The subject was a familiar one to me: a dire warning from the North American Electric Reliability Council that America will face a critical shortage of electricity within a decade unless there’s a massive building boom for power plants.

The grid organization--known commonly as NERC--forecast US demand for power will increase 20 percent from 2006 through 2015. That’s total demand growth of 141 gigawatts of capacity, as opposed to just 67 gigawatts of new projects supposedly in the works. The total is a shortfall of 160 large power plants; one gigawatt can power 500,000 to a million homes.

The report projected particularly acute shortages in New England, the Rocky Mountain region and Texas, with a time table as close as the next two to three years. It also cited 50 gigawatts of capacity it deemed “poorly utilized,” either aged plants taken out of service or newer plants that have been unable to line up contracts.

On their face, NERC’s assertions look imminently reasonable. So are most of its recommendations, including an appeal for more long-term planning, a doubling of conservation programs nationwide and increased usage of energy-efficient technology and equipment. NERC also advises using federal government power to cite new transmission projects, as granted under the 2005 Energy Policy Act. And it says it may push state regulators to do more to promote investment.

In addition, as I pointed out in my 2002 book “Power Hungry,” there are deeper problems with America’s electricity system. The power grid in many parts of the country, particularly the Northeast, is more than 75 years old. The Bush administration has re-licensed several nuclear plants that would otherwise have had to shut down, while other underperforming plants have gotten a new lease on life from better management--as ownership has consolidated. But during the next decade, we’re still likely to see several aged and underperforming nukes closed for good, further increasing reliance on fossil fuels.

More than 90 percent of the power plants built in the late 1990s and early this decade were designed to run on natural gas. These plants are more efficient than the old base-load capacity they were designed to replace. Unfortunately, natural gas prices are several times what they were when the plans for these plants were drawn up.

And despite a major decline from last year’s post-hurricane highs--as well as the potential for a mild El Niño weather system or a recession--there’s absolutely no way they’re going to the $1 to $1.50 per million British Thermal Units level again, at least not as long as those plants are running.

These plants, consequently, are basically peakers now, run only when demand is high enough and spark spreads--the difference between the price of power and the cost of gas to generate it--are strongly positive. Oil use in power plants was mostly phased out during the ’70s energy bull market. Wind power use is exploding. Unfortunately, units are smallish by nature, with even the largest wind farms generating only a fraction of a gigawatt. In short, despite the hype, wind isn’t taking over as a base-load source of energy, and neither is gas or oil.

That basically leaves King Coal, source of more than half of America’s current power demand. At current usage rates, the country has an estimated 100 years of proven coal reserves, and there’s likely a lot more than that left to be tapped. Some rising political stars like Montana Governor Brian Schweitzer are making a national issue of advocating using technology profitably developed by South African technology giant SASOL (NYSE: SSL) and others to convert coal to natural gas and liquid fuel, thereby replacing otherwise needed imports.

Coal, however, has its share of problems. For one thing, burning more of it means emitting more CO2, the gas blamed for causing rapid global climate change. And, whether you buy the Bush administration argument that global warming is a hoax, or the rest of the world’s that it’s a critical and growing problem, more regulation of CO2 is likely, particularly if the Democrats seize control of Congress as current polling trends indicate. Coal plant owners are also under pressure to clean up mercury emissions and there are still some operating that spew out acid rain emissions and particulate matter.

Coal burning utilities in the US will spend tens of billions of dollars to fix these problems during the next decade or so, not counting potential action to curtail CO2. But there’s a more basic problem.

Natural gas prices today are several times those of the late ’90s in part because North American fields are in rapid decline, but also due to soaring gas demand. That demand began accelerating when companies built natural gas plants in the ’90s,

Here in late 2006, there are 160 coal plants in the planning process. Many of those are in Texas, where TXU (NYSE: TXU) is trying to get them into the mix before potential CO2 regulation makes it a lot more difficult. If all of these are eventually built, demand for coal will undeniably increase. That will surely increase coal prices and decrease the projected life of America’s reserves, just as more natural gas-fired power plants increased gas prices.

