The electric power industry lies in the midst of major change, including a shift to market-based wholesale prices. Market players and regulators will recognize that competition requires a shift in...
The New England Auction: Regional Strategy for Competitive Generation
an estimated 3,600 MW of new merchant power plant capacity may enter the market (see Table 1). These plants will compete in wholesale spot markets and will be financed without long-term contracts.
Meanwhile, certain NEES production assets are strategically located in key load centers. For example, Salem Harbor units serve eastern Massachusetts, which at times is a transmission-constrained area. Also, the availability of NEES hydroelectric assets along the Connecticut River and Bear Swamp pump storage provide important system support and operating reserve capacity during contingencies, an ancillary benefit that a buyer of the assets would gain.
In fact, after Northeast Utilities, NEES is the region's second-largest utility, serving 1.3 million customers. With 4,000 MW of generating capacity and contracts to receive another 1,100 MW, NEES provides 20 percent of the region's electric generating capacity. Note the fuel diversity of the NEES plants. Table 2 shows the non-nuclear generating resources NEES offered for sale.
As the buyer of the physical assets auctioned by NEES, USGen also assumes the utility's contractual entitlements to approximately 1,100 MW of generating capacity under 23 multi-year power purchase agreements. To compensate USGen for the above-market portion of these contracts, New England Power Co. agreed to pay USGen approximately $150 million to 170 million annually over 10 years. These payments may offset some of the $1.59-billion purchase price, if USGen can reduce the differential between the contract prices and the competitive market price.
Then comes deregulation. The pace and direction of New England's electric restructuring certainly marked an important variable in any potential valuation of the NEES assets.
On that score, the CEO of PG&E noted that the success of the venture would depend in part on deregulation of the local electric industry, so that USGen could sell its power to utilities and other buyers. In Massachusetts, at least, legislation was passed in November to open the state's retail market by March 1, 1998. But what about progress in the other states? To address that uncertainty, the parties structured the sale to make the full price contingent on whether customer choice was in place. PG&E is not required to pay $225 million of the purchase price until choice is broadly available in New England. The rebate will decline on a prorated schedule if retail choice is implemented by Jan. 1, 1999.
Of course, deregulation in neighboring states raises the prospect of more plant sales by other utilities that sell power into the New England power pool. For example, as shown in Table 3, of the large New England utilities, Boston Edison, Central Maine Power, Commonwealth Electric, Consolidated Edison, and Northeast Utilities have announced asset sale programs.
Asset Value: The Plant as Commodity Producer
Most bidders of the NEES assets probably began their valuation analysis from the same point: They developed a model to estimate future cash flows for the asset and then discounted this figure by an appropriate cost of capital. Among the key parameters examined are plant capacity factors, new capital investment requirements, wholesale market-clearing prices, transmission constraints, and the discount rate, which is based on the effective