NORTH AMERICAN POWER PLANT VALUES: UNCERTAINTY AND BIASES FUEL BOOM-AND-BUST CYCLES

The power industry is one of the most capital-intensive sectors of the US economy and in the past has been prone to boom-and-bust cycles in asset values. The lesson is clear: living with boom-and-bust cycles in power plant values is a strategic imperative in the power sector. Today

*The boom-and-bust cycle appears to be at work again. Trends in power plant transaction prices and trends in power plant economic values-discounted cash flows-are often inconsistent. These gaps suggest cycles of overvaluation and undervaluation.

*The cyclical drivers of over- and undervaluations of power plants can be understood. Power plant transaction prices are likely to continue to cycle through booms and busts, in part because the uncertainty and collective two-way bias in forecasts cause over- and undervaluations of power plants.

*Boom-and-bust cycles in power plant values define risks and present opportunities in the power sector. Competitive advantage depends on developing unbiased forecasts and having the discipline to act counter to current conventional wisdom in the marketplace.

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