However, the other half of the equation--that so many new plants will be needed in the first place--is what really cuts to the chase here. In fact, if all those plants are built, we could well go right back to another supply glut as we saw earlier this decade. At best, that would mean poor returns for the builders and at worst another meltdown.

BACK TO THE FUTURE

If the NERC’s premise of a looming power shortage sounds familiar, it’s because we’ve heard it all before, and not very long ago. In late 2000, early 2001, California experienced spiking electricity prices, in part because of years of underinvestment, but also because of gross market manipulation, spearheaded by Enron and others.

Fears of a power shortage were fanned by Vice President Dick Cheney, who at one point stated the US would need to build the equivalent of a major new power plant every month to avoid disaster by the end of the decade. Details about the veep’s secret committee to forge energy policy are still scarce, as Mr. Cheney has succeeded thus far in protecting them in court. The list of players, however, was largely drawn from those with a personal interest in promoting the idea that power was scarce, and that government needed to remove most or all regulation from the energy industry.

With power prices spiking in California, the idea of an imminent power shortage became an article of faith with investors and Wall Street literally threw tens of billions of dollars at unregulated power producers like CALPINE CORP (OTC: CPNLQ). Some 90 gigawatts of capacity wound up being built, virtually all of which was constructed to burn natural gas. And it all hit the market at basically the same time, just as the economy was slowing and Enron’s collapse was precipitating a sector-wide meltdown.

To be sure, even if there is a coal building wave, it will be a while before the new capacity hits the market. That means we’re still a long way from the kind of environment that created the glut of the early 2000s. But those who bought the hype of an impending power shortage the were left holding the bag, as some two dozen utilities were nearly driven to insolvency. Those who buy the arguments this time around are risking the same.

It’s taken four years for the sector to fully recover its financial health. Power prices have yet to reach pre-crash levels. And one company is still trying to come out of bankruptcy: Calpine. The company collapsed under the weight of aggressive construction, massive debt and soaring natural gas prices, which made it uneconomic to produce electricity from many of its facilities.

The power supply glut created in the late ’90s is finally being soaked up by steadily rising demand--a trend more than a century old--and further consolidation of plant ownership into stronger hands. While developers like Calpine had no choice but to run their natural gas-fired plants full out all the time, these new owners can afford to run them only when it’s economic. And they’ve acquired them at better prices as well, further enhancing flexibility.

The power producers that survived the crackup of 2001-02 are profiting as never before. Nuclear companies like EXELON (NYSE: EXC) are realizing huge margins. So are wind producers like AES CORP (NYSE: AES) and FPL GROUP (NYSE: FPL). Even companies relying on natural gas power plants, such as DYNEGY (NYSE: DYN)--are seeing results improve.

Another building wave--if pursued too aggressively--could land these companies and many others right back in the soup again. That’s another good reason to buy utilities as businesses, not as plays on the grand theme of a power shortage.

As long as companies are growing and becoming stronger and more valuable, it makes sense to bet on them. If a prospective power shortage helps that, fine. But once those basic fundamentals start to unravel, it’s time to cut and run--no matter how attractive the theme or story.

That’s a lesson many of us learned the hard way earlier this decade, after paying the price for trying to bet too aggressively on a supposedly impending power shortage. We learned from it. But those who get caught twice in the same trap have no one to blame but themselves.

As third quarter earnings are released over the next several weeks, we’ll get an ideal time to assess just where utility and power companies are in this cycle. I’m expecting we’ll see continued strong results, especially for companies that produce power from stable-priced sources and sell it into unregulated markets.

Part of the reason for the NERC’s alarmist report this week is the continued rise in peak power usage. Demand on the summer’s hottest day was 6 percent higher in 2005 than in 2004, and should register a solid gain this year despite the overall mild temperatures. It’s absolutely true the American economy is becoming increasingly electrified and that’s not going to change. And the result is going to be a strong bottom line for solid power producers like nuclear-focused Exelon and wind/nuclear-focused FPL.

I’ll be reporting on and analyzing these expected strong results in The Roundup (available below to Utility Forecaster and Personal Finance subscribers). But again, my interest in my favorites is the growth of their businesses, not a grand theme of widespread power shortages and blackouts.