Most electric utilities have invested heavily in building private telecommunications networks. In fact, U.S. utility telecommunication networks combine to form the largest private network, second only to that of the Department of Defense. While these networks improve power system control and operational efficiency, they typically contain excess capacity available for sale to other companies. Given increased competition in their core business, many utilities are currently reviewing opportunities to use this excess network capacity. In most cases, the utility is attempting to leverage the following assets:

s Networks. An advanced telecommunications infrastructure, including fiber optic and wireless networks.

s Physical Plant. Rights-of-way and structures that can support wired and wireless network expansion.

s Spectrum. A dedicated allocation of frequency spectrum.

s Staff. A staff experienced in deploying and maintaining a communications network.

s Network Management. A

24-hour telecommunications network management and maintenance operations center.

Where's Your Advantage?

Here's the critical question for any electric utility that would jump into telephony: What is the source of your sustainable competitive advantage?

The dynamics of the telecommunications industry lie a world apart from power generation, transmission, and distribution. The differences present a daunting challenge to utilities who seek to profit from potentially underused telecommunication assets. The value proposition must be clear and must recognize both the technology and market-based challenges.

Standard telecommunication services based upon existing utility fiber or radio networks only provide transport service. Transport represents a commodity service. Ubiquity and cost leadership ultimately prevail for commodity services. Ubiquity (em which makes the telephone so valuable (em requires widespread national deployment; yet, most utility networks are regional. Cost leadership has granted a significant advantage to new telecommunication entrants, like Teleport and Metropolitan Fiber Systems, who have deployed low-cost metro-area fiber networks with low ongoing overhead. In light of their relatively high-cost structures, electric utilities probably cannot expect to become low-cost providers in this area.

Take fiber optics, for example. Even if an electric utility has deployed fiber throughout a major metropolitan area, that alone will not justify the company's entry into the local telecommunications market. Competitive access providers (CAPs) invented and built this market. They offer extensive networks at affordable rates, a national presence, a proven reliability record, and network management/billing systems that are already in place. The electric utility must find some source of competitive advantage that competitors cannot or will not offer.

In short, electric utilities must compete on another dimension. One way to do this is to bundle services to generate greater value for the customer. Essentially, the utility follows a "niche" or differentiation strategy and attempts to add some unique capability. One obvious example is to combine a "wireless packet network" with power-management services. This type of network can offer real value; it can monitor, track, predict, and save power. This new packaged service would enable utility customers to better manage their electric consumption. The sustainable competitive advantage for the utility comes from its experience in deploying a wireless packet and its expertise in managing power consumption.

This bundling/differentiation strategy avoids head-to-head competition with existing wireless carriers. In fact, the actual data transport makes up only a small portion of the larger service concept. The customer is buying information and efficiency (em not just transportation. Furthermore, the utility is combining two unique strengths that will help to create a defensible market position.

While the concept of bundling information and energy is not new, it represents one possibility for competitive advantage and differentiation in an era of increasing competition. The challenge facing utilities is to create new sources of value and capture them with new services. Given that customers rely increasingly on information and technology, utilities ought to be able to create and capture value through diversification into carefully selected telecommunication markets. Nevertheless, many other sophisticated and aggressive players lie in wait in this market. Don't take the challenge lightly.

Which Technology?

A number of different technologies can support a wide range of potential service offerings to help electric utilities ease into telecommunications. Most commonly considered technologies include fiber optics, trunked radio systems, and other wireless technologies like microwave and personal communications services (PCS). To assess which are most attractive, the utility must analyze the potential risks and rewards associated with each.

Exhibit 1 presents the generally available switching and transmission alternatives for creating any telecommunications network. Circuit-switching establishes a dedicated connection for the duration of the call. Packet-switching segments data into small units (packets), which include "headers" and "trailers" that define the start and end of each packet. A newer packet technology called "asynchronous transfer mode" (ATM) messages are broken into fixed-size cells. Packets or cells are then reassembled in the correct order at point of receipt. Packet-switching is generally useful for short, "bursty" data exchanges.

Radio (wireless) transmission avoids the need for deploying wire-based facilities. Radio transmission combined with packet-switching forms "packet radio," which can transmit low-speed data to locations not already wired for traditional wireline packet services. As noted above, a packet radio network offers a good technology mix for electric utilities to use to develop a niche telecommunications service to help customers monitor electricity use.

A packet radio system features three essential component technologies: radio transmission, packet switching, and software.

