In Search of... Transmission Capitalists
Facing a cash crunch, transmission owners look for new funding sources.
In recent months, discussions about the shortfall in transmission have touched on market structures and regulatory issues related to participant funding, nodal pricing, independent transmission companies (ITCs), multi-state entities, and the role of standard market design (SMD). However, with much more investment in transmission required now than in the past, the major issue is finding money for transmission expansion. This is the essence of the capital expenditure ("capex") problem that persists currently in the industry.
Transmission financing is on the verge of dramatic change, with funding in the very near future coming from several sources that may surprise you.
Of the three principal types of transmission investment, most utilities in recent years have focused with regard to transmission investment on retrofits-modest improvements to existing lines, transformers, operations, and rights of way to ensure the continued reliable flow of power from utility-owned power plants to their customers. Occasionally, the utility might need to upgrade (e.g., double-circuit) a line to enhance reliability and increase the flow of power, but such need is infrequent. Transmission was developed primarily to ensure reliability, rather than to support commerce.
But times have fundamentally changed. Now, on top of the foundation of retrofits, there are increasing amounts of transmission upgrades and expansions required, both for reliability purposes and to support many more transactions. With the formation of regional transmission organizations (RTOs) and regional planning, substantial expansion will need to take place to better interconnect within the traditional service territory, between utilities, and between regions (i.e., intra- and inter-utility). The goals of eliminating congestion and supporting access to lower-cost wholesale power supplies will become of co-equal importance to reliability. Acquisitions of transmission assets are becoming more common. How utilities will shift transmission asset ownership and raise capital to satisfy this new picture is a major challenge for the power industry. Figure 1 shows this anticipated shift.
The ability to make necessary investments in transmission is clearly in doubt, 1 with potentially substantial consequences for market participants and consumers. But there is hope of filling the capex gap as well. In that context, the first issue that must be addressed is whether there is a significant need for new transmission investment. The answer? Absolutely.
- Congestion in the most developed market, PJM has quintupled in the past two years, reaching $271 million in 2002. Nationwide, the figure is well into the billions. Thus, the wholesale cost of power today is already several percentage points higher than it would be without congestion.
- According to the North American Electric Reliability Council, unfulfilled transactions (TLRs) have increased five-fold to nearly 1,500 instances in 2002, compared with 300 in 1998. For example, the ability to move power out of Entergy has fallen from 6,000 MW to 1,000 MW or less in the past three years because generation additions have not been matched by transmission investment.
- According to an Edison Electric Institute (EEI)-sponsored study in June 2001, transmission investment has fallen $115 million per year for 25 years, from about $5