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CASE ANALYSIS (7 POINTS) – INSTRUCTIONS AT THE END OF THE CASE SAM MARTINEZ

CASE ANALYSIS (7 POINTS) – INSTRUCTIONS AT THE END OF THE CASE SAM MARTINEZ

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Case Analysis (7 points) – Instructions at the end of the caseSam Martinez is seeking to invest a portion of his considerable assets in the“independent” electric power production industry in California, a sector projectedto experience very rapid growth in the 21st century. He has set up a company“MexiEnergy Inc.” using his own funds and those of a number of family andcolleagues. The intention is to use the company to build and operate an electricpower plant, and then form a non-profit organization to “donate” some of thepower to social service agencies serving immigrant families in L.A.However, the large public-sector California Energy Resources producesmost of the power for California. The main exceptions are co-generation plantsassociated with food processing, timber and similar industries, some small hydroplants which generate electricity for northern California via water, and purchasedpower from other states. California Energy operates all long distance distribution,selling electricity to municipal utilities for local distribution; brokering power salesto large industrial customers, and providing electricity wholesale to small ruralcustomers. California Energy will buy power from independent producers, but atrather low prices negotiated privately with each potential supplier, based on“avoided costs” which vary considerably from base to peak load usage patterns.California Energy wishes to increase its current significant dependence uponNavo Valley nuclear power reactor, which is projected to construct three more 880megawatt units over the next twenty-five years. Should this happen, “avoided cost”for base load power could be very low. However, there is strong political pressurefrom a range of sources for publicly-declared prices well above current avoidedcosts to encourage private co-generation of electrical power.Privatization of California Energy is being argued by leading environmentalgroups, with a view that increases in electricity cost per unit which would decreaseelectricity consumption. These probabilities have been calculated as part ofCalifornia Energy’s financial forecasts but lack any risk management plan.Sam has identified what he believes to be his first big opportunity. It wouldinvolve:

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