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Electric Perspectives, Jul/Aug 2001 by Avila, Wanda

Many energy and telecommunications companies have become involved in the convergence of the two industries. And more convergence activity is anticipated over the next few years, according to a recent survey conducted by KPMG.

In the survey (conducted among more than 90 energy and telecommunications professionals from the public and private sectors during the KPMG'S Convergence 2001 conference last March), 58 percent of respondents said that their companies were involved with some form of convergence, and 13 percent said that they expected an alliance or merger within one to three years. The rest (29 percent) expected an alliance or merger with a telecom/energy partner in the next 10 years.

"This demonstrates how prevalent the coming together of the industries has become as energy and telecommunications companies compete heavily for right-ofway ownership of transmission lines and cope with strong regulatory requirements-major issues driving the movement toward convergence," said William F. Kimble, KPMG's national industry director, energy and natural resources.

"Sharing of infrastructure" was by far the most important reason given by the respondents for energy and telecom companies to join forces. (See Figure 1.) Secondary reasons included "bundling of opportunities" and "gaining experienced people." It's interesting to note that "building new sources of revenue"-one of the traditional battle cries of diversification-was cited by just 6 percent of the respondents.

Additionally, "internet access/broadband" was ranked the "most likely" electrical service that companies will offer over the next one to two years.

Among the potential opportunities of convergence for power companies are the ability to offer high-speed data over existing electricity lines and to determine the dollar value of their existing right-of-way, said Jerry Borowick, a partner in KPMG'S communications practice. (See the related article, "The Final Connection," page 20.)

Yet only 25 percent of respondents said the monetization process was completed, and 38 percent said the process had not yet been initiated.

Are They Ready?

An overwhelming number of respondents (73 percent) said the most important business challenge for the industry during the next two years would involve regulatory changes. (See Figure 2.) Technology proliferation, mergers and acquisitions, industry consolidation, and enhancing shareholder value were also cited as factors, though they ran well behind other business challenges.

But when asked how much confidence they had that their company could meet those challenges, 56 percent said "none at all," and 35 percent said "not much." (See Figure 3.)

Interestingly, in a separate survey of 31 high-level energy and telecom executives, who answered the same questions, nearly the same percentage of respondents (55 percent) said that they had no confidence at all that their company was prepared to meet the convergence challenge. And if the executive doesn't have confidence, who will? Kimble thinks that the doubt stems from being tentative in new territory. "All of a sudden, it's a new business model for these companies, so a large part of their answer probably reflects that they haven't done anything like this before," he said.

Convergence activity will likely accelerate in the next year because energy companies will take advantage of the recent downturn in telecommunications, according to Kimble. "With the low price/ earnings ratios of many telecom company stocks, we are going to see energy companies at the convergence forefront, buying their way into the telecom market through acquisitions," he said. "That would be an easy route for them to get into the business to offer new products and services."

But it is a small window of opportunity. "The way the telecom industry is changing, energy companies interested in convergence should implement their plans now," Kimble said. "Utilities have been very capital-intensive and now have the money to invest in telecom convergence. Today, they can leverage their assets and end up with other income strength."

Wanda Avila is a business writer in Washington, DC