Please help solve last three questions on this case analysis

Please help solve last three questions on this case analysis
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IV. 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 21stcentury. 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 encourageprivate 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:1. Producing base load electric power for sale to California Energy in anorthern California town using a CCGT (combined cycle gas turbine) set of naturalgas powered turbines driving generators with waste heat producing high pressuresteam to drive a steam turbine generator.
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2. Providing low pressure steam for manufacturing organizations in theimmediate vicinity of the CCGT plant.The local city has a natural gas network and supply, but the supply pipelineis not large enough to cope with the proposed CCGT. The gas supply company willprovide a new main and gas at a price per unit fixed for a substantial period oftime, but require a “take-or-pay” contract. If MexiEnergy decides to contract totake gas from any given date — they will in effect have to pay for the contractedgas flow whether they use it or not.A range of established suppliers of CCGT plants can provide the requiredequipment. They each tend to be at a different point in a cycle, which can beapproximated by three phases as follows.A) New untested design. Very high fuel efficiency. Initial reliability isuncertain. Likely to be very reliable in the long run. Claimed very lowmaintenance costs. Low capital cost to encourage purchase.B) State of the art tested design. High fuel efficiency, high reliability and lowmaintenance costs. Very high capital cost.C) Tried and true design. Low fuel efficiency, moderate reliability andmaintenance costs. Moderate capital cost.CCGT plant suppliers will install the major plant components on a fixedprice basis.MexiEnergy Inc. has revised the scope and Contract, with stiff penaltyclauses for 1) delays or 2) performance failures the manufacturer is responsible for.However, such penalty clauses may not be operable, for example, if groundconditions are not as tested environmentally or grid connections are not in placewhen required.California Energy will provide grid connections, and will not allow anyoneelse to do so. The plant could be delayed for weather reasons and start-up delayeddue 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 themunicipality. However, no Environmental permits have been granted to removewater from these rivers during the several drought years in California.Permit feesstatewide 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 pressuresteam lines and power lines, and all construction must be scheduled dependentupon permitting governmental agencies.
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