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 has
become a commodit y business, in which skill at cost control, operating
efficiency and price speculation through trading are the drivers of suc-
cess. On a parallel track, regulators increasingly derive self satisfaction
from the increasing conformity of their domains to true marginal cost
comp etition. For all these pla yers, the power business finally seems to be
fitting int o that Econom ics /Finance 101 box we know so well: valuation
of alternative strategies discounted cash flow streams.
Thi s almost Newtonian certainty of how the world work s also is to
be 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 value
cash stream analysis to corporate strategy. Sales of assets are dri ven by
re gulator y compliance or core business focus . Purchasers are drawn of
asset s by one of three basic approaches: economics of scale, initially
throu gh the fuel suppl y chain; asset backed trading of retail and whole-
sale en erg y services; and operational efficiencies based on improved
mana gem ent of specific sites. Power strategies are thus characterized as
all ab out alternative appraisals of cash flow potential; different cost of
capital hurdle rates and different forward price curve s for the regional
mark et s int o which the particular auction is being carved.