Investment in electric transmission assets is on the rise globally, and these new outlays could have implications for credit quality, according to a report published this week by Standard & Poor's Ratings Services titled "Capital Spending On Electric Transmission Is On TheUpswing Around The World."

The report summarizes the dynamics of the electric utility industry's transmission segment in three major regions: Australia and New Zealand, the U.K., and the United States. The common theme of the continued need for more spending to enhance reliability and wholesale markets is contrasted against regional differences in the types of companies that own transmission assets and the regulatory oversight of the transmission owners.

Although the quality of transmission assets varies between states within Australia's national electricity market, there is no evidence to suggest that any region is suffering to any significant degree from material underinvestment. It is difficult to identify the precise level of investment required to maintain the integrity of the grids. However, the sizable amount of recent capital expenditure, robust reliability requirements and indicators, and a supportive regulatory environment, indicate that the quality of Australia's grid assets is sound.

The investment environment for New Zealand's transmission system is hindered by the nation's opaque regulatory regime. Indeed, the lack of certainty threatens to delay substantial capital spending that the government-owned transmission corporation, Transpower New Zealand Ltd., believes is necessary to maintain grid integrity.

The U.K. electricity transmission networks, owned by National Grid PLC in England and Wales, and by Scottish Power PLC and Scottish and Southern Energy PLC in Scotland, have entered a period of hugely increased investment due to the aging of assets (nonload-related investment), and the required increase in connections (load-related investment) for new wind-farm and hydropower stations in the U.K.

Investment in the U.S. transmission system by investor-owned utilities has begun to recover from a fallow period in the final decade of the 20th century and is set to reach new heights. According to the Edison Electric Institute, a 2003 survey of its members showed an intent by utilities to increase capital expenditures on the transmission grid by 60%.

"Some of the higher spending in recent years can be fairly characterized as "catch-up" after years of threatened--and then actual--industry restructuring led utilities to hold back on making financial commitments until responsibilities and cost recovery became more certain," said Standard & Poor's credit analyst Todd Shipman.

Now signs point to a renewed interest by utilities in making strategic transmission investments designed to improve market presence and financial returns. Standard & Poor's believes the focus on transmission expenditures on balance is beneficial for credit quality, but important decisions that will affect how risks are shared could still alter that conclusion.