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 fully regulated model where the incumbent welcomes the low-cost generation benefits of increased transmission, Con Edison would have welcomed the project, experts say.
In fact, if Con Edison had taken on such a project in the 1970s, Empire would have been easily built and financed, Empire backers say. It's the competitive generation in the city, those voices add, who stood the most to gain by quashing Empire. Some experts claim that's also the reason no bids were made when Empire had its open season.
How Politics Intruded
One year ago, in a report to Mayor Michael Bloomberg, the New York City Energy Policy Task Force suggested running one or more big, new transmission lines into Gotham to help import lower-cost power from neighboring regions. The report says:
"New York City's electricity needs can be met through several options, including 2,550 MW of proposed transmission lines and approximately 3,700 MW of new and repowered generation projects." The report, commissioned to improve reliability in the wake of the largest U.S. blackout, identified two lines in its recommendations to achieve this objective; these were the 2,000-MW Empire Connection and PSEG Power's 550-MW Cross Hudson project ().
But six months later, many of the same stakeholders who had signed their names to the report supporting Empire as a solution to what ailed New York were openly tearing it down at the Federal Energy Regulatory Commission's 2004 technical conference on the electricity infrastructure of the Northeast region. These turnabout naysayers included NYISO, New York City Economic Development Corp., and Con Edison. Even FERC Chairman Pat Wood had referred to Empire Connection in the past tense in his opening address at the conference. So what happened?
Here are some anecdotes from last year's conference.
Gil Quiniones, the senior vice president of energy with the New York City Economic Development Corp., backtracked from his report to Mayor Bloomberg: "Well, the [Empire] Project is still in the planning stages. I don't want to be picking and choosing what's in the pipeline." Eugene R. McGrath, CEO of Con Edison, feared that Empire might start a chain reaction, boosting costs and stepping on toes: "So what that means is I have to support the city infrastructure in such a way that it could handle the loss of that 2,000 megawatt line at peak. And that requires a whole lot of infrastructure to be built in the city to support that new line…. And there are other unintended consequences. Does it cause some of the in-city plants to be uneconomical and shut down?"
William J. Museler, CEO of NYISO, worried about project profitability: "The large what I call 'home run' projects like [Empire] … look at what it would cost to carry that project and then factor it in to energy bids. I am not commenting on the economics of that particular project, I don't know them. But it was hugely expensive, and whether or not the economics would even work, even with upstate and PJM power being significantly less expensive than downstate power … ."
Past history teaches that utilities sometimes have had to wait years or decades simply to get their lines sited, let alone built. Quite a few utility executives that I've talked to can recall in excruciating detail the negotiation, political wrangling, town halls, environmental meetings, and the years and years of more negotiation with regulators and stakeholders. And that's with a rate-base allowance included, to save the utility from any additional worry over the economics of the project.
Today, many of these utility executives believe private investors may not be suited to the lengthy, unpredictable, and sometimes contentious transmission-siting process.
In our case, Steve Mitnick, the CEO of Conjunction LLC, the parent company of Empire Connection, had tried to respond to the concerns raised at the FERC conference.
In fact, Mitnick apparently tried to scale back the project. But most industry watchers say that attempt simply came too late. In the popular perception, Empire was done.
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