German Utilities Look to Transform Their Business With Broadband Play - TheStreet

BERLIN -- Utilities, often considered the frumpiest of companies, have begun to tap into the Internet fever that has swept so many other industries.

In Europe, the deregulation of national electricity markets is causing power companies to fight for their customers amid shrinking margins and increased competition. That, in turn, has led utilities to think about other ways to supplement their core businesses.

Within the rapidly consolidating sector, a new technology to provide high-speed Internet access and telephony over traditional power lines has given some utilities the hope of generating a lucrative new use for their extensive networks. The system sends data and voice signals via a transformer to a regular power outlet in the home.

Although the technology is being developed by firms such as electronics giant

Siemens

(SMAWY)

and

Ascom

, Switzerland's largest maker of telecommunications equipment, it's fusty German utilities such as

RWE

(RWAGY)

and

EnBW

that stand to gain from the association with the Internet and telecommunications business that investors love so much these days. While RWE has been involved with the technology for more than a year, it was only in the past couple of days that renewed interest and hype pushed the company's stock up, around 15%.

Even though the data transfer operations would merely supplement their traditional power distribution business, the shares of utilities companies, considered by many analysts to be undervalued anyway, could see a considerable boost as investors are drawn in by all the online-telco hype. RWE rose 1.60 euros, or 4.9%, to 34.60 on Tuesday as the power line excitement helped make it one of the few issues not to end up in negative territory.

Part of the attraction in the power line delivery would be circumventing the former national telecom monopolies such as

Deutsche Telekom

(DT) - Get Report

. These companies and their metered local phone calls have been blamed for hampering Internet growth in Europe. Also, DT, which recently announced plans for a flat-rate fee for unlimited Internet usage, has angered ISPs such as

AOL Europe

, a joint venture involving U.S. giant

AOL

(AOL)

. The ISPs feel they will be at a disadvantage if their customers still have to pay metered rates to connect to online services.

A new high-speed network via the local power grid would also render Deutsche Telekom's stonewalling in selling off its TV cable network -- a potential broadband competitor -- irrelevant as well.

To be sure, practical consumer applications of the technology are still a few years off. RWE is only expected to present the results of very preliminary first trials at the

Cebit

technology fair in Hanover next week. But as evidenced by the latest DT-AOL Europe scrap, even offering flat-rate Internet service won't clearly decide the battle for the Continent's online business. In truth, should DT keep the other German ISPs at a competitive disadvantage with metered local calls, it could force them into cahoots with the utilities and other alternative networks.

"Clearly there is going to be some excitement surrounding this stuff," says Chris Rogers, an analyst for

Commerzbank

in London. At the present time, however, he says it's still too soon to factor telecom possibilities into utilities' share prices. "Once they work out some of the practical applications, you can start to apply all of the weird and wacky valuations used in (the Internet and telecom) sectors."

With the eight million households currently covered by RWE's service area, it's easy to see the potential impact of the new technology on your average staid power company. According to Rogers, after applying average ISP figures to RWE (should those electricity customers become online users), the company's market capitalization could double or even triple. "There are all kinds of absurd valuations you can get into with this technology." Commerzbank does not have an investment banking relationship with RWE.

Clearly, should utilities' stock continue to benefit from a power line-telco association, other big European power providers such as the soon-to-be-merged

Veba

(VEB)

-

Viag

(VGAGY)

German giant or

Electricite de France

will attempt to get in on the action.

That means the formerly buttoned-down utilities may not just be fighting for each other's power customers, but they also may be battling ISPs for their Internet users and telecoms for their telephony business as well.

And an electricity bill may have megabytes mixed in with kilowatt usage.