Conducting a valuation of transmission capacity rights (Strategic Economic Analysis)
“MCR looked at the valuation analysis from three very different angles and explained their final choice for valuation. No party contested any of the analysis.” — City Manager, municipal utility
—City Manager, municipal utility
Background
A municipal utility was contemplating leaving its joint action agency and wanted to determine the value of its transmission capacity rights if it were to sell those rights to another member of the agency. After conferring with industry colleagues, city managers of the two municipals engaged MCR to conduct an independent valuation analysis of the transmission capacity rights to establish a fair sales price.
Solution
MCR reviewed existing and previous contracts to fully understand the details of transmission capacity rights and how the transmission capacity rights could be transferred. MCR worked with the agency’s outside counsel to ensure proper interpretation of the contracts, leading to the appropriate set of modeling assumptions. MCR calculated the net present value (“NPV”) of the transmission capacity valuations using three different valuation methods and determined the most appropriate method given the specific circumstances. The NPV analysis was conducted over 30 years and over 15 years to assess the sensitivity to the forecast horizon. MCR presented its results, including an explanation of its methodology, to the city managers and to the agency’s outside counsel.
Results
MCR’s methodology and recommended valuation provided a framework and starting point for the two municipals and their agency to negotiate the terms of the sale of the transmission capacity rights. In the end, both municipals agreed on a value and were pleased with the outcome. They are now moving forward with the transaction. The selling municipal will be able to use the funds to reduce its long-term liabilities and the municipal acquiring the transmission rights will use the additional transmission capacity to help offset the transmission costs associated with substantial load growth.