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In Search of... Transmission Capitalists
- $25 billion in debt is coming due in 2003, without much revenue to show for it. 4
Thus, the ability of utilities to fund transmission investments from traditional sources is seriously compromised, with few prospects for near-term improvement. In such a climate, utilities tend to focus on those transmission investments necessary to keep the lights on (i.e., retrofits) but not much more.
Some utilities (e.g., American Transmission Co. and TransLink) have formed ITCs and separated transmission, both financially and structurally, from the rest of the utility. This is a positive development for raising capital, since ITCs have a clear focus on transmission, regulated rates, and separation from other potentially volatile segments of the utility. Whether through ITCs or standalone transmission firms, a sole focus on transmission will enable such companies to find better ways to operate, increase throughput, manage risk, identify investments, raise capital, and handle regulatory issues. We expect significant consolidation of the ownership of the transmission business as a result.
In sum, public equity, debt markets, and bank financing have become less accessible to the electric industry for infrastructure capital. Given the shortage of utility financial options, there is likely to be a gap in utility capital available for transmission investment. Those utilities fortunate to have adequate access to capital markets may choose not to seek such financing to fund transmission projects, in an effort to preserve capital and share risks.
Non-Utility Sources of Capital to the Rescue?
If utilities are not going to fund new transmission, where is the capital going to come from? Answer: a wealth of new sources.
The areas of transmission in need of investment-the retrofit of existing systems to maintain reliability and capabilities; upgrades to enhance reliability and capacity of existing infrastructure; new expansion; and acquisition of transmission systems-overlay both intra-utility systems and inter-utility systems as outlined in Figure 2. Each area presents unique characteristics to financing capital investment and may come from different sources.
While utilities continue to focus on retrofits, current third-party transmission financing in North America is primarily directed at upgrades and expansion projects. Compared with retrofits, these projects are more discrete, tangible assets, with defined revenue streams, and therefore better investment targets for such investors. For example, many of the projects under consideration for private investment involve point-to-point system interconnections and high-voltage direct-current lines. 5 Third-party investors tend to prefer such specific assets to readily distinguish their returns from the utility as a whole, though other options may develop. Acquisitions clearly have the opposite focus, since they seek a revenue stream from the transmission asset base as a whole.
How will these investments be financed? Not surprisingly, discrete asset projects will tend to use project-financing techniques, while projects involving new assets that are integral to the existing asset base will primarily use corporate finance. For example, transmission insulator retrofits likely will involve traditional utility corporate financing from internal cash flow or new capital from equity and/or debt. However, this may change if early private investment in more discrete transmission projects proves successful. Transmission systems recently acquired by private entities will use