Major utility assets -- and even entire utilities -- have become hot items this holiday season.

In recent weeks, buyers have begun aggressively shopping for bargains in a utility sector that only last year resembled the land of misfit toys. They have spent billions of dollars -- and intend to spend billions more -- on big-ticket items that once seemed destined for the lowly discount bin.

In mid-November, private investors backed by Texas Pacific Group agreed to pay $2.35 billion for a struggling Portland utility owned by bankrupt

Enron

. Then, less than two weeks later, a second investor group led by Kohlberg Kravis Roberts stepped up with a generous bid on a utility that's already on the mend. KKR offered $3 billion -- or a 30% premium -- for

UniSource Energy

(UNS)

, a small-cap utility that was flirting with bankruptcy a decade ago.

In the meantime, big value investor Warren Buffett has promised to spend up to $15 billion to expand his firm's utility holdings if lawmakers pass an energy bill that allows more consolidation in the industry. The proposed repeal of the Public Utility Holding Company Act, or PUHCA, is viewed by some as the biggest, although least contested, component of a sweeping energy bill that is currently stalled in Congress.

"As long as PUHCA remains on the books, a single fund can likely purchase only one" utility, Power Insights analyst Maurice May explained this month. "But there are many funds. ... As a result of two deals in two weeks, we believe a trend may be emerging -- with or without PUHCA repeal -- for investor groups to acquire utilities."

Damaged Goods

Private investors are paying about $1 billion less than Enron ponied up for

Portland General Electric

(PGB)

seven years ago. But they're also getting damaged merchandise.

Portland Electric last year posted a "miserable" 5.9% return on equity, May pointed out. And the utility -- which serves nearly half of Oregon's population -- still faces big challenges.

"New management will have its work cut out for it to rebuild relationships with regulators and customers and restore the company to normal profitability," May wrote.

Enron is attempting to unload the utility for the third time in less than five years. It originally tried to shed the utility in a failed $2.1 billion transaction four years ago. Then it nearly sold the utility for even less -- offering it up to

Northwest Natural Gas

(NWN) - Get Report

for $1.9 billion -- in a deal that fell through just before the company spiraled into bankruptcy in 2001.

Two years later, the utility market finally seems to be improving. Merrill Lynch analyst Steven Fleishman pointed to this month's two multibillion-dollar transactions as signs of a recovery.

"Between these two transactions and the potential for PUHCA repeal under the new energy bill," Fleishman wrote, "it could be a signal that merger and acquisition activity is picking up after a hiatus in the post-Enron era."

Shopping List

May, for one, sees the UniSource transaction as the more significant of the two.

Unlike Portland Electric -- which sold cheaply for a reason -- UniSource fetched a premium at a time when utilities have not been selling at all. And the utility, some believe, could have gone for even more.

"While the price may be fair, we do not view it as overly generous," May wrote. "We would expect that the investor group would strive to maximize earnings swiftly following deal closure, and would bring them to a level that would make its purchase price look relatively cheap."

If that happens, other small-cap utilities could bring even higher prices. May has already listed at least three regional players --

Cleco

(CNL)

,

El Paso Electric

(EE) - Get Report

and

PNM Resources

(PNM) - Get Report

-- that are rumored as takeover candidates.

In the meantime, Karl Miller is pointing to the recent utility transactions as evidence that "there is a place for private equity to participate in the regulated power and gas sector." But Miller's own private equity firm, MMC Energy, is far more interested in the unregulated assets that are gathering dust on utility shelves.

"There are still 200,000 megawatts of substantially untouched distressed merchant power generation in North America, which requires significant capital and management by a seasoned operations and risk-control team," Miller said, adding that his own firm is "focused on this significant problem."

Bargain Bin

To be sure, debt-laden utilities have plenty of power plants to sell. They just can't ask very much for them.

Take

Duke Energy

(DUK) - Get Report

, for example. After sinking $8 billion into merchant energy plants, the company says it is now being offered "20 cents on the dollar for state-of-the-art facilities." The company must, therefore, sell the plants at a steep loss or hold onto them -- and lose money -- as it waits for demand to pick up and absorb the current glut of capacity.

But some of the industry's own players see no recovery in sight. Fleishman recently noted that two separate utilities --

International Power

( IPR) and

Williams

(WMB) - Get Report

-- have hinted at a long road ahead. International, which owns power plants in both New England and Texas, could in fact walk away from some of its plants before a recovery even nears.

"If that occurred," Fleishman wrote, "this would be the first instance of which we are aware of relatively new, efficient gas combined-cycle plants being mothballed in this region."

Waiting for a recovery could be even tougher. Just 10 days after International slashed its 2004 guidance -- blaming the 35% shortfall on weak merchant profits -- Williams came forward and predicted that power markets could remain depressed for the next five to 10 years. Some on Wall Street were clearly struck by that forecast.

"Our

independent power producer analyst, Elizabeth Parrella, noted that Williams' views on forward power markets, while candid, were among the most bearish we've seen in terms of timing of recovery," Fleishman wrote.

Still, Fleishman expects Williams to weather the current storm -- and perhaps exit the power business entirely -- as the industry struggles to recover. He believes the company could sell its Western power book alone for up to $1.5 billion. It could then pay down debt and be poised for a turnaround over the next few years.

"We remind investors that this is a 2004/2005 debt reduction/business turnaround story," he wrote. And the power business "as currently packaged is a distraction to the story."

Grab Bag

Meanwhile,

Dynegy

(DYN)

appears to be stuck with its own noncore "distraction."

The company, which continues to focus on its unregulated businesses, has failed to sell its highly marketable electric utility. Although it found a willing buyer for the asset -- when

Exelon

(EXC) - Get Report

stepped forward with a $2.2 billion offer -- it failed to secure the legislative concessions necessary for the deal to go through. As a result, the company is now looking for new ways to finance the business instead of selling it off to pay down debt.

"While we are disappointed that the legislation did not pass, we must now focus on the future with Illinois Power as a part of our organization," Dynegy CEO Bruce Williamson announced. "Our first priority will be to improve Illinois Power's financial condition by creating a sustainable cost structure for this business."

Analysts haven't given up on a sale, however. They believe that buyers -- including Exelon -- remain interested in the utility.

"Industry publications have suggested that several other entities had expressed interest in acquiring IP," J.P. Morgan analyst Anatol Feygin wrote. "A new bidder would not necessarily pay less for IP than EXC. ... Despite the transaction's termination, we continue to view a sale of IP as a question of when, not if."