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LOS ANGELES BUSINESS JOURNALVolume 34, Number 32 August 6 - 12, 2012 • $3.00

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T H E C O M M U N I T Y O F B U S I N E S S TM

By JONATHAN POLAKOFF Staff Reporter

When Bob Bergen, the actor who voicesPorky the Pig, stutteringly says “That’s all, folks,”he’s closing out an episode of Looney Tunes. Buthe took the shtick to the air this summer to dosomething altogether different.

He asked viewers to donate money to KLCS-TV (58), a small PBS affiliate in downtown LosAngeles that is the poorer cousin to the area’s larg-er public TV stations.

Pledge drives are staples of public television,but they are new to KLCS, a station that bills itselfas “The Education Station” and has carved out a

LAUSD FailsPublic Station

Please see TV Page 43

Go ahead. Drinkthis cocktailwith real goldflecks. It’s forthe Olympics.PAGE 3

DIVINGIN

TV: KLCS forced to scrambleafter district cuts subsidy.

ENERGY: Capstone chargesinto industry to boost sales.

By JAMES RUFUS KOREN Staff Reporter

On a marshy oilpatch next to a gatedCosta Mesa community,Chatsworth manufactur-er Capstone TurbineCorp. has finally founda home.

There, at the WestNewport oil field, tinyWest Newport Oil Co. is using a Capstone tur-bine generator. Fueled by natural gas that comesup along with crude oil, the generator produces

By HOWARD FINE Staff Reporter

A tax nightmare began for Pete Vegas when atruck carrying his L.A. company’s food made aroutine stop at a weigh station in Washington state.

It’s cost him hundreds of thousands of dollars.And he’s now taking part in an intensifying battleover states’ rights to tax companies where theydon’t have facilities or employees.

Business groups contend states should nothave the authority to impose such taxes. State taxcollectors say they have a right to collect billions

By JOEL RUSSELL Staff Reporter

IF you sail out a few miles off the Long Beachshore, one day next year you might see aseries of buoys bobbing on the swells. Butyou won’t see what’s below: a multimillion-dol-lar oyster and mussel farm.

If Phil Cruver’s plans work out, there will bethousands of cages of oysters under the buoysand tons of mussels clinging to ropes that danglefrom the buoys to the ocean floor.

His company, KZO Sea Farms in LongBeach, last month received preliminary approvalto develop a 100-acre farm for oysters and mus-sels about eight miles off the shore of LongBeach. The operation still needs financing and hisplan needs additional regulatory approval, but if itworks out, it apparently would be the first bigopen-ocean oyster farm off Southern California.

KZO’s strategy is to reproduce on a large

Carlos Camara, an inventor atTRIBOGENICS of Marina del Rey, isdeveloping portable X-ray technology.His company is one of many spunoff from L.A.’s top research universities.You can see more examples oflocal innovations that may soon beproducts in this Special Report.

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GO

H.W

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BEGINNING ON PAGE 27

Mussel Man: KZOCEO Phil Cruverwith shellfishfrom the SanPedro Shelf.

Please see ENERGY Page 41

Please see TAXES Page 42

Please see FOOD Page 40

Gas, Oil PowerTurbine Maker

Businesses DrawThe Line onTaxesFrom Other States

Sea farmer hopes to harvest shellfish off Long Beach

SPECIAL REPORT INNOVATION / TECH TRANSFER

Lab toMarket

Amount of Capstone’srevenue from oil

companies, up from 39percent the year before.

58%

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electricity that helps power oil pumps andother equipment.

That natural gas, which comes in quantitiesso small it’s not worth selling to a utility, nor-mally would be “flared off” or burned at thesite. Instead, West Newport uses the byproductto produce about one-third of the well’s elec-tricity needs.

“The (small) amount of gas we produce, it’sjust a problem,” said Tom McCloskey, opera-tions manager for the oil company. “So we liketo use what little gas we do produce to produceelectricity in-house. It’s a great advantage toproduce your own electricity.”

It’s the same story at oil and gas fields nearand far, from Signal Hill in Los AngelesCounty to the deserts of southwest Texas toRussia’s vast Siberian wilderness.

For the past two years, oil and gas companies– and especially American firms cashing in onthe glut of domestic oil and gas reserves openedup by the controversial practice of hydraulicfracturing – have been buying Capstone’s tur-bines: essentially small-scale jet engines thatgenerate electricity instead of thrust.

Those sales have boosted the long-strug-gling company’s revenue above $100 millionand pushed it closer to profitability. Customersinclude Oklahoma City’s Chesapeake EnergyCorp. and Houston’s Marathon Oil Co.

“We’re seeing increased demand for ourproduct,” Capstone Chief Executive DarrenJamison told investors on a June conferencecall. “We started with (Anadarko PetroleumCorp.), which got us Chesapeake, which gotus Marathon Oil, Talisman, then Shell. Wecontinue to get repeat orders from almost allthese customers.”

The oil and gas industry isn’t a new marketfor Capstone, but it has quickly become thecompany’s largest one – and it’s still growing. In2011, the oil and gas sector represented about$32 million in sales, or 39 percent of Capstone’srevenue. In the fiscal year ended March 31, salesto oil and gas companies nearly doubled andcomprised 58 percent of revenue.

