Break out a top gas and power marketer, like for instance,Aquila Energy, from its regulated brethren at UtiliCorp United, andpartner it with an aggressive, hard-charging independent powerproducer (IPP), like for instance, Calpine, and you could create adynamic front-runner in the energy market.

Add some broadband assets and an extra measure of bandwidthtrading, and you would have a triple crown contender in thereassembled, competitive utilities business.

So far UtiliCorp executives aren’t saying who their partnermight be — “we’re talking with a number of companies” — butthey have acknowledged they are getting close to a deal with acompany holding generating assets.

“We see Aquila right now as very marketing rich and a bit assetlight,” Edward Mills, president and COO of Aquila Energy, told NGI.”We see generation fleets coming on, and they are basically assetrich and marketing light. Put those two types of organizationstogether and it becomes more of a pure-play in terms of WallStreet’s perception, and I think it’s valued differently than theway a conglomerate utility is valued today. We think a lot of valueis trapped in UtiliCorp right now, and for whatever reason, themarket is not recognizing the value of Aquila.”

The disaggregation of the electric utility industry is providing potential partners, Mills said, following up on remarks made by UtiliCorp COO Robert Green, who revealed the plan to add generation assets during the company’s second quarter earnings conference call. (see NGI, Aug. 7) The idea would be for UtiliCorp to put Aquila Energy into the new company and hold a “cornerstone” of the joint venture, with the generator holding another cornerstone. Eventually, shares could be sold to the public.

Mills said UtiliCorp is looking for a company with between 4,000and 10,000 MW for a “first combination. We would look to grow afterthat through other combinations. We are looking for a non-regulatedgeneration fleet, or at least a fleet that is being pulled awayfrom regulation so that we have the opportunity to take the excessenergy from those units and sell into markets where energy is mostneeded.”

“The other thing we would look for is a fleet that isstrategically located so we could get access to a number ofdifferent markets,” Mills added.

One rumor picked up in Kansas City last week shown the spotlighton Calpine Corp., an IPP, that currently has interests in 44 powerplants with an aggregate 4,273 MW of capacity. The San Jose,CA-based IPP has projects underway to add 5,935 MW and plans foradditional facilities. When current projects are completed Calpinewill have interests in 54 power plants in 17 states.

The possibility makes sense, according to Ed Tirello, analystwith Deutsche Banc Alex. Brown, who noted that Calpine is lookingto beef up its marketing. “It would be a good, natural fit.”

Aquila recently completed the process of moving its 400employees into new downtown Kansas City office space and held agrand opening ceremony, which included Kansas City Mayor Kay Barnescutting the ribbon for a new trading floor. The 15-year old energymarketing arm led the company’s earnings last quarter at $49.5million, gaining 113% from the same period a year ago. For thefirst half of 2000 Aquila has increased sales 39% and profits by141% over last year.

The number of employees is due to be expanded as Aquila addsbandwidth trading to its gas and power marketing. Aquila rankedthird last year in natural gas trading and second in power trading.It is now aggressively building a bandwidth trading unit under thedirection of Sushil Nelson, general manager of Aquila BroadbandServices.

Nelson believes the bandwidth market will grow to be twice thesize of electricity in four years. By the end of the year heexpects it to be traded along 10 to 14 city-pairs. “We arepreparing for this increase and are looking to increase ourbandwidth trading staff tenfold by the end of the year,” Nelsontold NGI. Aquila currently is working with the Bandwidth TradingOrganization on a standard contract.

In other action, Aquila Energy last week announced it will makean initial investment of $50 million to develop its e-businessportfolio, including an interactive web site for itsGuaranteedWeather products. Aimed at providing risk managers withthe best available weather-related tools as well as wholesaleweather trading, the website features a contest for the bestlong-term weather forecasting. A $100,000 per year prize for thenext three years will be awarded to the weather forecasting firmfor the forecaster that most accurately forecasts weather variablesduring summer and winter periods. “This is directed at gettingbetter weather data oriented to business,” said Al Butkis, vicepresident corporate communications. Even a 10% difference inaccuracy can mean a big difference to businesses.

Ravi Nathan, portfolio manager for Aquila’s weather desk pointedout, “Today there is no objective way for businesses to measure therelative accuracy of the different forecast products available.”

Dexter Steis, Kansas City; Ellen Beswick, Washington

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