Electric utilities, meanwhile, were pegged as major beneficiaries of this paradigm shift. The need to recharge vehicles at night was to increase demand in off-peak hours, pushing up sales, earnings and dividends.

Here in late 2006, most of the companies that were supposed to revolutionize American transport are mere exhibits in a museum of industrial history. Investors who bet on them lost, sometimes heavily. Big US auto companies are scarcely lifting a finger to develop anything but cars and trucks that run on gasoline. And even with gas at the pump selling for well over $2 a gallon, fuel-saving hybrid vehicles are a rare sight in most US cities.

Alternate fuel vehicles, however, are again breaking into the news cycle. Seeking a plan to help the US exit the debacle in Iraq, Democrats in Congress are formulating a strategy to increase US energy independence, in order to reduce the need for our presence in the Middle East. And alternate fuel vehicles have been pegged as a vital part of that solution.

We’ve seen all of this before, of course, dating back to President Carter’s fireside chats in the heat of the late ’70s Energy Crisis.

So it was with a skeptical eye this week that I interviewed my long-time friend and colleague Gregg Early, editor of the complimentary Internet service Nanotech Investor News. Gregg’s done quite a bit of work on the subject.

I’ll be following up the implications of nanotechnology for my favorite industry--utilities--in future editions of Utility & Income and Utility Forecaster.

ROGER CONRAD (RC): What exactly is nanotechnology and why should utility and income investors care about it?

GREGG EARLY (GE): Nanotech is essentially about four things:

Lighter, smaller, cheaper and stronger. The potential applications are just surfacing from laboratories now. In fact, the science is as transformational as the implementation of chemistry was to the last century. Nanotech will change forever every aspect of how we live in coming years.

Without getting too technical, nanotechnology lets us manipulate the basic building blocks of matter in order to make almost any process more efficient. The idea is that by changing things at the smallest level we can have the greatest effect on the largest scale.

In energy, the biggest problem America has now is inefficient use, which results in waste. A great deal of the original energy used to generate electricity, for example, is wasted before the power ever reaches a single consumer. The other problem is we’re still heavily reliant on a single source of energy--imported oil--that’s making us increasingly dependent on unstable and often hostile nations for our economic wellbeing.

Nanotech offers a solution to both problems--and electric utilities have an opportunity to profit richly as the process unfolds. That’s why EDISON INTERNATIONAL (NYSE: EIX) and the industry-funded Electric Power Research Institute (EPRI) are such big backers of its applications.

RC: How will utilities profit?

GE: I think it will happen first through improved efficiency in the grid. Rising demand for electricity is one of the surest trends in the US economy year after year. Nanotech can improve efficiency immeasurably, thereby reducing the need to spend money to build new power plants and buy fuel to run them, not to mention to make the necessary expenditures to curb emissions.

The second way utilities win is with increased sales of electricity.

One of the most exciting potential uses of nanotechnology is in producing batteries that will catapult electric vehicles to commercial status. Users will simply plug in their vehicles for a recharge, at home, at the office, or at the store. That could lead to a truly staggering increase in demand, and of course fatter margins for utilities. This increased consumer demand will also help utilities build more plants, upgrade infrastructure, etc. without having to foot much of the bill.

RC: Let’s focus on the basic grid first. How does nanotech improve efficiency?

GE: The key is the ability to build new batteries (energy storage and distribution devices) and a new generation of what are called “ultracapacitors.” Both essentially allow the storage of incredible amounts of energy.

On the battery side, we're starting to see much more efficient batteries, with longer lifespans, and quick recharges. Lithium ion

(Li) batteries are becoming the standard material for all batteries moving forward. There are still nickel metal hydride (NiMH) batteries that have a significant piece of today's storage market, but any battery company worth its salt is transitioning from NiMH to Li.

Ultracapacitors are another development that are changing the face of energy storage and distribution. Where batteries have traditionally been used to provide a stream of energy over a period of time, capacitors were developed to provide a powerful burst of energy quickly. Ultracapacitors are now able to store and deliver energy like batteries.

Think of it this way: If I stick my finger into a cup of milk and pull it out, my finger will have a very thin coating of milk on it.

But if I have milk-absorbent nano particles on my finger, it will come out with a very thick coating. That’s roughly how nanotech enables super-charged storage of energy.

Incidentally, NASA is deeply involved in developing nanotech, as is the Dept of Defense, Dept of Energy and the Dept of Transportation.

It’s not hard to see how utilities can use these to make the grid more efficient by increasing the ability to store energy, rather than have so much routinely vanish into thin air.

And here’s another idea. Imagine electric power generated from huge hydro or nuclear plants somewhere on Earth, then transported on a super tanker converted so the ship's hold now houses a giant battery or ultracapacitors instead of oil. The ship makes a stop at a wind farm somewhere in the middle of the ocean downloads all the stored electricity from the farm then proceeds to a docking station in the US, where it plugs its power into the grid for use.

