Pam Boschee, Managing Editor
FERC grabbed attention early this month when it filed its Standard Market Design (SMD) Notice of Proposed Rulemaking (NOPR).
One of the main proposals is the establishment of a single, flexible transmission service-Network Access Service, which is intended to facilitate honest-to-goodness free and open access to interstate electric transmission. This service would apply consistent transmission rules for all customers-wholesale, unbundled retail and bundled retail-as well as a standard market design for wholesale markets.
Sure, FERC Orders 888 and 2000 were supposed to accomplish this, but many utilities “complied” with a wink. FERC even conceded that its existing pro forma tariff allows undue discrimination in the provision of transmission services, with vertically integrated public utilities that own, operate or control transmission facilities and also participate in power markets still able to exercise market power and discriminate in providing service and spot market energy services. Also, under the current system, different types of customers are treated differently, in part because conflicting state and federal rules govern the use of interstate transmission facilities.
It seems as though FERC has finally said, “Enough is enough.” (And I don’t think they’re winking this time.)
Market loopholes and flaws aren’t news anymore. Problems have been escalating, with players becoming increasingly vocal about the idiosyncrasies that allowed clever (and the not-so-clever) companies to snatch the gray-area prizes. The breaking point seemed to be looming straight ahead.
FERC’s NOPR, even though not expected to be fully implemented for two to three years, lays a foundation upon which to build-actually, upon which to build T&D infrastructure. Investment may be viewed as less risky when the rules are known and enforced.
The question remains, however: Who will make this investment?
It may not be investor-owned utilities (IOUs). Their market power benefits will largely disappear (along with the accompanying economic benefits), and they’ll also face greater competition from wholesale generation and energy marketing (yes, this is presuming the energy marketing and trading mess gets cleaned up).
Add to that the current state of financial affairs for IOUs. It’s not a rosy picture.
In a recent teleconference, Standard & Poor’s (S&P) discussed their review of utilities. Ronald Barone cited the total debt to capital ratio in 1997 as 53 percent; today that number is 60 percent. Interestingly, he did not point to the events of the last year as the primary cause for this increasing debt burden. He served up a historical perspective with a twist.
Barone contended that S&P’s rating actions over the last six months reflected the outcomes of plans established by utility management five or six years ago. At that time, management’s strategy was to grow non-regulated operations, such as merchant power, energy marketing and trading, and telecom. All seemed reasonable at the time. The strategy had great risk attached to it, and utilities increased their debt. They assured S&P that they just needed some time for the cash flow to develop. Barone said, “We gave them the rope they needed.”
Five years later, the credit statistics show that the strategy failed. S&P’s downgrading began in late 1999. In 2000 and 2001, downgrades to upgrades ran four to one. Ninety companies have been downgraded since the beginning of this year.
According to Barone, the deteriorating credit trend has companies reassessing plans-and again asking for allowances during the turnaround period. Barone said, “Companies are trying to unwind plans they previously wanted to push and [are now asking] for time. No, I don’t think so. They had five years to improve this.”
He added, “Many firms turned this rope into a noose.”
Barone listed some of the strands that contributed to the making of the noose that many companies are now trying to dodge: round-trip trades; companies renewing bank lines and getting less; selling their prized assets; nefarious gas storage deals; securing assets to access needed liquidity; and FERC investigations.
The strand common to these struggling companies is the fact that they transformed themselves from regulated companies to speculative companies.
However, as S&P’s Richard Cortright pointed out, those companies staying close to their regulated roots retain reasonable leverage positions. He said companies will strive to refocus their investors’ attention on the cash flow of their utilities.
So, where are the deep pockets when it comes to transmission investment?
Are the independent transmission companies ready to jump in? How about the American Transmission Co. or Trans-Elect? These companies surely must be anticipating good times ahead.
Or, how about companies like Siemens Power Transmission & Distribution Inc. or ABB? Siemens PTD and Black & Veatch have proposed an initiative, TransAmerica Generation Grid (TAGG-see our March 2002 top story), which would interconnect the east and the west power grids via construction of new HVDC lines. Is it an unrealistic leap to suggest that Siemens PTD or ABB could move from being a transmission equipment supplier to also being a transmission service provider?
As the NOPR gels over the next year or two, there’s no telling who might step up to take the lead.