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Transcos Reborn

Recent attrition raises the question: Consolidation or death spiral?

Fortnightly Magazine - July 2005

transmission industry. In addition to the issues presented by internal competition for capital, the complexities if planning and building interstate systems, in particular, argue in favor of alternative structures.

“A major question being discussed is how to take a unified approach to planning and siting,” Oppel says. “Conflicts appear between state and federal jurisdictions, and incentives for grid expansion.”

Integrated utilities, regulated mostly by state commissions, encounter difficulties in planning transmission investments that cross state lines. To the degree regional investments are needed to effect a more economically efficient wholesale market, integrated utilities might not be well positioned to make those investments. RTOs are playing an increasing role in planning such investments, and they have authority to order needed investments. Integrated utilities nevertheless face disincentives and conflicts, however, and transcos arguably represent a better ownership structure for developing and building such regional systems.

“The investments that have the greatest risk of not being funded today are those that cross state boundaries,” says Jaeger of Xcel Energy. “RTOs can provide a common forum for different bodies with different planning interests. But if you are looking at regional plans, requiring investment in transmission beyond what is needed to serve your native load, there is still an element of regulatory uncertainty.”

The main reason for this? State regulators frequently are reluctant to approve cost recovery for projects that benefit regional rather than in-state markets. “We haven’t landed on a model of cost allocation that clearly divides the costs among those who benefit,” Jaeger says. “Until we do, it will be hard to make those investments unless you are under a transco type of model.”

Transcos’ key advantage is that they are regulated by the Federal Energy Regulatory Commission rather than by state commissions. Thus, they can respond more easily to regional transmission demands, independent of native-load considerations that dominate the planning processes of integrated utilities.

“We won’t get the changes necessary if we keep tackling the problem one transmission owner at a time,” Jaeger says. “As momentum grows for regional transmission investments, it’s critical that regional planning coalitions form, either through RTO leadership or another approach to cooperative partnering.”

One such approach is emerging from the ashes of TRANSLink, which was a proposal to combine 26,000 miles of transmission systems owned by several investor-owned, public, and cooperative utilities. Had it succeeded, TRANSLink would have been huge, with lines extending across 13 states: Colorado, Illinois, Iowa, Kansas, Michigan, Minnesota, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas, and Wisconsin. The systems would have been combined through divestiture, leases, and operating agreements, but the plan was scuttled when regulators in Minnesota and Iowa balked over jurisdictional issues, ratepayer impacts, and public-interest issues.

However, state regulators did not quash the idea entirely, with the Iowa Utilities Board going so far as to invite participants to try again. The forces that gave rise to the TRANSLink proposal have not disappeared, and the concept is showing signs of life once again.

Resurrecting TRANSLink

In 2004, a group of six utilities—again including Xcel Energy, as well as other investor-owned and