Can Transmission Stand on Its Own Two Feet?

By Kathleen Davis, associate editor

Those apron strings linking generation and transmission are coarse, tough, thick-difficult to sever. Only a handful of companies have sliced through here in the United States: American Transmission Co., ITC Transmission, METC and its parent company Trans-Elect (see editor’s note at end of article). All continue to work toward this idyllic, Sir Thomas More-painted vision of a transmission utopia, of a grown and well-adjusted wires business that can push away from the production side and crow an escape from co-dependency. But, is such freedom really possible?

“[Potential growth in independent transmission] depends on how the Federal Energy Regulatory Commission approaches this problem over the next several years,” said William Hogan in an interview with Utility Automation & Engineering T&D. Hogan is the Raymond Plank professor of Global Energy Policy at Harvard’s John F. Kennedy School of Government. He’s also the research director of the Harvard Electricity Policy Group.

“If they think of this area as a part of the old regulated utility industry, it will make it difficult for transmission to evolve,” he continued. “However, if they think of it more like an independent business-and treat it accordingly-you could see independent transmission companies grow substantially, I would think.

“But, we’re still going through the throes of trying to figure out what we’re going to do with the overall electricity market. And, these are long-term investment decisions. So, people are waiting, I think. And, they are nervous about this-about what the rules are actually going to be.”

We’re a Happy Family

Since electric power itself grew up in little pockets of monopolies, pulling apart generation from transmission is analogous to separating a family-the matriarchal power plant torn from her linear and scattered children. But, with the firestorm of deregulation a few years ago, that separation seemed inevitable. The logic was there: Severing the ties that bind would be better for the market, create more competition, keep those kids from pleasing the parents exclusively. So, we saw a bevy of activity, including the Federal Energy Regulatory Commission’s (FERC) Order 888, which came down the pipe in ’96 with the intentions of clearing the way to market through establishment of open access.

A good idea. A solid foundation. Now, how do we achieve that open access? The devil’s in the details, and FERC’s been tweaking those rules, regulations and stipulations in Order 888 since its inception. The tweaking started in 1997 with Order 888-A, and it continues today.

“Electric utilities grew up as territorial operations, constrained by transmission technology and reliability considerations to be largely self-sufficient,” Robert Michaels, a professor of economics at California State University in Fullerton and an adjunct scholar with the Libertarian think tank the CATO Institute told Utility Automation & Engineering T&D. Michaels, among others, sees a few loopholes in FERC’s current open access set-up.

“When long-distance wholesale trades became feasible in the 1970s, vertically integrated utilities were happy to add to their rate base and defend themselves against competition by building and owning the necessary transmission. Now their main interest appears to be in not building it, which maintains an advantage for their own generation in a world of open access,” he said.

“People are getting conflicting signals from the regulators,” Hogan said. “If FERC enforces the open access ideas, and they take it seriously-this idea about equal access on the same terms-then this will lead to pressure to separate transmission. If this is all just talk, and they aren’t going to enforce it, there is a strategic advantage to holding onto your transmission assets. You can favor yourself.”

So, what happens with these issues about connections and favoritism and conflicting signals? FERC continues to tweak. And, what does all of this mean for the idea of independent transmission? One word: Uncertainty.

Both Michaels and Hogan commented on this uncertainty. In a world that vacillates between carrots and sticks, it’s dangerous to take sides. If you grab at the carrot of markets, will the stick of regulation wallop you from behind? If you hedge toward the regulation side, will you be at the back of the pack if the market cracks open?

Place your Bets

“The Federal Energy Regulatory Commission is undecided-or unable to decide-which way it’s going to go,” Hogan said. He spoke of a FERC being pulled in two directions: toward the open market and toward regulation. This, he said, is leading to that giant maw of uncertainty, which, in turn, may be keeping independent transmission companies from getting the direction they need.


The future for independent transmission may be shaky, unless FERC takes decisive action.
Click here to enlarge image

“[FERC] wants to have it both ways. They want a greater reliance on markets, but, at the same time, they want to have regulatory control over everything,” Hogan said. He sees more problems for the future of independent transmission. Open access-the real kind with market signals and property rights and long-term transmission rights-would move FERC toward a particular market design, reflected in organized regional transmission organizations (RTOs). Those RTOs then lead us down the path to making independent transmission attractive, but Hogan doesn’t see us going there.