It may sound fantastic now but it's not unrealistic. Utilities would have the ability for the first time to buy their power anywhere in the world for the cheapest price as an option to building. That could be very attractive in coming years, as more communities vote NIMBY (not in my backyard) to their every move. Utilities with excess capacity in the US would have the ability to sell their output abroad as well.

RC: OK, what about nanotech and electric vehicles? We’ve heard a lot of pie-in-the-sky stories about what fuel cells can do, but most fuel cell companies seem more focused on getting government handouts than making anything that can compete commercially. What makes today’s electric vehicles any different?

GE: I agree that fuel cell technology in automobiles has been a bust so far, and very likely will continue to be. In fact, I agree that fuel cell companies will never amount to anything as long as they’re so dependent on the government, and particularly as long as their executives aren’t interested in doing much else. BALLARD POWER

(NSDQ: BLDP) has never made money and has now even lost its place as the number one global maker of fuel cells.

Another problem vehicle-based fuel cells have is they need hydrogen.

That means either the country will have to construct a system of hydrogen filling stations or for some other fuel from which the hydrogen can be extracted. The cost is highly prohibitive as is the concept of developing the infrastructure necessary for it to work.

Even without nanotechnology, electric vehicles (EVs) have a huge advantage here, as they can simply refuel by plugging into the existing grid. No one needs to build any new infrastructure to accommodate a massive fleet of EVs.

The biggest problem with electric vehicles is the battery technology simply hasn’t measured up to the traditional internal combustion engine yet. For one thing, the batteries are massive. The all-electric Tesla sports car, for example, has a battery that weighs about 700 pounds, runs the entire width of the car and is bolted in right behind the seats. Sure it gets up to 135 miles per hour, but I wouldn’t want to be in the driver’s seat if it hit a wall!

Nanotech’s advantage here is again making the process lighter, less bulky and more efficient. In fact, one executive told me that to get similar Tesla performance out of car using ultracapacitors, you'd have a drive system that weighed less than 100 pounds.

Incidentally, a new generation of EVs based on the latest Li technology or ultracapacitors would also have major advantages over the hybrid cars now on roadways, such as the TOYOTA Prius. The Prius has its fans and is actually a nice ride. But its NiMH battery suffers from all batteries’ chief downfall--the chemical reaction necessary to pull the energy from the battery.

The projected lifespan of the Prius battery is about six years. At that point, owners of the hybrids will have to replace them, which will cost about $5,000 to $6,000. They’ll have to make a decision to either shell out the money to keep a fully depreciated car running, or else junk the thing. And the after market for a hybrid in need of a new battery won’t be pretty.

Ultracapacitors don't involve chemical reactions. That means the car will fall apart, you pull the ultracapacitor drive unit out of the car and put it in your new car.

RC: Those are no doubt profound technological advantages. But we’ve seen other promising technologies tossed on the scrap pile due to lack of interest. What makes you think this one will be any different?

GE: Obviously, any successful technology has to have sponsors. And when it comes to energy, new technologies have a very powerful potential enemy in the Super Oil companies. Everyone has heard the stories of these giants buying up technologies like this and sitting on them for a very obvious reason--they’re a direct threat to future sales of fossil fuels.

As is usually the case with revolutionary new technologies, the primary developers that could make these innovations possible are fry that I’ll bet you’ve never heard of like MAXWELL TECHNOLOGIES, EESTOR, ALTAIRNANO and ELECTROENERGY.

These developers, however, have some interesting differences from other would-be revolutionaries. For one thing, many of them are making money now, particularly in Europe where at least one major wind power developer is buying ultracapacitors in quantity from Maxwell.

Another big difference is there are some pretty powerful companies that stand to gain a lot from developing this kind of technology.

Utilities’ involvement and sponsorship of EDTA conference I attended in Washington, DC, is a pretty clear indication they’re eager to make this work.

Their efforts in the early ’90s were derailed by the push for industry deregulation in the mid-’90s. But now that things have stabilized, they’re in much better position to adopt new technology.

And this time, they’re likely to have a lot of backing by government, both on the federal level and in the states. California Governor Arnold Schwarzenegger, for example, is a big backer of new energy technology and recently signed into law curbs on CO2 emissions that really accelerate the need for new solutions.

There’s even reason to believe the big automobile companies will be interested. Toyota obviously has made the biggest push into hybrid battery technology as have HYUNDAI and NISSAN. The US companies have held back largely because of limitations on the battery technology, and the problems dead ones would bring to their parts, servicing and other operations that come after such as car is purchased.

