Transmission may take leading role in the next “energy crisis”

Discussions of transmission capture attention. This was evidenced by the standing room only attendance at the T&D sessions held during PennWell’s American Power Conference (APC), which took place in Chicago last month.

Of course, one could argue that a topic so long neglected by the industry as a whole is now sorely in need of discussion and more importantly, action.

FERC Order 2000 opened the floodgates and now debates roil over the types of regional transmission organizations (RTOs) most appropriate for which market. Capacity constraints, reliability, upgrades, investment in new projects and rates of return are part of a new vocabulary in this niche once claimed predominantly by engineers who fluently conversed using terms such as sag, thermal/current limits and voltage constraints.

The grid is reaching (and in some cases, has already exceeded) its capacity limits or its ability to move the power from where it is generated to where it is most needed. It’s an old system, with many parts of it not improved/upgraded for decades. For example, according to a report from New York’s attorney general, between 1988 and 1998, capital improvements to the state’s transmission system dropped from more than $307 million per year to about $90 million per year. I can assure you that while spending on the transmission system dropped to less than one-third that of 1988, the traffic on those lines increased.

The uncertainty of deregulation hasn’t spurred on development of new projects, making transmission of electricity in this country the next “energy crisis” candidate. Frankly, even prior to that, engineers were tweaking the laws of physics, but for the most part, they’ve done all they can. Physical laws, by definition, don’t provide much wiggle room.

However, let’s talk about economic and policy issues related to transmission, and the room to wiggle expands exponentially.

In addition to the recognition of the need to build more transmission (does the “build more” sound familiar? As in generation?), alternative structuring of transmission entities is being touted as part of the solution in moving electricity across this nation.

As our cover article proclaims, the transco model seems to be the emerging dominant form of RTO. At APC, Paul Addison, Salomon Smith Barney, agreed with this trend, but highlighted some of the obstacles that lie ahead in changing the traditional ownership of transmission assets from utility-owned to that of a stakeholder-owned, for-profit investment.

The economic benefits of transmission, according to Addison, will depend on several factors. Some of his observations included:

  • Most transmission assets will be transferred at book value
  • The tax hit is a problem in companies selling these assets. However, deferrals are being considered that would facilitate such sales.
  • Earnings multiples similar to those of gas distribution and pipelines (13x to 15x) need to be targeted.
  • Rates of returns allowed by PUCs must be attractive to encourage investment.
  • Innovative rate designs, such as incentives and performance based rates, will attract investors.
  • Investments look most attractive in a company with greater worth. Addison suggests that having only five to six RTOs across the country would facilitate the right size for attention from investors.

The evolution of RTOs warrants close attention and analysis. Market dynamics in the involved regions will make or break the RTO-as-a-business concept. William Hogan, Center for Business and Government, Harvard University, summed up California’s ISO/PX debacle with these words: “Bad policy, bad luck, bad news.”

So, to all the engineers: You ought to be safe from blame; after all, there’s no validity in pointing to “bad physics.”

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