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Tilting Toward Telephony: How Electric and Gas Companies Can Leverage Their Systems for a Changing Market

Fortnightly Magazine - June 1 1995

must also consider restrictions imposed by the Public Utility Holding Company Act of 1935 (PUHCA). Under the Act, registered holding companies must obtain Securities and Exchange Commission (SEC) approval to provide telecommunications services. Traditionally, the SEC has imposed conditions when permitting a utility to diversify or acquire extraneous lines of business. Under PUHCA, these diversified ventures must be "reasonably incidental" and bear a "functional relationship" to the utility's core business. These conditions often require the nonutility subsidiary to earn 50 percent of its revenues from the same geographic region served by its registered holding company.

The proposed telecommunications bill, adopted by the Senate Commerce Committee this March, would end restrictions on utilities entering the telecommunications market and repeal SEC authority under PUHCA. It would also prohibit cross-subsidization, provide for state commission audits, and require separate books and records for telecommunications activities. Further, states would retain the authority to regulate any public utility associated with a registered holding company.

The Electricity Consumers

Resource Council (ELCON) is concerned about proposals to eliminate PUHCA restrictions that govern utilities entering the telecommunications market. According to ELCON, electric utilities not subject to PUHCA show extremely poor results in diversification activities over the past 20 years. These efforts have lost billions of dollars, sometimes leading to higher consumer electric rates or lower bond ratings. ELCON contends that any proposal allowing utilities to offer telecommunications services must contain tighter rules for separate subsidiaries. ELCON's concerns merit serious consideration, given that many of the same executives are still around who told us in the 70's and early 80's that nuclear energy would be "too cheap to meter." ELCON also contends that any proposal allowing registered electric utility holding companies to venture outside their core business would be premature unless their own markets were opened to competition.

PUHCA reform also garners opposition from the personal communications industry and the regional Bell operating companies (RBOCs). The Personal Communications Industry Association voices concern that ending PUHCA restrictions without adequate safeguards may lead to anticompetitive abuses, such as self-dealing and cross-subsidization of telecommunications ventures with utility assets and revenues. Ironically, but not surprisingly, this same position is echoed by the RBOCs, notwithstanding their own legislative efforts. The RBOCs fear that broad PUHCA reform could allow electric utilities to compete unfairly in local exchange markets, free from regulations imposed on telephone companies.

Remember Stockholders

In any event, deregulatory measures and advanced technologies will continue to emerge. At this juncture, utilities must exercise caution when entering the telecommunications market. Although utilities are ideally positioned to enter this industry, it is likely in their best interests to form alliances with experienced telecommunications service providers. As past experience has demonstrated, utility efforts at diversification have garnered mixed results. In seeking new growth opportunities, utilities must ensure that their efforts lead to increased revenues, rather than higher consumer electric rates or lower utility bond ratings.

Alternatively, utilities may "create two classes of stock," one for the core business and another for new ventures into telephony. The two classes of stock would reflect the differing values of its traditional utilities