Efforts to make generation competitive have induced several electric utilities to sell their power plants. Some sales are voluntary. Some are forced by rules mandating functional segregation from transmission and distribution. Of those sales announced or completed, most have involved high-cost utilities, and all have garnered at least book value, suggesting an attempt by sellers to deal with stranded costs.
Why then, are buyers willing to pay more than book value? They must believe they can improve on cash flows - either by raising revenues, trimming costs, or both. But such expectations lie open to scrutiny.
For one thing, price deregulation does not eliminate regulation.
I started my consulting career with the management consulting firm that remained after Sam Insull's Middle West Utilities operating companies were spun off in response to the 1935 Public Utility Holding Company Act. Insull supported regulation early on, because he knew it would stifle competition. Today, electric utilities deciding to retain the wires business are opting for continued price regulation, but some are also opting to participate in the market for unregulated generation. This mixture of regulation and competition will prove unstable and will invite efforts to extend government oversight beyond the regulated business. Note, for example, how the California Independent System Operator has mandated that plants designated as "must-run" by the California Public Utilities Commission must sell into the Power Exchange at prices based on costs approved in regulatory proceedings.
On the other hand, whatever deregulation does take place will only hasten the onset of new technologies - which could make any asset a white elephant.