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The New England Auction: Regional Strategy for Competitive Generation

Fortnightly Magazine - February 15 1998

the NEES assets about $125 million to $150 million on a net present value basis.

Closing the Deal

Taken separately, none of the capabilities identified are sufficient to raise the NEES asset values above the base-case estimates significantly. Because of their unpredictable nature in a competitive marketplace, fuel and power supply prices represent key risks to manage. Consequentially, trading instruments and institutions like integrated companies will be important in managing risks and providing information on future prices of real commodities. In a competitive market, owning generation assets is also an important form of risk management for maintaining customer value.

So how did USGen/PG&E arrive at $1.59 billion? The potential sources of value enhancements discussed above are summarized in Table 4. The estimates represent the most significant sources of value enhancement. Not included in the table are several other potential ancillary sources of value. For example, it is difficult to assign a dollar value to increases in gas sales, repowering of plants and taking advantage of transmission constraints and plant siting. PG&E's financial engineering capabilities and cash position may also allow the company to decrease its weighted average cost of capital and so increase the value of the NEES assets as an addition to its portfolio. At the end of the day, the only test whether PG&E overpaid or underpaid will be the market test: Is it successful in efficiently meeting consumer demand and thus raising the value of shareholder equity?

David Haarmeyer is an executive consultant at Stone & Webster Management Consultants Inc., a subsidiary of Stone & Webster Inc., a full-service engineering, construction and consulting company. Robert T. McWhinney Jr., president and CEO, has provided clients in the U.S., Asia, Eastern Europe, and Latin American with advice on corporate and industry restructuring. Ronald Moe is a vice president and specializes in providing utility clients quantitative analysis of competitive power markets.

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