“Unfortunately, because of the politics of this situation-and some over-reaching by FERC a few years ago with their Standard Market Design-you have the one workable solution now viewed as such a political “Ëœhot potato’ that they can’t even talk about it,” he said.

The California energy crisis of 2000/2001, the competition between state regulators and federal ones over power, and complicated technical issues have combined to make the RTO model look negative or problematic, according to Hogan, although he also admitted we’re not alone in this muddle. Europe has similar issues. And Hogan, by no means, sees RTOs as a system without issues-just that it’s a solution that isn’t getting the attention it deserves.

“We could have a long period of confusion and disarray, and where it’s going to come out, we don’t know,” he said. “But, it’s not going to come out with reliance on markets and independence clearly defined, nor the role of ITCs clearly defined.”

So, if FERC continues to walk the line between the two worlds of market competition and regulation, what could be the outcome for independent transmission companies? Hogan sees difficulties like resource adequacy getting worse, and, this way, the market can’t solve the problem. So, who will? FERC, with a regulatory response.

“If FERC goes in that direction, an independent transmission company could be a pretty attractive business,” Hogan said-that is, if they go completely in that direction, no hedging. A transco in that situation would have no market ups and downs to deal with and a single federal regulator instead of a series of state regulators to manage. In that stick-based scenario, independent transmission could see rapid growth, although not, perhaps the way most people envisioned independent transmission. This would be based on a nice rate-of-return and not an open market.

There is, of course, the possibility that FERC will abdicate the power to the state level, leading to conflicts with loop flow and NIMBY as well. Obviously, nothing is yet set in stone-or law.

“If we don’t want to have markets, we should just make that policy decision. Decide it was a mistake-and I don’t think it was-and then reinstitute something that has coherent planning as opposed to having everything decided by default,” he commented. “They make these little decisions-or what they see as little decisions-but they feed on each other. And, pretty soon, we’re back to an extensive prescriptive regulatory system.”

From the Horse’s Mouth

Michaels and Hogan agree that the future for independent transmission may be shaky, unless FERC takes some serious decisive action. But, not everyone supports this assertion. One obvious dissenter knows about ITCs personally-after all, he’s on the inside.

Utility Automation & Engineering T&D spoke with Mark Williamson, vice president of major projects at American Transmission Co. (ATC). He sees positives in many areas of independent transmission, including the advantages in more industry-specific sticky wickets like transmission line siting.

“Stand-alone transmission companies are well-suited to successfully complete all aspects of transmission line siting for several reasons: organizational focus, regional coordination, and reduced rate impacts to customers,” he stated, pointing out that, “as a stand-alone company, transmission projects do not have to compete with generation, typically a bigger part of a vertically integrated utility’s business.”

He added, “A more regional footprint eliminates the potential for competing objectives across smaller LDC franchise territories and allows us to bring a larger cross-section of stakeholders together in a collaborative process to implement more regional projects. The regional nature of our company also allows us to perform more comprehensive planning over a larger region, by taking into account a broader array of needs and issues. Our larger footprint also means that the investments can be spread over a larger rate base, so that impacts of new transmission upgrades are not felt as strongly in rates on a per-customer basis.”

Investment is key. The problem is investment means risk. And the question remains whether this risk in manageable.

“I wouldn’t invest my money in a company that was entirely dependent upon a regulatory decision that could be reversed overnight and the fundamentals were inconsistent with what the regulators wanted to do. Eventually, the fundamentals will overwhelm, and they’ll change all the rules again,” Hogan commented.

But, while Hogan boldly stated that he wouldn’t invest his personal funds in an independent transmission company within the current market environment, ATC was recently rated “A+/Stable” in a late April 2006 Standard & Poor’s (S&P’s) peer comparison. S&P’s comparison took in ITC and the Canadian transmission company AltaLink as well. All scored decently, with ATC topping the three. Analyst Terry Pratt concluded, “The stand-alone transmission company, or transco, is proving to be a good business model for making transmission investments and providing shareholder returns-a favorable combination that could support a virtuous cycle for additional investment in this critical infrastructure.”

