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As regulators step back, utilities remake themselves
Sunday, April 09, 2000 By Frank Reeves, Post-Gazette Staff Writer
A wave of government deregulation and technological change has transformed the once steady utility and telecommunications industries.
In the current environment, it's no longer easy to tell where industry boundaries end.
Electric utility companies are selling off generating plants, drilling for gas, and laying thousands of miles of fiber optic cable.
In a world where telephone, cable television, video and Internet connections can be sent through the same electronic pipeline, boundaries within the telecommunications industry also are eroding. AT&T, the nation's largest telephone company, has spent billions of dollars to turn itself into a major cable operator in order to be able to provide customers a broad range of services through its cable lines.
And these trends can be seen in companies that have long been major players in southwestern Pennsylvania.
Energy
Last month, Allegheny Energy Inc. joined five other energy and telecommunications companies to form what they are calling America's Fiber Network. Allegheny Energy, based in Hagerstown, Md., is best known by its electric utility, Allegheny Power, formerly known as West Penn Power.
If the Federal Communications Commission approves the pact, AFN will initially offer 7,000 miles of high-speed fiber that will connect Pittsburgh and other major cities in the eastern and central United States.
For many years, electric companies were protected monopolies whose profits were guaranteed by state regulators. Now these companies are trying to position themselves for the new deregulated markets, as state governments dismantle the utilities' monopoly protections.
In some instances, this has led to a spate of mergers and acquisitions between gas and electric companies as they strive to become "fully integrated" power companies. In January, Pittsburgh-based Consolidated Natural Gas was acquired by Dominion Resources Inc. of Richmond, Va. The merged companies will serve about five million retail gas and electric customers in five mid-Atlantic states.
Some companies are seeking to increase earnings and growth by using their core businesses as a springboard for moving into other areas.
DQE Inc. is best known in this region for its electric distribution subsidiary, Duquesne Light. But in an effort to reposition itself, DQE is getting out of the electric generating business. Later this spring, DQE will complete the sale of its power plants in Pennsylvania to Orion Power Holdings, based in Baltimore, for $1.7 billion. Duquesne Light will continue to own the wires that deliver power to most customers in Allegheny and Beaver counties.
DQE said its power plants generated too little electricity to compete in the electric-generating business, which is consolidating.
DQE Enterprises, the investment wing of DQE, has stakes in an assortment of Web-based commerce companies, including businesses that pool the purchasing power of thousands of consumers and smaller businesses to win lower prices for goods.
DQE also is buying propane and water-utility companies around the country to become major suppliers in those industries. It now has about 504,000 water and propane customers throughout the United States compared with 584,000 electricity delivery customers in southwestern Pennsylvania.
At the unveiling this year of the company's new fiber optic network division, Allegheny County Executive Jim Roddey said what is increasingly apparent about DQE and the electric industry as a whole: "This is not your father's power company."
The nation's electric companies didn't fare well in 1999. Investors shunned these companies -- long known for their low-risk but steady income -- for telecom companies and other harbingers of the New Economy.
Last year, DQE and Allegheny Energy did slightly better than Standard & Poor's electric utility index. But the utility index itself dropped about 23 percent, while the overall market benchmark S&P 500 gained 20 percent.
Electric utilities could still face a rough ride.
"Under one future scenario, energy utilities could lose up to $100 billion, or one-third of their value over the next five to 10 years," said Philip Giudice, vice president and global energy analyst for Mercer Management Consulting. "Utilities will find it difficult to increase earnings by raising the price," since many states undergoing deregulation have frozen rates.
Telecom
Telecommunication companies are feverishly trying to build and upgrade their networks in order to be in a position to provide millions of customers with "broadband services," including video, high-speed Internet access, cable television and phone services. At present, ordinary telephone lines tweaked to carry DSL service, along with modems connected to television cable, are the primary means of delivering broadband services.
Charles Smith, chief investment officer of Fort Pitt Capital Group, estimates that the Internet, cable TV and telephone industries are spending billions of dollars -- from $500 to $600 a household -- to make broadband a reality.
AT&T Chairman and Chief Executive Officer Michael Armstrong said recently: "The demands of the Internet have created a near insatiable need for speed. Today it's been estimated that some 280 million hours are wasted every year simply waiting for files to download. Those kinds of numbers put pressure on companies like AT&T to increase the speed and capacity of our networks."
AT&T is spending $120 billion to buy local cable television companies and build a fiber optic network that can bypass the DSL (or digital subscriber line) networks being set up by regional Bells.
Smith said the regional Bells such as Bell Atlantic have been slow to embrace DSL. He attributes this, in part, to the companies' long history of being in a regulated industry. Some Bell executives still act as though they need government permission to pursue innovative technologies, Smith said.
But other technologies loom on the horizon.
Investors are pouring millions of dollars into telecommunications companies, many unprofitable, that are building wireless networks to bypass the television cables and telephone lines to provide broadband connections.
One such company, Teligent, raised $500 million late last year from an investor group led by Microsoft Corp. In 1999, Teligent, based in Vienna, Va., had a net loss of $529 million on revenue of $31 million.
Smith of the Fort Pitt Capital Group said that for investors some of the best opportunities lie in companies that are manufacturing the equipment that will be key components of the broadband network: Texas Instruments (digital signal processors), Xilinx (programmable gate arrays), Cisco (routers and switches), and Lucent Technologies. Other providers of broadband hardware and software include COM21 (cable modems) and Cheswick-based Tollgrade Communications.
The telecommunications industry also has had its share of mergers, as companies try to position themselves in the changing markets.
In January, America Online agreed to buy Time Warner for $156 billion. Last year, MCI-WorldCom and Sprint announced their $129 billion merger.
In the wake of mergers sweeping through the telecommunications industry, the chairman of the Federal Communications Commission has set up a task force to create procedures that would enable the commission to review proposed mergers within six months.
In Pennsylvania, Bell Atlantic and AT&T are waging a tough battle to gain access to each other's principal markets. It mirrors a nationwide struggle in which AT&T and other long-distance carriers are trying to break into local phone service, while Bell is trying to become a major provider of long-distance phone service.
Under law, the Bell companies must prove that they have opened their local markets to outside competitors before they can get into the long-distance arena. Last year, Bell Atlantic won permission to provide long-distance service in New York after the company convinced state regulators and the Federal Communications Commission that it had opened up its local phone service to competitors.
In Pennsylvania, the dispute among Bell, AT&T and other long-distance companies is now pending before the state courts.
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