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
weighted-average cost of capital.
This analysis yields wholesale bulk power prices ranging from 3 cents to 4 cents per kilowatt-hour, with a nominal escalation factor. Capacity values are estimated to begin in 2003 at $15 kW and increase to $50 kW by 2011, if the New England power exchange should put in place equivalent capacity payments for infrastructure, such as spinning reserves and voltage support.
Under the standard discounted cash-flow analysis, the value of the assets runs between $800-$900 million, about 77 percent of the $1.1 billion book value and 53 percent of the $1.59 billion sale price. On a stand-alone financial basis, that approximates the worth of the assets as "commodity producers." But can the assets create additional value? Can a strategic buyer leverage the value of individual assets beyond their discounted future cash flows? Here, however, the ability of any individual bidder to create greater value from the NEES assets will depend on the bidder's mix of tangible and intangible resources and capabilities. In this case, that prospect will depend upon the specific resources and capabilities of USGen, and how it might integrate these with the NEES assets.
Operational Value: Labor and Productivity
As an affiliate of PG&E, one of the largest investor-owned utilities in the country, USGen maintains ownership, management or operational interest in 17 generating plants, accounting for nearly 3,400 MW and represent a capital investment of more than $5 billion. This portfolio includes six operating electric generation facilities in the Northeast with an installed capacity of 1,400 MW, most of which is committed to several utilities under long-term contracts. Three of these plants lie in Massachusetts and Rhode Island, and produce about 4 percent of the region's electricity. Consequently, the company has both knowledge of the regional market and existing capacity on which to build.
This track record (em a reputation for operating "lean and mean" (em suggests that USGen can probably create additional operating savings from the NEES assets. According to the Wall Street Journal, before the sale NEES expected to cut 700 to 800 employees from a work force of 4,900. To be conservative, if USGen can eliminate 600 positions, at an average annual salary of $50,000, it can save $30 million per year over 20 years, for a net present value (10-percent discount rate) of about $255 million. This figure should be adjusted by the $85 million USGen is required to pay NEES beyond purchase price for retraining and early retirement.
With increased labor productivity as but one source of value enhancement, we estimate that USGen can increase the net present value of NEES' non-nuclear assets by at least $125 million to $175 million above the baseline estimate.
Merchant Plant Experience
USGen has considerable experience developing new power generation facilities that sell electricity competitively.
As shown in Table 1, of the 3,600 MW of merchant capacity planned for New England, USGen is responsible for about 1,500 MW, or more than 40 percent. The company is developing new facilities in Albany, N.Y., (1,080 MW) and Charlton, Mass., (400 MW).
USGen's merchant-plant experience and