'Transco' model gains momentum
By Anne M Porter -- Purchasing, 1/14/1999
A few months ago, it looked like not-for-profit independent system operators (ISOs) might emerge as the dominant model for controlling traffic on the nation's interconnected electric power grids. Now, it appears the for-profit transportation company (transco) model is fast gaining ground, even overtaking the ISO model. Since Purchasing's report on ISOs last October (PUR: Oct. 8, '98; p. 37), at least three major transco proposals have been put into the works. They are:* The "Alliance." The original Midwest ISO group (comprising roughly 26 companies) eventually split into two rival groups--the Alliance and the group that went on to obtain ferc approval for a smaller Midwest ISO. A subset of the Alliance group--comprising American Electric Power (AEP), Consumers Power, FirstEnergy, and Virginia Power--says that, by the end of first-quarter 1999, it expects to file with the ferc a plan to form a regional "transco-lite." In October, FirstEnergy announced it would transfer its transmission business to a new subsidiary--American Transmission Systems--as a first step toward the formation of said transco.
* Alliant Energy, Northern States Power. When the upper-Midwest (mapp) region voted down an ISO referendum in November, transco proponent Northern States Power (NSP) quickly proposed a region-wide rate for transmission service under its Independent Transmission Company (ITC) project. Soon thereafter, NSP joined forces with Alliant Energy--a major member of the nascent Midwest ISO. The two firms announced plans to create Midwest ITC, an independent transmission company to which NSP would sell and Alliant would lease transmission lines.
* Arizona Public Service, Tucson Electric Power. In exchange for full stranded cost recovery, Arizona's two dominant investor-owned utilities (IOUs) have announced a plan to swap assets. Tucson Electric Power (TEP) would trade its generation assets for transmission assets owned by Arizona Public Service (APS). TEP would then form a transmission company with the ultimate intent of purchasing and operating all transmission assets in the state (including those of the three existing public utilities). (Note: At press time, the fate of this settlement with the ACC was in the hands of the state Supreme Court.)
A fourth transco application--first announced last spring by Entergy--is also said to be in the works.
The allure of transcos
Transco proponents say the charms of the model go beyond pure profit motive. Advocates say the new transmission companies would be--in theory--more inclined to operate efficiently and to maximize asset value because they would be answerable to shareholders and to boards of directors.
Craig Baker, vice president of transmission policy for AEP, describes the Alliance's transco-lite vision as a "regional transmission organization for all seasons." Unlike ISOs--which would simply operate transmission grids--the transco would serve as both owner and operator. Some companies, Baker says, might want to sell their transmission assets. The transco would be the buyer. Others may choose to lease their wires. The transco would be the lessee. Still other utilities, wishing to neither sell nor lease their wires, would be able to obtain "ISO services" such as oasis management or tariff services from the transco.
Unlike the ISOs that have been approved by the ferc, Baker says the Alliance's transco-lite plan "will have both an ISO and transco fully described and fleshed out." The application, he says, "will spell out a plan for converting the proposed regional transmission organization (RTO) from an ISO to a for-profit transmission company." Of the ISO proposals that have been approved by the ferc, Baker contends that, "they only create bureaucracies with no clear way to convert from not-for-profit ISOs to for-profit transcos." While ISO's may well be capable of converting to transcos in time, he says, "they have no structure to get there."
The opposition
While as many as four proposals for transcos could go to the ferc this year, there are plenty that would oppose them. In December, the Large Public Power Council (lppc) released a report titled, Uncrossing the Wires, slamming for-profit transcos and advocating instead the idea of not-for-profit transcos. (Full report is available at www.lppc.org.)
Meantime, press reports in the wake of the APS-TEP announcement in Arizona remark a strong negative reaction by some of Arizona's publicly owned utilities. But, Alan Bunnell, director of communication for TEP, says these press reports "tended to put a higher spin on [the opposition] than it deserved." Indeed, he says, these companies "have not yet had a chance to review or discuss our proposals. Nor have we approached them [about acquiring their transmission assets]. That would be premature since we have yet to obtain a clear settlement agreement [with the Arizona Corporation Commission (ACC)]."
