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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

regulatory process to foster the market conditions that will support substantial transmission investment, we are likely to fall short, both in dollars and in the timing of such investment.

The benefits of new transmission would far outweigh its costs, especially if those investments are well targeted. Transmission shares one major feature with an insurance policy-having too little is a major risk. Perhaps there should be a national debate and a national transmission summit, at which market participants could focus attention on the impediments, incentives, opportunities, and benefits that are possible from "getting transmission right." It is possible to solve the transmission capital expenditure problem in the relatively near term, but only with new deal structures and new sources of capital.

Transmission & Private Equity: Doing the Deal

The following examples, drawn from public announcements of recent investment, illustrate how private financing is playing a role in the development of transmission.

California Path 15 Upgrade 6

Path 15 upgrade is a project to de-bottleneck an 84-mile stretch of electrical transmission lines in the California Central Valley. The new 500-kV line will cost about $300 million, with an expected operational date in summer 2004.

Trans-Elect Inc. is partnering with the Western Area Power Administration (WAPA) and Pacific Gas & Electric Co. (PG&E) to design, build, and finance the project. Trans-Elect has a 72 percent share of the Path 15 project and is responsible for sourcing project financing. WAPA has a 10 percent share and has project-manager and land-right acquisition responsibilities. PG&E has the remaining 18 percent share and is responsible for substation construction. Equity will come from Trans-Elect (82 percent) and PG&E (18 percent). Trans-Elect is expecting its equity participation to combine with funds from GE Capital Services Structured Finance Group Inc. Project debt financing reportedly will be from one or more financial institutions, arranged by Macquarie Corporate Finance (USA).

Project Neptune 7

Neptune Regional Transmission System LLC (NeptuneRTS) is a proposed HVDC undersea cable transmission system providing 1,200 MW of new transmission through two planned links between New Jersey and New York. One cable will connect New York City with Sayreville, N.J., while the second cable will connect Long Island to Sayreville. The project is expected to cost $500 million and take two years to construct. In 2001, Neptune RTS received FERC approval of its merchant-based tariff in anticipation of revenues and returns based on market demand for access between PJM and New York.

DTE Transmission Acquisition 8

DTE Energy is selling its transmission business subsidiary, International Transmission Co. (ITC), to a partnership of Kohlberg Kravis Roberts & Co. (KKR), a private investment firm and Trimaran Capital Partners LLC, a private asset management firm, for approximately $610 million in cash.

The ITC system comprises nearly 3,000 miles of high-voltage electric transmission lines and associated facilities and easements. ITC currently serves the LSE requirements of Detroit Edison and will continue to provide service under a proposed transmission rate cap charged to Detroit Edison's customers until Dec. 31, 2005. Future rates will be subject to adjustment by FERC. ITC contemplates the electric transmission system will