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Utility Diversification: Munis Find Cable TV a Costly Business

Fortnightly Magazine - September 15 1998

entitled to the benefits of these assets."

George Dean, assistant attorney general in the Massachusetts Attorney General's Office, says his office may file a separate action concerning cross-subsidization of the cable venture with utility rates. "It's a matter of what's the best thing for the consumer," Dean says. "RCN didn't go looking for Boston Edison for its managerial expertise. It needed their rights of way, line crews and other assets. Along with the transfer pricing question, Boston Edison will collect more than $1 billion in stranded costs."

Monahan says the issue is not cross-subsidization or stranded costs, but competition. "Cable TV has never had any competition," he says. "Where is the incentive for cable companies to beef up their systems, control rates, and provide better service? Look at how Cablevision is now investing hundreds of millions of dollars here right now because suddenly there's competition."

"Competition is welcome," Rosenblum says. "But you can't have competition subsidized by captive electric customers. Predatory pricing will preempt the market."

From Here to AT&T

Jim Ewalt, CATA executive vice president, summarizes many of the issues. For one, the cable industry has been hamstrung by the high capital investment necessary to continually upgrade networks with the latest technology. "When cities enter into these risky business ventures, they are trading off the CATV operator's ability to make a long-range investment in upgrading the system in exchange for income to the utility and short-term, low cable rates," he says. "The longer the community maintains the cable-rate savings illusion, the greater the probability that the community will be bypassed by the next stage of technological innovation. Why not offer an economic inducement to the cable operator to lower cable rates, such as reduced franchise fees?"

Many electric utilities, including municipal systems, may now decide to rethink any plans to diversify into telecommunications, after the June 24 announcement that TCI will merge with AT&T to form AT&T Consumer Services. For one, AT&T brings aggressive marketing and deep pockets to this capital-intensive business. TCI brings wholly owned and affiliated cable systems that pass 33 million homes. The merger will not only increase competition for any utility in the CATV business, but it also means that consumers will finally benefit from true competition in the local telephone arena, AT&T's major benefit from the merger.

The AT&T/TCI merger also will bring new issues to the regulatory arena. Without regulation of cable rates, price wars can create a new class of stranded assets in CATV networks lacking enough subscribers to cover costs. The real question is: Will ratepayers and taxpayers have to bail out utilities when they suddenly discover they're unable to compete in this capital-intensive, highly competitive industry?

Len Grzanka is an Alameda, Calif. freelance writer. After filing this article in July, he urged the Alameda city council to submit its cable TV business plan to an accounting firm's independent analysis. Subsequently, he signed a voter information pamphlet against the ballot to authorize the city's bureau of electricity to enter the cable TV business.

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