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Transcos Reborn

Recent attrition raises the question: Consolidation or death spiral?

Fortnightly Magazine - July 2005

it puts the company in a strong position to garner support from federal regulators.

Indeed, FERC commissioners already have reacted positively to Sokol’s transco concept. In a briefing after FERC’s May 25 open meeting, Chairman Pat Wood III said he is “very heartened” by MidAmerican’s transco plans. Commissioner Nora Mead Brownell added that the envisioned transco could mean “the potential for a huge infusion of cash to build infrastructure … in a region that has huge transmission needs.”

Nevertheless, FERC harbors concerns about whether passive investment in transcos by former transmission owners violates the principles of independence the commission seeks to advance through its policies.

Advocates of passive investment argue that structural protections and governance oversight can be sufficient to ensure independence. “You take the assets through the veil and apply the commission’s standards for independence,” Landgren said. “The assets are independent.”

While generally supporting the ATC model, however, FERC commissioners are reticent to give their full blessing to the idea of passive investment. “I’m afraid [of the consequences] if we start indicating we’re OK with a lot of passive investment,” Wood said during the April 22 conference. “We’ve been down that path with the other two industries [pipelines and hydropower], and it’s not a really happy path. How do we keep the pressure on to get full independence ultimately?”

Possible answers include establishing incentives for transmission owners to divest their stake in the transco, or setting a date-certain for that divestiture. But such an approach raises potential uncertainties of its own, mostly regarding how the owners can get the most value from their assets under a mandatory divestiture timeline. By definition, the requirement to divest puts the seller at a disadvantage in the market, and liquidating such assets might be economically unattractive as the deadline approaches.

One possible solution to this issue, however, might be to list the transco’s stock in a public market, as ITC now is attempting to do with its initial public offering (IPO) ( see “Successful Transco Models” ). Having a ready market for the transco’s shares would allow transmission owners to incrementally sell down their holdings over time, as market prices and company needs dictate.

“Our experience around the world has been that the public listed markets are a good home for infrastructure,” said Christopher Leslie, executive director of Macquarie Securities (USA) Inc., speaking at the April 22 conference. “If you focus on the end game being a listed, independent transmission market, with ticker symbols for [transcos], that might assist in making the transition through this phase where we’re just trying to get utilities and incumbent public owners to cooperate with the vision.”

Merger Momentum

A major wild card in the game is the omnibus energy bill, a draft of which the Senate Energy & Natural Resources Committee approved in late May. Two features of the bill could change the regulatory landscape significantly: its repeal of the Public Utility Holding Company Act, and the authority it gives to FERC to approve utility mergers.

Taken together, the two changes could accelerate the transco trend by encouraging utility

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