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M&A for T&D

Grid system operators now hold the cards. That means a bidding war for talent and a new wave of mergers.
Fortnightly Magazine - October 1 2002

holding firm on what functions they will perform. This needed clarity should not only enable progress in the formation of an independently operated grid by fewer entities than today, but it will also stimulate important strategic thinking about the industry's future. New approaches to serving customers and building infrastructure may come out of this thinking, and that would be welcomed. In any event, an almost certain path will be renewed merger activity, including the consolidation of generator companies, the amalgamation of transmission-owning and operating entities, and the combination of distribution companies.

Rule: Utility Must Turn Over Operations to Independent Transmission Provider (ITP)

Q. If we hold onto our transmission assets, what is the best form of compliance: direct member of a Regional Transmission Organization (RTO), direct member of an Independent Transmission Company (ITC) under an RTO, employ an ITP only, or under contract?

Many factors to analyze:

  • Confidence in operational abilities of the independent entity(ies)
  • Cost of implementation, not likely the same for each option
  • Span of control by new entity associated with each option
  • Need to retain control area responsibilities
  • Integration requirements differences/comparative analysis
  • Effect of each option on the ability to achieve allowed rate of return
  • Economies or dis-economies of scale associated with each option that would affect rates (grid management charge)
  • How each entity would handle planning within regional construct
  • Timetable for compliance and implementation (beginning with discussion about compliance with SMD with stake holders and state representatives within 30 days of final rule)
  • Preferences of state regulator/stakeholders
  • Interest of neighboring systems
  • Potential for divesting assets at later date
  • Interim approach of ITP versus RTO

Q. What are the financial implications of turning over system operations to an independent entity?

Key factors to analyze:

  • Loss of dispatch control for energy and capacity
  • Effect on owned generation in providing energy and ancillary services
  • Effect on native load
  • Effect on ability to compete in wholesale market
  • Grid management costs versus internal staff reduction and other cost elimination
  • Whether there will be issues of potentially stranded investment in own energy management, metering, AGC, OASIS, and other systems
  • Whether or not state regulators allow transition costs in rates
  • Contract terms with ITP (Standard RTO Operations Agreement versus an agreement with an ITC or ITP)
  • Specific terms regarding the responsibilities and liabilities of each party
  • Financial risk assessment should the RTO, ITC, or ITP fail
  • How SMD and the new Network Access Tariff will change loading on transmission system (Will reliability upgrades be required? Who should pay for those upgrades?)

Rule: ITP Must Offer a New Network Access Service (NAS)

Q. How will NAS be accommodated with grandfathered network and point-to-point service? For example, what NAS service must the transmission owner take to meet contractual obligations to serve pre-Order 888 contract customers?
Q. What analysis will be required to reform retail rates, e.g., T&D split?
Q. What performance/incentive rate proposals should be made?
Q. Will cost shifting adversely affect native load and create rate-ceiling problems?
Q. What state rate proceedings will be triggered by the NAS?
Q. What pricing model is needed to maintain