His company, he admits, is all about cherry picking.

This issue we took some time off to have some fun. We caught up with Trans-Elect president and COO Bernie Schroeder in downtown D.C.

We wanted to learn the latest on who's buying, selling, and churning assets in the transmission world. And Bernie did not disappoint. As Schroeder puts it, Trans-Elect is "all about cherry-picking."

Trans-Elect can be fun to watch. In just two short years, it has gone from shoestring to front page-from scrounging some funds from teacher's pensions to buying some power lines up in Alberta, to seeing its CEO, Fred Buckman, named by in January as one of its top entrepreneurs of the year.

And with Trans-Elect staking out ground as one of the first companies to get into the merchant transmission biz, they are taking advantage-buying up just as many properties as they can. That's the business model, in fact. Interconnection can come later.

Trans-Elect states its goal right up front: buy two transmission systems a year, at a minimum. The key, Schroeder explained, is to find the sellers, which is why it took some time to talk to him in person-he always is flying around the country scoping out the next deal.

"The strategic advantage by geography is something we really have to create," he said.

"In a perfect world you would buy the most ideal, centralized grid and then begin buying the contiguous lines next to them-but it doesn't work that way."

The heaviest area of concentration for Trans-Elect at present, he added, is the Midwest and Southeast.

Playing for Path 15

Schroeder said that Trans-Elect is pursuing development, ownership and operation of Path 15, the notoriously constrained transmission area in northern California. When the U.S. Department of Energy issued its initial request for proposal (RFP), somewhere between 13 to 15 entities filed to buy the assets. Nine were selected. That meant that some individual bidders would receive small ownership shares.

"We were surprised," says Schroeder, who said that a 9 percent stake was not large enough for Trans-Elect to take part. He wanted a larger interest.

But then some bidders began dropping out. (Some, in fact, were likely acting only as placeholders, Schroeder notes.) Now Trans-Elect has 83 percent of the deal and the Western Area Power Administration has the rest. And now that Schroeder and Trans-Elect see critical mass, they are very "intrigued" about taking part.

Schroeder believes that so many entities dropped out since they were generators and financial players, who likely were interested in the capacity, while Trans-Elect was the only transmission line operator that bid and was truly interested in running the line. Schroeder adds that the estimated project cost totals some $306 million, a bit more than Trans-Elect's recent purchase of the Consumers Power transmission system (Michigan Electric Transmission Co.) for $290 million. Trans-Elect has about 6 to 9 more weeks before they must make a final decision on whether to proceed with the Path 15 project.

Dialing for Dollars

And what about those pension funds? Well, Schroeder says that Trans-Elect financed the TransAlta line purchase in Alberta through not only the Ontario Teacher's pension fund, but via an Australian bank's Macquarie fund. "

This is the kind of project that pension funds would like, because it's the closest thing to a blue-haired ladies stock-you have the low, but steady growth kind of return company like utilities were in yesteryear," Schroeder explained. And while Trans-Elect has not yet gone public, it plans to in the next three to five years.

When asked if Trans-Elect had any interest in joining some of the new direct current (DC) merchant transmission projects such as Neptune, Lake Erie Link, and the proposed mammoth TAGG transmission project led by Siemens that would link Chicago with Los Angeles, Schroeder said no. But Trans-Elect is looking at some merchant line opportunities.

We also asked Schroeder about FERC's announcement this spring that it would soon issue a white paper on a standard market design.

"You want to go from [a]current pancaked situation to the local license plate rate and then eventually you'll move to a regional and even national rate," he said. "I think that is where the real debates are going to come and that FERC is likely providing the path to getting to that debate."

Closing the Deal

When it comes to making the deal, Schroeder predicts that prices for transmission assets may go down as more transmission assets are sold. He feels there is an "early mover advantage" whereby companies that are being innovative and are selling early are getting a premium.

"As it becomes more and more apparent what FERC is trying to do-which is to get companies to divest the transmission assets and they get to the point where they simply have to do that-that price probably will look more like book," he believes.

Schroeder believes the market will get better, not worse. But he insists that regulators must learn to tolerate a premium over book value, or else the buyers won't show up.

"The question for the selling utility is how much of that premium can they keep?" he added.

For example, by statute, Michigan required a 50-50 split between the shareholder and the ratepayer. "In some states, we have been asked by the utility not to bid any more than book, because the utility can't keep it anyway," he said. Also, "the bigger the book, the more likely it is that the state commission is going to take a look at it and divvy it up.

"That is what makes this dramatically different than generation, where you can get 2 or 3 times book for some purchases in a deregulated environment," he explained.

Locking in Profits

Schroeder believes FERC is going to give the Midwest ISO some sort of pay raise-perhaps high enough to boost return on equity up to around 12 to 12.5 percent. He thinks that will make room for an even higher return for a "truly independent" transco like Trans-Elect.

"So can a company like mine then get 13 to 13.5 percent, or even 14 percent," he asks, for putting in a new line. "Maybe even as high as 15 percent?"

Those numbers are not out of line if you look at natural gas pipelines, which are getting such rates, he added. "I think those are the hints we have gotten from FERC, but that remains to be seen" Schroeder added.

Schroeder said he wants readers to understand that consumers will still gain, in spite of those high returns.

First, Trans-Elect is buying those grid assets subject to three- to five-year rate freezes. Second, when Trans-Elect buys assets, it funds only 20 percent with equity-the rest is lower-cost debt. Third, the transmission component of an end-user's bill is very small.

"We are going to increase the ROE through savings and other things we do that might not show up on the bill at all. We might be able to do that under the umbrella that already is there," Schroeder added.

Certainly, he believes, the finished price of power will drop.

"And that is where I think the experiment comes together, [but] that is a ways down the road." A five- or maybe ten-year horizon, he predicted.

But for now, he warned, "We have broken the mold and we're trying to re-cast the debate."

So where is the next big deal?

Schroeder acknowledged he's got a few in the works. He's hitting the road this spring, in fact, but not to Calgary, Michigan, or Los Angeles.

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