The movement in the United States to encourage investor-owned utilities to sell off generation began in California. Regulators, sporting a flawed deregulation plan, mandated utilities, including Southern California Edison (SCE; Rosemead, California) and Pacific Gas & Electric (PG&E; San Francisco, California), to sell their generation. The public utility commission wanted to make sure there was room for new entrants in the generation market. Other states across the country followed with their own plans for deregulation, often requiring the separation of delivery from generation. Although results from retail competition have been mixed at best, we now have several utilities focusing solely on power delivery.

On the national scene, there is pressure for utilities to turn over the operational control of their transmission networks to regional operators to facilitate wholesale transactions. On the local scene, retail choice left to the individual states impacts dispatch and thus power delivery.

National Forces Come to Play

Matthew Cordaro, director of the Center for Management Analysis at Long Island University, sees change sweeping the T&D landscape. Cordaro finds “utilities are hesitant to chase higher unregulated returns, which at one time was a primary motivating force.” Now, with merchant generation in oversupply, many of the utilities that chased the generation market have under-performed their peers. In fact, some generation companies have experienced catastrophe. Cordaro, the former CEO of both Nashville Electric Service (Nashville, Tennessee, U.S.) and the Midwest Independent Transmission System Operator (MISO; Carmel, Indiana, U.S.), puts it this way: “I've always felt comfortable with the T&D business. Give me something approaching a 12% return and I'm happy.”

More executives with both public and private utilities are now attracted to the stable, regulated T&D business.

Distribution Utilities Gain Focus

Hugo van Nispen, vice president of management services with KEMA, believes money is to be made in the core. “Regulated T&D will continue to be a moderate risk, moderate return business for quite some time,” says van Nispen. But to perform well under existing structures, “utilities must figure out how to squeeze blood out of a turnip.”

Management consultants are seeing an increase in utility work. Says Cordaro, “We are finally entering an era where utilities have a need to file for a rate increase.” He believes that size does matter in distribution, and he believes regional distribution companies would make sense for both owners and customers. “It is not beneficial to have many small distribution companies in a limited area,” says Cordaro. “In the Tennessee Valley region, for example, we have 159 distributors. This is inherently inefficient and an unnecessary duplication.”

But Cordaro sees actual change coming slowly. He sees an avalanche of talk about consolidation but only a small stream of merger activity with a time horizon that can stretch to decades.

KEMA's van Nispen doesn't expect a major burst of investment in the delivery business segment. He predicts, “Investment in distribution utilities will come about mostly as a function of new connections, load growth and equipment age.”

T&D utilities have changed their focus in deregulated states. As these utilities sold off their generation, they looked for places to park the proceeds of the sale. Utilities came up with a variety of strategies. Some bought generation in other states; others migrated into energy trading. Still others bought their way into the contracting business.

Kevin Burke, president and COO of Consolidated Edison (New York, New York, U.S.), states, “Some utilities decided to invest in businesses they really didn't understand. We are now seeing a movement by utilities to return to the basics. We like to say that we never left.” Con Edison is now a delivery utility that transports electricity, natural gas and steam to customers in New York and Westchester County. When Con Edison sold off its fossil and nuclear facilities, the company was able to pay cash for the purchase of neighboring utility Orange and Rockland.

Consider Generation

Of course these T&D-only utilities must now purchase generation for their retail and wholesale customers. This electricity is purchased either by long-term contract or on the trading floor. “I can't believe any utility would allow themselves to be liable for the generation source. Also, regulatory organizations are beginning to realize that they must not hold the regulated utility liable for this risk,” says van Nispen. “At the end of the day, regulators are going to allow good business decisions to flow to the customer.”

Purchasing electricity on the open market requires an absolutely different skill set than that historically found in most utilities. Cordaro says, “It is critical that T&D-only utilities sign good power contracts while they look forward and show caution.” He warns delivery companies not to depend on one supplier. According to Cordaro, “Some utilities have limited experience in negotiation, while other utilities are quite capable and creative.”

