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Did Power Plant Buyers Pay Too Much?

Fortnightly Magazine - November 1 1999

to the Homer City analysis.

At a 33 percent capacity factor for the CMP portfolio, it might be expected that generating stations would at least capture the higher peak period prices. However, hydropower, a significant portion of this CMP portfolio, frequently is limited in its ability to "load follow" and may not be able to concentrate its generation time during the higher-demand, higher-price periods. This aspect is an important consideration because the all-in unit cost of incremental capacity, which establishes theoretical price caps, is $33.18 per megawatt-hour for baseload capacity factors (84 percent) and $48.12 per megawatt-hour for the CMP portfolio capacity factor (33 percent). However, even the $48.12 per megawatt-hour potential from the energy market is quite short of the $54.85 per megawatt-hour that would provide a modest 12 percent ROE for the CMP portfolio.

Clearly, a more in-depth analysis is needed to assess all of the market revenues available to the CMP portfolio. Additionally, a hydrological analysis to determine the ability of the hydro portion of the CMP portfolio to concentrate its output on peak demand periods where it could capture the higher market prices is necessary. In the absence of a more complete analysis of all of the factors that contribute to power plant value, it is not possible to conclude that the CMP portfolio will support FPL's acquisition cost.

Art Holland is project manager at Pace Global Energy Services. He can be reached at hollanda@paceglobal.com. Paul Meyers, Bo Poats and Xiang Kong contributed to this article.

Asset Divestiture: Bargain or Bust?

Some thoughts on the Fortnightly's recent feature.

The Sept. 1 feature article, "Generation Asset Divestiture: Steal of the Century?" by Richard Stavros (Public Utilities Fortnightly, p. 42) discusses some of the most important considerations regarding the prices paid to acquire generating assets. It examines regional vs. national portfolio strategies, unit operating costs, fuel mix and the market supply/demand balance. The article also touches on price volatility, but describes it as a risk variable that generators must "accept."

It is our view at Pace Global Energy Services that power plant owners should embrace price volatility, and endeavor to extract the full value that a power plant offers in a price-volatile environment. The potential for power price "spikes" enhances revenue and upside profit potential, key determinants of plant value.

Plan Strategically. The mistake many people make when assessing a power plant's value is not recognizing that effective operational and growth strategies increase market value. Power plant value is not static. Rather, plant value is tied to the owner's ability to use the asset in a way that maximizes and supports a 20-year-plus investment. To maximize value, generating companies will employ strategies that result in "best in class" status for a portfolio. These strategies include:

* Fuel management and procurement optimization,

* Operating excellence resulting in operations and maintenance synergies,

* Wholesale trading, and

* A regional presence that facilitates a market-maker rather than price-taker status. Don't Bank on Diversity. Several people quoted in the article by Stavros expressed the view that regional diversity is important because markets do

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