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October 1999 Deregulation Series
Utilities Mull Marketing Strategies
What Role Will Regulators Play?
Who Will Protect the Poor?
More Options for Small Business
Pepco Will Auction Off Its Plants
Environmental Impact Uncertain
An Example of What to Expect
States Deregulate, Congress Debates
Cash Flow
Albert Crenshaw says its the same old song. Big business and large-volume users will benefit, while homeowners will likely lose out.

Investing in utilities used to be easy. Fred Barbash points to where the better investment bets can be found in a more complex, deregulated market.

Color of Money
With deregulation spelling the likelihood of more phone solicitations, commercial ads and legal fine print, Michelle Singletary is tense with anticipation.

Pepco’s Power Plants on the Block

By Martha M. Hamilton
Washington Post Staff Writer
Sunday, October 17, 1999; Page H09

FOR SALE: One 42-year-old power plant located on 1,288 acres on the Potomac River in upper Montgomery County near Dickerson. Three older units with net summer capacity of 182,000 kilowatts each with three newer units available for meeting those pesky summer peak demands. Eye-catching 700-foot emissions stack. A classic!

If all goes as the company hopes, Potomac Electric Power Co. will sell its Dickerson Generating Station and other power plants by the middle of next year to a successful bidder who will hand over large sums of money.

Pepco announced in February that it was putting its power-manufacturing facilities on the auction block — exiting the business of making electricity so it can concentrate on delivering power produced by others and on retailing power, cable television, Internet access and other services to as many customers as possible.

In doing so, Pepco is following in the footsteps of other utility companies. "In our case, we came to the conclusion that we are too small to grow our generating business," Chairman John M. Derrick Jr. said at the time.

As electric power, a market worth more than $200 billion a year, reinvents itself, companies are making strategic bets on where their futures lie. Power generation is expected to end up in the hands of a small number of very large companies — large enough to make good money operating a commodity business where margins are small.

And so far the market for used power plants has been good. Through September, utilities have sold approximately 300 power plants for a total of about $26.1 billion, according to the consulting firm McKinsey & Co. Many power plants have sold for two to three times their book value, according to analysts who follow the transactions. The estimated book value of Pepco's power plants is $1.9 billion.

Under Pepco's plan, which is still awaiting final approval by regulators in Maryland and the District, the proceeds from the sale would be used to pay off the company's "stranded costs" — commitments the company made with regulatory approval based on its obligation to provide universal service. Pepco's estimated stranded costs in Maryland and the District are $1.1 billion, which should leave additional proceeds to be split between customers and the utility, under Pepco's plan. If regulators approve the Pepco plan, the company plans a two-step auction of the assets, said Mary Sharpe-Hayes, vice president of strategic planning and the manager of the asset sales.

Calls from prospective bidders have been coming in for several months, and Sharpe-Hayes said the company will probably send letters to about 300 companies that have expressed interest. Of that number, Sharpe-Hayes said Pepco expects about 100 to follow up by signing confidentiality agreements to receive bid packages.

Of that number, she estimates that maybe 40 will want to go further. Among the possible bidders, according to analysts, are Duke Energy Corp. of North Carolina; PG&E Corp. of California; Southern Co. of Georgia; AES Corp. of Arlington; Sithe Energies Inc. of New York, which is 60 percent owned by Vivendi, a European consortium; Reliant Energy of Texas; Pennsylvania Power & Light Inc.; and NRG Energy, an unregulated subsidiary of Northern States Power Co. of Minnesota.

In the first round, bidders will be allowed to respond with bids for any or all of the power plants. Sharpe-Hayes said Pepco has been working with auction experts who indicate that the two-phase auction yields better results than other techniques.

After the first phase, Pepco could repackage the assets or require bidders to respond in a particular fashion. The bidders who are still in the game also would be allowed to visit and study the power plants in more detail, she said.

Sharp-Hayes is optimistic about the results. She noted that large players have bid aggressively for assets to acquire a national presence. "In addition," she said, "there is a competitive aspect. You don't want to feel left out, and if you lost three auctions in the past, you're probably going to get a little more aggressive."

© 1999 The Washington Post Company

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