Radio Transmission. Although the fundamentals of radio transmission have been well understood for most of this century, spread spectrum transmission was developed in the 1960s. This technology comes in two varieties: frequency-hopping and direct sequence. Frequency-hopping requires the transmitter and receiver to change carrier frequency at short intervals according to some predetermined pattern. Direct sequence uses low-power transmitters to send digitally encoded data by "spreading" each bit with a predetermined key.

In either case, the benefits of spread spectrum are the same. The signal exhibits a high resistance to noise and multipath rejection. The probability of

transmission interception is minimal because the low-power

transmission makes the signal appear as background noise. The frequencies may also be used by other transmitters and, thus, do not require special licensing at very low power.

Nevertheless, spread-spectrum technology does pose certain difficulties. First, such transmission requires high-performance, wideband radios. Second, the transmitter and receiver must establish and maintain synchronization. Transmissions may prove difficult to troubleshoot because they resemble background noise or hop frequencies quickly. In general, these difficulties have made spread-spectrum equipment more expensive. However, recent advances have made low-power, packet radio transceivers much less expensive.

Packet-Switching. Packet-switching is a communications technology widely available today in many different forms. The Internet is based upon a packet-switching protocol called TCP/IP (Transmission Control Protocol/ Internet Protocol). This protocol comes standard with any UNIX system. Another common packet-switching protocol, X.25, is typically used for lower-speed applications, (at or under 56 kilobits per second (Kbps)). X.25 is widely available and relatively inexpensive. The internal packet-switching protocol in most packet radio networks remains a proprietary format derived from the X.25 protocol. Packet-switching vendors have modified X.25 to optimize radio network transmission. As with any proprietary protocol, the user becomes dependent upon the manufacturer for equipment.

During the last four years, two new forms of packet-switching have developed. Frame relay, which operates from 56 Kbps to 1.544 megabits per second (Mbps), is commonly available as a wide-area networking protocol from local and long distance carriers. Frame relay improves upon X.25 by reducing overhead for error-checking to generate higher data throughput. The newest protocol, ATM (asynchronous transfer mode), first became available in 1993. ATM allows only fixed-size packets (cells), but these can be switched at very high line speeds (in the gigabit range).

While frame relay is now widely available in major metropolitan areas, ATM has just made its market debut. Currently, frame relay appears to have become the packet-switching protocol of choice because of its price/performance ratio (for equipment and service). In the future, most industry analysts agree that ATM will serve as the network technology for almost all voice, data, and video services because of its superior performance. However, since it is of limited availability and currently more expensive than frame relay, ATM is now only emerging in high-performance, niche applications.

Software. Any telecommunications network is built upon switches that require software for operation, administration, and maintenance. Certain software functions are essential to any public data network:

s Call setup, administration, and termination

s User configuration

s Network management (trouble identification, tracking, escalation, and resolution)

s Security

s Billing

s Equipment and transmission media inventory

A utility network for internal use does not have to support billing, network management, and security at the same level as a public network. Users of a public network will expect these issues to be well defined before placing their own data at risk. Therefore, the software systems required of public carriers must be planned, developed, and tested before a transport service can be offered.

Exhibit 2 shows how an electric utility might set up a packet radio network as the backbone for telecommunications services. The diagram depicts a utility that has deployed a network management center and a wireless packet network in a specific geographic region. The utility may target certain regional industries in close proximity to the backbone (such as, military/government, water, oil/ gas, or other power companies). Some locations will lie close enough to serve without deploying any intervening packet radio nodes; others will be served by installing packet radios to span the distance between the utility's network and the desired locations. Finally, some companies may want a turnkey installation where the utility plans and installs a network that will be completely operated and managed by the client company.

The most obvious applications for packet radio networks will require bursty data transmissions where wire-based services are not readily available. Target applications might include

portable computers/ personal digital assistants for field workers, demand-side management and distribution-automation programs for other utilities, automatic meter-reading, remote facility monitoring, and alarm monitoring. However, while these applications may be appropriate from a technical perspective, the utility must align this service with the company's overall strategy (em that is, to support a sustainable competitive advantage. In the end, the success of any new telecommunications offering will depend on select- ing the appropriate technology

to fit the company's corporate strategy. t

Larry Stein is a senior associate with Theodore Barry & Associates, a management consulting firm that specializes in the energy and telecommunications industries. Mr. Stein works in the firm's telecommunications practice and has extensive experience with the regional Bell operating companies.

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