The New England Auction: Regional Strategy for Competitive Generation

Fortnightly Magazine - February 15 1998
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USGEN IS THE NATURAL CANDIDATE TO PURCHASE NEES' generation assets. We have a well-established commitment to the region; we have strong power plant operating experience; and we have been a leader in promoting competition and customer choice in gas and electric industries."

(em USGen President and CEO Joseph P. Kearney

In August 1997, U.S. Generating Co., an affiliate of PG&E Corp., successfully bid $1.59 billion in a competitive auction for all of New England Electric System's non-nuclear generating business (18 power plants, plus power purchase contracts and other assets). The transaction marked the first major sale of electric generating assets in preparation for U.S. deregulation; following close behind came the sale of three PG&E plants for $501 million and 10 Southern California Edison plants for $1.12 billion. More will follow, as states encourage utilities to divest their generating assets to prepare for competition.

One detail merits a closer look: USGen's bid price offered a substantial premium over book value, listed by NEES at $1.1 billion. Many observers blamed USGen's apparent high bid price on its over-eagerness to position itself early in a market that is rapidly growing competitive. This explanation appears short-sighted, however. It assumes that PG&E stockholders are indifferent to how the company invests its dollars or whether it receives an adequate return. It fails to explain the value that comes from being the "first mover" in a market.

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