Fortnightly Magazine - July 1 2000


T+D Out, G+D In

Why not keep the power plants and sell off transmission instead?

U.S. utilities made a big mistake in selling off their power plants. They should have held those plants and sold off their transmission lines instead. That's what Ed Tirello says, the financial analyst now at Deutsche Bank Securities Inc., who made his mark about a decade ago with his famous quip of "50 in Five"-that mergers would bring the number of U.S. utilities down to about 50 companies within five years. He was right, back then, but a little off on his timing.

Tirello adds that state regulators at the public utility commissions perhaps should share part of the blame. After all, in many cases it was the PUCs that forced utilities to divest their generation assets-or at least their fossil-fired plants. They wanted to establish a fair price for the plants to help gauge the extent of stranded costs.

The PUCs also wanted to deflate market power. Divesting generation would segregate the production process from the monopoly wires highway that transports the product.

But Tirello says the PUCs goofed. Speaking in late May, Tirello pooh-poohed any PUC concern over market power. "Market power appears to be a federal story," he said. Tirello seemed to feel it was clear all along that federal regulators had special plans for transmission-to place it in the neutral hands of an independent system operator (ISO) or regional transmission organization (RTO). So the utilities never needed to sell their plants to separate the grid from generation. It would have happened anyway.

Can Tirello be right again? Is the pure "wires utility" doomed to extinction?

DTE Energy, parent company of Detroit Edison, is one utility that is betting on Tirello's vision. On May 19, DTE applied to the Federal Energy Regulatory Commission to sell off its transmission lines to a new company, to be known as the International Transmission Co. But DTE would hold on to its power plants and its monopoly franchise as the local distribution company. It would become a combined distribution utility and power producer.

Don't think T+D. Think G+D.

SO HOW FARES THE WIRES-ONLY UTILITY? At press time, the British transmission giant National Grid Co. reportedly was mulling the idea of offering $4 billion to purchase GPU, one of the first U.S. electrics to advertise a strategy of exiting generation and proclaim itself a wires-only utility.

On June 7, the day the Manchester Guardian reported the story, GPU stock closed at $28.75, off its high of about $44.50 during the prior 12 months. GPU closed at $29.44 on June 12, at a price-earnings ratio of 9.06, off some 30 percent over that 12-month period vs. the universe of U.S. electric utilities, according to CBSMarketWatch.Com. GPU's depressed stock price seemed to make it an attractive target. (Yet GPU stock did match the electric industry's 20 percent stock runup over the three months from early March to early June, coinciding with the recent tech-driven crash in the NASDAQ index.)

Speaking two weeks earlier, on May 23, at the World Forum