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In Search of... Transmission Capitalists

Facing a cash crunch, transmission owners look for new funding sources.
Fortnightly Magazine - April 1 2003
  • billion in 1975 to $2 billion in 2000 (in 1997 dollars). 2
  • The same study identified the nationwide need for at least $56 billion in new transmission investment over the next decade.
  • At present, PJM, New England, and New York can transfer only five to 10 percent of their peak loads between them, far less than needed to support an open regional power market.
  • Southern Co. alone anticipates $2 billion to $3 billion in transmission investments, nearly doubling its current asset base.

Further, as discussed below, the new resource planning procedures that FERC wishes to implement through RTOs, and the need to encourage commerce as well as reliability, will require even more of a focus on transmission investment. A mix of generation, transmission, and load response will satisfy the need for new resources in the future, but regardless, the share of the pie dedicated to transmission will increase.

How much more investment is required? The net book value of transmission in the United States is about $40 billion among investor-owned utilities, and perhaps $60 billion including public utilities. Given the renewed focus on system expansions and new investment in addition to retrofits, it would not be surprising to see this amount rise by $30 billion to $60 billion during the next decade, even taking siting challenges into account, especially if one includes the acquisition of existing systems. This is a huge increase in capital allocated to this segment of the power industry.

Utility Finances: Shaky at Best

Given a burgeoning and critical need for new transmission, are utilities prepared to make such substantial investments in transmission? Not at all. Traditionally, utilities raise capital from three sources: 1) internal cash flow; 2) bondholders; and 3) equity investors/shareholders. In each area, the available pool of capital is being depleted just when transmission needs the most investment and consumers would benefit the most from such new infrastructure. Utilities were once the paragon of investment safety, but according to a recent study by Standard & Poor's: 3

  • Bonds are unattractive. In 2002 there were an unprecedented 182 downgrades of utility holding and operating companies and only 15 upgrades, continuing 2000 and 2001 trends. A full 62 percent of electric utilities are just investment grade ("BBB") or below, while those rated "A-" or better fell from 51 percent to 38 percent in one year;
  • Industry financing activity (debt and preferred securities) fell from $86 billion in 2001 to $74 billion in 2002. In the meantime, debt rose to nearly 60 percent of total capital in 2002 from 55 percent in 1998, affording bondholders less protection;
  • Public equity is unattractive. According to Bloomberg, as of Feb. 14, the Philadelphia index of electric utility stocks had fallen 24 percent in one year;
  • Internal funds are way down. Funds-flow interest coverage and pretax interest coverage have slipped, to 3.3x and 2.8x in 2002, from 3.9x and 3.1x in 1998; and
  • The poor performance of non-utility divisions has had a substantial negative impact on utility investors and customers from deferred equipment and maintenance expenditures. Largely due to such ventures, more than