A whole new cast of characters is expected to enter the energy industry—overseas ventures, telecom firms, insurance companies, and financial-services groups. But even as the future seems to hold boundless opportunity, utility executives and industry experts continue to disagree on what sort of consolidation is right.

Buyers of power-plant assets use a number of tried-and-true approaches to asset valuation, including discounted cash flow and option-pricing models. While the valuation approaches employed generally are sophisticated, they focus almost exclusively on individual assets. Conspicuously missing is consideration of the asset portfolio as a whole. For illustrative purposes, we performed an assessment of a basic new power-plant portfolio. The results are well suited for general risk analysis and risk management, portfolio planning and restructuring, power plant acquisition, development, and divestiture.

Two obstacles must be overcome to achieve true competitive markets: reversal of the long-term underinvestment in transmission, and greater clarity in the legal and regulatory environments. How can the industry make the most of a somewhat defensive regulatory posture?

A material capital structure mismatch, which occurs frequently, can lead to material misestimates of the appropriate allowed return on equity, perhaps on the order of 2 percentage points. That is, a 9 percent estimate of the cost of equity can imply an allowed rate of return on equity of 11 percent.

People

New Opportunities:

The California Independent System Operator board of governors hired Yakout Mansour, a 30-year veteran of western grid operations, to be its president and CEO.

People

New Opportunities:

Jack Hawks, EPSA's current vice president of public affairs and planning, took on additional responsibilities as EPSA's acting vice president of policy. He replaced Julie Simon, who left the association to join Constellation Energy Group as a managing director. Hawks previously was vice president, Regulatory Policy, for PG&E National Energy Group.

Commission Watch

IOUs, RTOs duke it out over standardization.

Have regional transmission operators (RTOs) and independent system operators (ISOs) asked for excessive levels of credit from customers, to the extent that the burdensome requirements foreclose full market participation by competitive entities? The Federal Energy Regulatory Commission (FERC) must face that difficult question as it investigates whether to institute a rulemaking on credit-related issues for service provided by ISOs, RTOs, and transmission providers.

Like it or not, changes are coming for electric cooperatives. Fewer and bigger might be the inevitable result.

When power planners at Basin Electric Power Cooperative began trying to decide how and where the company's next big power plant would be built, they did what a co-op does best -they reached out and formed a coalition.

Interviews

For Public Utilities Fortnightly's 75th Anniversary CEO issue, the magazine looked to the horizon and asked these new captains about the planned course for their companies, and for an entire industry.

What construction cost might prompt orders for new nuclear power plants in Texas?

Electricity generation deregulation has opened U.S. wholesale electricity markets to unregulated power producers. In this uncertain environment, how should a generating company evaluate the risk of investing in new capacity?¹