- The Washington Times - Saturday, July 15, 2006

The utility bills arrive like clockwork — electricity, phone service, cable — and they seem to keep rising. Then there’s gasoline for the car, a once- or twice-weekly expense.

Meanwhile, salaries are inching up slowly, if at all. Spreading that income to cover the increasing costs is becoming more difficult and sending consumers further into debt.

Average household debt soared nearly 34 percent between 2001 and 2004, while income rose 2 percent, according to the Federal Reserve Board’s latest Survey of Consumer Finances, released in February.

As U.S. consumers were trying to pay for record-high gasoline and other energy prices after Hurricanes Katrina and Rita last year, Exxon Mobil reported its 2005 profits — a U.S. record of $36.1 billion.

Some members of Congress were infuriated, accusing Exxon Mobil and other oil companies of profiteering during an energy shortage caused by hurricanes last year. They called executives from the major oil companies to testify twice in recent months about how they can justify such high income and threatened to reinstate a windfall-profits tax.

Not only did the world’s largest oil company earn record profits, but it paid retiring Chief Executive Lee R. Raymond compensation of $98 million in a pension, $32 million in stock futures and $38 million in salary, bonuses and stock options in 2005.

“Obviously, they need to make some kind of profit,” said Chris Bettencourt, 38, a police officer filling up his Ford F-150 pickup at a New York Avenue Exxon station on a recent afternoon. “They’re a company. But when they’re making record profits and gas prices are at all-time highs, there’s a problem there.”

He paid $3.18 a gallon for regular gasoline. “If the price gets to $3.50 a gallon, I’m definitely trading [the F-150] in,” Mr. Bettencourt said.

Although many consumers are screaming about rising prices, rising profits and rising executive compensation, financial analysts say the companies to whom U.S. consumers pay their monthly and daily bills are running healthy business operations.

“We’re a capitalist society and a free market,” said Bob Dobkin, spokesman for Washington utility owner Pepco Holdings. “Are we going to limit what companies make? Hopefully, supply and demand will take care of that.”

Pepco pays, too

Pepco Holdings Inc., which provides power and heat to about 1.8 million customers in the District, Maryland, Virginia, Delaware and New Jersey, knows it always will have a market for its electricity and natural-gas supply business, which it sells through three subsidiaries.

In the District, households pay the utility an average of $1,143.31 per year to keep their home appliances, lights and heaters operating.

Last year, Pepco Holdings made a $371 million profit on total revenue of $8.06 billion, which translates to a 4.6 percent profit margin. The margin so far this year is running about 4 percent.

Meanwhile, utility rates have risen about 40 percent in the past two years.

“Most of what is driving the price of electricity these days is the price of fossil fuel, coal and oil and natural gas,” said Tony Kamerick, Pepco Holdings treasurer. The fuel is used to power the generators that produce electricity.

Pepco, the largest of Pepco Holdings’ three subsidiaries, distributes the electricity to customers. It sold off its four biggest generating plants to energy company Mirant Corp. in 2001 in an effort to focus solely on distribution as the industry was deregulated. It still owns two “peaking plants” in the District that operate only during greatest demand, for about 20 days per year.

Continuing regulation of the distribution industry gives it no opportunity to gouge consumers, Mr. Kamerick said. Supply and distribution rates are subject to limits from the public service commissions in states where it operates.

The past year has been more challenging than most because the hurricanes damaged natural-gas facilities in the Gulf Coast region. In addition, the price caps that kept energy costs artificially low under Maryland’s deregulation plan are being removed, causing price spikes and angering customers.

Industry analysts say Pepco Holdings is a reasonably good investment for shareholders but faces uncertainties over its coal and natural-gas supplies, as well as the regulatory environment.

Pepco is operating in a business environment in which “missteps in execution could prove costly,” said Neil A. Kalton, a research analyst for the financial firm AG Edwards & Sons.

The dividend it pays investors rose to $1.04 per share this year from $1 a year earlier. Its stock, POM, is up slightly on the New York Stock Exchange from around $22 a share six months ago to close Friday at $23.25 per share.

Among its gambles is a proposed 320-mile, 500-kilovolt interstate transmission line that it says could cut costs for consumers. The $1.2 billion line would originate in Northern Virginia and run up the Delmarva Peninsula to New Jersey.

The proposal is awaiting approval by the PJM Interconnection, the regional power-grid operator for the Mid-Atlantic.

Exxon’s black gold

Exxon Mobil, the world’s largest oil company, says it has bills of its own to pay.

The company spends about $4.5 billion a month on its routine business costs, another $15.5 billion to buy crude oil and $8 billion on taxes. Its $36 billion in cash would keep it operating for a little over one month without an influx of steady income.

“There’s a whole lot of money we have to spend to keep us running,” said Russ Roberts, Exxon Mobil spokesman.

Its business consists of producing, refining and distributing oil and gas products under the Exxon, Mobil and Esso brands. It operates on six continents.

The company produces about 40 percent of the oil it sells and 3 percent of world output.

At the moment, it is paying the highest price for oil in more than a quarter of a century. Crude-oil prices, which hit a record of more than $77 last week, make up more than half the cost for every gallon of gasoline.

“People have to realize that we’re in a commodity business, which has its ups and downs,” Mr. Raymond, then CEO, told a Senate subcommittee investigating the oil industry’s record profits in the fall.

Its stock, XOM on the New York Stock Exchange, closed Friday at $64.90 a share, up from about $55 a share in December but nearly unchanged from a year ago.

The company’s soaring profits have prompted a public outcry.

