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Transcos Reborn

Recent attrition raises the question: Consolidation or death spiral?

Fortnightly Magazine - July 2005

often are reluctant to bring transmission-related rate cases before utility commissions if it means other revenue streams might be opened to scrutiny.

“Some of the barriers to investment via vertically integrated IOUs lie with state regulation,” says FERC Commissioner Suedeen G. Kelly, speaking at the FERC technical conference in April. “If you have to go to the state regulator to get your transmission investment included in your rates, then the whole game is up. Since a significant portion of the investment of an IOU is in the generation assets, that opens up the generation assets to a rate case and potentially a lowering of the rate of return.”

Such barriers are difficult to break down, given the historic and continuing turf war that rages between state and federal authorities. The transco business model, however, was conceived in the mid-1990s as a way to sidestep many barriers by disconnecting transmission operations and planning from integrated utility operations. Because transcos are focused solely on transmission systems, they are one step further removed from the competing interests that have discouraged integrated IOUs from investing in transmission. Additionally, they are regulated by the federal government, not by the states, which allows transcos to take a more expansive and less parochial view of the transmission system.

In theory, these advantages allow stand-alone transcos to invest more money in transmission upgrades faster than integrated utilities generally can. And in many cases that theory has proven to be true. “We’ll invest more than $300 million this year alone,” says Dale Landgren, vice president and chief strategic officer at American Transmission Co. in Pewaukee, Wis. “We expect to be in that range each year for the next few years at least. Our customers are clamoring to get greater access to the regional market, and we are working on projects to increase that.”

The trouble with transcos, however, is they need a critical mass of operating transmission assets to work effectively. When the first transcos formed in the late 1990s, transmission assets were expected to become white elephants for IOUs and other integrated utilities. As wholesale electricity markets became more robust and competitive, integrated utilities were expected to divest their transmission assets and put the money into assets with greater strategic value—such as generation capacity.

But except for three examples, involving utilities in just two states (Michigan and Wisconsin), that hasn’t happened. In many cases state lawmakers have stymied the move toward transcos, fearing they’d lose authority over key utility assets and ratepayers would be forced to pay for investments that would benefit out-of-state energy consumers. Additionally, IOUs in general have been unenthusiastic about getting out of the transmission business.

“Clearly many utilities view their transmission as a strategic asset, plain and simple,” says Laurie J. Oppel, a managing director with Navigant Consulting in Albany, N.Y. “Where the utility has a fairly decent transmission portfolio and it is a significant piece of their asset valuation, they don’t want to spin it off.”

Recent trends among IOUs may be solidifying this position. Specifically, the “back-to-basics” business trend that has prevailed since mid-2002