But a commercially viable Li battery or ultracapacitor unit would solve a lot of those problems, and allow them to compete effectively with the foreign makers in a way they haven’t been able to for decades.

In any case, this is a developing market that has a long way to go and a lot can happen in the meantime. But nanotechnology is already in a wide range of applications, from tumor-busting nanoparticles, to “liquid armor” to better shampoo. Utilities and energy are big money industries where the potential applications are only beginning to be conceived, let alone developed. And the potential profits are well recognized and worthwhile for the players.

MARKET WRAP

In the December Utility Forecaster, I noted that barring an unforeseen catastrophe, utility stocks would turn in a positive fourth quarter for the 32nd time since 1969. Since then, they’ve continued to push higher and it’s now likely that this will be one of the better finishing quarters in that time.

Utilities have benefited from several factors closing out this year.

Third quarter earnings were strong across the board. Even the few disappointments were minor and due to what should be ephemeral reasons. Both inflation and US economic growth appear to have moderated. And the Federal Reserve has not raised the federal funds rate again, even while making statements that controlling prices is its first priority.

The November elections rendered a generally business-as-usual verdict for utilities. Meanwhile, the Canadian government’s proposal to tax income trusts as corporations beginning in 2011 has benefited utes with a capital inflow, as money has left our northern neighbor.

Fundamentally, I expect the sector to remain strong in 2007 and beyond. The excess capacity in the power and communications markets from earlier this decade has been soaked up and markets for these services are strengthening. The push to open markets has gone full circle. And even ELCON--an advocate for heavy industry and a major proponent of ’90s deregulation--is now leading a call for more regulation.

Meanwhile, most states have far more interest in increasing reliability and decreasing emissions than in promoting wrenching industry changes. And they’re giving the utilities the tools to do the job by allowing the pass through of needed costs.

There are few better examples of the turnaround than Nevada, where SIERRA PACIFIC RESOURCES (NYSE: SRP) was a basket case just three years ago. Today, thanks to strong cooperation with state regulators, its finances are mending rapidly even as it embarks on an ambitious plan to meet soaring demand. There’s even talk of restoring the dividend next year, a move that will almost certainly catapult the shares back to the mid-20s, levels not seen since the late ’90s.

All this shows every sign of continuing to play out in 2007 and beyond. And if the interest rate environment remains relatively stable, we should see another good year for share prices.

There are two things, however, that should make all of us a little cautious, at least when it comes to new buying. The first is that, despite earnings gains, valuations have run up to fairly high levels. Shares of Utility Forecaster Core Holding ENTERGY (NYSE:

ETR), for example, have run up in the low 90s, despite some remaining challenges bringing its Hurricane Katrina-wracked New Orleans unit out of bankruptcy. It now yields just a little over 2 percent and sells for more than 20 times earnings.

To be sure, there are a lot of reasons to like Entergy as a company.

For one thing, its nuclear power plant fleet is the second largest in the nation and it continues to run well. Earnings were strong in the third quarter and are expected to be again in the fourth. But those valuations for a utility usually precede a cooling period, which is why I’ve rated the stock a hold for now. And it’s by far not the only ute that’s been off to the races in the latter half of this year.

The second reason for some caution here is simple seasonality. The first six weeks of the year are traditionally very strong for most of the market. For utility stocks, however, the track record is considerably more mixed. In fact, since 1969, February has generally been a down month.

Then there’s the record of the past four years, in which income investments in general have suffered from mid-spring through early summer. All four of those pullbacks were relatively short-lived, but they did do some damage while they lasted.

The bottom line is to keep cool. As I pointed out in the last edition of Utility & Income, it may make some sense to take some money off the table, particularly if an investor’s holdings have become over-weighted during the run-up to a particular stock or stocks. That doesn’t mean selling all of a favorite holding--just enough so a surprise drop won’t cripple you overall. In non-taxable accounts, those gains can be balanced against this year’s losses in less fortunate sectors, such as Canadian income trusts.

The worst mistake many income investors make is to overload their portfolio in a sector that’s been red hot, and bail out of sectors where they’ve had losses. That may be emotionally salving, but it also keeps you constantly at risk to a cooling off of sectors, while it prevents you from profiting from rebounds.

It’s sometimes a more difficult road, and it’s not as sexy as making big bets. But you’ll do a lot better over the long haul by keeping your exposure to the best plays in many sectors and maintaining a balance between them. That way something out of left field in one won’t wipe you out. In fact, as I pointed out last issue, a hit to one will frequently trigger an exodus of funds that will wind up in the other sectors.

In other words, you may actually benefit on the whole, even while certain of your holdings absorb a blow. Then, once the move has played out, you can rebalance your holdings again, collect the income and enjoy the gains as good stocks backed by good businesses pick up ground.