If it weren't so indecorous, Steve Letbetter, the chairman and CEO

Reliant Energy

(REI) - Get Report

, might consider kissing Vice President

Dick Cheney


In a speech yesterday doubting the U.S.' ability to produce the power it needs, Cheney said the White House estimates that 1,300 to 1,900 new power plants will need to get built over the next 20 years -- more than one a week. In a happy coincidence, Reliant's unregulated energy business,

Reliant Resources

(RRI:NYSE), which Letbetter also heads up, made its public debut today. Originally expected to garner $14 to $19 a share, the stock was priced at $30 last night. In its first day of trading it rose $3, or 10%, to $33.

Even without the vice president's thoughts on energy hitting the front pages, there is little doubt that Reliant Resources would have done well. The company is in an obvious sweet spot: Power generation has been one of the few exceptions at a time when most companies have not done very well. While first-quarter earnings at companies in the

S&P 500

declined by 13% from a year ago, the S&P utilities sector saw earnings growth of 9%.

Econ 101

It all comes down to a matter of demand. You may disagree with the vice president's assessment of America's energy problem and you may argue about the solutions he proposes, but that there is a problem is undeniable. For some time now the capacity utilization rate of U.S. utilities has averaged over 90%. Because of a string of mild winters and the effects of the Asian financial crisis, this unsustainably high level didn't lead to any serious trouble until recently -- but when the trouble did come, it came with a vengeance.

Utilities' capacity use (top) vs. chipmakers'

Source: Federal Reserve

Although California's energy crisis was initially viewed as an isolated problem, more recently it has been seen as a harbinger of what could happen in other regions. The Northeast in general and New York in particular are seen as prone to California-style power shortages, and potential blackouts, this summer. Western states will probably see shortages, though demand should be met through cutting back to big industrial customers that have interruptible power contracts.


While such capacity problems are obviously a problem for power consumers, they are just as obviously an opportunity for those in the business of supplying power. Eager to meet those demand needs, companies have been rushing to the markets for funding to build new power plants. In the first quarter, utilities raised $27.1 billion in the debt and equity markets, according to

Thomson Securities Data

. Compare this to the first quarter last year, when only $11.3 billion got raised. Investors are clearly enthusiastic over the prospects for the business.

Perhaps they should also be a little wary, recalling the lessons they have just learned in tech stocks. Much of the exuberance that developed for many tech stocks resulted from chronic undercapacity: Companies couldn't produce enough to meet demand. The market responded to this by generously funding those that would work to meet that demand. There was a flurry of initial public offerings, a tremendous buildout of plants making everything from semiconductors to telecom equipment. When demand slowed, the undercapacity problem turned into an overcapacity problem so fast it was like someone threw a switch.

For the time being, though, it looks like overcapacity is far off in the power business.