5 hot stocks for a heat wave -- and beyond

By Jim Jubak

Electricity demand soared to a record 33,926 megawatts in New York state on Aug. 1 as temperatures broke 100 in New York City and the rest of the state sweltered in the mid-90s. The state's utility grid was on standby to dump 400 megawatts of demand from big industrial power users such as Alcoa (AA, news, msgs), hospitals and hotels.

Days before, that same heat wave had scorched the Midwest -- setting a record for electricity demand -- on its way east from California. There, three days of 110-degree temperatures in inland areas had also resulted in record demand for electricity -- at 50,270 megawatts. Only by shedding 855 megawatts from customers who pay lower rates in return for curtailed power in emergencies was California able to avoid a replay of the energy crisis of 2000-2001. Still, a blackout left 1.2 million PG&E customers without power.

In New York, even before the worst of the heat wave, 250,000 people were without electricity for a week.

Nothing like a crisis to focus the financial markets' attention, of course. With the U.S. in the grip of a heat wave, the price of natural gas soared, rising 14% to $8.21 per million BTUs. Natural gas had been stuck between $5.90 and $7.30 for the last two months after breaking $15 per million BTUs in December 2005.

But this electricity crisis won't be over when the temperatures break, and the opportunities for investors aren't limited to the stocks of companies that produce natural gas.

My five hot-times-for-electricity stocks are Chesapeake Energy (CHK, news, msgs), General Cable (BGC, news, msgs), Itron (ITRI, news, msgs), TXU (TXU, news, msgs) and XTO Energy (XTO, news, msgs).

Let me count the ways.

Base load power

It may have taken a heat wave to focus attention on the U.S. supply of electricity, but the heat wave didn't cause the crisis. That crunch is a result of the utility bust of 2001, when Enron went into bankruptcy and took other electricity producers to the edge. Enron was just the most visible symbol of a fad in the utility industry.

The idea was to split electric utilities into two pieces: a regulated part that would distribute electricity at prices set by the states, and an unregulated part that would produce wholesale power for sale at market prices to other utilities and consumers. The post-Enron bust decimated these merchant power companies; they'd expanded too fast with too much borrowed money. Some went into bankruptcy reorganization. Others wound up scuttling plans to build new power plants in an effort to survive the downturn.

The result is tight supplies of electricity around the country. For example, Indiana needs to add 1,000 megawatts of base load generating capacity by 2010, according to the State Utility Forecasting Group.

Investors looking to play the need to expand base load capacity might look toward TXU. The company has one of the nation's most ambitious plans for adding coal-based generating capacity, and Texas state regulators are the most generous in the country when it comes to setting rates to encourage new power-plant construction.

Peaking power

Base load capacity isn't everything. In fact, it's the least efficient and most expensive way to address a crisis like the current one. Base load plants, most commonly powered by coal, water or nuclear in this country, produce electricity for the lowest cost only as long as they run pretty much full time. Once they've been shut down, they're hard and expensive to start up again. Getting a nuclear plant back up to speed takes so long that any crisis is likely to be over before the plant can help out.

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