Paul McCoy is an intense but excitable man, and why shouldn't he be? His new company, Trans-Elect (Reston, Virginia, U.S.), is rewriting the future of transmission in America. In an acquisition mode, the company recently purchased the transmission assets of Consumers Power (U.S.) and TransAlta (Canada). The company is also deeply involved in the upgrade to Path 15 in California.
McCoy shares his insights on the issues facing transmission-owning utilities today, the need to get rates right, the difficulty and expense in siting transmission, and the options available for transmission-only utilities in deciding how to keep their assets up and running.
T&D World: Paul, I understand Trans-Elect is one of the pioneers in creating a transmission-only entity.
McCoy: If Sam Insul could see the rebirth of transmission, he would be smiling in his grave. Actually, the first transmission companies came into being in this country in the 1920s and 1930s, and encompassed a fairly broad geographic footprint for their time. Here in the Midwest, one of the transmission companies had the name, believe it or not, the Super Power Co. It owned 138-kV lines that spanned a number of operating utilities. Ultimately, the Super Power Co. was broken up as a result of the Public Utilities Company Holding Act of 1935. So the first regional transmission service was 75 years ahead of its time.
T&D World: Why would utilities sell their transmission assets?
McCoy: Transmission is a relatively small portion of most utilities' business. Some utilities have made the strategic decision that the transmission assets don't fit their business model, so they sell for the best price. A second type of seller comes to the table when its transmission system requires a significant capital investment. The owner simply may not want to commit to that level of investment, preferring to sell elsewhere. A third type of seller is trying to strengthen its balance sheet.
T&D World: What scares sellers?
McCoy: Sellers want confidence that the purchaser will treat them as a valued customer, because in almost every case, the incumbent utility selling the transmission assets instantly becomes the transmission company's biggest customer.
T&D World: Why would a company commit assets to an independent transmission company but still retain ownership?
McCoy: The company may not be able to invest the cash proceeds from a sale that would exceed the earnings it is now getting from its transmission assets, or it wants the ability to “recall” the assets in the future.
T&D World: Will we see the transfer of transmission assets of generation and transmission companies and of municipals?
McCoy: We are already starting to see some action. A couple of Nebraska public power entities have linked up — no pun intended — with the TRANSLink construct. Also, a major municipal utility contacted us regarding the possibility of an asset sale.
T&D World: What's holding sellers back?
McCoy: Some potential sellers are waiting to see the outcome of the FERC Standard Market Design Notice of Proposed Rulemaking (SMD NOPR).
Editor's Note: FERC issued SMD NOPR on July 31, 2002
T&D World: Chairman Pat Wood has stirred up action at the FERC. What report card would you give him?
McCoy: I've heard Chairman Wood (and Commissioner Brownell as well) state that the FERC approach is a holistic approach. The FERC would like to provide a series of rules that in the aggregate produces a market design that works. My belief is — this is Paul speaking now — that it may take some suboptimization of the pieces to optimize the whole. The FERC wants to lay out a fairly global framework about how the market will work, how generators will interconnect, who will pay for the new connection and whether generators will continue to be asked to act as bankers. For trying to solve the big issues, I give the chairman a lot of credit. I would give the chairman a good report card right now for what he's trying to do.
T&D World: When I heard the FERC chairman speak in New York, he was pressing for reliability of the system as much as he was for putting the uniform market rate structure in place.
McCoy: I absolutely agree with that. I had the opportunity to meet with the chairman recently. He raised that very question to me about reliability. We will not have succeeded if the FERC provides an elegantly designed standard market design but the lights don't stay on.
T&D World: Aren't generators out to take advantage of transmission owners?
McCoy: At times, yes. At times, transmission owners try to take advantage of generators. In general, though, suppliers actually want transmission owners to make money. They want the system to be well maintained. They want it to be expanded when it needs to be expanded. They don't want artificial barriers to keep them from getting access to the customers they want to serve.
T&D World: What is your position on the development of market rates?
