The ever-increasing environmental constraints and consequent deployment of many new and innovative technologies have led to the adoption of more proactive and intelligent business models.
These developments demand a more sophisticated telecommunications network, which can accommodate the demand for large amounts of additional bandwidth. These fundamentals can only be satisfied by means of a fibre optic based network and hence dictate that utilities need to invest heavily into fibre optic technology. Fortunately, ideal servitudes are generally readily available and the installation of fibre optic cables upon HV line infrastructure, water utility pipelines and sewers, gas lines etc. has become more cost effective.
An added benefit that the installation brings is the option to commercialise spare capacity and thereby introduce a new revenue stream. However, it is important to understand the many issues that need to be addressed and resolved before revenue from this source can be realised – nonetheless, the value of additional and generally lucrative revenue that can be generated, with little or no capital outlay, surely makes this an extremely worthwhile exercise for any utility.
Motivation for fibre leasing
A cost effective fibre core count, for aerial fibre optic cables installed upon HV lines, is typically between 24 and 48 as these are available as standard issue from cable manufacturers. Studies have shown that cables containing up to 48 cores have little or no impact upon the loading capacity of most transmission lines. Given these considerations, many utilities have settled on a 48 core count as the cable of choice and only resort to lower counts when the carrying capacity of the line can become compromised (normally only applicable to LV distribution lines).
Since utility telecom network and tele-protection requirements will seldom exceed eight cores, the majority are left completely idle – and worse still, this is likely to endure for the lifespan of the cable. Considering the capital expenditure incurred by the utility to install the fibre cables in the first place, this is surely unacceptable, especially when a financially attractive alternative is readily available.
Utility-owned power lines invariably also link all major cities and many smaller towns. These servitudes are particularly attractive to commercial operators whose only viable solution is to bury cables alongside roads linking these centres. This remains an expensive and time-consuming exercise and moreover, cables thus installed will always be more susceptible to vandalism and theft.
Thus, the unutilised cores (i.e. dark fibre, which refer to unused fibre-optic cable) within utility owned fibre optic cables are an extremely valuable asset and consequently have potential to generate a significant income stream for the utility with little or no risk to normal utility operations. The enhanced security normally associated with fibre cables installed upon HV line infrastructure – above the electricity conductors – provides perfect redundancy for a commercial operator’s roadside routes; making these even more lucrative.
While the financial benefits and technical issues are reasonably clear, utility management often expresses concerns relating to its operative’s telecom business inexperience. These concerns are easily addressed through the establishment of a partnership agreement with an existing commercial entity. This arrangement will involve a profit sharing scheme, or commission based agreement, and will thus reduce the utility’s overall revenue to some extent; but if this serves to alleviate concerns and thereby facilitate approval it is a worthwhile consideration. It remains crucial though that the correct partner be selected to ensure that the resultant partnership proves to be mutually beneficial in the long term.
The continued demand for broadband services ensures an abundance of commercial telecom operators, all seeking whatever competitive means available to expand their existing networks and thereby connect more subscribers. Thus, in addition to government and other corporate entities, each of these commercial operators represent a potentially lucrative customer for the utility. Prospective utility dark fibre (i.e. dark fibre, which refer to unused fibre-optic cable) customers will typically include the following:
• Cellular operators
• Fixed line operators
• Internet service providers
• Banking institutions
• Commercial dark fibre providers
• Commercial broadband service providers
• Government institutions
• LECs (Local Exchange Carriers)
Several diverse pricing policies, each with its own distinctive benefits and/or shortcomings, can be considered.The most popular include:
1. Cost recovery;
2. IRU (Indefeasible Right of Use);
3. Lease; and
4. Fibre swapping/exchange between fibre owners and will often take place without any monies being exchanged.
It should be noted however that within each option variations are available and these can easily be implemented in accordance with market demands.
Cost recovery policy
This option considers only the incremental cost incurred by the utility for the installation of fibre optic cables upon its power lines, but can also include the resultant maintenance costs that will follow. This policy makes no provision for profit when tariffs are determined and hence results in the lowest possible pricing scenario.
Since this option will never generate any meaningful income for the utility and can also serve to introduce uncompetitive behaviour into the market, it is normally only ever implemented when forced by legal or regulatory stipulations. To further exacerbate matters, the tariff ultimately applied will probably be dictated, or at the very least heavily influenced, by the regulator and is therefore unlikely to benefit the utility.
IRU (Indefeasible Right of Use) policy
The term IRU implies the exclusive, unrestricted, and indefeasible right of use of an asset and hence constitutes a permanent contractual agreement, between the utility (fibre cable owner) and the customer (commercial operator), that cannot be undone. The customer purchases the exclusive, unrestricted and indefeasible (cannot be annulled) rights to use one or more fibre cores within a fibre cable owned by the utility for any legal purpose, for a specified number of years.
The IRU contract will also generally define detailed technical and performance specifications for the fibres involved. These should specify fibre acceptance and testing procedures, a description of the physical route, operating and performance specifications such as attenuation, chromatic dispersion, polarisation mode dispersion and optical return loss. Maintenance and restoration terms are also normally included and all specifications, terms and conditions are valid for the full duration of the IRU contract.
