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Divestiture Will Affect You

Issue 10 and Volume 101.

Divestiture Will Affect You

Opinion

By Robert W. Smock,

Publisher

We`ve been talking

about utilities divesting their power plants for several years. Now it`s happening. In August New England Electric System sold more than 5,000 MW of power plants and power purchase agreements for $1.6 billion to Pacific Gas & Electric`s unregulated subsidiary, U.S. Generating Co.

That was the first major move in a trend that will spread. Several other New England and California utilities have put their generating systems on the auction block. Those sales should be consummated by the end of the year.

This kind of massive transfer of assets is unprecedented. We`re moving into new territory, which directly affects power plant engineers, operators and designers. You must understand this trend, what`s driving it, where it`s headed, how it will affect you.

Several big investor-owned utilities have agreed to sell because their state regulators have made a deal: if they divest they will be allowed to recover sunk costs, the so-called stranded assets, over a transition period that seems to average about four or five years.

Divestiture is real. It`s happening. It`s starting in New England and California and will spread quickly to other states and regions with above-average retail costs. Not all utilities will sell their power plants, but many will.

What are the results of divestiture? It`s too soon to say in any comprehensive way, but a few common effects are beginning to show. Employee levels will be trimmed. The general rule at the moment appears to be that about half the current power plant work force will be retained. This is obviously one of the main attractions of buying someone else`s power plants. The buyer can make cuts in labor costs that the current owner can`t do. Fuel contracts will be renegotiated. This is more difficult than cutting labor forces, but is another cost-cutting opportunity.

The divestiture trend is surely distressing to Power Engineering`s readers. Cuts in labor forces and other cost centers will be difficult, but there is a positive side to this trend.

Power plants are worth more on today`s market than many thought. The New England Electric assets sold for well above book value. Buyers will trim costs, but they will also invest to protect their new assets. The purchaser of a Commonwealth Edison power plant has indicated it will spend more than the purchase price of $131 per kW to upgrade the plant.

Buyer intent is clearly to operate the purchased assets in the new competitive markets. They own the plants because they value them and want them, not because they`re stuck with what they see as some previous management`s bad decisions. Let`s face it. That`s how some utility managements see their power plants.

Divestiture will be painful, but it should solve some long-standing problems and result in a stronger, better managed power plant fleet. S