Exclusive C Three Equity Index: 2007 Gains Gone

February’s losses pile on top of January’s

Every C Three index except Less Regulated Gas saw all remaining gains from 2007 wiped away in February. February’s 5.93 percent losses were on top of January’s 5.3 percent losses. For the full 12 months, the average share price has lost 7.8 percent.

Coal prices continue an upward climb as world demand increases and in March, oil closed at more that $100 per barrel. Not surprisingly, natural gas prices are following these trends.

Winners: Natural gas reserves are showing their muscle these days. Williams, TransAlta, Equitable and Questar are not only in the top 10 for the past month but are all in the top five for 12-month returns.

What about the losers? The simple answer: regulatory environment—not having appropriate gas cost, fuel or purchased power adjustment clauses in the rate base or being cross-wise with regulators during crucial rate cases. PNM Resources, UniSource Energy, Sierra Pacific Resources and Nicor all have their share of state regulatory issues. As the price of natural gas increases (with the implied price increases of other energy commodities), those companies without adequate commodity price protection imbedded in their rate structures will continue to have a lot of downward pressure on their equity prices.

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We are seeing continued acceptance of decoupling in the natural gas industry. With electricity prices having almost no place to go but up and with companies facing incredible obstacles for building new generation and transmission capacity, decoupling on the electric distribution side will likely begin to find some traction. Demand-side management and energy conservation initiatives should be bundled with equitable mechanisms so the distribution side of the business is not penalized. Obviously, there are huge downstream ramifications of decoupling but if utilities are going to get serious about conservation initiatives, which consumers will increasingly demand as electricity prices rise, there have to be incentives for the utilities. One of the first areas that should be considered is how the structure fits with other initiatives such as smart metering and smart grid technologies.

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PS Enterprise Group completing a 2-to-1 stock split on February 5. Calpine emerged from bankruptcy and is re-listed under CPN on the NYSE and has been added back to our indices under Less Regulated Electric.

For more, visit www.cthree.net.

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