[BETA] Fortnightly

Once burned, but twice eager, utilities reprise their 1980s-era strategy, this time in the telephone business.

"It's not like they're going to open a pharmacy. It is directly related in some way, or at least arguably."

Earlier this year, 15 utilities grabbed the brass ring: a full-blown chance to enter the telecom business.

By September 26, all but four of these registered holding companies had new subsidiaries being considered or approved by the Federal Communications Commission as exempt telecommunications companies (ETCs).

Under the Telecommunications Act of 1996, the Securities and Exchange Commission (SEC) can no longer prevent utility companies registered under the Public Utility Holding Company Act (PUHCA) from diversifying into the telephone business.

But this latest diversification could prove foolhardy. Why?

s Telecommunications markets, these days, can chew up any entrant, let alone a company fighting for market share within its deregulating core business.

s Previous attempts at diversification (em in banking, real estate, drug stores, airline leasing, and yes, even telecom (em haven't been exemplary for utilities.

s State regulators, as mandated by the '96 Telecom Act, might move to prevent cross-subsidization. They could make sure that utilities can't divert retained earnings aren't diverted from core businesses, draining assets that might be used to pay such items as stranded costs.

But eager executives at the new ETCs counter these arguments, as does Sean Stokes, a senior attorney with UTC, The Telecommunications Association.

"While it's certainly true that utilities have had an up-and-down record under diversification, most of that probably doesn't include the utilities under PUHCA, precisely because they weren't allowed to do it," he says. "It's not like they're going to open up a pharmacy. It is directly related in some way, or at least arguably related, to their core business."

Utilities already own 12 percent of the telecom networks in the United States, according to UTC. AT&T alone uses 29,000 miles of fiber-optic line provided by utilities, says Bernice K. McIntyre, a utilities-telecom consultant (and former chair of the Massachusetts Department of Public Utilities) who wrote a UTC booklet for utilities new to the market.

Fiber optics is only one link utilities have to the communications business; at least one utility backed the funding of a personal communications services license in the recent PCS auctions.

But what is the track record for utilities and PUHCA subsidiaries that have dabbled in telecom?

One exempt holding company, Houston Industries, Inc., jumped in up to its neck, buying cable operating systems in the late 1980s. It swam in losses of about $216.5 million over four years before selling KBLCOM, Inc. in 1995 for $2.4 billion.

Spokesman Dan Bulla says Houston Industries hasn't looked at telecom since. "We pretty much have made the decision to refocus on the energy sector," he says. Houston planned to buy NorAm Energy Corp. and has made international investments.

Robert P. Wason, chief financial analyst in the SEC's public utility regulation office, says Houston's telecom adventure follows a path set by other utilities:

"It has at least proven to me that Houston's foray into telecommunications has now ended