Frontlines
August
1, 2001
Bullish
for Business
By Bruce
W. Radford
Forced
consolidation of RTOs would set transmission owners free to go
after profits.
On
July 12, the day after the feds dropped the bomb and told transmission
grid operators to consolidate their activities, Mirant spokesman Lee "Buddy"
Eller sent me a short six-page company study that spelled out the best
explanation I've ever seen of power price differentials across the Northeast
US.
With fully readable
charts and maps showing congestion and pricing zones in the New York and
PJM grid regions - plus data for New England, as well - Mirant's white
paper fixes a precise dollar value ($440 million) on the various mismatched
seams and bottlenecks connecting the three markets. (I don't believe you
can find the study on the Mirant Web site, but call me and I'll send you
a copy by email, if I can get Mirant's permission first.)
As if on queue,
Mirant's study offered the perfect endorsement for the newly invigorated
Federal Energy Regulatory Commission (FERC), and for its tranche of nine
major decisions issued the day before. In those orders, FERC told the
three Northeast grid operators to hold talks to consider merging into
a single regional transmission organization (RTO), operating on the PJM
model. Second, it also advised GridSouth, Entergy, Southern Company Services
and the Southwest Power Pool to form a single RTO in the Southeast. Third,
it appealed to industry players out West and in flyover country to form
a single RTO in their respective regions. In other words, it recommended
only four RTOs under FERC jurisdiction - Northeast, Southeast, Midwest,
and West.
The Mirant study
is fine as far as it goes, but it obscures an important point.
In reality, the
RTO concept implies two revolutions: (1) market formation and reliability
assurance through a new regional institution, and (2) the launching of
a stand-alone transmission business by the grid owner. Up till now, I
believe that revolution #1 has stymied any real progress on revolution
#2, by imposing requirements for stakeholder participation and collaborative
discourse on the process of raising capital from investors, which can
be done better in private. I've been thinking about this idea for quite
a while, but consultant Mike Brown, from the Hay Group's National Utility
Practice, offered some new insights when we talked a few days after the
FERC issued its orders.
A Wall
Street View
The business of transmission is business.
|
|
June 1, 2001
Mr. Paul Cutler
Dir., Corp. Finance & Banking
FPL Energy Inc.
Juno Beach, Fla.
Dear Mr. Cutler:
You have asked us to
summarize our views on what factors the public equity market would
assess in valuing an independent transmission company such as Grid
Florida LLC ("the Company"). Because the Company is not yet established,
this letter is only intended to examine the basis concepts ... Nevertheless,
we can provide certain general observations.
There is no simple formula
for a successful initial public offering. All investments are examined
as a unique set of risks and rewards ...
Since neither the Company
nor a for-profit U.S., electricity transmission industry exists
today, the Company must initially be able to demonstrate the basic
elements of any viable business enterprise. It should have:
- a definable market,
preferably growing, with sustained demand for the product or service;
- an ability to demonstrate
a revenue/earnings model of framework that will result in [i]
a reasonable expected return on invested capital, [ii] some level
of earnings predictability and growth, [iii] a sustainable dividend;
- a positive strategic
direction with real growth opportunities through internal and
external means;
- an articulate management
team that can describe and execute their business plan; and
- some actual operating
history prior to going public.
As of the date of this
letter, the Company also has (1) no operating history; (2) no comparable
group of public companies with which to compare; (3) an unidentified,
untested management with yet unknown experience; (4) no alternative
business other than transmission; and (5) no prior regulatory history.
All other things equal, these factors obscure the merits of an investment
in transmisison and reduce the ability of investors to make a more
precise assessment of the potential opportunities and risks facing
the Company. ...
To better attract capital
investment, the Company should focus on eliminating as much uncertainty
about its future as possible .. .
J. Scott
Magrane
Vice President
Goldman Sachs
New York, N.Y.
Source: Florida
Power & Light Co. & Tampa Electric Co., Request for Approval of
Transmission Pricing Plan, FERC Docket No. ER01-2205-000, filed
June 1, 2001.
|
"THE
FERC HAS CREATED A WINDFALL FOR THE TRANSMISSION OWNERS," said
Brown, "though I doubt that the commission or the staff or the utilities
realize that yet.
"What they've
done," he explained, "is to free the TOs from having to work to set up
all those administrative conventions and protocols required for RTO formation
- like governance, security, balancing market monitoring and OASIS node
management, which don't return any dollars to the utility - and instead
free up time in their schedules for the transco business, including marketing,
asset management, spare parts control, creative tariff design and employee
recruitment.
"The transcos
now shed the administrative responsibilities that contributed to overhead.
Now they can just run the money-making side of the business. This is a
good deal."
To understand
more of what Brown is talking about, consider the turmoil in the Alliance
RTO process, where state PUCs have complained of little or no stakeholder
input.
"The design process
remains under the control of the Alliance companies," according to a protest
filed in mid June by a coalition of state public utility commissions (PUCs)
representing Michigan, Illinois, Missouri, Iowa, Ohio, Pennsylvania, Indiana
and Virginia.
The PUCs complain
of the "continued haze" surrounding the search for a managing member,
but that's exactly the sort of process where collaboration gets in the
way. (Of course, it now appears even less likely that the FERC would ever
allow National Grid to become managing member of Alliance, as per plan.)
I
CONFESS I WAS SURPRISED AT THE FERC'S MOVE. I did not see it
coming when I sat in on the FERC's technical conference on RTO seams coordination,
held on June 19. Then there was no clear call for consolidation, beyond
what I'd already heard. "Forced marriages are bad for everyone," said
Nicholas Brown, from the Southwest Power Pool.
Others had suggested
that the FERC should certify new RTOs immediately, without waiting for
all characteristics and functions to comply, so as to make them jurisdictional
and give the commission unquestioned authority to force them to move more
quickly, but this idea also saw its detractors.
"We are participating
with RTO West, but we don't want to join agreements to which we did not
participate in negotiations." said Yakout Mansour, from British Columbia
Hydro.
Will the industry
now buy in? "I don't know," says Attorney Sheila Hollis, from Duane, Morris
& Heckscher, "but we're sure going to be busy. I think the northeast and
southeast ISOs "will give it a very serious try to make it work."
Hollis doubts
that FERC has created a windfall for utilities, as Brown suggests, but
instead finds it more important that FERC has signaled a new way of doing
things.
"The most important
thing is the human interaction on the commission," she told me, as brought
about largely by the presence of the two new Bush appointees. "We're watching
the future stretch before us."
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