(And why power plant buyers may follow suit.)
"WINNERS' CURSE" IS IMPORTANT TO THE UTILITY ASSET AUCTIONS. Winners' Curse is the tendency for the "rookies" and the wide-eyed visionaries to overbid in auctions with uncertain valuations.
The spectrum auctions at the Federal Communications Commission reveal the Winners' Curse even in the more "successful" rounds, despite the agency's elaborate precautions.
FCC's 14 spectrum auctions booked almost $23 billion in license fees (em almost $10 billion in broadband personal communications services (PCS). That's close to $1,000 per man, woman and child in spectrum license fees alone. (No wonder some call FCC the "Federal Cash Cow.")
Despite the promises of the game theorist "rock stars" (em many of whom are now advising utilities acquiring plants (em FCC's auctions may not have been as successful they claimed. For one thing, about $4 billion of the $10 billion bid in the PCS auctions are at risk. Rookie companies, such as NextWave, bid up properties to astronomical levels only to find their ability to attract capital severely limited.
Moreover, the lesson was not lost on subsequent wireless auctions where even premium properties, such as Los Angeles, sold for a $1. Like the Klondike, the glittering FCC auctions evidence "boom and bust" dynamics.
We are seeing a similar pattern in some early utility auctions. In the New England Electric System auction, the "winner" was Pacific Gas & Electric, which won the bid at more than 40 percent above book value. However, like the spectrum auctions, these early results may not be sustained in the later rounds.
This is not to say auctions do not work (em for NEES they worked very well (em only that the wrong commodity is for sale. From the utility's perspective, rather than auctioning assets, the prize should have been the direct analog to the PCS auction (em the right to play in the power game. Last year I argued that auctions could effectively rationalize market access and address stranded investment issues (See, "Auctioning Access to Regulated Markets," by Stephen Maloney, PUBLIC UTILITIES FORTNIGHTLY, March 15, 1996, at p. 18.).
Except for winner's curse, power auctions have only superficial similarities to the touted and erratic FCC auctions:
• Access vs. Assets. While the Federal Communication Commission's auctions were about market access, utility auctions concern generating assets.
• Carrying Capacity. Spectrum's bandwidth carrying capacity can be expanded. For example, frequencies on wireless base stations can be reused and enhanced with new technologies. This capability justified the exorbitant bids filed for PCS licenses. In contrast, the capacity of existing power generating assets is fixed. Since most generating assets are old, impending recapitalization tends to discount current values.
• Cost Savings. PCS offers substantial cost advantages over existing cellular (em its immediate competitor. For the power analogy, the cost advantages of aging, base-load capacity often evaporates against natural gas. For some properties, it is actually the site that holds the value, not the station. For instance, gas-fired turbines can be delivered within two years at a fraction of base-load costs, making current power auctions more of a fire sale than some utilities think. Lucky there are buyers with fat checkbooks.
Confronting competitive markets, new entrants are lining up and targeting share, flying blind on competitive pricing dynamics, and rolling the dice on an auction for the family jewels, these are not salad days for stockholders of power companies (em those buying now and those planning to sell later on. One thing for sure, it will have been one interesting ride for those surviving the next few years.
Stephen Maloney is president of Devonrue LTD, a consulting firm to power and telecommunications companies.
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