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Bullish for Business
Forced consolidation of RTOs would set transmission owners free to go after profits.
On July 12, the day after the feds dropped the bomb and told transmission grid operators to consolidate their activities, Mirant spokesman Lee "Buddy" Eller sent me a short six-page company study that spelled out the best explanation I've ever seen of power price differentials across the Northeast US.
With fully readable charts and maps showing congestion and pricing zones in the New York and PJM grid regions - plus data for New England, as well - Mirant's white paper fixes a precise dollar value ($440 million) on the various mismatched seams and bottlenecks connecting the three markets. (I don't believe you can find the study on the Mirant Web site, but call me and I'll send you a copy by email, if I can get Mirant's permission first.)
As if on queue, Mirant's study offered the perfect endorsement for the newly invigorated Federal Energy Regulatory Commission (FERC), and for its tranche of nine major decisions issued the day before. In those orders, FERC told the three Northeast grid operators to hold talks to consider merging into a single regional transmission organization (RTO), operating on the PJM model. Second, it also advised GridSouth, Entergy, Southern Company Services and the Southwest Power Pool to form a single RTO in the Southeast. Third, it appealed to industry players out West and in flyover country to form a single RTO in their respective regions. In other words, it recommended only four RTOs under FERC jurisdiction - Northeast, Southeast, Midwest, and West.
The Mirant study is fine as far as it goes, but it obscures an important point.
In reality, the RTO concept implies two revolutions: (1) market formation and reliability assurance through a new regional institution, and (2) the launching of a stand-alone transmission business by the grid owner. Up till now, I believe that revolution #1 has stymied any real progress on revolution #2, by imposing requirements for stakeholder participation and collaborative discourse on the process of raising capital from investors, which can be done better in private. I've been thinking about this idea for quite a while, but consultant Mike Brown, from the Hay Group's National Utility Practice, offered some new insights when we talked a few days after the FERC issued its orders.
A Wall Street View
The business of transmission is business.
June 1, 2001
Mr. Paul Cutler
Dir., Corp. Finance & Banking
FPL Energy Inc.
Juno Beach, Fla.
Dear Mr. Cutler:
You have asked us to summarize our views on what factors the public equity market would assess in valuing an independent transmission company such as Grid Florida LLC ("the Company"). Because the Company is not yet established, this letter is only intended to examine the basis concepts ... Nevertheless, we can provide certain general observations.
There is no simple formula for a successful initial public offering. All investments are examined as a unique set of risks and rewards ...
Since neither the Company nor a for-profit U.S., electricity transmission industry