DTE Energy, the parent company of Detroit Edison (Detroit, Michigan, U.S.), is getting out of the transmission business and, therefore, will no longer have control of the lines that transport power from its generating stations to its retail customers. In a sense, though, DTE was already losing the right to control power flows on its transmission lines. Nationwide, transmission owners are required to turn over the dispatch of generation and other wholesale transmission functions to independent system operators and regional transmission organizations. This course of action didn't fit the way DTE likes to transact business.

Anthony F. Earley Jr., DTE Energy chairman and CEO puts it this way: “The current regulatory environment requires us to cede operational control of our transmission assets. Because we generate the greatest value for our shareholders and customers from assets we own and operate, transmission is no longer strategic to DTE Energy or a driver of future growth.”

Consequently, DTE put its transmission assets on the auction block. On Dec. 3, 2002, DTE agreed to sell its bulk transmission assets to KKR and Trimaran Capital Partners. When the deal closes, DTE will be US$610 million richer, but it will no longer own 3000 miles (4828 km) of high-voltage electric transmission lines and associated right-of-way. DTE will buy back transmission services from the new owners and rates will be capped at current levels through 2005. With the proceeds, DTE intends to invest in its generation and distribution businesses, while strengthening its balance sheet.

Sam Brothwell, director of utilities research for Merrill Lynch, predicts we won't see a mad rush for utilities to sell transmission assets to independent transmission companies until investors understand exactly how transmission will be regulated and, thus, how money can be made. Says Brothwell, “Investors want to know whether the states or the Federal Energy Regulatory Commission (FERC) will ultimately regulate the assets.”

Investment in the transmission grid in North America has been stagnant for the past 10 years. Without proper incentives to build, utilities have built minimal long-line transmission. At the same time, load growth averaging 2% per year continuously eats up any transmission margin. Overall capacity margins are increasing in North America as generating capacity is rising faster than the increase in load growth. Still this does not address the need of transmission to move electricity from the generator to the load.

According to the North American Electric Reliability Council (NERC), 7088 miles (11,407 km) of new transmission are proposed at 230 kV and higher in the near term, with about 10,100 miles (16,254 km) to be added during the 2002/2011 time frame. This increase represents a mere 5% increase in installed transmission at 230 kV and higher in North America over the next 10 years.

Utilities often cite the inability to obtain right-of-way as a reason not to build. Although a legitimate concern, investment in transmission is often low on the list of spending priorities for vertically integrated utilities. FERC is proposing standard market designs it predicts will provide the financial incentives necessary for utilities to invest in new transmission capacity.

Utilities Face Choices

With FERC orders mandating that all generators have equal access to transmission, some formerly integrated utilities have decided to exit the transmission business. Some are looking for cash to invest, others intend to pay down debt. Utilities in distress are fighting just to stay alive. We've already seen major asset sales from utilities that bet their future in power trading. Distressed companies including Dynegy (Houston, Texas, U.S.) and Aquila (Kansas City, Missouri, U.S.) are selling off T&D assets in an attempt to stay solvent.

New Players Emerge

Of course, with chaos at record levels, new players see opportunity. Although vertically integrated and federally owned utilities still own most of the transmission in North America, we are seeing a shift in ownership as new players arrive intent on reshaping the landscape of transmission over the decades to come.

In the transmission arena, four major trends are emerging:

• Transmission owners are selling assets for cash.

• Owners are pooling their transmission assets with others while outsourcing operational functions.

• Companies are buying existing transmission assets for cash.

• Companies are building independent transmission links.

Independent Transmission Links

TransÉnergie US, a subsidiary of Hydro-Québec (Montréal, Canada), was the first North American company to see opportunity in the development of independent transmission links. “TransÉnergie's strategy,” says President and CEO Jeff Donahue, “is to build, operate and own transmission links that tie excess generation to constrained load areas.”

One of TransÉnergie's first projects was the Cross Sound Cable Interconnector, a ±150-kV HVDC submarine cable system that provides additional power transfer capability between New Haven, Connecticut, U.S., and Shoreham, Long Island, New York, U.S., in either direction. The Cross Sound Cable has received all permits and construction is complete. Operations are expected to commence in the first quarter of 2003.

