CMS Energy inks first-ever sale of U.S. transmission system to ITC

By Pam Boschee, Managing Editor

CMS Energy Corp.’s utility subsidiary, Consumers Energy, announced in late October that it is selling its electric transmission system to Trans-Elect Inc., a private, independent transmission company (ITC) based in Washington, D.C., for about $290 million.

This is the first outright sale of a U.S.-based transmission system to an independent transmission company. It includes about 5,400 miles of 345 kV and 138 kV transmission lines serving Consumers’ entire electric service territory in Michigan’s Lower Peninsula. Eighty substations are also included in the sale.

Actual transfer of ownership to Trans-Elect requires regulatory approvals, including Federal Energy Regulatory Commission (FERC) approval, which the companies hope to receive in the first quarter of 2002.

Transmission is a topic of lively discussions across the United States, and new business models are being considered as the regulatory tone continues to evolve. Independent transmission companies, such as Trans-Elect, are providing alternatives to utility holding companies that are considering new strategies.

EL&P spoke with Frederick W. Buckman, chairman and CEO of Trans-Elect to learn more about this unique deal. Buckman’s name may be familiar to readers-he was most recently president and CEO of PacifiCorp. Prior to that, he was president and then CEO of Consumers Power Co. (now Consumers Energy).

Buckman described the Trans-Elect model: “Trans-Elect sets up a limited partnership in which Trans-Elect would be the general partner and would have an equity stake in the transmission system. We would have limited partners who come in and make an investment and have a financial interest, but no management interest in the transmission system. Trans-Elect would operate the system and stand in the place of the utility with whatever RTO or ISO they were in and participate with that RTO or ISO. We would either do our own maintenance or contract back with the utility for maintenance on the system. We would make the capital expenditures and the expansion to the system and have all the financial responsibility that was associated with the system.”

In the deal with CMS Energy, GE Capital Global Energy, a unit of GE Capital

Structured Finance, is a limited partner with Trans-Elect in purchasing these assets. In addition, CIBC World Markets Corp. and Deutsche Bank Alex.Brown Inc. are financial advisors to Trans-Elect and are also providing the debt funding for the purchase.

The CMS deal is Trans-Elect’s second purchase. In July, Trans-Elect became an owner of transmission assets purchased from TransAlta as part of a Canadian consortium, AltaLink. Trans-Elect is a 50-50 general partner in the operating partnership of AltaLink, which has 7,200 miles of high-voltage, high-capacity transmission lines and nearly 260 substations in Alberta, Canada.

Asked if the Midwest holds promise for additional deals, Buckman replied, “As we travel the United States looking for opportunity, I would say that we’re seeing quite a lot of opportunity in the Midwest, and so it would be my guess that we will do more transmission systems in the Midwest-not because we’re concentrating on the Midwest, but because we’re getting a fair amount of resonance with our story, and there seem to be a number of utilities that are at least interested in exploring the idea pretty thoroughly.

“I think that we’ll have some success elsewhere as well. I would say particularly in the West and perhaps in the Southeast.”

This kind of deal is a new consideration for many companies. As with most new ideas, people have questions, and when it involves an asset as valuable as transmission, caution prevails. Buckman said, “Initially, people are leery about two things. One is whether or not they can pull their transmission system out from the middle of the value chain and make things work without being terribly frightful as to whether or not we will operate the system and care for it as well as they have.”

Buckman added that such concerns are being dispelled as companies learn more about Trans-Elect and as they see its involvement in AltaLink as well as Trans-Elect’s recently announced participation in a Department of Energy public-private partnership to upgrade California’s Path 15.

The second concern, according to Buckman, “was some anxiety about whether or not we had enough capital behind us to do deals like this, and I think that with the two deals we have done, that concern is also one which is disappearing.”

As mentioned previously, GE Capital Global Energy, is a limited partner with Trans-Elect in the CMS deal. Paul Berry, vice president with GE Capital Structured Finance, recently spoke about challenges to transmission investment at the IEEE/PES T&D conference in Atlanta, including:

  • Level of return on investment. Investors look for returns within the mid- to high-20 percent range;
  • Incentives for sellers/buyers;
  • Unclear rules as FERC’s recent RTO directive continues its transformation into a real, operational model;
  • Predictability of how markets and institutions will evolve; and
  • Timely approval processes for transmission upgrades or new lines as needed.

However, he also cited why transmission investment is attractive to GE Capital, including its status as an under-invested sector and a long-lived, essential use asset (50+ years), and its potential to provide predictable, non-volatile cash flows.

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