IT TAKES LABOR, FUEL, OPERATING CASH AND INVESTMENT capital to produce and deliver electric power. Which utilities have managed to use these resources optimally to produce and sell kilowatt-hours...
Transmission Asset Sales: Running the Regulatory Gauntlet
There are many considerations and obstacles to overcome before transmission assets can be bought or sold.
By now, everyone has heard of the first high profile, large-scale transmission system sales that have taken place in the industry, which were made to look like a smooth and easy process by leveraged buyout kings such as Kohlberg Kravis Roberts & Co. (KKR), and independent transmission operators such as Trans-Elect (see Chart 1). But most will agree that buying or selling a transmission system requires careful planning and is not always feasible; the transactions carry with them a whole host of financial risks and regulatory obstacles that must be traversed before the deal is done. 1
Some potential sellers may choose to stay on the sidelines. There always will be utilities that prefer to stay vertically integrated and do not want to deal with tax issues and questions of what to do with the money, or the implications to the future health and earnings power of the utility company (see sidebar, p. 48).
Other potential sellers may be willing to move forwared if they can get comfortable with the business risks and regulatory issues. Having the best market intelligence and understanding of the regulatory climate will be essential for transmission asset sales in the near future among utilities and utility holding companies anxious to raise cash and improve their balance sheets in the wake of the Enron debacle.
It is no coincidence that many of the recently announced deals have taken place in the Midwest, which has had an ideal climate for transmission divesture along with supportive statutory frameworks. 2 Regulators in other states, including Pennsylvania, also may be receptive to such transactions, 3 whereas southeastern and western regulators have been extremely vocal about their concerns that asset sales may transfer regulatory authority from state capitals to Washington, D.C. (In New England, regulators have been advocates of electric restructuring, but they often have encouraged divestiture of generation rather than transmission assets.)
Moreover, depending upon the regulatory climate, the economics of divesture may be unattractive. While federal regulators may create a climate under which potential purchasers would pay attractive prices for transmission assets, there is a very real threat that state regulators would require all proceeds in excess of book to flow back to customers (see, e.g., Democratic National Committee v. Washington Metropolitan Area Transit Commission, . Selling utility assets for proceeds that are effectively capped at book value at a time when utility equities are trading at a premium to book 4 is simply a recipe for destroying shareholder value.
Thus, for utilities considering these transactions, it is essential to have a favorable state regulatory climate that allows the selling utility to retain enough sales proceeds to make a sale economically attractive to the company and its shareholders. Direct state control over the rates charged for transmission service is limited and diminishing as a result of Order 2000 and the proposed standard market design. 5
Yet state utility commissions typically do have authority to determine the retail rate impact, if any, of profits earned upon