Gainesville Free-for-all
Utility Ready to Challenge BellSouth's Market
By Danialle Weaver

Is a city-owned utility in a university town nimble enough to compete effectively with the largest of the Baby Bells? Gainesville Regional Utilities is about to find out.

During the first three months of this year, GRU will try to lure away BellSouth's choicest business customers by offering them private line and special access telephone services at rates 20 percent below those of BellSouth.

GRU's communications division, GRUCom, already is testing a service that will provide high-speed connections to the Internet for corporate and university intranet applications. GRUCom also is leasing space on its communications towers to cellular providers.

If all goes well, says Ed Hoffman, GRUCom's business manager, the city could one day offer local telephone services to all of Gainesville's 100,000 or so residents. For now, at least, competing with the local cable television franchise, Cox Cable, has been ruled out, Hoffman says.

Thanks to the simultaneous deregulation and convergence of two huge monopoly markets - the $15 billion U.S. telecommunications market and the $30 billion U.S. electricity market - a battle royal is brewing over business telco dollars. When the dust settles, a business may wind up paying for its electric, gas, water, wastewater, telephone, intranet, Internet, cable television and high-speed data access services with one check.

The Baby Bells want to offer long distance, Internet access and cellular and wireless services, but they have to give up their monopolies on local telephone service to do so. Meanwhile, the long distance companies want to provide local telephone service, while some cable companies want to offer telephone service, too.

Electric utilities, which could lose monopolies on local electric, gas, water and wastewater services, aren't about to be left out of this new Gold Rush. In two months alone - October and November 1996 - U.S. electric and gas utilities committed $500 million to new telecommunications ventures, according to Chartwell, Inc., an Atlanta-based utility publishing company.

Many electric and gas utilities already have extensive unused capacity on their internal fiber optic networks that can be used to generate new revenue streams. Those revenues could offset the loss of a utility's most profitable customers: industrial and commercial accounts.

"It is true that 80 percent of your business comes from 20 percent of your customers," says Judy Boles, the BellSouth regional manager for the Gainesville market. "And those are the customers GRUCom is going after."

The fight is particularly acute for the 33 Florida cities and towns that operate their own utilities. Typically, municipal utilities serve as cash cows that provide a steady stream of operating revenues flowing into a city's general fund, which pays for services such as police, fire and recreation. Of the $55.7 million in general funds earmarked for Gainesville's fiscal year 1997 budget, which began October 1, 1996, just over $20 million will come from GRU. In nearby Ocala, which is gearing up to provide high-speed data services to area businesses, $8.8 million of the city's 1997 general fund of $30.4 million will come from the Ocala utility. That is down sharply from just a few years ago, when the utility provided half the city's general fund, says utility director Dean Shaw.

Gainesville and Ocala have another reason for dancing with an 800 pound gorilla: They don't want to be roadkill on the Information Superhighway - that is, left behind with POTS (Plain Old Telephone Service) as the major telco carriers focus on the big urban markets. "For most providers, Gainesville is a third-tier market for telecommunications services," Hoffman says.

Estimates compiled by GRUCom and BellSouth peg the size of the entire Gainesville telco market in the $5 million per year range. GRUCom reasoned that if it didn't use its fiber network to provide bandwidth to area businesses, no one else would, either.

BellSouth's Boles disagrees. "Gainesville is not what I would call a third-tier market, but that's what they used to justify going into competition with us."

GRUCom already has agreements with a cellular carrier, Alachua County and Gainesville's general city government for point-to-point private line telephone services, which allow telephone and data connections between multi-site locations, such as bank branches or doctor's offices, Hoffman says. Late last year, GRUCom was finalizing agreements with Gainesville's long distance carriers - AT&T, MCI, Sprint and LDDS - to provide special access service, which allows customers to bypass BellSouth when connecting to their long distance carrier. Fees charged to long distance providers by local phone companies for this service account for about 40 cents of each long distance dollar.

GRUCom currently is testing high-speed Internet access for corporate intranets and extranets, which would facilitate telecommuting and Electronic Data Interchange, for example. GRUCom also plans to set up an intranet for the University of Florida so professors can communicate electronically with off-campus students without tying up Gainesville's main Internet connection.

By late last year, GRUCom was receiving about $33,000 per month from leasing space on city-owned communications towers to wireless companies and personal communications services providers, Hoffman says.

Somewhere down the road, GRUCom could provide alternate local telephone service. Late last year, GRUCom received an alternate local exchange provider certificate from the Florida Public Service Commission. Whether the utility actually will provide these "switched" services or whether it will buy bundled service, such as a dial tone, from other resellers and remarket it remains to be seen.

"During the debate on deregulating Florida's telecommunications markets, I tied two tin cans together with a string and called it MonteTel," recalls Monte Belote of the Florida Consumer Action Network. "I paid my $250 and got my alternate local exchange certificate. Anyone can get one of those things. The question is whether they can connect you to anyone."

Undaunted by the immensity of its task, GRUCom's list of potential customers reads like a who's who of Gainesville-area businesses. It includes the University of Florida, Santa Fe Community College and the Florida Department of Transportation; the VA Hospital, the post office and the federal building; and Alachua County government, schools, public safety and library services. Also included are Nationwide Insurance, the Florida Farm Bureau, CH2M Hill, Blue Cross/Blue Shield, The Gainesville Sun, UPS, Federal Express and Continental Can. The Gainesville medical community is another prime target.

Moody's Investor Services analyst John Incorvaia says "it's too early to tell" whether these investments will affect utility credit ratings. "Obviously, we don't want them to get too far away from their core business," he says. As a general rule, the greater the investment, the greater the risk.

From a societal standpoint, requiring phone companies to serve low-margin residential customers is unfair unless alternate providers such as GRUCom also are required to do so, says David Sappington, a University of Florida economics professor. "You do not want to allow cream-skimming," Sappington says. "You want at some point to have symmetric regulation, where all the companies have the same ground rules."

For now, BellSouth is gearing up for a fight. "I know the management team, and they're very aggressive, so I expect them to certainly make a run at us," BellSouth's Boles says. "Fortunately, we have a good reputation here for service. Costwise? We don't know yet how significantly they'll cut their prices, and it remains to be seen whether they can provide that level of service at a reasonable cost. They plan to cherry pick, but I'm not aware of any contracts they've taken away from us."