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Electric companies soon will plug into bright future


Dear Mr. Berko:

I asked my broker to recommend several conservative, long-term growth stocks for my account. He recommended Dominion Resources Inc., Duke Energy Corp. and Public Service Enterprise Group. These are utilities and he says that in three to five years they will be in the Internet business with high-speed power lines.

My wife thinks he’s nuts and I’m almost convinced she’s right. He’s talking about space-age stuff, and I don’t want to get involved in high-tech risky investing. But he was so certain of himself that he suggested I write you for more information, and he said that you would agree with his selections.

W.B., Durham, N.C.

Dear W.B.:

I do! I think your broker is a live wire and I believe he’s giving you powerfully good as well as conservative advice. I unquestionably agree with those three recommendations.

Certainly in the coming couple of years, most of us may be able to get rid of that ungainly mess of tangled wires, loose cords and plug-ins that provide access and power to our computers. Those same lines that deliver power to run your washer and dryer, that keep your air conditioning running and light up the rooms in your home will connect your personal computer to cyberspace. Hopefully, this can begin within the next six months if the Federal Communications Commission gets off its duff and approves regulations that will give consumers broadband access via the electrical outlets in their homes.

The plug-and-play concept is called broadband over power lines, or BPL, and is considered a better, faster and less expensive alternative to cable- and phone-based Internet access services. It also gives the consumer another way to make phone calls by using voice over Internet protocol (VoIP).

The procedure is as uncomplicated as making change for a quarter and as simple as flicking a light switch. Because power is transmitted over low frequencies, the power companies (Southern Co. Inc., FPL Group Inc., Duke Energy, American Electric Power Co. Inc., just to name a few) have enormous extra capacity to use higher frequencies to carry data. In fact, Southern (SO-$34.08), which is one of the largest utilities in the nation, may consider offering wholesale broadband services and is currently providing BPL as a trial run in several Alabama cities. This is a significant new revenue source for many old, arthritic, sleepy, boring and staid utility companies that kind of limp along year after year with flat revenues, paltry earnings increases and niggardly dividend growth.

BPL is a natural. Practically every home in the country is connected to a power line. Each of these homes is threaded with wires connected to multiple outlets in every room. This enables the homeowner (it’s OK if you rent, too) to get high-speed Net connections exceeding DSL speeds by plugging a special modem into a wall switch. This also gives the utility (for the first time) the ability to offer other new services such as video on demand and VoIP. Oh, it’s going to cost the power companies a few bucks to upgrade their lines and substations, and they will have to mount boxes on various utility poles to smoothly deliver and coordinate signals. The cost could run between $60 and $125 per home plus another $125 for modems. However, the utility could recover its costs in the first year or so with a $25 per month charge. And that’s a lot less than we currently pay our cable or phone company.

There are other advantages that can accrue to a utility, such as immediate knowledge of power outages, elimination of meter readers, power production reduction and measuring peak demand periods to encourage power conservation.

The potential increase in earnings could add excitement to an old industry that has been moribund for years and is dependent upon state public service commissions and the price of oil, gas, coal and nuclear power to generate an acceptable return on investment.

This gives some needed sex appeal to issues like Consolidated Edison Inc. (ED-$43.82), Cinergy Corp. (CIN-$40.45), OGE Energy Corp. (OGE-$26.32), PG&E Corp. (PCG-$34.97), Pinnacle West Capital Corp. (PNW-$41.39) and others.

This won’t happen overnight, but it’s going to happen. It may take three to six years before it becomes a fait accompli, but it will. When (not if) it’s plugged in, this new revenue source could increase a utility’s net profit margins by 10 percent to 15 percent, which would do wonders for dividend and principal growth. The utilities mentioned in this column today can certainly benefit from this new revenue source. Most folks don’t realize it yet, but they’re looking at a new and compelling future for many utility issues.

Many of my managed accounts and I own shares in each of the utilities mentioned in this column.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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