Diversification, Round Two: Telecom Act Has Electrics at it Again.

Fortnightly Magazine - December 1996
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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.

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