Deregulation has made the electric supply industry more competitive in a number of states. While not every state is deregulated, Congress and the Federal Energy Regulatory Commission (FERC) have paved the way for a more open marketplace and an increase in competition among electricity producers.
The changes allowed each segment within the industry to be priced separately, preventing plant and transmission owners from offering preferential treatment to their own plants. This caused many public utility companies to divest their plants into separate, unregulated companies, while retaining their transmission and distribution activities. It also resulted in a greater focus on competition and income, while making it more difficult for power producing plants to generate profits. Now, power generating facilities are seeking power plant valuations to determine the fair market value of their property within a changing industry.
Several approaches are used for power plant valuations—most notably the cost approach, income approach, and the comparable sales approach—and the method best suited for a generator depends on whether their market is regulated or deregulated, although deregulation has impacted how all of these valuations are conducted.
The income approach assumes that the property is worth the value of the income stream it generates, and deregulation has shifted this technique to be based on a projection of what a facility will earn based on future market prices. The cost approach assumes that an investor will only pay what it would cost to build a substitute plant with equivalent assets, taking depreciation into consideration. In a regulated market, power plant developers are guaranteed a low-risk return that matches their cost to build. Deregulation means that returns are no longer guaranteed and bankruptcy is possible, but it also makes higher returns a possibility, thus altering the way the cost approach is handled. A comparable sales approach examines the market sales prices of comparable power generating facilities.
Deregulated markets have created active demand for power plants sold separately from transmission and distribution assets, meaning that a wealth of market data is available to accommodate sales comparisons. Deregulation and increased competition has brought about changes in all three of these methodologies, making it crucial for companies to reassess their current worth.
Whether you’re dealing with solar, wind, coal, waste to energy, or other types of power generation facilities, a valuation should include generation and transmission equipment, land, buildings, intangible assets, and any other assets tied to such operations. A more deregulated industry has made appraisals both more important to obtain, as well as more difficult to execute.
Working with an industry expert such as Appraisal Economics provides you with information that withstands the scrutiny of financial institutions, government agencies, and the courts. Whether you need to buy or sell assets, improve your accounting and property tax filings, file an insurance claim, or strengthen your strategic plan, an accurate and defensible power plant appraisal is an invaluable resource.