In the late 1990s, many formerly stodgy utilities started to focus on lines of business beyond the regulators' grasp -- like energy generation and specialized services for industrial customers, for instance.

As these are areas where innovation and good business practices can add to the bottom line, investors looked upon them favorably.

But, was this new, competitive environment, where utilities started merging with others and lopping off their own slow-growing regulated units, really a better one?

If you look at the results of Enron, Covanta and others, the answer is a resounding ‘No'!

There are several types of utility companies, but the ones that investors find simplest to understand are the pure-play regulated Electric and Gas Utilities and (possibly) the Water Utilities.

The multi-line utilities, and the mixed regulated/unregulated utilities are often too diversified to analyze in depth.

Besides, too many of them become "story" stocks, and I like to fundamentally analyze a company before investing in its stock.

That utility companies, just like industrial sector companies, should be evaluated based on their efficiency, resourcefulness of their management, and by how well-positioned they are in the marketplace--not just on the reliability of their dividends—is a good thing.

Investing is a journey " for individuals and corporations alike. To succeed in your journey, you need to know a few things in advance, like " in addition to who you are -- where you are going, where you are starting from, and the path of least resistance.

In the 1990s, utility company management often ignored these basic facts of life.

And, investors seeking growth stocks certainly proved by their performance in 2000-2001 that they messed up in the supposedly-safe utilities sector almost as badly as they had in the info technology sector.

That period wasn't just an Internet Bubble you know.

But in 1999, seldom during the rush to buy up the stocks of utility companies did I hear the one practical piece of advice from Wall Street that could have saved investors from the collapse of the utility stock bubble, which is: always look at the credit rating before buying any security for fixed-income.

What you have to do with utility sector stocks is sell them on S&P or Moody's rating downgrades. Don't even bother to read the report.

Early in the 2000-2003 bear market, as high-tech stocks started to crumble, investors began piling into their old rainy-day friends, utilities stocks. Nasdaq's loss seemed to be the utilities' gain as the S&P 500 Utilities Index grew 44% while Nasdaq came off 62%.

Part of this gain came from investors seeking the shelter of stable earnings and a reliable dividend. But other investors were bidding up prices for a new breed of "growth" utilities capable of logging double-digit earnings gains. They were being urged to do so by the biggest of Wall Street sell-side firms.

The utilities sector underwent a major transformation as de-regulation forced change and reshaped companies, making big winners of some and catastrophic losers of others.

"These aren't your grandmother's utilities any longer," said Robert Becker, co-manager of the Franklin Utilities Fund. But, at the same time, most on Wall Street put on a different spin.

I say turtles and tortoises don't fly. If it crawls and has a big weight on its back (i.e., interest rates and regulators), then we know what it is.

Rather than creating a new "growth" sector in the capital markets, I looked at the late 1990s deregulation period for the utility sector as a one-time-only special situation.

The financial media, with the money of Wall Street talking, took the other side. They told us about eagles, not turtles.

BusinessWeek wrote in March 2001, "Just look at what's going on in California. Calpine (NYSE: CPN), a wholesale power producer selling electricity at whatever the market will bear, has been a big gainer. Its 2000 profits are up 163% from the year before, its stock price has gained 80% from last March, and analysts like Brian Hayward of INVESCO Funds think it can add 30% over the next 12 to 18 months."

Rather than soar higher, March 2001 was the top for Calpine, at about $58. It then slid quickly into the swamp -- all the way to $2.50 (presently $3.55).

What a disaster. Down 95.7% in 12-18 months. So much for INVESCO's projected 30% gain in 12-18 months.

I always like to revisit the advice of conflicted analysts to see just how much the money was doing the talking. Also in my files is a major report from Forbes Magazine where Morgan Stanley was touting Calpine heavily in 1H01. I'm sure I could find more of these reports because Calpine was in heavy distribution (to the public) at that time.

Judging from Wall Street's track record, and my feelings about it, I would guess that INVESCO Funds and Morgan Stanley Dean Witter were actually selling Calpine during the 1H01. Selling heavily. And I wonder when the Franklin Utilities Fund, another Calpine tout at the time, changed its glowing outlook.

These people should be made to "walk the talk" or else "walk the plank" " straight to jail.

To me, advising people who rely on you and then taking the opposite side of the transaction is criminal.

I tell you, if I was a Calpine bag-holder in early 2001, I'd be calling the SEC to find out if INVESCO Funds were in truth living up to their representations to the BusinessWeek writer that they truly believed in the 30% gain over 12-18 months.

I'd also be calling to find out if Morgan Stanley really believed in their forecast of a 3 to 5-year 35% CAGR in earnings, as reported by Forbes.

If these Wall Street firms were actually selling, there should have been retraction letters sent to BusinessWeek and Forbes because they knew that the readers of those very popular magazines were buying heavily based on their incredibly strong buy recommendations published in bold quotes.

Calpine/BusinessWeek/Forbes is just one illustration of many that I use to state that investors cannot take their lead from magazine writers.

Sooner or later, all investors must get the point that the market is about marketing and that the media is the spin machine. Read their stuff at your peril.

In this regard, I know I can back up my words. When asked by a market letter writer what I thought of Calpine, during 2000, I sent him an e-mail, which I retained.

Regardless of the technical point of cycle, I have a problem with utilities that are both regulated and de-regulated, which by definition is a conflict. You know what I think about conflicts.

Another problem I have with the deregulated component of the Utilities Sector is with the politicization of capital markets. Like mixing oil and water, I know they don't mix very well.

Jason Selch, energy analyst for Liberty Wanger Asset Management in Chicago summed up my feelings: "The prominent benefit of electric utilities is that they used to be apolitical. But I personally don't find them attractive because of all the uncertainty surrounding their businesses in Washington."

But the biggest trading issue happens to be interest rate related. As utility sector companies hold large bond positions, and their quarterly balance sheet is marked to market, these assets take quite a hit during periods of rising interest rates.

As 2005 is believed to be a period where current bond yields will rise, and prices of the bond portfolio sink, the utility sector should be under-weighted.

In my view.

BCara@BillCara.com