Regulatory, Technology Uncertainties Send Telecom Investors to Sidelines

Analyst Anna Marie Kovacs of Regulatory Source Assoc. said telecom carriers labor under multiple layers of policy makers at state commissions, the FCC, state and federal courts, state legislatures and Congress: “The question facing telecom investors is, at what point does a policy decision become final? There are more layers of uncertainty in telecom than in an industry such as pharmaceuticals.” At the same time, she noted, traditional telecom regulatory tools are becoming less effective as new technologies and service concepts proliferate. She noted the effects of competition and technology are far more profound in telecom than in the energy industries.

Nancy Brockway of Brockway & Assoc. said Wall St. has been known for “irrational exuberance” toward companies like WorldCom or Enron, and can be just as irrational about regulatory impacts on telecom. The disconnect occurs, she said, because regulators take a long-term policy view while investors increasingly are locked into short-term thinking. Martin Cohen, dir. of the Ill. Citizens Utility Board, said another divergence is that regulators’ primary job is to protect consumers from unfair market exploitation, not maximize investors’ returns.

Merrill Lynch analyst John Thorndyke said utility investors used to be individuals seeking a safe harbor for their investment capital. But recent years have seen declines in individual investment and the rise of investment institutions like giant pension funds that look for growth. He said communication among industry, policy- makers and investors is the key for dealing with institutional investor concerns. Utah Comr. Connie White said regulators and other telecom stakeholders must make a point of ensuring there’s clear communication with the investment community about policy direction and progress. Iowa Comr. Elliott Smith noted the emergence of a new competitor for investor dollars -- municipalities that seek to build their own telecom networks for operation or lease. He said “municipalization” will be a key factor for investors to consider when looking at rural and high-cost areas.

Dorothy Attwood, SBC strategy & planning vp, said her company plans to invest up to $6 billion the next couple of years on its Project Lightspeed fiber-to-the-premises project. “Yes, this is an investment risk and high returns aren’t guaranteed,” but she said she expects SBC will be able to raise the needed capital because this project will expand the size of the telecom pie, not just shift around the existing pieces. Mich. Comr. Bob Nelson, NARUC Telecom Committee chmn., noted Project Lightspeed is targeted toward “high-value customers” and said the big question is “where the investment dollars will come from for the other half, the rural areas.” Attwood said Lightspeed will include some rural areas: “Our distinguishing factor for where we go is the high-cost areas vs. low-cost areas.”

Verizon Vp Link Hoewing said all telecom players are trying to deal with the effects of disruptive new technologies, and are trying to predict the path from the old circuit-switched voice platform to new IP and broadband technologies. He said investors are looking for business models for the new wireline and wireless technologies: “New technologies succeed when they find a new niche or purpose that wasn’t filled by the old technology.”

Kun Lee of Springwell Partners said new technologies like VoIP don’t offer the prospect of sure return. He said investors are skeptical of new voice-related technologies because of unrelenting downward price pressure and uncertainties about the new providers. N.J. Comr. Connie Hughes said “It’s up to the companies to develop new business models and then discuss them with the regulators.” She said regulators need to be better educated on technological capabilities and on what consumers want from technology if they are to fulfill their primary role as protector of retail residential and business customer interests.

In another panel Tues., analyst Michael Balhoff predicted investors “will back off” the next 2 or 3 years until policy and technical uncertainties are resolved. Robert Blau, BellSouth public policy vp, said if Congress changes the Telecom Act to give the FCC clear authority to establish a more rational regulatory system, it could help the telecom investment climate. Rick Cimmerman, senior state affairs dir. for the NCTA, noted: “It’s easy for public policy to deter investors but it’s hard to incent them through policy.” He said if Congress chooses to rewrite the Telecom Act, it should focus on clear public policy goals and let the investors sort things out for themselves. -- Herb Kirchhoff

NARUC Notebook…

NARUC elected new officers for 2004-05. Marilyn Showalter, chmn of the Wash. Utilities & Transportation Commission, was elected pres., succeeding Ga. Comr. Stan Wise. Iowa Comr. Dianne Muns will be first vp and N.C. Comr. James Kerr 2nd vp. NARUC’s Telecom Committee picked N.D. Comr. Tony Clark to succeed Fla. Comr. Lila Jaber as vice-chmn. NARUC also filled the vacancies on the Federal-State Universal Service Joint Board left by the departures of Jaber and Mont. PSC Chmn. Bob Rowe. NARUC selected Iowa Comr. Elliott Smith and Ore. Comr. Ray Baum. Both must be confirmed by the FCC.