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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

continue to be operated by the Midwest Independent System Operator. KKR and Trimaran intend to provide additional investment in ITC to support retrofits, upgrades, and expansions. -E.R. & P.D.

Many Paths to the Solution: The ABCs of Transmission Building

A combination of techniques could achieve the goal of sufficient investment in transmission.

A. An increasing share of new investment in transmission needs will come from non-traditional sources, including equity investors, institutional investors, and standalone transmission companies. Utilities and ITCs will need to become more skilled at orchestrating this group of potential capital sources, targeting the investment opportunities to different entities.

B. More utilities will decide that transmission is not in their strategic interest and will sell or contribute their transmission assets to ITCs and private transmission firms.

C. Transmission costs will rise to cover the new investment required, but overall, customers' bills should be lower as a result. Since transmission is about 10 percent of the system, even a 20 percent increase in transmission investment would increase retail rates by just 2 percent. However, overall rates would be reduced through reducing congestion and lowering wholesale costs.

D. Regulators will need to make a meaningful contribution. Developments on the RTO, ITC, financial incentives, and resource planning front hold the promise that transmission will gain a higher profile and lead to more investment, but the timing of this contribution is uncertain. There also should be a resolution of the participant funding issue, which could hamstring transmission as it has done in recent years.

E. The federal government could decide that transmission is a priority too important to be left to the vagaries of the market, especially for certain high-voltage, highly congested lines. Whether for national security or economic reasons, the administration could decide to sponsor (through direct investment, federal bonds, or competitive bids) the development of specific lines that will achieve its purposes, while also serving as a catalyst for investment.

F. Finally, there could be an outside event that stimulates transmission investment. While obviously undesirable, a major outage of the type experienced in 1965 in New York State that cascaded through much of the Northeast could provide the spark for a "Marshall Plan" to develop and strengthen the grid. -E.R. & P.D.

  1. The investment required is not just in new high voltage wires, though that is a significant component. The industry also needs new substations, transformers, reconductoring, switches, and more, all working in tandem to increase the efficiency of the system and support the movement of power both within and between regions. New technologies (e.g., FACTS, super-conductivity) that enable more power to be transmitted through existing lines and rights of way require funding as well.
  2. Eric Hirst and Brendan Kirby, "Transmission Planning for a Restructured U.S. Electric Industry," June 2001, p. 9.
  3. Barbara Eiseman and Kevin Beicke, Standard & Poors, "U.S. Power Industry Experiences Precipitous Credit Decline in 2002; Negative Slope Likely to Continue," Jan. 15, 2003. The study also cites the major reasons for such downgrades, which include growing debt finance outside of the utility industry; regulatory difficulties; weakening of bondholder protection