DATE: Sunday, September 14, 1997            TAG: 9709130632

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY AKWELI PARKER, STAFF WRITER 

                                            LENGTH:  165 lines

POWER BROKERS TURN UP THE JUICEAS FULL-SCALE COMPETITION IN THE ELECTRIC POWER INDUSTRY APPROACHES, UTILITIES ARE GETTING BIGGER AND OFFERING MORE. BUT WILL THEY BE BETTER?

Anyone who's been stuck in midday Internet traffic - you know, the kind where a web page takes an entire lunch break to download - appreciates having plenty of ``bandwidth,'' geek-speak for capacity to haul electronic data.

Now let's raise the stakes. Say you're an Internet service provider, relying on one of AT&T's crowded data pipes to transmit info for your thousands of customers. When the network slows to a crawl, so do you.

For years, Virginia Power has been itching to sell such folks access on its private fiber optic network and let the eighteen-wheelers of the information superhighway - ISPs, cellular companies and commercial users - bypass other wholesale access providers.

Problem was, that kind of thing was illegal. But because of the Telecommunications Act of 1996, those barriers are gone. As early as this month, Virginia Power's new VPS Communications subsidiary plans to offer some of its capacity to those bandwidth big rigs.

It will mean one more telecommunications choice for customers, but it also illustrates a massive change in what it means these days to be a ``power company.''

Virginia Power is ready to float $40 million of equity into the new business. VPSC won't reveal earnings projections, but it estimates that its target market tops $1 billion.

VPSC was almost a no-brainer, explains David Fellowes, a staff engineer and former acting general manager.

Virginia Power already had about 250 miles of fiber-optic cable stretching from the suburbs of Washington to Hampton Roads - a private network set up in the 1980s to guarantee the company a link with its geographically far-flung operations. Advances in data compression meant the company could sell excess space on its network, once the practice became legal.

Today it is legal, and ``demand is skyrocketing,'' Fellowes said. With the growth of the Information Age, said Fellowes, ``corporations need more bandwidth to do business.''

With VPSC, Virginia Power joins a growing number of companies evolving toward a new breed of super-utility. Through buy-outs, partnerships or - like Virginia Power - new business ventures, volt vendors are getting in on everything from natural gas to Internet access to cable television.

``Utilities are seeing an opportunity to provide in some cases, a package of services,'' says William Mistr, Virginia Power's vice president-information technology.

Whether consumers should be cheerful or fearful about these multi-headed utility giants has yet to be determined. They may offer some advantages - customers might have fewer bills to keep track of, fewer checks to write and better service. They could also save money as their utilities achieve economies of scale through merging with others. And competition with utilities like phone and gas could drive those prices down as well.

There are possible drawbacks, though: Some industry watchers worry that fewer power companies - as a result of frantic consolidation - will kill competition.

``The accelerating pace of utility mergers threatens to create `mega-utilities' that could dominate regional electricity markets and effectively bar other entrants from vying for customers,'' warned Rep. Edward Markey (D-Mass.) in a July congressional speech.

What's more, said Markey, customers need assurance that they won't have to subsidize unprofitable new offerings, like telecommunications service, through higher electric bills.

Virginia's State Corporation Commission, which regulates public utilities, raised just that concern before giving the green light to VPSC. A condition of SCC approval was that costs won't be borne by ratepayers.

Competition - or perhaps the fear of it - is driving utilities toward new ways of doing business.

Unlike breakfast cereal or even gasoline, there's not much to differentiate Brand X electricity from Brand Y. You flick a switch and it's either there or it isn't.

In such a commodity market, consumers respond to whoever has the best price and service.

But, many utilities are asking, what if they can sell their customers more than just power?

What if they could sell cable television service, Internet access, natural gas or home security monitoring?

Such ventures would mean:

additional revenue streams

a diversified business able better able to weather cyclical patterns in the industry

a better grip on customers, who in the future may be hard to keep.

``Each company looks around to reduce things that are going to produce costs and accentuate things that are going to earn a suitable return on investment,'' says Matthew Holden, a University of Virginia government professor and a former regulator for the Federal Energy Regulatory Commission.

