IV. Case Analysis (7 points) - Instructions at the end of the case Sam Martinez is seeking to invest a portion of his considerable assets in the \"independent\" electric power production industry in California, a sector projected to 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 and colleagues. The intention is to use the company to build and operate an electric power plant, and then form a non-profit organization to \"donate\" some of the power to social service agencies serving immigrant families in L.A. However, the large public-sector California Energy Resources produces most of the power for California. The main exceptions are co-generation plants associated with food processing, timber and similar industries, some small hydro plants which generate electricity for northern California via water, and purchased power from other states. California Energy operates all long distance distribution, selling electricity to municipal utilities for local distribution; brokering power sales to large industrial customers, and providing electricity wholesale to small rural customers. California Energy will buy power from independent producers, but at rather 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 upon Navo Valley nuclear power reactor, which is projected to construct three more 880 megawatt 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 pressure from a range of sources for publicly-declared prices well above current avoided costs to encourage private co-generation of electrical power. Privatization of California Energy is being argued by leading environmental groups, with a view that increases in electricity cost per unit which would decrease electricity consumption. These probabilities have been calculated as part of California Energy's financial forecasts but lack any risk management plan. Sam has identified what he believes to be his first big opportunity. It would involve: 1. Producing base load electric power for sale to California Energy in a northern California town using a CCGT (combined cycle gas turbine) set of natural gas powered turbines driving generators with waste heat producing high pressure steam to drive a steam turbine generator. 2. Providing low pressure steam for manufacturing organizations in the immediate vicinity of the CCGT plant. The local city has a natural gas network and supply, but the supply pipeline is not large enough to cope with the proposed CCGT. The gas supply company will provide a new main and gas at a price per unit fixed for a substantial period of time, but require a \"take-or-pay\" contract. If MexiEnergy decides to contract to take gas from any given date -- they will in effect have to pay for the contracted gas flow whether they use it or not. A range of established suppliers of CCGT plants can provide the required equipment. They each tend to be at a different point in a cycle, which can be approximated by three phases as follows. A) New untested design. Very high fuel efficiency. Initial reliability is uncertain. Likely to be very reliable in the long run. Claimed very low maintenance costs. Low capital cost to encourage purchase. B) State of the art tested design. High fuel efficiency, high reliability and low maintenance costs. Very high capital cost. C) Tried and true design. Low fuel efficiency, moderate reliability and maintenance costs. Moderate capital cost. CCGT plant suppliers will install the major plant components on a fixed price basis. MexiEnergy Inc. has revised the scope and Contract, with stiff penalty clauses for 1) delays or 2) performance failures the manufacturer is responsible for. However, such penalty clauses may not be operable, for example, if ground conditions are not as tested environmentally or grid connections are not in place when required. California Energy will provide grid connections, and will not allow anyone else to do so. The plant could be delayed for weather reasons and start-up delayed due to grid hook-ups or electrical black-out failures due to 'rolling black-outs'. Water for the CCGT will be taken from a river which flows through the municipality. However, no Environmental permits have been granted to remove water from these rivers during the several drought years in California. Permit fees statewide are rumored to rise dramatically before construction begins. Extraction of water requires State Govt. as well as municipal approval. Municipal planning approval is required for the plant, water pipelines, low pressure steam lines and power lines, and all construction must be scheduled dependent upon permitting governmental agencies. The latter two also require local govt. approvals with respect to safety issues. Sam proposes the purchase of phase 2 (state of the art tested design) CCGT turbine plant to be installed and running as soon as possible. His Engineering team has voted for high-fuel efficiency and low maintenance costs over price. He has made you responsible for preparing a Risk Assessment report soon, with probabilities and impacts analyzed. If you succeed, in Sam's view, you will become a Vice-President in charge of new plant development for MexiEnergy Inc. but Mr. Martinez has made it clear that he has no time for failure