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Managing the Telecom Value Curve

There are opportunities for utilities despite the telecom market correction of 2001 and 2002.
Fortnightly Magazine - June 15 2002

a foot of ROW (a basic asset) grow exponentially as the utility invests capital and takes a more active role in providing service. As an example, a straight facility lease or "landlord arrangement" typically yields revenues of $.25 to $6 per foot, per year, depending upon the market size and demographics the ROW addresses.

Adding fiber optics to the ROW requires an additional capital investment; however, the investment radically changes the inherent value of the ROW asset. The resulting lease value can be increased to an estimated $100 per strand mile per month, again depending upon the addressable market. Using a benchmark standard for comparison, the resulting revenue derived from a foot of ROW can be extended from $.25 to $20 per foot per year by moving one step up the value curve. While there are many assumptions in this estimate, it represents a fair point indicator of the value enhancement.

Moving up the value curve can increase the utility's value extraction exponentially. ( ) But here is the rub—or one of them! Too many utilities have been attracted to the allure of these returns and sacrificed significant resources trying to compete with large telecom businesses already in place. Others, however, have succeeded admirably.

Lighting Dark Fiber

The economic incentives to move up this value curve are extremely attractive and compelling. But the problems associated with this optic bonanza can be many and varied. Of the utilities that have failed in telecommunications, and some have failed in spectacular fashion, there are a few common themes. The successful entrants maintained a disciplined and orderly trajectory along the path toward success. The key question is: How can an electric utility prudently manage its entry into telecommunications and leverage its assets so as to maximize value?

In our experience every successful enterprise has four common qualities:

  1. A clear business strategy and objectives that everyone in the organization understands.
  2. Specific accountabilities for each person in the organization, with direct linkage between accountabilities and business objectives.
  3. A good management team with the capability to execute efficiently.
  4. A business strategy based upon exploiting the enterprise's sustainable competitive advantages.

While the need for these elements seems obvious, in fact, few organizations can put all these pieces in place at once. However, it is the last of these tenets of success-business strategy-that specifically causes the most problems. Reasons include:

  • The failure to identify a sustainable competitive advantage.
  • Falsely seeing advantages where, in fact, there are none.
  • Moving too slowly to establish new competitive space once an advantage has been exhausted. The key to success is to build or improve a basic core competence, essentially managing risks while creating new competitive space.

Wholesale Services

Perhaps a better view of the telecommunications value curve is seen in the context of the risk-adjusted opportunity. Figure 2 depicts the relative risk and return profiles for two different enterprises in the telecommunications business-an energy utility and an existing telecommunications service provider (TSP). The straight line represents the typical risk-return profile of an existing TSP, and the curve represents the risk-return profile of a utility at