Utilities Need to Focus

What about the day-to-day running of a T&D-only utility? Con Edison's Burke believes T&D utilities have a significant advantage because “the management and staff can really maintain their focus on the business.” As to growth by acquisition, Burke believes we will continue to see merger activity but only when transactions make sense for customers, employees and shareholders.

As to revenue growth, Con Edison has a history of maintaining good relationships with their public service commission. “Our PSC understands the need for continuing investment in infrastructure,” says Burke, who finds Con Edison customers are more interested in a reliable system than in a minor increase in electric rates.

What is the key to running a T&D utility? “You must invest in both people and infrastructure,” says Burke. Con Edison continues to invest in its T&D assets to meet load growth. Con Edison already has one of the most reliable systems in North America, and it continues to invest in reliability initiatives. For instance, Con Edison monitors every transformer on the network portion of its system and with this knowledge gains much better control over the system.

Bulk Transmission is Complicated

The Federal Energy Regulatory Commission (FERC) sets transmission tariffs, but state, regional and local entities influence the siting of new transmission, which makes expansion of the grid difficult. FERC continues to push transmission-owning entities to join regional transmission organizations (RTOs). The FERC is also pushing for uniform rates but has encountered opposition with its Standard Market Design proposal.

van Nispen agrees with FERC's strategy, stating, “They have a good overall game plan and are focused in the right direction, but it will take a long time to get the political support to push their views through. van Nispen sees the efforts by independent system operators paying off and expects they will work out the remaining kinks. He believes the industry will then move forward by codifying already working solutions.

Transmission-only utilities are already having an impact. The utilities in Wisconsin recognized back in the late 1990s that their electric power supply system was vulnerable and acknowledged the importance of a strong regional transmission system.

In January 2001, American Transmission Co. (ATC; Pewaukee, Wisconsin, U.S.) began operation under the direction of CEO José Delgado. Delgado believes “the present system is poorly adapted to support a regional energy market, but access to a wholesale market is extremely valuable to the consumer.” If, in fact, transmission is run with a regional view and with sharp focus, Delgado believes customers will be better served. ATC has invested more than US$330 million in transmission infrastructure since the company began operations in January 2001. Another $280 million in investment is planned for next year, with $2.8 billion in construction being contemplated over the next 10 years.

With a larger footprint, a transmission-only utility can take on bigger transmission construction projects that benefit a broader area, thus reducing the per-customer impact, while making a good return for its owners. “It used to be that a 12% return was not considered acceptable,” Delgado says. “Today, investors will die for a well-managed company that makes a 12% return. The financial markets like us a lot.”

It is critical that transmission entities be able to raise the money to invest in their facilities. ATC is currently having no trouble raising funds with a rating that is typically in the A to A+ range, but it is concerned that a rebound in the economy, along with negative cash flow implications of current rates might cause trouble. Because of this, ATC recently filed with the MISO at FERC a change in rate structure to improve cash flow. ATC needs access to low-cost capital to fund its planned improvements.

“Most vertically integrated utilities cannot afford to build the transmission they need because of the resulting rate impact on their retail customers. Maybe a company as large as the Southern Co. (Atlanta, Georgia, U.S.) can do it, but most others cannot,” says Delgado, who is eager to demonstrate for the industry that the ATC model works.

Transmission by Acquisition

Paul McCoy, executive vice president of Trans-Elect Inc. (Reston, Virginia, U.S.), expects we will see transmission-only entities growing as well as forming, but he predicts it will take time. “I think that longer term, we will see an environment where strong regional transmission-only companies will form. But first the industry needs to know what federal legislation will hold.”

Trans-Elect focuses solely on transmission and has purchased the transmission assets of both Consumers Power Inc. (Philomath, Oregon, U.S.) and Trans Alta Utilities (Calgary, Alberta, Canada). The Michigan assets, now called Michigan Electric Transmission Co. (METC), are investing in infrastructure, with a strong emphasis on control and relaying. “Our investment over the next five years in protective relaying is four times the level previously spent by Consumers Energy,” McCoy says. METC is now involved in a large-scale change-out to remove electromagnetic relays and put in electronic relays.