The diversification current is flowing both ways: A few natural gas marketers are muscling their way into the electric arena as well. Perhaps most visible is Houston-based gas goliath Enron, with more than $16 billion in assets. Promotional literature for the company trumpets: ``Natural Gas. Electricity. Endless Possibilities.''

The Houston company is marketing its electricity to residential customers as far away as Peterborough, N.H.

Area gas marketers say they'll also be getting a piece of the action.

``We will be offering electricity,'' says Anthony Trubisz Jr., president of Commonwealth Gas. Commonwealth has 165,000 customers statewide and serves parts of Portsmouth and Chesapeake in Hampton Roads. Commonwealth is a subsidiary of Reston-based natural gas giant Columbia Gas System, which claims a business empire serving 7 million gas customers, directly or indirectly, in 15 states and Washington.

``We will be a total energy company of the future,'' says Trubisz.

Columbia has focused on aggressively expanding its customer base through pipeline expansions and heavy marketing to reach a goal of double-digit income growth.

Their philosophy is simple: Natural gas will get the company's foot in the door to sell consumers a host of other products, like home security systems, gas appliances, even repair service.

And of course, says Trubisz, Columbia is ``always on the lookout'' for attractive merger or partnership deals.

Merger-mania is another sign that competition is coming. The bigger the utility, so the thinking goes, the less vulnerable it will be to pricing attacks by nimble competitors.

Without the shield of monopoly, there will be little incumbent utilities can do to stop such guerilla warfare. Any power marketer ``that has the money and the skill can enter and exit the market at nearly any point,'' says U.Va.'s Holden.

U.S. investor-owned utilities - as opposed to electric cooperatives or publicly owned utilities - will merge at a rate of four to six companies a year, leaving 80 by the year 2000, down from about 100 today, predicts Resource Data Institute, an energy market research firm.

Traditional utilities, which own or are paying off capital items like power lines, substations and power plants, worry that their cost of maintaining these facilities will put them at a disadvantage in a competitive market.

One way to mitigate those costs is to merge with a neighboring utility.

``Utilities are now merging with more distant partners to provide a wider spectrum of energy services,'' said Kent Knutson, senior vice president of RDI.

The arrangements ``represent the most significant sign to date of the impacts of market competition in the electric industry,'' he said.

Virginia, with no public outcry over its lower-than-average electric rates, is moving slowly toward competition. The SCC has established working groups to study the issue, and a joint committee of the General Assembly expects to issue a report this fall.

Mergers, meanwhile, are hitting close to home as local utilities try to become regional behomoths. Delmarva Power, based in Wilmington, Del., last month announced plans to get hitched with Egg Harbor Township, N.J.-based Atlantic Energy to form an energy powerhouse serving almost 1 million customers in Delaware, Maryland, New Jersey, Pennsylvania and Virginia.

Months earlier, Hagerstown, Md.-based Allegheny Power System made a grab for the parent of Pittsburgh's Duquesne Light Co. If approved by state and federal regulators, the company will boast 2 million customers in Maryland, Ohio, Pennsylvania, Virginia and West Virginia.

There's a not-so-remote chance that those companies will be competing with Virginia Power to sell you electricity a few years from now, just like MCI, Sprint and AT&T climb over one another for your long-distance telephone dollars already.

Legislation in California, New Hampshire, Rhode Island and Pennsylvania has already stripped power fiefdoms of their monopolies in those states, but it's still anyone's guess as to whether competition will be the consumer panacea that its supporters advertise.

One thing is certain though. Utilities will do everything they can - even recycle old equipment to do new jobs - to survive.

``Ten years ago,'' says VPSC's Fellowes, holding up a finger-thick frond of fiber optic cable, ``we would have been able to put `x' amount of data on one fiber.

``Today it's probably 100 times that,'' says Fellowes. ``We're helping to leverage the company's assets.'' ILLUSTRATION: Color drawing by JOHN CORBITT, The Virginian-Pilot

Graphic

How Utilities Are Planning to Expand

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