But, don’t let the different sides fool you. Michaels, Hogan and Williamson each want investment, and all three agree a transco can be good business. Where they differ is in their opinions about the current state, the makings of a proper environment for growth, whether we’re on the right track right now.

“The market showed significant interest in the ITC IPO. This shows promise for future development of stand-alone transmission companies,” Williamson stated, pointing out that its fellow transco, ITC Transmission, began trading publicly-and successfully so-in 2005. He sees this as a positive sign for the future of independent transmission. He admits, however, that the role of independent transmission companies within the overall larger picture of the power industry in the next decade may fluctuate with market and regulatory changes.

“As utilities see transmission assets as being more valuable in the market than retained at book value, a stand-alone or independent transmission company model could become more accepted. Another possibility is that an ITC could build transmission for others or operate as a transmission service provider or reliability coordinator,” he added.

What’s the Plan, Stan?

So, if independent transmission is our goal, how do we get there, how can our industry “lay out the welcome mat” for ITC development? Our experts have differing opinions on the solution, although all the solutions involve the power of one: the regulator, whether state or federal. In fact, that same Standard & Poor’s report that gives ATC high marks also notes that its Canadian neighbor, AltaLink, “has a lower business risk profile” than an open transco like ITC “due to more favorable regulation and markets.”

“A primary issue in moving from a vertically integrated to stand-alone utility is for state regulators to become comfortable with a new role of regulating transmission primarily through siting rather than through traditional rate making,” Williamson commented. Hogan agreed, saying that transcos siting lines would be “conceptually simpler.”

Williamson continued, “When a stand-alone transmission company is formed, rate authority typically moves from state authority to federal energy regulators. Some utilities also have concerns with relinquishing control of transmission, although in reality many have far less control today due to open access requirements for transmission service and the emergence of the RTOs. The issue is one of perceived control for utilities. RTOs exist to encourage a more open wholesale market.”

It seems everyone wants RTOs. Hogan believes in the power, as he stated earlier. With a real open access design and a “fixed” RTO model, he could get behind independent transmission. Michaels, however, would like to see the RTO replaced in full by the market-driven world of independent transmission (which doesn’t seem to be too different from Hogan’s market RTO theory-perhaps just a different labeling, as RTOs are sometimes seen as part and parcel of the restricted and regulated and problematic system, as Hogan noted earlier).

“[A perfect] independent transmission company would act like an interstate pipeline, operating its regulated system in a nondiscriminatory way because it would have no reason to favor any particular power sources or users. Whether under cost-of-service or incentive regulation it would have no incentives to restrict capacity or under invest,” Michaels stated. “A large enough ITC could easily take over all of the functions that are currently in the hands of RTOs, and with far fewer of the governance problems that affect those politicized nonprofits.”

He added, “The real problem is that an RTO will not stand aside and let itself vanish just because it is a less efficient and less accountable form of organization.”

Michaels also believes that FERC could “encourage the formation” of more ITCs, but, he commented, “Whether it will do so or not is more a matter of politics than economics.”

And, so, this adjunct scholar from the CATO Institute brings us back to Hogan’s earlier argument: that the major issue is FERC and that the major problem is politics.

“It’s all coming back and falling into FERC’s lap because they failed to set up incentives and structures for the market,” Hogan said. So, whether FERC moves toward a carrot-based market program or toward a stick-based regulatory one, transcos could make a good profit-or “lose their shirts,” as Hogan pointed out. But, the current problem remains that pesky, middle-of-the-road, fence-stradling, according to Hogan (although he’s a big fan of the market side, himself).

“The one thing that’s hard for [transcos] to deal with is no way, which is where we are now. Either way would be fine. Either way could be profitable. But, halfway in between is unsettling,” he said. “We can’t get consistency at the moment because regulators are so frightened about confronting what the implications of their policy might be.”

Hogan sees a number of decisions critically affecting the future of independent transmission companies coming along in the next few months or even few weeks, not years-especially the tweaking of Order 888.

