When PAETEC (PAET) said last week it had acquired U.S. Energy Partners, a small electricity distributor in New York state, it sounded like a curious reversal on a business model that has been tried many times before: the convergence of energy and telecom.
The acquisition of U.S. Energy Partners, a privately-held company that sells electricity to more than 3,500 customers in western New York State, will allow PAETEC to provide complementary services to its communications customers.
Under the daring and dynamic leadership of CEO Arunas Chesonis, PAETEC executives see the energy business as “very complementary” to their existing core business of providing advanced telecom services to enterprises, said COO EJ Butler Jr. The company plans to expand its energy supply operations into all 14 deregulated state markets, starting with New York City by May 2010.
"We have over 44,000 medium and large business customers nationwide, and we've found that our average customer spends four times as much on energy as they do on telecommunications," Butler told VON. "We've seen a trend towards energy decisions being made by the office of the CIO, and this acquisition further supports that strategy."
That sounds like an alluring combination. The problem is, it’s been tried repeatedly, usually in the other direction: over the last two decades a series of electric utilities, convinced that selling megabits is not that difference from selling megawatts, have crossed over to provide telecommunications services, often with mixed results. The question now is, with electricity prices climbing upward, states deregulating their power markets, and telecom investment flattening, is the reverse move likely to work out any better?
The most notable cautionary tale of an attempt to combine energy and telecom services is the story of Williams Communications Group, the subsidiary of oil and gas pipeline giant Williams that flourished, briefly, in the dot-com boom of the late 1990s.
Billions Destroyed
Foreseeing a huge surge in demand for fiber-optic transport as the Internet took hold, Williams began laying fiber in decommissioned pipelines in the mid-‘80s, becoming one of the first energy companies to enter the telecommunications industry. By 1995 it was the nation’s fourth-largest carrier of long-distance traffic, and in 1998 the communications unit, saying it had $1 billion in long-term revenue commitments, said it would build a new next-gen fiber network.
Many of those commitments evaporated in the telecom crash of 2000-01, though, and in 2002 Williams Communications filed for Chapter 11 bankruptcy.
Along with Williams, companies like Enron Broadband and Montana Power “destroyed billions in shareholder value trying to make [the energy-telecom alliance] happen,” stated a 2004 “Energy Insider” report from research firm EnerDynamics.
Now, though, executives from both telcos and power utilities see a series of developments that have brought the talk of convergence to the fore. One is technological: the push to create a “smart grid” to allocate resources and distribute power in more intelligent and efficient ways has forced energy suppliers to become more and more like networking companies.