12/15/2023 0 Comments Marked to marketAt the time, Entergy paid $180 million for the power plant. The Entergy Corporation purchased the Vermont Yankee power plant in 2002 from its former utility owners. Here is another example, to which we will return in the assignment for this lesson. This value may change from year to year month to month day to day or in some cases, hour to hour. But an energy asset that sells its output into a competitive market, with prices set by the machinations of supply and demand, will have a value that is equal to the stream of profits that it will generate to its owner in the future. The value of such an asset will inexorably decline over time. A power plant owned by a regulated utility that operates in a regulated electricity industry is indeed worth, to its owner, the total sum of its non-depreciated book value. The example of electricity deregulation illustrates that the value of an energy asset is not independent of the market in which that asset participates. Even so, the companies still profited handsomely from the plants.) (Footnote: because of market manipulation in California's electricity market, many generation companies were later forced to return some of their profits to California ratepayers. Electricity prices in California became so high that even at multiple times book value, the prices paid by generation companies for the utility power plants were mere pennies compared to the profits they raked in. In reality, the generation companies were the cleverer of the two. In California, in particular, the utilities believed that they had run into a windfall and were basically stealing money from the generation companies. Generation companies were unexpectedly (well, unexpectedly to the utilities, anyway) getting offers to buy power plants at multiple times their book value. But in the electric utility industry, in particular, as the former investor owned utilities began to sell off their generation assets, they noticed something peculiar. By this logic, book-valuation is completely sensible. The utility earns a fixed rate of profit on any capital asset that it constructs, and once an asset is fully depreciated, then it can no longer generate any profit for the utility. If you took that section to heart, you would conclude that the economists are wrong and the value of something is its original "book" value minus all of the accrued depreciation.ĭuring the era of regulated utilities (both electricity and natural gas), the value of a capital asset was defined by the remaining book value B(t), which if you think about it makes perfect sense. But if you think about this saying, it flies in the face of all of the accounting principles that we have learned thus far, especially in the last section on depreciation. (There is also an old joke about economists that an economist is someone who knows the price of everything but the value of nothing.) You can see what passes for humor among economists. There is an old saying among economists that the value of something is what someone will pay for it. Book versus mark-to-market valuation - or - how Enron gave good economic logic a bad name
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