McCoy: We're really going to err if we try to adopt the classic postage stamp rate for basic network service. Why should a resident of central Manhattan pay the same rate in terms of accessing suppliers as someone who's located next to a generating station in a lower cost to serve area? If we went to a postage stamp rate, we'd need to deal with subsidization issues.
T&D World: Which way are we going now?
McCoy: We are tipping toward maintaining the license plate approach, where each generator pays a certain rate to get access to customers in a specific zone.
T&D World: Are license plate rates hard to calculate?
McCoy: No, they're very easy to calculate. For example the PJM companies calculate revenue requirements that convert into a rate. That rate is in effect until the transmission owner goes to the FERC to get it adjusted. MISO uses license plate rates as well. There's no reason to go to a postage stamp rate other than for transactions that go across RTO regions.
T&D World: Can you describe the different types of transmission entities coming into the marketplace?
McCoy: There are really three new transmission entities. One model is exemplified by the American Transmission Co. (ATC), where a separate company now exists, but the market participants still own the stock. The Trans-Elect model has investors owning transmission assets. The FERC has recognized this distinction. When we purchased the transmission assets of Consumers Power (now Michigan Electric Transmission Co.), the FERC approved an innovative rate structure conditioned on us joining a FERC-approved RTO. The ATC and Trans-Elect models are close, the ownership is different.
Yet another approach, as demonstrated by TRANSLink, has utilities commit their assets to an independent transmission company (ITC), and a third party manages the assets. Member utilities still retain complete ownership.
T&D World: What are the big issues we need to face?
McCoy: Some major issues are being resolved. I believe the seams issues between RTOs will be resolved within the next couple of years. This will enable the industry to meet the goal of a single market unencumbered by corporate boundaries.
T&D World: How will transmission-only entities respond to natural disasters, including storms?
McCoy: It is usually desirable for everyone's long-term benefit to have the seller (now the distribution company) have some form of first responder contact. In a major storm, the priority is to put transmission back up. Transmission companies would be no different than utilities today. Most companies have contractors ready to respond to rebuild in an emergency. Beyond that, if the incumbent utility is best suited to do ongoing inspection and maintenance work, we're happy with that. If the seller doesn't want to do that, or if they'd like to exit the business, we can arrange for others to do the work on an outsourced basis or do it with our own personnel, as is the case with our Canadian affiliate Alta Link.
T&D World: Do you expect transmission-only companies will consolidate staff or outsource operations and maintenance (O&M) functions?
McCoy: There is synergy in combining the O&M practices, but not as much as you might think. For the typical transmission entity, about 20% of the revenue requirements are related to O&M. If we were extremely aggressive and, say, by combining two transmission entities, produced a savings of 20% in O&M, that's only four percentage points of the total revenue requirement.
Bottom line, cutting O&M costs is important but not the principal driver in the boardroom.
T&D World: What about these companies who want to construct for-profit transmission links to relieve bottlenecks?
McCoy: Good question. The Trans-Elect board has just authorized creation of just such an entity. This strategy fits right in with our initiative to build a 500-kV circuit along the California Path 15 corridor. There is indeed a place in the U.S. market for entities to develop and construct individual transmission links.
T&D World: Isn't TransEnergie US building a link to Long Island?
McCoy: Right. People bid for access to the line on a nondiscriminatory basis under a FERC control process.
T&D World: What about long direct current (DC) transmission lines built across RTO boundaries?
McCoy: The idea of a fairly long DC line from the powder river basin near the coal fields to serve loads in the Midwest is being talked about. In essence, we'd have coal competing against gas. There are similar opportunities in northern Alberta to move electricity generated by large cogeneration facilities associated with extracting oil from the oil sands and economically transport energy via wires to the United States. We see alternating-current opportunities as well.
T&D World: So you believe transmission companies could obtain right of way for these projects?
McCoy: I believe new transmission is constructable if people truly understand the need and if those who wish to build are sensitive to stakeholder concerns, and are realistic about the time frames involved.
T&D World: What about leveraging existing rights of way?
