PG&Es NEES Purchase Highlights Divestiture Trend

Issue 10 and Volume 101.

PG&E`s NEES Purchase Highlights Divestiture Trend

The latest trend in electric power preparations for competition is plant divestiture, which burst onto the scene in a media blit¥with US Generating Co.`s (USGen) purchase of New England Electric System`s (NEES) fossil generation plants and power purchase agreements. USGen, an unregulated subsidiary of Pacific Gas & Electric (PG&E), snapped up the assets for $1.59 billion in cash, well over the book value of $1.1 billion. Ironically, PG&E is in the process of selling its fossil generation plants.

So far this trend is seen mainly in New England and California, but it is expected to spread to other areas.

“It`s currently a seller`s market,” said Thomas O`Flynn of Morgan Stanley & Co., citing the NEES sale as evidence. There are only a few deals on the table right now, but as more plants are sold, O`Flynn expects the market to turn into a buyer`s market.

New entrants to power generation pay approximately $600/kW for new combined-cycle generation, producing electricity at a cost of around 3¢/kWh. This rate helps set the value of existing power plants. In the NEES purchase, USGen picked up 5,000 MW, including 1,100 MW of long-term power contracts, for $1.59 billion, or $318/kW.

Utilities are expected to sell $100 billion worth of power plants in the next two to three years, according to predictions from Chuck Watson, NGC Corp. chairman. But utilities aren`t necessarily getting out of power generation, as utilities are expected to be the most active bidders. The industry is dividing into utilities that are increasing their generation capacity and those that are reducing it, either voluntarily or by force.

New England

The New England power pool is expected to evolve into an independent system operator structure, supporting a power exchange and direct links between power suppliers and retail customers. Several New England states are moving quickly toward competitive markets, and utilities in those states have announced plans to sell power plants. NEES agreed with state regulators last fall to sell all its fossil and hydroelectric power plants and purchased power contracts. In return, NEES can recover its sunk costs during the transition period to a competitive market through a retail charge. NEES received bids from 25 companies last March, of which fewer than 10 were invited to prepare final bids.

Prior to the NEES purchase, USGen owned 17 independent power plants across the United States with a total generating capacity of 3,375 MW. USGen has two more independent projects under development in the Northeast that will add another 1,440 MW to its total capacity.

“The Northeast, along with California, is leading the nation in the movement to provide customers with the ability to choose among competitive suppliers of electricity,” said Joseph Kearney, USGen president and CEO.

Approximately 1,600 of the 4,800 employees at the 18 NEES plantsare expected to be affected by the sale, but NEES will receive $85 million for retraining, early retirement and special severance programs. Around half of the workers affected are expected to be retained by USGen.

Several other New England utilities have announced plans to sell plants:

Boston Edison will sell all its fossil-fired plants, totaling almost 2,000 MW of capacity. The sale is to be complete by the end of 1997. Pilgrim nuclear plant is not included.

Central Maine Power is selling a majority of its generating assets, not including the Maine Yankee nuclear plant.

Eastern Utilities Associates plans to sell 1,100 MW of generation in an auction process this fall.

Commonwealth Energy Systems has announced plans to leave the generation business.


The other hotbed of power plant divestiture, California, will be the first large U.S. state to enter full competition when its ISO, power exchange and full retail access begin on Jan. 1, 1998. As part of the prelude, PG&E and Southern California Edison both agreed to sell half their fossil generation assets by Jan. 1 to reduce their market power. Both companies have stated plans to sell all or most of their California-based fossil plants.

PG&E is selling its capacity in three lots, totaling 3,000 MW with a book value of $400 million. SCE will sell oil and natural gas plants totaling 10,000 MW of capacity with a $750 million book value. PG&E is keeping Diablo Canyon nuclear plant and SCE is retaining its hydro facilities, San Onofre nuclear station and its share of the Palo Verde nuclear plant. S