Exxon Mobil’s net income increased to $8.4 billion in the first quarter of this year, compared with $7.86 billion one year earlier. It was the biggest first-quarter gain the company has ever reported. Sales rose 9 percent to $89 billion.

The oil and gas industry earned an average of 8.5 cents on every dollar of sales last year, compared with an average of 7.7 cents for all U.S. industries, according to data from credit-rating agency Standard & Poor’s. Exxon Mobil says it earned 9.7 cents per dollar of revenue.

Verizon’s ‘bundle’

Telecommunications giant Verizon Communications Inc. is operating in a tough environment where competitors would seize any opportunity to provide customers with the same service at a cheaper rate, according to industry analysts.

“There are a lot of alternatives,” said David Weissman, telecommunications analyst for Zacks Investment Research, which has no financial dealings with Verizon. “There’s wireless; there are different service providers. There are less opportunities for profiteering.”

Verizon provides communication services worldwide for telephone, wireless, data and Internet services. The Domestic Telecom division provides voice, data and related services in 28 states and the District of Columbia. The Domestic Wireless division operates nationwide.

The international division provides wired and wireless communications and investments primarily in the Americas and Europe.

The company was incorporated in 1983 as Bell Atlantic Corp. after the breakup of AT&T; and changed its name to Verizon Communications in 2000 after the merger of Bell Atlantic and GTE.

Verizon is betting big that expanding its fiber-optic cable network will keep it on the cutting edge of digital communications.

The company is spending about $3 billion this year to run fiber-optic cable to more homes and businesses in hopes of dominating the “bundled services” market, which combines telecommunications services, such as land-line telephones, Internet, cable television and wireless, under a single bill.

It earned a $7.4 billion profit last year, compared with $7.8 billion in 2004.

So far, it’s anyone’s guess whether the large-scale effort to expand fiber optics, which started last year, will pay off for Verizon. The company’s stock, VZ on the New York Stock Exchange, dropped 20 percent in value when the program started but has been holding steady for the last six months, closing Friday at $31.62.

At the beginning of 2005, Verizon was spending about $1,200 for each home or business it connected to its network. It is trying to bring the costs down to around $715 for each connection by the end of this year through greater operational efficiencies.

Meanwhile, Verizon competitors such as AT&T; and BellSouth are focusing their budgets on upgrading their less-expensive coaxial cables.

“The investment required to be in this business of communications is a long-term, deep-pocket investment,” said Matt Flanigan, spokesman for the Telecommunications Industry Association in Arlington.

He estimated the telecommunications industry has invested a total of about $80 billion in recent years to bring customers the latest digital communications services.

Verizon earned revenue of $75 billion last year and is on track for revenue of about $90 billion this year as its network grows.

In the first three months of this year, Verizon brought in $22.7 billion and earned a $1.6 billion profit.

The company’s 250,000 employees serve about 83 million customers when wired and wireless customers are added together.

“They’re probably one of the best wire-lined companies to go after the cable companies,” said Mr. Weissman, the Zacks analyst, referring to the company’s fiber-optic network that offers bundled services throughout the East Coast.

Only 1.18 percent of Verizon’s wireless customers have chosen to switch to a different service provider — the lowest rate for the industry.

“You can interpret that as meaning a high level of customer satisfaction,” Mr. Weissman said.

Comcast into VOIP

Comcast is trying to become the nation’s biggest provider of telephone service using Internet technology after already growing to the largest cable-television company in the United States.

Comcast increased its revenue to $22.3 billion with a $928 million profit last year, from $20.3 billion in revenue but a higher profit of $970 million a year earlier.

In the first quarter of this year, the company had what its officials called “an outstanding quarter” with a $466 million profit, compared with $143 million a year earlier.

From a humble start in 1963 as a single-system cable operation, Comcast has grown into a diversified business that operates cable television, Internet-based broadband services, digital data and phone service nationwide. The company says it is on target to add 1 million new digital voice subscribers this year.

Comcast offers cable, high-speed Internet, digital telephone and digital television services throughout the Washington area. It has 21.7 million customers in 36 states and the District of Columbia.

Competitors, such as Verizon, DirecTV and EchoStar Communications Corp., have taken note of Comcast’s success, moving into the same territory with similar services.

In addition to its cable segment, the Philadelphia company has programming such as E Entertainment Television, Style Network, the Golf Channel, OLN (formerly Outdoor Life Network), G4, and AZN Television. The company also stages sporting events and owns or manages facilities for sporting events and concerts.

The company spent $4.4 billion last year on programming to bring customers hundreds of channels on television and thousands of video-on-demand programs.

The average Comcast cable-television customer pays the company $53 a month. Cable rates increased 3 percent last year and are rising 4.3 percent this year.

The company has expanded its network for high-speed Internet, interactive video and digital voice service, which is known in the telecommunications industry as Voice over Internet Protocol (VOIP).

“Over the last 10 years, Comcast has spent about $40 billion to upgrade our networks,” said spokesman Tim Fitzpatrick.

Industrywide, Voice over Internet Protocol, which lets consumers use the Internet for phone service, grew 29 percent in the first quarter of 2006 to 5.39 million subscribers, compared with 4.17 million a year earlier, according to the financial firm Sanford C. Bernstein and Co.

Industry analysts say the market shows no signs of slowing down.

Any threat of an industry slowdown “are years away from materializing, and it is increasingly evident that cable is putting up numbers today,” said Doug Shapiro, cable and satellite analyst for Banc of America Securities.

The outlook for the telecommunications industry shows in Comcast’s stock, CMCSA on Nasdaq, which is up from around $25 a share in December to close at $31.05 a share Friday.

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