Forget the Internet, and forget Internet stocks.

Chatsworth-based Capstone Turbine Corp., a maker of "microturbines," went public on June 29 at $16 a share. But it never traded at the initial public offering price. It shot up to $27 on the first trade and roared into the $90-a-share range last week.

Just what has Capstone Turbine swaggering around with a market capitalization of $7.1 billion despite having posted rather modest sales of $6.1 million and a net loss of $9.1 million, or $14.32 a share, in the quarter ended June 30?

Think energy crisis. Electric utility deregulation has meant major users and small businesses alike are facing the prospect that power will be very expensive (like 10 times normal) during peaks. Some customers even fear their power may be cut off, reduced or supplied in alternating "quivers" when demand is at its greatest.

That can be a problem. Even manufacturing processes considered low-tech sometimes use sensitive high-tech monitoring and regulating devices that don't handle shutdowns very well. Other companies as diverse as bakeries and plastics manufacturers can find themselves with ruined products if the lights go off. Likewise, telecom and Internet service providers of all sorts regard a power outage as worse than the plague.

That's what has set Capstone Turbine spinning like a top on Wall Street. Its microturbines, which are actually about the size of a Volkswagen Beetle (we're talking the power industry here), run on natural gas and can be installed on-site by manufacturers or others. Each device can produce 30 kilowatts of power, about enough to run a convenience store.

"We can sell them in groups of 10," said Mark Kuntz, Capstone Turbine vice president of marketing.

That's 300 kilowatts of readily available energy on hand in case of problems. The machines also run clean (natural gas is long a favorite of environmental authorities) and cost about $30,000 each.

Kuntz said sales are heating up. "We expect to sell about 1,000 units this year and about three times that many next year," he said.

Sales are now predominately domestic, but by next year it's expected that international sales could comprise two-thirds of revenues. In developed nations, microturbines make sense as a way to supplement the power grid. But in less-developed countries, there are no grids, so the potential market for microturbines is far greater.

"Like cell phones, microturbines have the ability to (go beyond) the infrastructure-building-out stage," said Kuntz.

Microturbines can also run on propane and other fuels, so tanks can be set up to power machines in the Third World. It makes for an interesting alternative version of the world, in which electricity and communications are not linked by wires.

In this country, Kuntz said, microturbines are cheap enough that they could become practical for everyday economic reasons not just emergency use when utilities start charging peak rates.

In the future, thousands of microturbines may be fired up across the state and even across the nation when electricity demand soars and rates rise. Additionally, the turbines produce heat, which can be used in many industrial processes for further savings.

Capstone has competitors, including other turbine manufacturers and makers of promising technologies such as fuel cells. "The reason that Wall Street likes us is that we are furthest along in the commercialization of our product," Kuntz said. "We are installing our product now, not talking about it."

Capstone Turbine may be eating through money right now, but it's hardly cash-strapped. Not only did it raise $160 million (minus fees paid to Goldman Sachs & Co.) in its IPO, it privately issued nearly $90 million in convertible preferred stock in February. It has plenty of dough, at least for awhile.

Big pre-IPO investors include Microsoft Corp. co-founder Paul Allen, and Benjamin Rosen, chairman and founder of Compaq Computer.

Advice and Consent

If an accounting firm wants to be a consultant to a public company, and even help it devise strategic plans or start a Web business, should that same accounting firm also be allowed to audit the client?

The Securities and Exchange Commission has proposed rules that would place limits on how much consulting work an auditing firm can do for a public company. The move is considered heresy among the Big 5 accounting giants, which have become accounting, auditing and consulting supermarkets over the past 20 years.

The SEC is worried that a firm doing the auditing may get weak in the knees. What if the business plan was authored by the same accounting firm, and it isn't working? Auditors might come under pressure to perform a friendly audit.

With nearly 2,000 professionals employed in greater Los Angeles, Deloitte & Touche is active in all forms of consulting and auditing. Sharon Allen, managing partner, says the SEC is making proposals for problems that don't exist.

"As an industry, and as a firm, we already have standards in place," said Allen. "In 27 years of working at Deloitte and I have worked professionally with more than 20 public companies I have never seen a problem."

However, Gerry Boltz, former regional SEC administrator in Los Angeles and a veteran securities lawyer with Bryan Cave in Santa Monica, says he is seeing plenty of problems in the industry. Indeed, he stays busy untangling clients who have been accused of fudging the numbers.

"You know, there are just a variety of ways a public company can boost quarterly figures," he says. "They can count (an increasing portion of) receivables as income, or even send out bills early, to increase reported revenues. The pressure is very strong to meet (Wall Street ) analysts' projections."

Boltz says the investing public probably deserves an auditing firm that doesn't have other business to lose if it conducts a tough audit. "In the short run, the integrity of markets seems distant to individuals who need to make money on Wall Street," he says. "In the long run, if the public loses faith in Wall Street, our capital markets will suffer tremendously. Perceptions are very important."

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at sevencontinents@mindspring.com.

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