They see leasing and dark fiber as "no-risk" ventures, with more upside potential.
Few seem ready to predict when demand might wane for rights-of-way for long-haul telecommunications. The consensus suggests a long-lived market - with interstate natural gas pipelines primed to take advantage. The question seems not so much whether to dive in, but how deeply to get involved.
Should pipelines stick to leasing rights-of-way to carriers? Or should they lay fiber and perhaps offer their own long-haul services?
"Essentially what you get today is an insatiable demand for bandwidth," says Bill Moroney, president of the United Telecom Council. He attributes the burgeoning demand to the Internet, both for entertainment and business-to-business communications. "All of this," Moroney says, "just burns up bandwidth."
In January the UTC completed a study[Fn.1] indicating that significant opportunities exist for entering the telecommunications market as a (1) carrier's carrier, (2) a dark fiber provider, or (3) only as a lessor of rights-of-way. Known years ago as the Utilities Telecommunications Council, the group shortened its name to better reflect a wider membership including gas pipelines.
Of course, it's nothing new for pipelines to lease rights-of-way for secondary purposes. Such uses "go back a long time," says Joe Kraemer, senior vice president at Hagler Bailly. "I think it would be impossible to find a pipeline that has not done a right-of-way deal."
Yet Kraemer sees a subtle change occurring in just the last 24 to 36 months. He believes pipelines are no longer sitting passively, waiting for a lessee, but instead are taking initiative to build a business in rights-of-way.
"The consciousness, the visibility, the awareness is up," says Kraemer.
The Buzz on the Street
UTC's Moroney sees the market in rights-of-way as "huge," whether for gas pipelines or electric transmission lines.
"It doesn't much matter," he adds. "The big telephone companies are just going nuts." And Moroney claims utilities are poised to exploit right-of-way assets through their own expertise.
"Utilities are superb at building infrastructure," he adds. "[It's] a construction business. They [utilities] will be the telecom infrastructure data company." Moroney sees this diversification into telecom as the "perfect capitalization" of utility core competencies.
Columbia Energy Group found Moroney's assertions to be true. Using the rights-of-way of the company's gas pipeline operating affiliates, Columbia Transmission Communications recently completed the first leg (from New York City to Washington, D.C.) of a planned 2,500-mile fiber optic network in the eastern United States.
"We were looking for ways to extract more value from our rights-of-way, says Bill Hederman, vice president, strategic initiatives, at Columbia Gas Transmission. Hederman explains that when Columbia first explored the idea of going into telecom, it found that two-thirds of the estimated costs for such a venture fell within its core strengths. It seemed a perfect fit.
"We wanted to move quickly, and found that [by] staying in our competencies [we could do so]," Hederman says.
Gary Murphy, vice president for utility services at Exelon Infrastructure Services, says his company, a subsidiary of PECO, found the plunge into telecom just as natural for exploiting the parent company's 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 notes, however, that the rapid change of technology might force a company to replace its dark fiber sooner than it had envisioned.
How far are energy companies taking their telecom activities? "There's no clear pattern," says Kraemer.
Will Columbia, then, with its growing fiber infrastructure, take the next step and go into telecommunications services? "Nothing's off the table," says Hederman. He does say, however, that if his company were to go in that direction, "[I]t would involve strategic partnering."
Hederman's company would not be alone. Because the leap into the services side of telecommunications entails the greatest risk, the energy companies that have done so have acted through a partnership or through acquisition. As examples, Moroney highlights two separate alliances at Exelon - one with AT&T and another with Hyperion.
Energy companies "are certainly in line to partner with a telecom," agrees Kraemer. Also, Kraemer says, they would be eager either to partner or merge with another energy company ready to move into telecom, giving them an even greater portfolio of rights-of-way. But will telephone companies start merging with energy companies?
"I think partnering is the model we'll see," Moroney says, while half-joking that as soon as he makes such a prediction, some major energy company-telecom merger will be announced.
The services sector poses another key problem as well. The company that begins by leasing dark fiber and then offering services may find itself competing as a service provider against its own dark-fiber lessees.
"As you get into this [leasing] business, you have to look at the issue of 'do we think we'll go into services?' If you answer 'yes,' it could affect your own lease policy," says Kraemer. "[Diversifying] is not incremental. There's got to be some kind of end-game vision because what you do could affect your downstream activity."
Columbia, which has yet to offer telecom services, has at least considered the issue. "It certainly is a potential problem and it's something that we recognized [as Columbia Transmission Communications was developed,]" Hederman says. But, he points out, the issue is more complex than it might appear. In the interconnected, serpentine routes of telecommunications transmission, competitors inevitably end up using one anothers' rights-of-way. "You're going to end up swapping, anyway," Hederman says.
Still, he acknowledges, "It's something you have to think about."
Perfecting the Right-of-Way
"You have a partner that's the underlying landowner," Allen is quick to remind pipeline companies anxious to lease their rights-of-way. Before exploiting their rights-of-way for new sources of revenue, he says, pipelines need to examine carefully the multitude of easements that inevitably comprise one long-haul pipeline, since the language for a particular easement may allow for a pipeline, but not for fiber optic cable.
"These rights-of-way are highly specific. Just because someone has a right-of-way doesn't mean it's a clean enough title," Allen points out. "Yeah," he continues, "this is a great source for some additional [revenue], but you better have what they need."
When the business of multi-use rights-of-way really started taking off, some companies presumed that they had a right-of-way for whatever they wanted to use it for, when in fact, easements vary. Moroney, however, thinks companies no longer are ignorant of this potential problem, and that most easements allow for multiple or ancillary uses anyway. He acknowledges, however, that companies do need to examine each individual easement before doing anything new with their right-of-way, to avoid costly legal problems in the future.
Of course, if an energy company has foresight, it planned for a multi-use right-of-way when it first built its pipeline. "They do it the right way [when a company first acquires the easements], so that in the future, what they have is a good asset," Allen says.
Even if a right-of-way isn't perfectly "clean," a pipeline company can perfect it for fiber cable to enhance the value of its asset. "[Even if] you've got an existing right-of-way, you need to go out and improve it," Moroney says.
Has the Train Left the Station?
To anyone who thinks that the need for pipeline rights-of-way is peaking right now, Moroney says categorically, "I don't believe it."
And the market may yet climb higher. "Right now, I see no end to it," Moroney adds. "We're really only beginning to scratch the surface of demand."
Sure, he says, the "hot spot" in the area of rights-of-way demand will continue to swing back and forth between long-haul and local, urban routes, and there will be peaks and valleys in both areas, but he sees no end in sight.
Joe Kraemer, on the other hand, is more cautious. "You can't pull a Hamlet and stare off into space [saying] 'To be or not to be,'" he contends. At some point, the partners will be gone. The telecommunications carriers will solve their own right-of-way problems. Kraemer predicts that intercity construction will "settle back down" in about two years.
Carl J. Levesque is associate editor at Public Utilities Fortnightly.
1 For more information on the study, contact Karnel Thomas at 202-872-0030.
2 To receive a copy of Kraemer's article, contact Peggy Ray at 202-828-3926 or firstname.lastname@example.org.
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