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The pros and cons of selling the transmission system.
Fortnightly Magazine - May 1 2003

defining these risks. Utilities executives should take note.

Many have argued that recent grid incentives from the Federal Energy Regulatory Commission (FERC) make a compelling reason why a utility transmission system might now command a premium in the resale market. Of course, the incentives are far higher for those utilities that divest their transmission to an independent entity.

But there is a danger that in the coming years FERC, due to a shift in policy or leadership, might find that the ROE is too high as compared with the true economics of the transmission grid, he says.

Furthermore, Barancik adds that private firms like KKR are banking on the fact that they will not only be able to retain the ROE for a significant period of time, but at some point will want to monetize their investment or sell. But spinning a transmission asset in the coming years may be difficult, and realizing a profit impossible. The fact that at any time a merchant generator can site its plant wherever it wants can quickly change the economics of any transmission system. The pressures to lower the ROE from where FERC has placed it could be very strong at some point in the future.

That's why utility executives continue to seriously consider selling the transmission assets: They may not get the high ROE promised by FERC, and they may never again get the opportunity to sell these assets at the market values now being paid, Barancik says. He adds that there is reason to believe that sale prices of transmission assets are currently at peak levels.

And that brings us back to the earlier discussion of the considerations needed to be made before selling-namely, the future health of the company.

Meanwhile, utility executive don't really see the transmission system as a growth engine of any kind. In a report by Accenture called Mergers & Acquisitions in the Utilities Industry, utility executives told the consultancy that when discussing ways to create value for themselves over the next five years, it was going to be through selective asset acquisition. Only those executives preferring the benefits of vertical integration referenced transmission.

"[Otherwise], among the industry's various segments, a focus on generation and distribution were identified as the best avenues for delivering high shareholder returns over the next five years. … The corporate functions that were identified as the two most important contributors to a company's long-term, ongoing profitability … [were] customer care and information technology."

So, whether you decide to buy, sell, or hold on to transmission, one thing is for sure: No decision will be without its risks, and no bet is guaranteed. Not even by FERC.

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