As state regulators and utilities gear up for the advent ofdistributed generation, one of California’s native sons and thefirst company in the nation to market commercial distributed powergeneration systems for businesses, Capstone Turbine Corp., ispreparing for its own $115 million IPO later this spring.

Woodland Hills, CA-based Capstone is one of several dozenspecial interests from both the private and public sectors thatfiled testimony with state regulators earlier this month as part ofyear-long effort to facilitate a smooth entrance for distributedgeneration into California’s restructured electricity market. Thefirst of two phases of hearings begins next month in San Franciscowith everyone from Enron to the Turlock (municipal) IrrigationDistrict putting in its two-cents-worth of advice.

Despite the advent of new state rules and a head start on mostof its competitors, 12-year-old Capstone is awash in red ink andexpects to stay that way at least through fiscal year 2001,according to documents it filed with the Securities and ExchangeCommission as part of its preparations for going public. Aspokesperson for the 156-employee firm said an SEC-imposed “quietperiod” prohibits Capstone from commenting on either the stateregulatory proceedings or the pending IPO.

Capstone’s 1999 results produced $6.6 million in revenues, but anet loss of $29.5 million, for the calendar year ended Dec. 31,1999. This compared to revenues of $84,000 the previous year and a$5.3 million loss. Commercial sales began in December 1998, sobefore that the company essentially spent a decade in a researchand development mode. In 1999, it said 211 units were shipped oncustomer orders of 521 units, leaving an order backlog of 310 unitsat the end of last year.

From its inception, Capstone has received more than $260 millionin private equity capital, some coming in the mid-1990s fromMicrosoft co-founder Paul Allen’s venture capital group, supportinga series of national beta tests, according to Capstone’s IPO filingand its president/CEO Ake Almgren. Operating losses over its12-year history top $120 million.

Nevertheless, the mostly natural gas-fired small powergenerating turbines in the long run are going to be produced anddistributed profitably, according to the company’s filing

“Since the commercial release of the Capstone Micro Turbine,demand has continued to grow and it is anticipated to accelerate assuccessful results from early adapters and new applications arerecognized in the distributed generation market,” Capstone stated.”To accommodate this increased demand we are increasing the scaleof our operations, including the hiring of additional personnel,resulting in higher operating expenses. We believe these increasedoperating expenses will enable us to realize accelerated revenuegrowth.”

Capstone makes a 30 kW microturbine, sub-assemblies andcomponents that can be fueled by natural gas, or in part bypropane, sour gas, kerosene and diesel. It is committed todeveloping other products, however, including some cogenerationapplications.

The California Public Utilities Commission is in the midst of aproceeding begun at the end of last year to tackle the politicallyand economically sensitive issues inherent in distributedgeneration, including the question of whether incumbent regulateddistribution utilities by virtue of their market power should beexcluded from the emerging small-scale power generator business.

In establishing a formal proceeding expected to result in newrules and the need for some new state laws, the CPUC took a morecautious approach to the broader issue of whether there eventuallyshould be competition in local electricity distribution, theso-called “wires” business monopolized by either private or publicsector utilities for the past 100 years.

In the midst of all of these tricky issues, some of theparticipants, such as Enron and the major natural gas utilities inCalifornia, want to have some discussion of distributedgeneration’s projected impact on the state’s natural gasinfrastructure, too. To date, the gas companies are embracing theadvent of distributed generation as another means of assuring theirrole in the production of electricity in the state.

Richard Nemec, Los Angeles

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