The Blackout Plays a Part

Of course, the August 14 East Coast blackout has affected almost every aspect of transmission. The first phase of the blackout report provided a thorough analysis of what went wrong. The report focused on the systems and data available (or not available) at MISO, and highlighted FirstEnergy's inability to alarm. But McCoy is more interested in what phase two of the blackout report will say when it comes out later this year. McCoy believes “we will see recommendations aimed at preventing a recurrence. We expect to see significant focus on the intelligence of the grid including smart relaying, where we can change settings in real time.”

McCoy expects future legislation to contain a lot of meat relating to the performance of the electric grid, including mandatory reliability standards. According to McCoy, “Protocols will become more codified and rigid.” He also expects to see training and certification mandated for personnel in key operating functions. Once these events come about, McCoy predicts utilities will come to understand the magnitude of grid investment necessary, including a big bump in system control, system protection and IT infrastructure.

Investment in Transmission

McCoy expects smaller transmission-owning utilities will find the costs to modernize their systems and meet coming standards will be quite high compared to the size of their system.

“Regardless of how well the smaller transmission systems are run, their executives will realize not investing to meet new standards is not an option,” McCoy says. Or as Delgado puts it, “The blackout taught us the most expensive transmission line is the one you don't have when you need it.”

In the past decade, too many utilities took their eyes off the service aspect of the business. Utilities ran into problems when control room operators were encouraged not to drop firm load. Delgado is a little more trigger-happy, saying, “We drop load when the system is at risk. We can always let the lawyers settle the details later.”

Delgado believes the primary focus of a transmission company should be to maintain reliability, security and adequacy. He wants to see reliability standards established that would be both obligatory and painful.

What's Next?

In the United States, Congress is considering the repeal of the Public Utility Holding Company Act (PUHCA). If this occurs, expect to see new investors come into the utility space. “This could have a profound impact on the shape of the utility industry” says van Nispen. “If PUHCA is repealed, we will see some utilities continue with the generic regulated model, but as new pools of money become available, other utilities will develop the bundling options needed to meet the returns demanded by investors.

MSAT Group Takes Shape

Transmission-only companies within the MISO footprint have created the Midwest Stand-Alone Transmission Companies (MSAT) group to work together on areas of mutual interest. Members have no qualms about sharing, as competition is not a concern in the regulated transmission business. The MSAT structure intends to recreate an environment where utilities share openly back and forth. Member transmission entities include Michigan Electric Transmission Co. (METC), American Transmission Co. (ATC), International Transmission Co. and Grid America. Participating utilities are sufficiently aligned that they believe their voice can be more effectively heard if they speak in one voice. Member representatives meet monthly to address joint issues. The MSAT concept has been received positively by FERC. Early goals are to make FERC filings and to present joint white papers in areas of common interest.

Proposed SeTrans RTO Suspended

A group of southeast U.S. utilities suspended its two-year effort to create the SeTrans Regional Transmission Organization. In a statement released on November 24, the sponsors of SeTrans, which include Southern Company and Entergy Corp., said their participation required the approval of applicable public service commissions as well as the approval of the Federal Energy Regulatory Commission (FERC).

The retail commissions in the region have expressed significant concerns about the role of an RTO and its effects on matters subject to their jurisdiction, including concerns about native load protection and cost impacts. These concerns have been expressed in numerous public forums, letters to FERC and to Congress, and in SEARUC resolutions. SeTrans said that its sponsors had concluded that it is “highly unlikely” that consensus support and acceptance for the RTO will be forthcoming from all state and federal agencies involved.

“While we are suspending our efforts, we believe that the SeTrans proposal contains much valuable work and could serve as an ultimate roadmap for future efforts in the region,” the statement read. SeTrans was formed to conform to FERC order 2000 that utilities turn control of their transmission over to RTOs. The other goals were to produce net benefits for consumers in the Southeast and to continue to provide highly reliable electric service. The SeTrans organization was to include Cleco Power LLC-a unit of Cleco Corp., Dalton (Georgia) Utilities, Georgia Transmission Corp., JEA-Jacksonville (Florida), the Municipal Electric Authority of Georgia, Sam Rayburn G&T Electric Cooperative Inc., and the City of Tallahassee (Florida).