McCoy: We have plenty of options, whether that means line compaction or innovative construction techniques. We must still be concerned with the loss of the whole right-of-way corridor.
T&D World: How big will Trans-Elect become?
McCoy: We would like to have 10 major assets in five years. That's averaging about two a year. Last year, we had two contracts, culminating in May of this year. Hopefully we will have acquired two more by May. We have also decided to establish a Greenfield transmission development arm.
T&D World: So you've seen increased opportunity in 2002?
McCoy: The pace picked up after FERC issued Order 2000. This year we have had several transmission entities call us and say, “We'd like you to come and talk to us.” Also, there has been little construction in the past 15 years. So, with a need to deploy capital, a lot of companies are looking at their situation, saying, “Instead of raising capital for an expansion to be performed over a 5- to 10-year period, we could sell the assets, leaving someone else to raise the capital, and we'll pay as we go and collect from our retail customers. As long as we're guaranteed we won't be discriminated against, let's investigate the possibility.”
T&D World: What are your strategies to operate your transmission purchases?
McCoy: Within Trans-Elect, if the greatest overall value comes from contracting back with the sellers to provide services like operations, we'll do that. If the greatest value comes from outsourcing to third parties, we'll do that. In some cases, like in Alberta, Canada, we took the majority of utility functions in-house, retaining the existing work force. Even there, all major construction and engineering had been contracted out. We're very pragmatic.
T&D World: What about planning functions?
McCoy: We take the planning function in-house. In an RTO environment, we would do our own local planning to serve local load, and feed local planning information up to the RTO so they can construct a regional plan.
T&D World: I take it you're going to revisit your agreements with services suppliers every three or four years?
McCoy: We visit it as often as the contract allows. And we review our strategy every time we have another opportunity to bid on assets.
T&D World: Will other people follow you to the marketplace?
McCoy: We are not naive. We believe that if our model is a successful model, just like in any business, others will come along. We've assembled the right team of people with operations, development, finance and regulatory expertise. To assemble another Trans-Elect-type company would be difficult. It is hard to pry loose people with these skill sets from employers.
Paul McCoy serves as senior vice president, Transmission Systems Operations for Trans-Elect. Previously, he served as senior vice president of Unicom and president of the Transmission Group of Commonwealth Edison (ComEd). McCoy started and developed ComEd's Wholesale Energy Trading Group into a major regional trading organization.
McCoy has held several leadership positions involving major industry organizations, including service as chairman of the Mid-America Interconnected Network (MAIN); chairman of the National Electric Energy Testing, Research & Applications Center at Georgia Institute of Technology (NEETRAC); member of the Electric Power Research Institute (EPRI) Research Advisory Committee; and board member of the North American Electric Reliability Council (NERC). McCoy was instrumental in the formation of the Midwest Independent System Operator (MISO) and has served as vice chairman of its Owners Committee.
McCoy earned a BSEE degree from the Illinois Institute of Technology and is a registered professional engineer in the state of Illinois.
Trans-Elect to Buy Illinois Power's Transmission System
Trans-Elect Inc., the nation's first and only truly independent electric transmission company, has announced a definitive agreement to purchase the transmission assets of Illinois Power for approximately $240 million. Illinois Power will use these assets as one of the customers of Trans-Elect.
Illinois Power confirmed the new deal, which encompasses approximately 1700 miles (2736 km) of 345,000-V and 138,000-V transmission lines, 20 substations, and the transmission assets within an additional 40 substations in central and southern Illinois.
The Federal Energy Regulatory Commission (FERC) has created a policy goal of separating electricity generation and distribution from transmission throughout the United States. When this separation occurs in Illinois, it further opens access to transmission systems for competitively priced electricity. FERC must approve the proposed transaction. Trans-Elect and Illinois Power expect the transaction to be completed by the second quarter of 2003.
This acquisition will have minimal, if any, impact on jobs. Trans-Elect expects to extend offers to all the employees directly impacted by this transaction, and it will offer compensation that, in the aggregate, is comparable to the current compensation employees receive from Illinois Power.