(MONEY Magazine) – Utilities used to be so square. Sure, they paid stable dividends and held their own during stormy stock markets. But compared with tech stocks, utilities were dull. Not anymore. Electric, gas and nuclear power firms are on fire, fueled by deregulation, the industry's rampant merger spree, soaring consumer demand and the freedom to move into higher-growth businesses. "Utilities always wanted to be growth companies, they just were not allowed," says Andrew Levi of Credit Suisse First Boston.

The Dow Jones utilities index is up 28% so far this year vs. about 1.5% for the S&P 500. And some utility stocks have posted tech-stock returns. Calpine and Dynegy--two of a group, with AES and Enron, that fund managers have gamely dubbed the Fab Four--have soared 325% and 177%, respectively, over the past 12 months. But there are still buys out there. Electric companies, on average, trade at about 12 times estimated 2001 earnings vs. about 24 for the S&P 500.

The four stocks we like--Reliant Energy, UtiliCorp United, Peco Energy and El Paso Energy--are thriving as they change from monopolies to market players. Before deregulation, power companies had little incentive to compete and innovate. They sold energy in local regions, charged regulated rates, and were legally required to pass along operating-cost savings to customers. Today, with deregulation breaking out all over--there are only eight states without active deregulation efforts--companies are selling their products on the open market, providing unprecedented opportunities to boost revenues and profits. For some consumers this may mean higher energy bills, but it also offers a ripe investing opportunity.

While the Fab Four and many utility stocks are trading at their highs, our four picks are bargains that have yet to achieve their full potential. Two are using deregulation to push into the energy-trading market just as behemoths like Enron have. The other two are cashing in on the industry's merger spree and substantially expanding their operations by combining with rivals.

Reliant Energy (REI). Excited by Enron's business but leery of paying 53 times earnings to get into it? Then consider Houston-based Reliant. Like Enron, Reliant is moving into the lucrative, high-growth wholesale energy trading and marketing business. But it trades at a mere 13 times earnings.

While it started to focus on trading only two years ago, it ranks among the top five utilities in combined electricity and natural gas volume. Reliant has developed a strong network of power plants by making acquisitions in such major markets as Texas, California and the Northeast. In July, Reliant also announced plans to spin off its power generation business by selling 20% in an IPO. This will give the company extra capital to develop its generation and trading businesses.

Analysts predict that earnings for Reliant will increase 25% this year and 10% in each of the next five years. Its earnings potential, price and spin-off make Reliant attractive.

UtiliCorp United (UCU). This Kansas City, Mo. company has so much high-growth potential that analyst Jason Selch of Acorn Funds contends it's "a wolf in sheep's clothing." On the surface UtiliCorp looks like a staid utility because most of its profits have come from regulated businesses. But that's changing.

The company is beginning to demonstrate its prowess in electric and natural gas trading. As a result, its energy trading business, Aquila Energy, is becoming a major driver of profits. Last quarter, Aquila represented 48% of operating earnings, up from 27% a year ago. The company is realizing big gains from its 36% ownership of Quanta, a utility and telecom-construction company. Earnings at Quanta are expected to rise 54% this year. UtiliCorp also has significant international holdings.

Investors have yet to fully recognize the company's shift into higher-growth businesses, says Selch. Management hopes to change that perception in part by spinning off a stake in its Australian telecom holdings and possibly making a similar move with Aquila. The $2.3 billion company is trading at only 12 times 2001 earnings. UtiliCorp is expected to boost earnings by 9% in each of the next two years. Plus, while many utilities are cutting regular dividends--the average payout is about 3.5%--UtiliCorp still sports a hefty 5% yield. "The company has the ability to nearly double [its P/E] multiple," says Selch. "If you're wrong, you'll still make 5% in the dividend." Selch says the stock, which is trading at $24, would be fairly valued at $38.

Peco Energy (PE). Merger mania is going to mean very good things for Peco Energy. When the Philadelphia-based company's merger with Unicom of Chicago closes this year, it will become the largest nuclear operator in the U.S., producing a fifth of the nation's atomic power. It's also moving further into the fossil fuel business by buying a 50% interest in Vivendi's Sithe Energies.

At a recent $49, Peco is trading at 12 times 2001 earnings, roughly the industry average. Analysts see the company increasing earnings by at least 13% for each of the next two years.

That said, the company is up 40% this year, but it has a way to go, thanks to the impending merger. "We still believe the company is undervalued," says Levi of Credit Suisse. "It's one of the strongest power companies in North America with one of the best managements in the business."

El Paso Energy (EPG). It may not be easy being green, but it's turning out to be pretty profitable for El Paso, a leader in the natural gas business.

Natural gas is booming right now because it is more environmentally friendly than coal and nuclear power and the plants are cheaper and easier to build. Gas-fired electricity, which now accounts for 13% of the nation's capacity, is expected to increase its share to 24% in three years, according to Acorn's Selch. That should be a big plus for El Paso.

Another plus: its upcoming merger with Coastal Corp. Once the deal is complete, the Houston-based company will have 58,000 miles of pipeline--the most of any operator in the country--with access to 70% of the U.S. "They have the potential to see the biggest margins because they are supplying the fuel that every gas-fired plant is going to use," says money manager David Kiefer of Prudential Utility Fund. It's also dipping into several other aspects of the business, including gas exploration. And it's pushing into energy trading and international utility ventures too.

El Paso isn't as cheap as our other picks--it's trading at 18.5 times 2001 earnings--but it's got mega-watt earnings potential. El Paso is expected to see earnings surge 56% this year and another 22% in 2001. PaineWebber analyst Ron Barone sees the stock, which trades at $58, going to $67 over the next 12 months.

--ADRIENNE CARTER AND JEFF NASH