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SIVY ON STOCKS from money.com
December 8, 2000

Electroshock in California

As the electricity shortage in the Golden State reaches a crisis, local
utilities are getting badly squeezed. But independent power producers are
having a field day.

By Michael Sivy

The craziness in Florida has overshadowed an even more bizarre story
unfolding in California. The Golden State is running out of electricity and
on Thursday declared an unprecedented "Stage Three" alert. To conserve
power, emergency measures are being considered that would ordinarily be
unthinkable. Pumps that move water from Northern to Southern California may
be idled for part of the day. Older generating plants may be allowed to run
at levels that cause excess air pollution. Extra water may be diverted
through hydroelectric dams endangering rare salmon. And it's possible that
residents won't be able to turn on their Christmas lights until after 7:30 
p.m.

California has been forced to contemplate such appalling measures because
of a hopelessly bungled electricity deregulation scheme begun in 1998. At
the time, experts predicted that competition could eventually cut
electricity costs by as much as 30 percent. To help California utilities
bolster their financial strength for the new competitive market, consumer
prices were left partially fixed until 2002, while wholesale costs were
allowed to seek market levels.

Since surplus power could be bought fairly cheaply, California electric
companies initially profited. But unfavorable weather boosted the demand
for electricity, while higher oil and gas prices increased costs for
suppliers. Prices for out-of-state power have soared: For example, the
cheapest surplus Canadian power that used to go for as little as $10 per
megawatt-hour recently hit $1,000 during periods of peak demand.

It's all been a catastrophe for California electric companies, which have
to pay market prices for power but are limited as to how much they can
charge consumers. The big utilities most affected are Edison International,
parent of Southern California Edison, and PG&E, parent of Pacific Gas &
Electric. Both stocks are down more than 25 percent from their highs.

But not all energy companies are suffering. One big beneficiary of this
mess is Duke Energy [DUK]. In addition to traditional power operations in
the Carolinas, Duke has an unregulated wholesale-energy subsidiary that
does extensive business in California and recently signed electricity
contracts with both Southern California Edison and Pacific Gas & Electric.
The subsidiary is also expanding and modernizing its California plants.
Those additions will account for a sizable chunk of the new generating
capacity expected to come on line over the next two years.

Duke has long been one of my favorite utilities. I recommended the stock in
May and again in July at $62 a share (see "Power companies" [
http://www.money.com/money/depts/investing/sivy/archive/000510.html ] and
"True value" [
http://www.money.com/money/depts/investing/sivy/archive/000728.html ]).
Since then, the share price has risen 38 percent to $85.75. With projected
earnings growth of 9.5 percent annually over the next five years and a 2.5
percent dividend yield, the stock offers a potential total return of 12
percent a year. At 19 times next year's estimated earnings, the stock looks
pricey for a utility, but the company certainly has a fantastic position.
I'd hang on to any that I already owned and buy more on any dips.



=======================
CHAT TRANSCRIPTS
MONEY's Michael Sivy identifies sectors and stocks that possess
true value in a rocky market.
http://www.money.com/chat/2000/001204.html

Tech Investor David Futrelle discusses the current state of the
tech market and the outlook for various sectors.
http://www.money.com/chat/2000/001201.html
=======================

###

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