Next on the docket for TransÉnergie US is a project to bring additional power into the New York City area. The Harbor Cable Project (HCP) is a proposed 2005 underground and submarine HVDC cable system controllable electric transmission interconnection that would link the PJM electricity market in New Jersey to the Rainey Substation in New York City, providing the severely constrained New York City Load Center with a bidirectional transfer capability of 650 MW.

Neptune Project

Another ambitious initiative will interconnect eastern Canada, New England, New York and the Mid-Atlantic States. The so-called “Neptune Project” is an underwater, HVDC electric transmission system. Phase one will connect electric-load centers in New York City and Long Island with northern and central New Jersey using the GPU/First Energy Substation in Sayreville, New Jersey. The Neptune link is to provide 600 MW of power to both the Consolidated Edison system and the Long Island Power Authority grid.

Northern Lights

The Northern Lights project is a proposed HVDC (500-kV) transmission link of approximately 2000 MW connecting the province of Alberta (originating near Fort McMurray) to the U.S. Pacific Northwest (terminating at the Mid-Columbia trading hub in Washington State). The project's sponsors, TransCanada and Altalink Investments L.P., expect construction to start in 2003 and take four years to complete.

Generators have proposed more than 5000 MW of new electricity generation for the Alberta market by 2005. This sum far exceeds the projected Alberta load-growth requirements by about 3000 MW. Most of the new generation projects have been proposed as cogeneration facilities whose steam would be an integral component of the oil recovery process of reserves from Alberta's vast oil sands. The Northern Lights project would enable the hydro-dependent U.S. Pacific Northwest market to tap these low-cost, base load generation projects.

Pooled Assets

Trans-Elect Inc. (Reston, Virginia, U.S.) is a truly independent, privately held transmission company with 12,600 miles (20,278 km) of transmission assets. Trans-Elect is run by seasoned executives with utility, finance, regulatory and legal experience. GE Capital Global Energy, a unit of GE Capital Structured Finance, is a limited partner with Trans-Elect in purchasing assets. Trans-Elect's mission is to buy, own and operate electric transmission systems under the jurisdiction of the FERC.

The transmission systems Trans-Elect acquired provide wholesale service between the electric generation companies and electric distribution companies. In May 2002, the company purchased the assets of the electric transmission business of Canadian electric-utility TransAlta (with 50/50 General Partner SNC-Lavalin). These assets are now managed by limited liability company AltaLink with 185 employees. The system includes 7200 miles (11,587 km) of transmission lines and 260 substations ranging from 69 kV to 500 kV. The AltaLink system serves more than half the electrical needs of the province, including Alberta, Calgary and Edmonton.

Trans-Elect then purchased the transmission assets of Michigan-based Consumers Power, with additional debt funding provided by CIBC World Markets and Deutsche Banc Alex.Brown. Trans-Elect, through limited liability company Michigan Electric Transmission Co. (METC), has taken over operation of 5400 miles (7242 km) of 345- and 138-kV transmission lines serving Consumers' entire electric service territory in the lower peninsula of Michigan. The US$290 million purchase also includes 80 substations. Transmission rates charged to Consumers Energy and its customers will be maintained at the FERC-approved levels for a minimum of three and a half years.

Trans-Elect's latest announcement is the purchase agreement for the transmission assets of Illinois Power (Decatur, Illinois, U.S.), an operating utility owned by distressed energy trader Dynegy. This sale is expected to close in the first half of 2003. Facilities include approximately 1700 miles (2736 km) of 345- and 138-kV lines, 20 transmission substations, and transmission assets within an additional 40 substations. Upon transfer of ownership, Illinois Power will contract for use of the transmission facilities on the same basis as other transmission customers. Illinois Power will continue to provide services to operate and maintain the transmission system under contract to Trans-Elect for an initial period of five years.

Statewide Transmission Company

Wisconsin law encouraged utilities in the state to transfer ownership and control of their transmission assets to a statewide transmission company. The law also encouraged the participation of public power and cooperative entities in the ownership of the new company. The American Transmission Co. (ATC; Waukesha. Wisconsin, U.S.) is the result of this effort.

On Jan. 1, 2001, ATC took responsibility for transmission systems that previously were owned and operated by multiple electric utilities. ATC presently owns, plans, maintains, monitors and operates the electric transmission assets in portions of Wisconsin, Michigan and Illinois. The system includes 8600 circuit miles of high-voltage lines and 450 substations.

