Electricity firms make a threatening connection: The regional power companies have burst on to the telephony scene. Mary Fagan reports

UP AND down the country, a virtually unknown company is busy wrapping telephone wires around overhead electricity cables. Energis is quietly piggybacking on its more famous parent, the National Grid Company, to build a fibre-optic telephone network that could soon begin to challenge the duopoly of BT and Mercury.

The fledgeling firm, with investment plans of pounds 200m for its initial phase, is now accepted as one of the most serious competitors in the telecommunications market of the future.

With a full public telecommunications operator licence already secured, it is hardly surprising that Energis has attracted the attention of the US telecoms giants, AT&T and Sprint, both of which aspire to be large telecommunications companies in the UK.

Energis has already completed more than half of its targeted 1,800- kilometre network and claims to be on course to start a service next spring. The company plans to offer local telephony to households and small businesses by linking into BT's local networks - a service BT is obliged to provide, although at a price. Customers who want to access the Energis network using BT's local wires will be able to do so by dialling a code.

Energis also aspires to become a long-distance link for local cable telephony operators and, possibly, mobile telephone companies.

The man at the helm of the operation is Gordon Owen, the chairman, who was once group managing director of Cable and Wireless and who is credited with having nurtured Mercury Communications in its formative years.

The chief executive is David Dey, a former director of BT. Together they have convinced the regional electricity companies - the owners of the National Grid Company - that the telecommunications market is a sensible place to be.

The cost of installing the network by using the electricity pylon system is reckoned to be one-quarter of the alternative of digging up the roads.

Some underground cabling might be necessary to forge local links, as the regional electricity companies and not the NGC are responsible for local electricity distribution. However, in an affort to avoid digging up the streets, Energis is already talking to several regional electricity companies with a view to using its wire- wrapping process on local electricity pylons as well.

Meanwhile, about half of the regional electricity companies are considering entering the telecommunications market in their own right. The companies increasingly view themselves as all-round utilities with the ability to economise on administration, marketing and billing for a range of basic services. Some of the regional firms have already started supplying gas, and telephony seems the next logical step.

Energis could act as a trunk network gluing these local businesses together. However the company is adamant that, although it belongs ultimately to the electricity firms, they would be treated as any other operator wishing to interface to the Energis national network.

The company is keen to preserve its autonomy and the NGC - which itself operates at arm's length from the regional electricity parents - appears willing to nurture the entrepreneurial drive within Energis. At the same time, however, Energis is keen to find a new investor with experience in the telecommunications market.

It is no secret that AT&T and Sprint want to challenge BT and Mercury in the UK. The acquisition of a stake in Energis would be one way of leapfrogging into the UK domestic market. AT&T has already seen BT gain access to its markets at home by acquiring a stake in another US carrier, MCI.

Besides providing entry into the UK market, taking a slice of Energis could be one way to obtain a licence to operate an international telephone service with Britain. The Government is loath to grant full international licences to foreign companies because, it argues, few other countries would give international licences to British firms. Energis has not asked for an international licence, but is confident that the Department of Trade and Industry would not stand in its way.

The potential partners are coy about their dealings with Energis. One issue that could decide whether a deal can be done is that of control. Energis has consistently talked of a minority stake while AT&T at least would probably insist on playing a dominant role.

One uncertainty clouding the future of Energis, however, is what would happen should the regional electricity companies decide to seek a listing for the NGC.

The NGC is estimated to be worth about pounds 3bn but there has been disagreement between its parent companies as to whether or when they should realise that value. Some would prefer to hang on to the dividends of about pounds 10m to pounds 15m a year for each regional company.

Energis appears unworried about the effect of an NGC listing. It is more concerned about cracking a market still dominated by BT but increasingly characterised by price-cutting and aggressive selling. To win customers from BT, rivals need to offer prices about 15 per cent lower as well as better service and frills.

A key problem facing newcomers is 'interconnection' - the link into BT's network necessary to complete calls. Mercury and BT have often been at loggerheads over the prices and terms for interconnection and Oftel, the industry watchdog, has had to intervene.

Now Oftel is trying to come up with a standard and fair set of tariffs and conditions for interconnection with BT. That, however, is inextricably linked to the watchdog's desire to see BT separate the various parts of its business in accounting terms. BT's rivals feel that the company is not going quickly enough on accounting separation.

Despite the barriers to entry, Gordon Owen believes that Energis has an opportunity to become the third force in British telecommunications. Others, however, have similar ambitions. They range from British Rail Telecommunications and British Waterways to the Cambridge-based start-up, Ionica, and the London telephone company, Colt.

There are also 39 cable franchises offering telephone services and some of these are linking up to form regional telephone operators. The result is a jigsaw marketplace in which the players must regard each other as potential allies as well as rivals.

The complexity of the market could prove the biggest problem of all. People at least know BT and many will be loath to change as the choice of alternatives becomes more complex. For the newly recruited Energis marketing team, that means many busy months ahead.

(Photograph omitted)