Government policies and the industry’s response has increased the risk factors affecting the quality of earnings at U.S. electric utilities. Deferred taxes and ballooning pension obligations...
off a piece of Solaris Power to become eligible to buy all of PowerNet, the regulated grid company in Victoria, Australia. Said Bruce Levy, president and CEO of GPU International Inc., "GPU is used to being a regulated business. We don't mind being a regulated business."
Fred D. Hafer, GPU's president and COO, summed up their plan to exit the generation business: "This was one of the most gut-wrenching [decisions] of all. It's very difficult to let go of a member of the family. But our plants are located in an area of excess capacity. To compete you need to be bigger and you need to have plants located over wide areas (em all over the country and all over the world.
"We will exit a business that we feel we cannot compete in, since it is going in a merchant direction. We will grow T&D assets horizontally and acquire other regulated commodity transport and distribution systems."
And how big does the domestic T&D business need to be? "It's 2 billion [dollars] now," said John G. Graham, GPU's senior vice president and CFO. "But we think you might need 6 to 8 billion."
At Houston Industries, I saw a different way of thinking. Forget about your current list of plants. Don't fish or cut bait on that basis. Don't worry if your plants look unprofitable; after all, you would never have put together that exact portfolio if you had known then what you know now. Instead, ask a different question: "How can you buy or sell generating assets to assemble a new portfolio of plants that will earn a profit?"
Oglesby at HI Trading offered the most cogent presentation on how to run a merchant generation business that I've heard yet. It's obvious that he relishes the idea of competition.
According to Oglesby, merchant generating plants will be selling largely into a competitive power exchange, with demand and supply bidding, so when you choose your portfolio, you want to own plants that operate on the margin. Picture a traditional supply curve from your Econ 101 textbook. Says Oglesby, you want to own plants that operate on the right-hand side of the curve (em where the curve starts moving upward at a steep slope.
In fact, he sees no problem at all in owning and operating a high-cost plant that might not be dispatched but once or twice a year, and then only for a few hours.
Oglesby acknowledges that utilities might have to play a few tricks to make generation profitable. "We have a lot of experience dealing with summer peaks and dispatching plants. When you operate on a merchant basis, and sell into a power exchange, you can watch the price climb during the day. We might decide to hold our plant off the market at 12 noon, even if the price looks favorable, because we know we can get a better price at 4 p.m. We think we know a little bit about what will happen if we hold our plant out for a few hours. We can play on