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Generating Plant Sales and Acquisitions: Who's Doing What, and Why

Fortnightly Magazine - February 15 1999

Sales prices for power generation assets in the United States during the past two years have climbed to unprecedented levels. This trend should continue. More than 20,000 megawatts of generation assets have been sold, with another 20,000 MW announced. During the next five years, it is expected that 70,000 to 140,000 MW will change hands. We have seen only the beginning of a massive redistribution of generation assets - from regulated utilities to unregulated marketers and plant operators.

In fact, the prices we've seen for generation assets may turn out to be bargains. Don't compare the price paid to the booked cost in the hands of the former utility owner. Instead evaluate the price in the context of the strategic objectives of the buying companies.

Of course, there is no single correct asset strategy. Here we take a look at various strategies for asset sale and acquisition, with examples taken from among recent transactions. These strategies may involve a full ownership interest, or perhaps only the management of leased assets or sale of management services. However, while ownership and control differ significantly in terms of capital requirements, risk and other characteristics, the steps in acquiring ownership and control are largely similar. Hence we treat acquisition of ownership and control in a similar manner.

Why They're Selling: Players and Strategies

Power plants involved in sales transactions vary widely in terms of geographic location, transaction price, power plant technologies and other items included in the sale such as power purchase agreements. However, all completed or announced sales are based on either of two reasons:

1. Compliance with state regulatory or legislative guidelines related to restructuring for retail access; or

2. An intent to focus on a core business, deemed to be something other than building, owning or operating power plants.

Regulatory Compliance. Regulatory and/or legislative policies underlie many of the recent transactions - especially in California, where the state forced two major investor-owned electric utilities to divest 50 percent of their fossil generation assets, and the third large IOU decided on its own to sell.

San Diego Gas & Electric was the only one of the three California IOUs that was not required to divest any of its generation assets by the California Public Utility Commission's December 1995 restructuring order. However, after seeing transaction prices obtained by Southern California Edison Co. and Pacific Gas & Electric Co. in their auctions, SDG&E decided to sell all of its generation assets and purchased power contracts in order to exploit the "hot" market conditions for generation assets in California.

Similarly, in other states, restructuring legislation requires, or at least strongly encourages, divestiture of utility generation assets. For example, in Maine, restructuring legislation requires the state's IOUs to divest their generation assets by 2000. In Massachusetts, while divestiture of generation is not mandated, full recovery of stranded costs is more difficult for utilities that do not divest all their non-nuclear generation.

Core Business Focus. GPU Inc. is the most prominent example of a company that had this driver as the principal reason behind generation asset divestiture. In October

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