right-of-way business involves very little maintenance.

"It's an annuity. Once it's in, you do no work. It's high-margin annuity flow," Kraemer says. He