Valuation

Some partners turn to the quick sale to raise capital and dress up performance.

Analysts cite several reasons why energy companies might wish to execute a spin-off:

* To cover a failed merger,

* To raise cheap capital, or

* To boost valuation of a diversified company.

In fact, many newly merged energy companies will fit into this last category. No longer just power companies, they now own merchant generation, transmission, pipelines and telecommunications assets.

State PUCs

Gas Appliance Repair.

The state foots the bill, while northern neighbors profit from a managed power market.

California's electric restructuring plan, launched on April 1, 1998, marks one of the most ambitious attempts in U.S. history to place the state in a social engineering role. Not only was the scale of the project daunting, with implementation cost estimates running as high as $1.2 billion, but the plan places California government in control of the most minute components of the electric system.

How has the experiment gone?

The California Power Exchange doesn't solicit separate bids for plant start-up, spinning reserve or base load operation. That can make spark spreads a bit misleading

IT SHOULD COME AS NO SURPRICE THAT THE PROSPECT OF electric competition has created a huge demand for price forecasting services. To their credit, the forecasters have obliged, supplying an abundance of tools and techniques. Do the forecasts serve the needs of those who would use them?

Some might wish to use a price forecast to assign a value to assets.

THREE FACTORS (em RESTRUCTURING, TECHNOLOGY AND environmental controls (em now create both reason and opportunity for electric utilities to lower their property taxes, which often make up a substantial cost of doing business.

Property tax valuation is fairly straightforward. Most states compute property taxes on fair market value, or what a hypothetical buyer and seller would agree the property is worth, with both parties having knowledge of the relevant facts and neither compelled to buy or sell.

"Spark spread" sets value, but as prices diverge from system

lambda, merchant plant buyers will be flying blind.

Many power plants will be bought and sold in the next decade. Some utilities will divest power plants as required by regulators; others will sell for strategic reasons. Most of the plants sold likely will become merchant plants, with no guaranteed market for their electric output. Merchant plant activity is already significant and growing. The value of these plants will depend on how well they can perform in an uncertain market.

With the end of monopoly in electric generation, utilities can assure savings by taking a creative approach to state and local taxation.

Deregulation of electric generation will force electric utilities to examine closely their state and local tax burden. Under deregulation, most state and local taxes will not be part of a reimbursable rate structure. Rather, such costs will directly influence bottom-line profitability.

Local property taxes take a big bite out of electric generation profits. Coal suppliers of utilities pay significant local taxes.

Some in Congress would link customer choice with a portfolio standard. How would that play in a wholesale power market where gas turbines rule the roost?

By Michael C. Brower and Brian Parsons

WHAT KINDS OF POWER PLANTS WILL

get built in a deregulated electric industry? If recent history offers any guide, utilities and independent power companies will succumb to the traditional wisdom and invest in gas-fired combustion turbines and combined-cycle plants. Sound reasons may exist for doing so. The plants are less expensive than conventional steam plants. They put less capital at risk.

Valuation, optimization and settlement strategies

oth gas and electric utilities face a variety of environmental issues arising from more than 1,500 former manufactured gas plant (MGP) sites, which supplied a major source of energy in the United States from the early 1800s to the mid-1900s. Using the standard operating procedures of the day, MGPs created and often disposed of byproducts such as coal and oil tars, tar/water emulsions, sludges, spent oxides (including cyanides), lampblack, ash and clinker.

A century ago, Congress conveyed valuable public property to certain entrepreneurs to serve the public interest. In exchange, these entrepreneurs agreed to carry the nation's principal means of communication at fair cost and, of course, serve the national defense.

In 1850, with a commitment to move the mail at fixed rates and freely transport federal troops hither and yon, a swath of public land was granted to the Illinois Central to connect Chicago with Mobile.