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Transcos Reborn

Recent attrition raises the question: Consolidation or death spiral?

Fortnightly Magazine - July 2005

makes wires assets look more attractive to utility investors, particularly in regions where overbuilding of power plants has led to low wholesale power prices, and consequently generation investments have underperformed expectations. Additionally, momentum toward deregulation has slowed down and taken unexpected turns, effectively serving to maintain the strategic value in owning transmission systems.

“Even though FERC has pushed since Order No. 888 to ensure there’s no preferential access, there’s still this question about what constitutes ‘native load,’” says Elliot Roseman, a vice president with ICF Consulting in Fairfax, Va. “Utilities still want to preserve their ability to have enough access on the system to serve what they see as their native load, and there’s no huge upside for shareholders to sell. The question is, if they sell, could they do something better with that cash?”

With IOUs’ financial positions improving dramatically in the past couple of years, most utilities aren’t facing major shortfalls in cash or credit. Indeed, after paying down their debt, many IOUs have increased dividends and initiated stock buy-backs to dispose of cash. At the same time, however, they are facing changing market conditions that demand management attention.

“Companies are trying to get a handle on rising gas prices, the next wave of new generation that will be required, RTO developments, and pending rate cases,” Roseman says. “They have a lot of things on their plate that arguably are more important than thinking about functionally unbundling or structurally changing the utility.”

Regional Rumblings

IOUs are not clamoring to spin off their transmission assets, nor do they seem to be neglecting transmission investments. According to the results of an EEI survey (conducted in late 2003 and released in May 2005), IOUs invested 12 percent more in transmission systems between 1999 and 2003 than they had in the previous five-year period. Furthermore, IOUs indicated plans to invest $28 billion in transmission systems between 2004 and 2009—a 60 percent jump in spending ( see Figure 1 ).

Plans don’t always translate into reality, of course, but EEI’s figures provide a window into IOUs’ intentions in the immediate aftermath of the 2003 blackout. And to the degree IOUs are closing the transmission-investment gap, they might be weakening a primary driver for alternative transmission-ownership structures.

“Utilities might not have made a complete turnaround, but they apparently are more focused on transmission than they were before,” Roseman says. “In some ways that cuts against the need for transcos.”

Whether investments by integrated utilities are meeting the economic needs of an interstate, open-access transmission grid, however, is another question. “If you are getting the ‘right’ investments in transmission, it doesn’t really matter whether it comes from a transco or a traditional utility,” Roseman says. “But that is a very pregnant question. Where are the right places for transmission to be built? Is the investment being made in transmission that would eliminate seams between regions?”

Such questions can’t be answered in a general way for all investments, and indeed the fact that such uncertainties persist suggests stand-alone transcos have an important role to play in the U.S.