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2006 Industry Report: Utilities

Many phone users don't feel the need to be wired

talking points

TREND: Wireless telephone subscriptions in North Carolina now outnumber traditional wired access lines.

OUTLOOK: The convergence of wireless and wired technology will accelerate.

When Concord-based CT Communications launched broadband Internet services that deliver information at 10 megabits per second about a year ago, executives touted the new lines as the fastest in the region. They certainly were a big improvement over 1.5-megabit digital subscriber lines, Chief Financial Officer Jim Hausman says.

Now CT executives realize that 10 megabits might not be enough. Consumers want to play games over the Internet and download movies. “We think the 10-megabit network is just the starting point. And it’s anybody’s guess what that ultimate endpoint is going to be.”

Traditional phone companies such as CT, which long operated as monopolies and still offer local phone service that’s regulated by the N.C. Utilities Commission, face competition on several fronts. Efforts to deregulate local phone service have encouraged other wire-line carriers to nibble away local market share. New technology allows competitors such as Holmdel, N.J.-based Vonage to carry conversations over the Internet. Cable-television companies have launched digital phone services. And more people are ditching traditional connections for wireless ones. The number of wired access lines in North Carolina has been falling since December 2001. In July, the Federal Communications Commission reported that for the first time wireless subscriptions outnumbered wired access lines in the state.

CT has adapted by offering a co-branded wireless service through Atlanta-based Cingular Wireless. CT bought cell sites, subscribers and spectrum from Cingular in 2001 for $23 million. It manages the system locally, and the deal positions it to survive the convergence Hausman sees coming in wireless and wire-line technology.

Exactly how it will shake out is unclear, but one thing is certain, Hausman says: There’s going to be a huge industrywide investment in telecom infrastructure equipment. “In order to maintain the broadband speeds that customers are going to demand, we’re going to have to continue to invest in the network.”

Meeting long-term customer demand also was on the minds of executives at the state’s two largest electric utilities. Charlotte-based Duke Energy and Raleigh-based Progress Energy told federal regulators that they’re interested in building nuclear power plants to handle everyday energy needs. Getting the plants approved and built will cost billions of dollars and take about 10 years. Neither utility has completed a nuclear plant — or any type of plant for everyday demand — since 1987. Even without incentives passed last year by Congress, the companies say, the economics of nuclear power are attractive.

Aside from keeping their nuclear options open, Duke and Progress are taking different approaches to their businesses. Progress is focused more on shedding assets and meeting debt-reduction goals. On Sept. 30, its debt-to-capital ratio was 57%. The goal is 55% by the end of this year. “Until we accomplish that, I think we’re pretty much focused on improving our financial flexibility, growing our earnings, things of that nature,” Chief Financial Officer Peter Scott says.

Duke, on the other hand, is preparing to integrate its announced acquisition of Cincinnati-based Cinergy. The deal is expected to close later this year and will add 1.5 million electric customers in Indiana, Kentucky and Ohio, bringing the total to 3.7 million. Cinergy CEO Jim Rogers will become CEO of Duke, and he’ll have to get used to running a bigger company. Cinergy grossed $4.7 billion in 2004, compared with $22.5 billion for Duke.

Volatile prices last year kept folks guessing at Charlotte-based Piedmont Natural Gas, the largest gas utility in the state. A hot summer pushed up demand, then hurricanes Katrina and Rita knocked out much of the nation’s production. Prices cooled toward the end of the year as production came back on line but still finished 84% higher than the year before.

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