That revenue growth helped the companypost its first positive gross margin last year. Butnet profits are still a long way off – the compa-ny lost $18.8 million last year – and the explo-sion in revenue from the oil and gas industryhighlights the uncomfortable fact thatCapstone hasn’t been able to attract as manycustomers in other target sectors.

Executives would like other sales to take offso that oil and gas companies would representa smaller part of Capstone’s future sales. Butwith the company’s turbines costing about 30percent more than traditional piston-drivengenerators with similar output, it’s not provingeasy to get those other deals.

West Newport won’t disclose what it spenton its Capstone generator but it uses a midsize65 kilowatt model that by one estimate costsnearly $200,000 installed. Assuming a 30 per-cent premium, competing piston-powered gen-erators would cost about $150,000.

To expand its presence in other markets,including transportation and telecommunications,Capstone will need to bring that price down, saidShawn Severson, who follows Capstone stock asmanaging director of clean technology research atJMP Securities in San Francisco.

“They have to be more cost-competitive withtraditional technologies,” he said. “If you wereprice competitive in upfront costs, then it wouldbe much easier to consider the microturbine.”

Niche marketsCapstone microturbines – micro because

they are much smaller than the turbines used insteam-generating power plants and even thosein most jet engines – burn pressurized gas orliquid fuel to spin the drive shaft of an electricgenerator.

Capstone’s products range from about thesize of a refrigerator, producing 30 kilowatts of

power, to about the size of a 40-foot shippingcontainer, producing 1 megawatt. Capstone’s 1megawatt unit costs about $1.4 million; thecompany said a unit of similar size from acompetitor would cost about $1.1 million.

But Capstone turbines’ use of flare gas andtheir relatively compact size make them a goodfit for oil and gas companies, which need elec-tricity to run pumps and other equipment atremote production sites. The turbines also useless fuel than other generators – the companysaid its turbines burn more efficiently than pis-tons – helping oil and gas companies meet strictregulations on emissions from drilling sites.

McCloskey of West Newport said theCapstone turbine at its Costa Mesa well sup-plies about one-third of the pump’s electricaldemands, with the rest coming from nearbypower lines operated by a utility.

Capstone is not the only company thatmakes generators that can run on natural andflare gas. Its competitors include GeneralElectric Co. of Fairfield, Conn., and othercompanies that make less expensive piston-driven generators. But McCloskey said he

went with a Capstone model because it usesmuch less fuel and has such low emissions thathe did not need a permit to install it.

“This one’s got the state certification, so it’sgood to go,” said McCloskey, who noted WestNewport would have needed a permit – whichis not simple or cheap to obtain – from theSouth Cost Air Quality Management Districtfor a standard generator.

West Newport is a small local operator, butCapstone over the past 18 months has sold tur-bines to oil and gas producers across the coun-try. In April, the company announced the saleof 30 turbines to oil and gas companies withoperations in Texas’ Eagle Ford Shale play.

The company has also announced big salesabroad, where foreign governments are start-ing to push oil and gas producers to use flaregas as a fuel instead of burning it to get rid ofit. Moscow-based Lukoil OAO recently pur-chased 17 Capstone turbines for an undis-closed sum for its Siberian fields.

“Flare gas is this huge problem in Russia, inAfrica,” said Jim Crouse, Capstone’s vicepresident of sales and marketing. “Countries

are limiting the amount of gas you can flarewithout utilizing it for some beneficial pur-pose. That’s a market that’s growing and willcontinue to grow.”

Slower salesBut other markets that Capstone hopes to

tap haven’t taken off.In investor presentations, company execu-

tives have said they believe the transportationmarket – turbines for hybrid buses and ships –could eventually be about 12 percent of itsbusiness. They estimate generators for datacenters and telecommunications equipment,which require an uninterrupted power supply,could be another 14 percent of sales.

But today, those markets each representless than 1 percent of Capstone’s revenue.

Crouse said it’s no surprise that oil and gascustomers have been earlier adopters. Bigfirms such as Chesapeake are willing to pay apremium for the generators because emissionregulations and because their fuel efficiencycan lead to long-term savings.

“Oil and gas customers tend to be moresophisticated buyers,” Crouse said. “They’llunderstand you may have to pay a premium of20 percent on day one, but that will come backto them. Other customers aren’t making deci-sions based on the lifecycle costs. They’remore focused on what it costs on day one.”

The company sells turbines through inde-pendent distributors and does not report tur-bine prices, but Steven Acevedo, president ofSan Juan Capistrano distributor RegattaSolutions, said a Capstone system costsbetween $3,000 and $4,000 per kilowatt,including installation. That’s about 30 percentgreater than others.

Severson, the JMP analyst, agreed that high-er upfront cost is a barrier for potential cus-tomers. He said it will be important for Capstoneto lower prices to become more competitive inother generator markets. But he added that evenwithout lower prices, it should be easier forCapstone to begin selling more turbines becauseit’s sold so many to oil and gas customers.

“People have seen them working, theyknow they work,” he said. “You can show offexisting customers to potential buyers.”

Energy: Turbine Company Spins Oil, Gas DealsAUGUST 6, 2012 LOS ANGELES BUSINESS JOURNAL 41

Continued from page 1

Getting Connected: Worker assembles turbine at Capstone’s facility in Chatsworth.PHOTOS BY RINGO H.W. CHIU/LABJ

Powered Up: Chief Executive Darren Jamison with a Capstone microturbine.

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