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Power and Energy Surety in a Telecoms Sector Increasingly Vulnerable to Market Failure

The foundation of U.S. wireline telecommunications is increasingly at risk of failure even as our reliance on digital networking continues to grow and government leaders strive to enact policies and programs that prove effective in providing affordable, reliable broadband information and communications services access to all. As highlighted in parts one and two LINKS of this three-part series, mid-tier telecoms carriers are proving particularly vulnerable amid the confluence of digital technology-fueled market disruption, industry consolidation and the inability of regulatory authorities to institute effective rules and guidance.

Owner-operators of the copper and fiber wires, central switching offices and network infrastructure that serve as the foundation for all wireless and wireline information and communications, mid-tier carriers are, or have been, the providers, at times the sole providers of telecommunications services in rural towns and small cities throughout the U.S. Yet they are not explicitly required to acquire the emergency, back-up power and energy capacity needed to ensure that these crucial information and communications assets will function when power outages or catastrophes occur. 

Compounding the risk of market failure, industry regulators and legislators are proving themselves unable to provide effective market and industry governance. “These mid-tier carriers are trapped in situations where large dividend payout ratios and heavy debt burdens preclude them from making important investments in their networks. The 'market' wants them to continue to redistribute cash in the near term, without regard to the long-term consequences to the network. This is a classic definition of a market failure,” explained Chris Mangum, CEO of Servato, a New Orleans-based provider of active battery management and emergency, back-up power services.

The FCC and Net Neutrality

The FCC's recent Net Neutrality ruling offers a case in point. Exempting wireline broadband communications from the same regulations that apply to legacy wireline telecommunications services in turn effectively exempts carriers from having to invest in emergency, back-up power capacity for wireline networks. 

“Wireless carriers have had to be more diligent about maintaining backup power as they are in a highly competitive segment of the telecoms market where network quality is one of two primary criteria their service is judged on (the second is price),” Mangum told Energy Central.  “But for many wireline carriers that are the only broadband providers in many of their markets, particularly the rural ones, there is no competitive pressure to ensure that investment in resilience is made.”

“The 900-plus independent telecoms carriers in the U.S. live in their markets and see their customers every day, so even if they are the only provider there is some market pressure to provide reliable service.  But for the larger, mid-tier carriers operating as absentee landlords in smaller markets, there is no catalyst to ensure that service is reliable.  And so it most often is not."

A withering supply wireline telecoms value chain

The unwillingness of astute, professional investors to commit capital in companies working to develop new, innovative telecoms infrastructure products and services is another key aspect of the brewing market failure scenario that's unfolding, according to Mangum. 

“When we set out to start Servato, we were told very clearly by venture capitalists that had spent decades investing in companies providing innovation to the telecoms industry that they were no longer investing in the space because of carrier buying behavior.”

Most start-up can't survive the time it takes for large telecoms corporations to make a purchase decision without tens of millions of dollars of runway in the bank, Mangum said. 

Furthermore, the major U.S. telecoms carriers stopped investing for innovation internally long ago. “Even those last remaining veterans of Bell Labs will be approaching retirement age in the next 5-10 years. As a result, there is very little internal or external investment going into innovation that impacts the network itself,” he continued. 

The telecoms market value chain has withered dramatically as a result. The giant, multinational corporations that came to specialize in developing innovative telecoms technology for carriers – companies such as Alcatel, Lucent, Ericsson and Nokia – are shadows of their former selves. 

“The vast majority of telecoms venture capital investment is going into applications and solutions that more or less free-load on the network (travel over it without paying for bandwidth usage),” Mangum explained.  

“This is one reason why the repeal of Net Neutrality was so important to the network operators’ survival.  It’s easy to imagine Netflix being able to spend billions of dollars on original content when what would be its largest cost of goods (bandwidth for getting the content to the end user) is zero.  Think of the logistics investment that Amazon is having to make to get its physical goods to the customer.” 

Need for more, better regulatory guidance

Telecoms industry regulators need to explicitly require that wireline and wireless carriers incorporate emergency, back-up power capacity in order to avoid a potentially catastrophic scenario from being realized, Mangum cautions. 

“Bad policy can have unintended consequences, but absence of policy can as well.  As more and more of us connect to and rely upon the Internet for our work, our health and our lives, it is scary to think that a power outage could throw an entire city or region into disarray by disconnecting all of it at once,” he said.  

Mangum doesn't believe regulators will come around to making this conclusion without some coaching, however. There are powerful vested interests that have a stake in maintaining the status quo. Those advocating for change will need to overcome the institutional inertia that has created, he explained. 

“It is the regulator’s job to regulate, not to wait for industry to point out what needs to be regulated.  Over-regulation leads to inefficiencies and stifles the flow of capital to solutions. But when the regulator is controlled by the regulated, we have a systemic breakdown that is not only bad for the commons, it is also bad for the regulated,” Mangum told Energy Central.  

A fundamental problem exists in that that most regulators don’t understand the growing complexities of Internet-based communications and digital convergence. They rely on the views and opinions of experts that find it much more lucrative and rewarding to work inside the industry than for the FCC of on a public service commission. 

“There are good, smart people in these roles at agencies and commissions, but they no longer stay very long before moving on in search of greener pastures. The Net Neutrality repeal process was a good example.  

“Reading comments on the FCC site, it dawned on me that we may have reached the day where no one in the government really knows how the Internet works.  The most 'impactful' technology to humanity perhaps since language emerged, and no one in our government knows enough about it to develop effective policy to advance it.  Not good.”

Who's responsible and who will pay?

Mangum believes permitting power utilities to provide emergency, back-up power for telecommunications network operators, and recouping associated capital expenditures by adding them to their customer rate bases, is an increasingly viable solution. “Telecoms carriers don’t want to deploy and maintain batteries and generators.  They are not power experts.  Batteries and generators don’t generate any revenue for them,” he elaborated.

“The telecoms companies have to maintain a highly specialized technical field force to monitor and maintain their core assets. And let’s face it,  these assets are essentially insurance policies against the risk that the power utility’s distribution grid goes down.  

“From a public policy perspective, who should pay for that insurance? Who ultimately benefits from a more resilient telecom network? Everyone who uses it.  And the power utility can generate revenue from batteries and generators. They do have deep power expertise on staff, including significant field personnel. To my mind, a solution along this line makes a lot of sense.”

Elaborating further, Mangum suggests creation of a transitional, institutional framework via which wireline telecoms carriers would be able to transfer emergency, back-up power assets off their balance sheets akin to the way wireless carriers transferred or divested themselves of wireless telecoms towers 10-15 years ago. 

That process freed up capital for wireless carriers to invest in higher priority areas, such as research and development, as well as network expansion. A new, independent wireless communications tower industry segment grew out of that industry restructuring as well. 

“Communications network operators (and their regulators) would have to get comfortable monetizing their backup power assets and treating them as non-core.  Entrepreneurs and investors would need to direct capital to this process.  Ultimately, the backup power assets could end up on the balance sheets of the power utilities,” Mangum continued.  

“The process might take 10-15 years to get from beginning to end, but it ultimately would make the Internet and our power grid much more resilient by putting backup power, resilient power, into the hands of power experts with proper incentives to invest in and maintain it.”

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