“If they keep stepping around the elephant in the room, then [the environment for independent transmission] will be very uncertain for quite awhile,” he stated. “And, unfortunately, I have seen no evidence so far that would support my fervent hope for a positive outcome in this area.”

Editor’s note: All four companies (ITC, ATC, METC and Trans-Elect) were contacted for this article. All expressed interest, but only ATC completed the interview process. As this article moved into production in mid-May, a press release was sent out revealing that “METC has signed a definitive agreement with ITC Holdings to acquire METC.”

A Peek Inside an ITC

For the article “Can Transmission Stand on its own Two Feet?” we spoke to Mark Williamson, vice president of major projects at American Transmission Co., for an insider’s view. Williamson also gave us a “behind the scenes” look at ATC itself and what’s on its agenda for the future.

UAE: Generally, what is the relationship like between an ITC and the IOUs, munis or co-ops it might interact with (for example, the relationship between an ITC like ATC and a utility like Wisconsin Public Service)? Is it a contentious relationship, or do the two parties view each other as benevolent partners working toward a common goal?

Williamson: We have positive and cooperative relationships with utilities of all types. Dozens of utilities operate in our footprint, so our projects often involve coordination with more than one utility and benefit more than one utility. We have one of our largest projects under construction that was started by WPS before ATC formation, the Arrowhead Weston project. In the past it was considered one of the more controversial projects in the country; today it is approved and under construction and benefits the other utilities in our footprint. Many of the smaller utilities, municipals and cooperatives, are also happy with us because we are focused on the transmission issues that affect them and have been responsive to their transmission concerns.

UAE: Consumers are always concerned with rising power prices. Since ITCs charge for the service, should consumers expect a price hike associated with the “pancaking” of transmission rates on top of generation costs? Is this a valid concern? How do you counter this issue?

Williamson: First, costs for transmission facilities need to be recovered, whether service is provided by a vertically integrated utility or stand-alone transmission company. Utility rates are normally structured so that transmission costs paid are by retail customers of the utility and by other utilities or power markets that use the utility’s transmission system in the wholesale market. The costs the utility charges itself to provide transmission service to its customers is the same amount it charges to other users of its transmission system.

Second, the formation of RTOs has reduced rate pancaking by operating the market on a regional basis. Withthe formation of an RTO, participants in the RTO normallypay only one transmission rate, the transmission rateto where energy is delivered. This pricing structure would remain the same for either a vertically integrated utility or a stand alone transmission company within an RTO.

Third, there may be some increase in transmission costs if investments in new infrastructure increase, but consumers would receive the benefits of increased reliability and lowerdelivered energy prices associated with new transmission investment.

UAE: What projects are you currently working on in areas of transmission development and corridor upgrades?

Williamson: In the 2005 10-Year Transmission System Assessment, we identified more than 500 projects estimated at $3.4 billion. This work includes over 500 miles of new lines, upgrading more than 1,000 miles of existing lines, and installing more than 30 new transformers and capacitor banks. Last year, we extended the planning studies 20 years into the future. The principal goal of that 20-year analysis initiative was to identify the likely long-term needs of our system, and to gain confidence that the capital investments being made over the next ten years are in alignment with those longer term needs. These studies can be found on the web at www.atc10yearplan.com.

Also, in 2005, we were the first utility and among the first five companies to be given Green Tier status by the Wisconsin Department of Natural Resources. Green Tier, the first program of its kind in the nation, recognizes businesses and organizations that demonstrate superior environmental performance and continual improvement. Many of our environmental activities are summarized in our first Environmental Annual Report, which also can be found on the web at www.atcllc.com.

UAE: How would you rate ATC in relation to other transmission companies like ITC Transmission and Trans-Elect? Business-wise? Financially? In terms of scope or vision?

Williamson: We have a slightly different focus than the other stand-alone transmission companies: our main focus and objective is on organic growth, upgrading the transmission system we have. If it makes sense for us to expand to adjacent systems, we consider that, but we are not evaluating acquisitions outside of our immediate region. Other existing stand-alone transmission companies are interested in growth over a much larger area than ATC and would likely consider growth opportunities throughout the country.

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