BUYING TIME: The New Merchant Power Dialectic

Abstract

Power business strategists have all long since come to the conclu-sion that the unique monopoly service of generation provision hasbecome a commodit y business, in which skill at cost control, operatingefficiency and price speculation through trading are the drivers of suc-cess. On a parallel track, regulators increasingly derive self satisfactionfrom the increasing conformity of their domains to true marginal costcomp etition. For all these pla yers, the power business finally seems to befitting int o that Econom ics /Finance 101 box we know so well: valuationof alternative strategies discounted cash flow streams.Thi s almost Newtonian certainty of how the world work s also is tobe found in analysis of the current acquisition boom triggered by de-regulati on, i.e. it is all interpreted as bidder match-ups of present valuecash stream analysis to corporate strategy. Sales of assets are dri ven byre gulator y compliance or core business focus . Purchasers are drawn ofasset s by one of three basic approaches: economics of scale, initiallythrou gh the fuel suppl y chain; asset backed trading of retail and whole-sale en erg y services; and operational efficiencies based on improvedmana gem ent of specific sites. Power strategies are thus characterized asall ab out alternative appraisals of cash flow potential; different cost ofcapital hurdle rates and different forward price curve s for the regionalmark et s int o which the particular auction is being carved.