Power utilities: Spin-off or middle mile? Making the right choice for your new business model

Broadband is increasingly being seen as a right rather than a privilege, closely aligned to freedom of expression. It is important for economic growth, education, and telehealth in remote communities. Yet, many rural communities remain underserved. Power utilities can change that. Using their presence and infrastructure in the community, they can deliver fast internet profitably.

There are several business models to choose from, before making any decision, it’s always prudent to understand the regulatory mandates and with your legal deparment. Perhaps most obviously, the power utility can establish a separate telecommunications company.  In this model, the fiber can be owned and managed by the power company, but leased to its service provider subsidiary. Together, the energy company and its subsidiary can provide internet, video, phone, and electricity services (a quad-play model). This may be particularly appealing in countries where the energy market is going to be deregulated, because it gives the power utility an opportunity to establish closer relationships with retail customers now, and creates a stronger sales proposition by bundling communications with energy.

Creating a separate subsidiary is the most lucrative model, because all the revenue from the customer flows back to the utility and its subsidiary. It is not, however, without risk. There’s a tremendous amount of capital investment because a video head-end is required to receive satellite TV signals and send them down the network. In some territories, there may be onerous regulation that applies to telcos, and compliance might be costly. To lower risk in the long term, energy companies can maintain separate infrastructure for the service provider side, so that it can be cleanly divested in the future. That negates some of the scale economies the power utility would otherwise enjoy entering the communications business, though. There are increased operational costs, too, in delivering and supporting telco services alongside energy services.

It is not necessary to spin off a separate company to deliver communications services. Energy companies can create value and deliver communications services using other business models, too. One alternative is the “middle mile”, where the energy company partners with a service provider. The power company provides fiber to the community, or even to the service provider’s Optical Network Termination (ONT) equipment. The service provider delivers the last mile of connectivity, either wired or wirelessly, and serves internet, video and phone communications to the retail customer. This can be a win-win-win situation. Service providers can enter communities without the huge capital expenditure of establishing middle mile infrastructure. The power utility can generate revenues that can offset their capex costs in the fiber network or be used to lower consumer rates. Most importantly, rural communities benefit from the availability of broadband.

For the power utility, this model is attractive because it’s lower risk, and does not require a huge capex investment in addition to the fiber they already have. It also spares the power utility from the organizational challenges of entering a new regulated space, and skilling up to deliver and support new services.

There may be opportunities to offer middle mile services to large organizations that want to route their own traffic over the fiber, too. For example, a hospital could use the power utility’s fiber to distribute large medical images quickly and securely between sites.

The middle mile model is flexible. Utilities can partner with several service providers to deliver services on the same fiber infrastructure, in what’s known as a “neutral host” model, giving customers more choice. Fiber capacity can be leased based on wavelength, bandwidth, or customers served. Using a pay-as-you-go model, service providers can scale up their costs and revenues in parallel.

There may be restrictions on what the power utility is allowed to do, but by working with regulators, they can find a creative solution that serves the community and works for the power company too. In an extremely underserved area, a regulator might approve of a quad-play service. In a saturated area, the middle mile model helps to lower costs for service providers. To avoid distorting the market, the neutral host model might be preferred.

The team at Nokia Bell Labs can help you to decide which model is most suitable for your business, and help you to navigate the regulatory environment. We can carry out a skills gap analysis, so you can better understand the organizational change required. Nokia also offers managed services, so we can operate the network on your behalf, quickly solving your skills and resources challenges.
Find out more.

See how EPB empowered Chattanooga  –  read the case study 

Planning your utility broadband services offering – download our Gigabit Technical playbook

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