Expect More Pooled Transmission

Three Midwestern U.S. electric utilities — Ameren (St. Louis, Missouri), FirstEnergy Corp. (Akron, Ohio) and Northern Indiana Public Service Co. (Merrillville, Indiana) — Indiana have proposed the creation of independent transmission company, GridAmerica, to become operational in 2003.

GridAmerica will be a regulated, for-profit transmission company, providing transmission service to power generators, marketers and load-serving entities. It will become the world's largest transmission-only company with 14,000 miles (22,530 km) of transmission lines across 46,000 sq miles (119,139 sq km) in five states.

In a unique move, Grid America has decided to turn over management responsibilities to National Grid. The GridAmerica structure will provide transmission owners a vehicle to transfer assets into GridAmerica, while receiving units of the company based on fair market value. Provision is available for new members who wish to contribute their facilities.

In addition, National Grid has committed up to US$500 million for asset investment or acquisition. GridAmerica will assume operations under the authority of the Midwest Independent System Operator. Ultimately, GridAmerica owners can opt out of the transmission business as an initial public offering (IPO) is planned between the third and fifth year of operation.

Yet another independent transmission company is under formation in the Midwest. Six utilities — Alliant Energy (Madison, Wisconsin), Corn Belt Power Cooperative (Humboldt, Iowa), MidAmerican Energy (Des Moines, Iowa), Nebraska Public Power District (Columbus, Nebraska), Omaha Public Power District (Omaha, Nebraska) and Xcel Energy Inc. (Minneapolis, Minnesota) — have filed with the FERC to create an independent for-profit limited liability transmission-only company, TRANSLink.

Expected to be operational by the third quarter of 2003, TRANSLink will provide open-access transmission service over 29,0000 circuit miles of transmission and 635 transmission substations. Each participant will retain an ownership interest in TRANSLink. Individual stakes will increase through capital expansions. TRANSLink also intends to seek independent financing to plan and invest in new transmission infrastructure. In addition, the company will perform regional planning to decide how to address congestion without overinvesting.

Rules of the Road

The rules that will dictate how transmission owners will be reimbursed for providing transmission services are still being written. Some areas of the country are more comfortable with proposed FERC market design rules than others. Merrill Lynch's Brothwell sees more opportunity today in the East and the Midwest where the concept of independent transmission is fairly well advanced. In the Western states, Brothwell still sees a significant resistance from state regulators and utilities that don't want an “East Coast solution imposed upon them.”

As the true costs of adhering to the many requirements mandated by the FERC come to light, many smaller utilities will realize that it makes more sense to buy access to transmission rather than to maintain their own transmission systems. The larger vertically integrated utilities will continue to serve existing transmission customers and expand the transmission grid.

Meanwhile, independent transmission companies are here to stay and, in fact, are enthusiastically supported by FERC Chairman Pat Wood (See T&D World, November 2002, “Power in Politics”). Today, most smaller and mid-sized utilities are waiting for the FERC to finalize market design rules before they make any major decisions concerning transmission assets. Many issues remain to be addressed on the FERC notice of proposed rulemaking. Until asset owners are assured they will be properly incented for building new transmission, we will not see major investment in the open-access transmission system required to deliver reliable and cost-effective transmission services to the marketplace.

NERC 2002-2011 Reliability Assessment

The North American Electric Reliability Council (NERC) is a voluntary organization that promotes bulk electric system reliability and security. NERC duties include the assessment of the reliability of the electric power system in North America. Extracts from the “NERC Assessment for the years 2002-2011” follows:

North American transmission systems are expected to perform reliably in the near term. Efforts to mitigate potential reliability impacts appear to be working effectively. However, in some areas of North America, transmission systems are reaching their limits as the systems are subjected to new loading patterns resulting from increased electricity transfers and customer demand increases. Although some transmission constraints are recurring and well known, new constraints are appearing as electricity flow patterns change. In cases where redispatch options have been exhausted or are ineffective, the only way to remove these constraints is to increase the capability of the transmission system or build new generation close to the demand centers.

New flow patterns result in an increasing number of facilities being identified as limits to transfers, and transmission loading relief (TLR) procedures are required in areas not previously subject to overloads to maintain the transmission facilities within operating limits. Several steps or classifications of NERC TLR exist, ranging from level 0 to 6. At TLR levels 5 and higher, firm transactions are curtailed. Although few TLRs 5 and higher have been called since the TLR procedure was instituted, the number has increased each year. The 2002 TLRs listed represent those called through July 2002.