Mon Sep 25

September 25, 2000

The Net's Power Play

The Internet is creating unprecedented demand for electrical power and, lately, for electric utility stocks. By Cory Johnson As I was writing this story at my cubicle, the power went out. High demand for electricity during a heat wave had forced Pacific Gas & Electric into rolling blackouts throughout the San Francisco Bay Area.

But it isn't just heat that's driving this spike in demand. The Net is causing unprecedented demand for electrical power. And now there are signs that investors, soured on dot-coms but excited by the investing potential of the Internet, are starting to turn to unregulated power companies as the next big Net investment play.

The story is simple. The bits of the Internet move around through the good graces of tons of electrical power. And the power demands of the Internet are largely hidden. The surge in power needs isn't coming from new computers and printers: PCs add only about 5 percent to the average power bill. And it's not coming from all the new online businesses burning the midnight oil. Electric power usage is growing faster than the economy.

"Traditionally, power demand has tracked GDP growth," says Harvey Padewer, president of Duke Energy (DUK) 's power services group, based in Charlotte, N.C. "But electrical demand has been outpacing GDP growth. And we believe the main reason is the Internet and electronic commerce. It has resulted in all sorts of new demand."

The Internet uses the most power in servers and workstations, the hubs and routers of networks, the giant Internet data centers  they're all massive electricity hogs. "These big data centers use three times the amount of power than an office building," says John Skeen, director of portfolio strategy at Banc of America Securities. "And yet there is very little by way of creation of new power facilities, while the Internet continues to grow by leaps and bounds. So where you want to be as an investor is in these unregulated power companies."

Why unregulated? After all, some expect the high rates in Southern California's deregulated power market to lead to more, not less, regulation. But don't you believe it. Many in the power industry see the Internet's demand for more juice as a boon for deregulation. "A centrally planned economy didn't work in Moscow, and it's not going to work for power in California," notes Padewer.

Perhaps the company making the most dramatic change to an unregulated, Internet energy economy is the Constellation Energy Group (CEG) . Formerly Baltimore Gas and Electric, the company has completely changed its business model: In addition to making power plants and creating power, Constellation is now in the business of trading power between utilities.

Constellation set up a trading desk with one of the world's best traders, Goldman Sachs. Last year this new area, known as the merchant-energy business, brought in 20 percent of Constellation's consolidated net income. But by the end of 2001, Banc of America Securities expects the merchant-energy business to grow to 66 percent of net income.

"People didn't really see the power business as an exciting business in years past," says Constellation CEO Charles Shivery. "But the opportunities created by deregulation and the demand that's coming from the Internet are really revolutionizing our business."

Since Banc of America initiated coverage of this company Sept. 5, the stock has been on a tear, rising 13 percent in two weeks. This company will now have to deliver on its promise. But for many an Internet investor, the surety of a utility as an Internet play offers some comfort.

"We think companies that have highly visible earnings streams and growth rates are the best bets here," says Skeen. "Because we think there are more bad times to come for this market."

http://www.thestandard.com/article/display/0,1151,18789,00.html

-- Martin Thompson (mthom1927@aol.com), September 25, 2000