The periods of these contracts are typically in the order of ten, twenty, or even thirty years, which correspond to the anticipated lifetime of the fibre cable. The long contract periods suit larger and more permanent operators as not only does this provide network stability and fixed pricing over the term, but is also attractive from tax and accounting viewpoints as the fibre cores purchased can be considered a physical asset, which in turn can be resold, traded or used as collateral.
Maintenance and co-location charges do not form part of the IRU and are normally negotiated separately as short-term contracts paid on a monthly or annual basis. These separate contracts must permit escalation to make allowance for rising labour costs due to inflation etc. The charges applied are usually relatively low and are a function of the fibre route kilometres irrespective of the number of cores involved.
In addition to the substantial injection of capital enjoyed by the utility in this option, the risk of nonpayment in the future is completely evaded and administration costs are reduced since the customer is locked in for a longer period. Thus, the guaranteed payment for the entire term of the contract, in conjunction with the huge upfront capital payment, far outweigh the only significant disadvantage, which is the lower (than a standard lease option) tariff normally applicable to these contracts.
Analogous to any standard leasing/ rental agreement, this option requires that the customer pay an agreed monthly or annual fee for the unrestricted use of a selected number of fibre cores for a certain period. A recurring income stream and generally higher tariffing over the term of the lease are the primary benefits of the lease option; however, since the highly desirable large upfront payment is not a component, funding for network expansion is reduced in the short term.
This option will typically be more suited to the smaller operator who may not be in a financial position to raise the large upfront payment required by an IRU contract. Hence, notwithstanding the lack of an upfront payment, it is still recommended that this policy be included in the offering to the market as it will serve to facilitate the attraction of many, albeit smaller, additional customers. Depending upon prevailing circumstances, two variations within this model can also be considered.
These are 1) a fixed cost per pair lease wherein an equal pricing per pair is applied irrespective of the number of pairs leased and 2) a declining scale lease whereby a higher tariff is applied to the first pair leased and thereafter subsequent pairs are leased at a lower tariff; furthermore, this can also be expanded to include a declining distance based tariff.
Fibre exchange policy
Lastly, although strictly speaking not a pricing policy, a fibre swapping/ exchange arrangement between fibre owners can also be considered. Since an agreement of this nature would more likely be adopted for the mutual benefit of both entities, it will probably be instituted without any monies being exchanged.
In summary, it is recommended that – in terms of the many compelling reasons stated in the addendum in the digital magazine, an IRU option be implemented whenever feasible. However, to accommodate the many smaller prospective customers currently prevalent in the marketplace, the utility would be well advised not to disregard the lease option, but rather to include both an IRU and lease option within the basket of services offered to the market.
The successful leasing of its spare fibre capacity will undoubtedly bring with it substantial additional revenue for the utility and this will of course raise the question of how best to allocate this new income. One conceivable, and very plausible choice, would be to allocate these funds to the further expansion and development of the utility’s fibre optic network. The benefits of this option would be threefold:
1. Increase the reach of the fibre optic network thus growing the customer base and creating opportunities to generate even more revenue from commercial operators;
2. The operational telecommunications network will be improved, thereby improving the utility’s ability to monitor and control the power network as well as enhancing internal data services; and
3. Additional fibre optic cables will facilitate extension of service to the more remote regions thereby facilitating much needed development and growth.
It may also be prudent to consider the creation of a ring fenced new business unit. This can be implemented, with or without an external commercial business partner, to facilitate the separation of this new unregulated revenue from the everyday regulated income and could also help to ensure that it is appropriately allocated.
The prevailing regulatory environment in the country has potential to stifle any commercialisation initiative proposed by a public utility. Thus, before any new telecom business enterprise can be contemplated, it is important to fully understand prevailing regulations pertaining to the licensing of commercial telecom operators.
Many utilities already operate privately owned telecom networks; however, licensing of these is normally restricted to providing for the utility’s operational and administrative requirements. Hence, to ensure regulatory compliance, it is essential that the regulator be formally engaged to investigate commercial licence options that can be made available to the utility.
After all, compliance with the country’s rules and regulations is paramount and these most certainly cannot be flouted under any circumstances. Moreover, contrary to sometimes populous opinion, the country’s legally instituted regulator can greatly facilitate entry into the market provided the correct official channels of communication are observed.
The leasing of spare fibre optic capacity clearly has potential to create a lucrative revenue stream, hitherto not available within the utility environment. Considering that many utilities worldwide struggle to raise capital required for much needed infrastructure expansion and modernisation, this revenue, which is primarily accrued from already owned assets, can certainly help to alleviate this constraint and thereby facilitate the expansion of basic services into rural and other currently under-serviced regions.
Finally, at a macro level, the cost-effective availability of fibre cores to ICT companies and GSM operators will certainly facilitate the expansion of broadband services throughout the country. This in turn has great potential to expedite education and the consequent creation of successful commercial enterprise, which typically serves to benefit all sectors of the population and furthermore, is inclined to attract additional investment, so crucial for emerging market economies. ESI
Article contributed for publication by ESI Africa’s association partner, African Utilities Technology Council (AUTC), a non-profit trade association owned by utilities. Contact Corrie Vermeulen for membership enquiries. www.utc.org/africa
The Future of Broadband in Africa: Christoph Stork, Enrico Calandro, and Ranmalee Gamage Dark Fiber Lease Considerations © CTC 2012 Wikipedia – Indefeasible Rights of Use Aalto University, Espoo, 2011.