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SCIENTECH IssueAlert, November 17, 2000
PG&E Corp. Pursues Multiple Generation Projections, Looks Outside of 
California
for Profits
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

PG&E Corp. (NYSE: PCG) announced that it will acquire a 44.4 MW wind power
generating station near Palm Springs, Calif., to supply electricity to
the Western power grid. PG&E subsidiary National Energy Group is purchasing
the plant from Seawest Wind Power Inc., a San Diego-based developer of
wind energy plants. PG&E expects the plant to enter commercial operation
in the spring of 2001.

ANALYSIS: This is just the latest in what appears to be a generation boom
for PG&E Corp. Just over the last two months, PG&E Corp. also has announced
several other generation projects, both within California and in other
strategic areas of the country. National Energy Group (NEG)*PG&E Corp.'s
unregulated power producer that sells energy on the East Coast, primarily
in New England*is spearheading all of the new generation projects. PG&E
Corp. claims that its goal is for NEG to be in a position to contribute
30 percent of earnings for the parent company by 2002. Thus, the accelerated
increase of megawatts under the NEG banner certainly is working toward
that goal.

Let's take a quick look at the other generation projects that PG&E Corp.
has announced in addition to the Palm Springs wind power facility. Just
last week, NEG announced a long-term tolling agreement with Southaven Power,
an affiliate of Cogentrix Energy. Under terms of the agreement, NEG's 
subsidiary
PG&E Energy Trading gains rights to the total generation capacity produced
at an 810-MW natural-gas fueled, combined cycle located in Mississippi,
just south of the Tennessee border near Memphis. The deal is noteworthy
because it positions NEG close to the existing TVA and Entergy electric
substations that will deliver the plant's electricity into the region's
transmission grid.

This announcement followed other substantial projects in Southern California
and Oregon. The 500-MW Otay Mesa Generating Project, located in San Diego
County, is in the final stages of plant siting. The project represents
the first new power plant built in San Diego County in almost three decades
and, of course, will become operational during a time when low supplies
in California continue to drive up prices. In Oregon, NEG has just submitted
an application to build a new plant in Hermiston, Ore., adjacent to an
already-existing 474-MW plant that NEG co-owns with PacifiCorp. The proposed
Umatilla Generating Project will be a combined cycle combustion turbine
that will burn natural gas, with its fuel supply transported via the NEG's
Pacific Northwest natural-gas pipeline.

The growth of NEG is a real success for PG&E Corp. at a time when its 
regulated
subsidiary is struggling. PG&E Company, the utility that provides natural
gas and electric service to approximately 12 million people in Northern
and Central California, has accumulated about $2.9 billion in debt. PG&E
Co. buys a great deal of the power it provides to customers on the wholesale
market, but because of a retail rate freeze that is still in effect the
company has little control over the rates it can charge customers. Thus,
over the course of last summer, PG&E Co. was paying up to 19 cents per
kilowatt hour while it was only able to charge its customers on average
5 cents per kilowatt hour. PG&E remains embroiled in negotiations with
the CPUC over its petition to retroactively bill customers for its debt.

While the regulated PG&E Co. could find itself wallowing in the red depending
on regulatory rulings, NEG has soared. In the 2Q of 2000, PG&E Corp. reported
second quarter earnings from operations of $0.69 per share on a diluted
basis, or $253 million, which represented a 38-percent over diluted earnings
from operations in the same quarter in 1999. Much of this success can be
attributed to NEG, which reported 2Q earnings of $37 million, which reflected
a 233-percent profit increase from the previous year's quarter. The winning
streak continued into 3Q, in which PG&E Corp. reported diluted earnings
from operations at $0.68 per share, or $248 million, and revenues of $7.5
billion, compared with third quarter 1999 revenues of $6.2 billion. This
constituted a 22-percent increase in profit for the parent company. Again,
NEG performed very well; NEG contributions rose, with diluted earnings
from operations of $0.10 per share, or $37 million, on revenues of $5 billion.


Clearly, PG&E Corp. has benefited greatly from NEG's ability, as an 
unregulated
subsidiary, to sell power outside of the regulated California market. Thus,
it is no wonder that, although PG&E Corp. still considers California to
be an attractive market, the core driver of its strategy is NEG, which
is able to operate in all lucrative markets as they become deregulated.
In addition, the plant siting process in California historically has been
quite restrictive and lengthy, which also may explain why PG&E Corp. has
chosen to focus its generation efforts primarily outside of its own state.
The siting process in California shows signs of becoming more facile. In
fact, just yesterday, the California Energy Commission adopted emergency
regulations to implement the state's new six-month power plant licensing
process. The new regulations allow for "environmentally advanced" power
plants*such as PG&E's wind power plant in Palm Springs*to be licensed and
come online more quickly in California.

Currently, PG&E Corp. has ownership and arrangement interests in more than
30 plants, the bulk of which are managed by NEG. The company's generation
portfolio currently consists of 7,000 MW, and more than 10,000 MW in new
power plant development and construction is in production.  As PG&E Corp.
continues to expand its generation base, it probably realizes that current
industry intelligence indicates that a company must have at least 30,000
MW in order to be a formidable player. By comparison, a company like AEP*
clearly
one the top generation companies in the industry*has a worldwide generating
capacity of 38,404 MW. As NEG is PG&E's primary growth vehicle at the present
time, I think we can expect to see additional generation projects announced
by this subsidiary.

Some questions remain. Will PG&E Corp. split its unregulated and regulated
operations into two stand-alone companies, as other utilities such as AEP
and Reliant have recently announced? I checked with my sources at PG&E
Corp., and the official company position is that there are no plans to
restructure in this way at this time. However, PG&E Corp. does acknowledge
the dilemma between asking regulators for the right to bill customers for
its regulated company's debt, while showing a 26-percent profit increase
from its unregulated business.

Also, what are the prospects for PG&E Corp.'s hydroelectric system? According
to prior agreements, PG&E Corp. was supposed to sell its 3,896-MW 
hydroelectric
system and the company in fact began to do with a bidding process in September
1999. However, just last August PG&E Corp. petitioned the CPUC to halt
this auction process and instead allow the hydroelectric assets to be sold
from the regulated PG&E Co. to an as-of-yet-unformed unregulated subsidiary
for $2.8 billion. PG&E Corp.'s motivation in this proposal is fairly obvious;
the unregulated subsidiary could reap substantial profits from the sale
of hydropower at market prices. In addition, according to a Sept. 15 report
from Dow Jones Newswires, assuming a book value of about $700 million for
the hydroelectric system, PG&E Corp. could take the remaining $2.1 billion
to pay off the transition debts incurred by PG&E Co. The CPUC and PG&E
Corp. continue to interface regarding the value of the hydroelectric system
and whether or not PG&E Corp. should be allowed to sell the assets to an
unregulated company. While this debate rages on, NEG is free to continue
along its aggressive growth mode.

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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
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