The U.S. electric industry is birthing the independent transmission business. Before too long the new business segment may grow to encompass electric transmission lines, natural gas and oil pipelines—along with at least a portion of the web of fiber optic cables that now crisscross most of the United States. Is it possible that the ugly duckling of the electric business may turn into a beautiful (and profitable) swan?
Under Order 2000, Federal Energy Regulatory Commission (FERC) provides very strong incentives for (but stopped short of requiring) investor-owned utilities to place their transmission assets under the control of regional transmission organizations (RTOs). Companies generating, trading or retailing electricity will not be allowed to retain operating control of transmission assets but will be permitted to retain some limited active ownership of transmission assets for a period of up to five years.
By October 15, all investor-owned utilities must submit their plans to FERC for joining an RTO (or rationale for why they haven’t made plans). This is forcing strategic decisions about whether to remain in the transmission business. A number of utilities will find handing control of their transmission assets to an RTO arrangement to be unattractive. They will forfeit control over their transmission assets while a portion of their income (and hence stock price) will be subject to decisions made by other parties. For many companies, this is not a particularly attractive long-term option.
What to do?
Many companies will seek to spin off or sell their transmission assets, and foreign companies with expertise in network operations may find this a low risk way to enter the U.S. market (as the world’s largest electric transmission company, National Grid Group, has already done in its acquisition of New England Electric). Companies whose primary focus is running and growing a profitable energy transmission business will begin to emerge.
FERC is willing to consider for-profit transmission companies as part of the overall market landscape, provide financial incentives, and consider non-traditional ownership and operating structures in order to encourage the rapid development of RTOs. (Some of the FERC commissioners feel that incentives are likely to work better than directives.)
To date, FERC has conditionally approved (with guidance provided) three different ownership and operating formulations which would seem to comply with the requirements of Order 2000. These include an ownership trust (Entergy), a combined RTO/Independent Transmission Company (Alliance RTO) and a “binary RTO” which would split the required RTO functions between a thin Midwest ISO and an Independent Transmission Company (Commonwealth Edison). A state-mandated Wisconsin Transco is in development but has yet to receive FERC approval. To date, FERC’s primary requirement is that any proposal must meet the minimum RTO requirements set forth in Order 2000.
Successful creation of independent transmission companies is a complex task. In most utilities, transmission has been a neglected backwater—low on the investment and prestige totem pole. Significant tax, accounting and financing issues must be addressed in order to excise transmission assets built into integrated utilities. (Providing a sufficient return to current transmission owners is also a challenge.)
Spinning off transmission assets is not a viable option for most companies due to lack of the critical mass required to create a viable business. Most transmission systems will require significant investment in the next five years, so the ability to attract capital must be a key consideration. Finally, the corporate and business infrastructure must be put into place. Most existing transmission business units rely on others for key financial and operating infrastructure.
What’s the result?
- The end of the ISO: At best a transitional mechanism, the ISO will be swept away by transmission companies that are independent from market participants and properly align risks and rewards. Even the ISOs are trying to figure out how to become independent transmission companies.
- Much needed investment and expansion: Utilities have woefully under-invested in transmission infrastructure and modernization over the past decade. If FERC follows through with the right incentives and market based equity returns, investment will follow.
- No more whining: Too often power marketers like to blame adverse market movements on “market manipulation by old line integrated utilities”(the electric industry version of “the Great Satan”). Creation of independent transmission companies—with no generation to protect—will remove this excuse. How about “the Devil made me do it” or “The dog ate my deal”?
- Innovation: If transmission runs like a business rather than a backwater, we can expect to see significant innovation in pricing, products and services. Just look at the flood of innovative services and pricing options which natural gas pipelines have created in the past year—mostly to serve the growing electric generation market.
With more than 20 years experience in the utility, natural gas, and telecommunications industries, Keenan currently leads the PricewaterhousCoopers Global Energy and Mining Strategic Mergers and Acquisitions initiative, as well as the Energy Strategy Consulting practice in North America.