Frontlines

The failure of the Empire Connection spells trouble for private transmission projects.

It's at the very heart of all policy initiatives for both electric generation and transmission: How do you attract the right amount of investment without creating an overbuilt market, or a boom-bust scenario? In recent months, utility executives, financiers, and policy-makers have been asking this question with even greater zeal than usual.

Consider two recent high-profile efforts: one a regulatory initiative for more power plants that is still pending, the other a private initiative for a new transmission line, which failed in spectacular fashion. Each has raised discussion and debate over what is truly needed to encourage investment in large-scale electric infrastructure.

First, New England's recent initiative to create a radical new locational market for electric generating capacity has taken the industry by storm. In this month's "Commission Watch" column, Bruce Radford analyzes the issues surrounding this effort ().

Second, the end-of-year failure of the New York-based merchant transmission project known as Empire Connection has given many industry watchers reason for pause. You see, Empire Connection was a bit different than the other so-called independent transmission projects, such as Trans-Elect's Path 15 Expansion or the undersea Neptune Project, proposed by Atlantic Energy Partners LLC (). Empire did not enjoy a hard-wired revenue stream, as might come with purchased power agreements (PPAs), a utility partner, or a state agency client. Furthermore, from January 2004 to June 2004, Empire seemed to have lost all political support from regulators, politicians, and New York utility executives.

The Economics of the Deal

Empire supporters say the lesson here is that you can't build a transmission line without some sort of in-place revenue guarantee. They say the pure merchant transmission project, like its cousin, the pure merchant generation project, is officially dead. Some regulatory support or mechanism is needed, claim financiers, before they will ever again undertake such a project. Furthermore, a more low-cost process is necessary to get to a decision. Lenders say the $10 million spent in upfront costs by Empire to get to a decision is too high and a disincentive for others to explore future projects.

Moreover, bankers say that the New York Independent System Operator (NYISO) idea of having merchant transmission projects financed using financial transmission rights (FTRs) doesn't work in practice. (The developer would receive a free allotment of FTRs, having value as a financial hedge against grid congestion or geographic differentials in energy prices.)

A transmission expert familiar with the NYISO financing mechanism says the problem is that NYISO won't tell how many FTRs you'll get until six months before project completion. "Take that to an investor," he says.

Meanwhile, some experts charge that Empire failed to attract customers and political support because it threatened to change the economics of the New York region-a region, I might add, that has had some of the worst congestion in the country and which was impacted by the largest blackout in U.S. history less than two years ago.

So, why wouldn't the Empire project be welcomed with open arms? In a