John Anderson, executive director of the Energy Consumers Resource Council (elcon)--a Washington-based lobbying organization representing large industrial end users--says he will reserve judgement on the various transco proposals until he actually sees them. "So far, we've heard a great deal of rhetoric, but have very little solid information about what might be in these filings." Nonetheless, Anderson says, "We are extremely cynical about what we're hearing." Main reason for this cynicism: "The companies supporting transcos are not well known for their support of industry restructuring."
Major points of opposition to transcos sort into the following basic categories--
* Size. Says Anderson, "We're not opposed to for-profit organizations, but we want to see very large, independently operated transmission companies. We don't think the imminent transco proposals will achieve this."
In defense of the Alliance vision, Baker of AEP says the plan remains very much open to others who would join. What's more, he says there has been some dialogue between the Alliance group and the Midwest ISO. "We are meeting," he says, "to see if we can find the ability to create an RTO that represents the best of both worlds. We want to entice all transmission operators to join a better organization." While not speaking for all Alliance members, Baker says AEP "would like to see larger, seamless RTOs." Others, he says, might wish to wait and see what occurs naturally in the marketplace.
Bunnell of TEP says the utility remains, "at the forefront of development for the DesertStar ISO," a transmission operating entity that would extend from southern Nevada to West Texas. "We are still reviewing the type of relationship we would have with the larger ISO," Bunnell says.
* Independence. Of the four transco plans said to be in the works, only the TEP plan proposes a full separation of generation and transmission ownership. Distinguishing TEP from other would-be transcos, Bunnell says, "TEP would no longer be a generation provider."
AEP's Baker says the question of independence remains an issue of great debate both among and outside of the Alliance group. "There is one school that would say as long as [the incumbent] utilities don't own more than 49% of the transco or take back non-voting stock, then independence of the transco is assured. Another side would argue that as long as there is any stock ownership in the transco, the company would not be independent." In the next year, Baker says "various models will be floated past the ferc, covering the spectrum from 0%-100% ownership [by utilities with generating interests]." The ferc, he says, will decide ultimately what constitutes independence. "We'll learn what is acceptable over the course of the next year."
* Investment. Critics of for-profit transcos fear the companies may neglect to invest in markets deemed unprofitable within their regions or to meet their social "obligations to serve." AEP's Baker counters: "I guess this argument is saying that capitalism doesn't work, and that for-profit companies ignore their customers." But history proves otherwise, Baker contends. "A transco could not remain in business if customers were to tell regulators it wasn't treating them fairly or responding to their needs," he says. "A transco would be at least as customer-responsive, if not more so, than an ISO."
TEP's Bunnell points out that the proposed transmission company would "still be regulated by the ACC. We would be under their jurisdiction to ensure equal treatment and equal access for all transmission providers." What's more, he says, "We would be required to serve and to have significant and required excess capability on the lines to meet needs during peak demand and emergency periods."
* Regulation. "A for-profit transco would not lend itself to light-handed regulation," says the lppc report. "Since the interests of shareholders and consumers are not the same, the for-profit transco would involve significant regulatory involvement by those entities charged with protecting the interests of customers and the public." Says elcon's Anderson: "Because transcos would need to be regulated, we might expect to see all the same [regulation-driven] problems that have always plagued the electric power industry to carry forth into the future."
AEP's Baker says, "Clearly a transco is a monopoly that needs to be regulated. But I think you can have somewhat light-handed regulation as long as you create [profit-based] incentives for the transco to perform as intended." This could be done, Baker says, by linking transmission companies' profits or "returns" to such things as reductions in customer complaints, fewer instances of congestion, or investments that reduce the cost of producing electric power. The Alliance plan, Baker says, will present some ideas for "incentive regulation," but probably won't cover all the possibilities. "This is an interesting time we're living in. Every day, we learn a little more about how we might do things. I wish I knew what we'd be talking about a year from now."
Which way will FERC go?
Some market observers suggest the ferc may now be leaning in favor of the transco model over ISOs. Others suggest the commission is more evenly split (two appearing to favor transcos, two appearing to favor ISOs, one unknown). AEP's Baker remarks that, "Various ferc commissioners have publicly stated that they would like to see alternatives to ISOs. We hope they like our proposal when they see it. We are building our plan with the expectation that they will."
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