How utilities are getting in on the transmission building boom
Utility-affiliated TransCos emerge in the race to win regional build-out opportunities
Expansion of renewable resources and new gas generation under the Clean Power Plan is expected to require thousands of miles of new transmission infrastructure in the coming years, and increasingly utilities are getting in on the race to build it.
The first wave of competitive transmission developers has already emerged, mostly spawned by utility affiliates, partnerships, and joint ventures. But new ones keep appearing, as evidenced by three recently green-lighted by the Federal Energy Regulatory Commission (FERC).
Ameren-affiliate ATX Southwest Ameren, Westar Energy-affiliate Kanstar Transmission, and Midwest Power Transmission Arkansas, a joint venture of Westar and Berkshire Hathaway Energy, were approved by FERC to compete to build transmission in unregulated markets in August.
Competitive transmission developers have the advantage of being able to work outside specific utility service territories and to access capital either from the utility balance sheet or market equity,” observed former FERC Chair James Hoecker, now the WIRES Group Counsel and Husch Blackwell Senior Counsel & Energy Strategist.
“These are ways to improve the utility’s bottom line by engaging in infrastructure development outside the service territory,” Hoecker said. “It is not a new line of business because utilities are about building infrastructure. But it is a departure.”
As indicated in the three new entries’ FERC filings, MTP Arkansas will enter the competition for projects planned by the Midcontinent Independent System Operator (MISO) and ATX Southwest and Kanstar will take part in the Southwest Power Pool (SPP) market.
“Both regions are talking about the need to strengthen their grids, so we believe there is a lot of opportunity as they go through their planning processes and identify needed projects,” said Westar Energy Spokesperson Gina Penzig of her company’s MTP Arkansas and Kanstar affiliates’ intentions.
FERC opens the transmission building market
The opportunity for utility-affiliated and independent providers to compete in this way is largely the result of FERC’s landmark Order 1000 rule, intended to bring market forces to bear in transmission building. The final version of the rule was issued in 2011.
“The new TransCos see Order 1000 as giving them the opportunity to compete,” said SPP Engineering VP Lanny Nickell.
Order 1000 opened that opportunity by removing the right of first refusal for transmission building previously held by incumbent utilities, Nickell said.
Order 1000 also required transmission providers to revise their rules to make clear which entities are eligible to propose transmission projects, what information a developer must have to support a proposal, and what the process is for project selection.
In response to FERC’s guidance that the process can be through competitive bidding, both MISO and SPP created criteria to qualify transmission developer participants and initiated solicitation and bidding procedures.
FERC wanted to remove the barriers to entry for regionally cost-allocated projects, said MISO Regional Executive Priti Patel.
The annual MISO transmission expansion planning (MTEP) process, Patel said, is aimed at identifying projects that “maximize the value of the transmission to our customers by minimizing the energy, capacity, and transmission costs.”
FERC’s effort to open the transmission business to more competition is based on the assumption that competition “means more new ideas, more efficient capital structures, and more efficient construction," said Clean Line Energy Partners (CLEP) Founder and President Michael Skelley. "But transmission is more complicated than the generation space so it has been slow to take off.”
CLEP, backed by National Grid and private investors, has five long-distance, high-voltage direct current lines in development that would interconnect renewables resources with MISO, SPP, and other regional systems. It has benefitted from Order 1000 provisions, but Skelly believes FERC’s intent has yet to be fully realized.
“More than half the new transmission being built in the U.S. now has for at least one of its goals greater access to wind and solar,” he said. “But most new transmission is still built by incumbent utilities. It is slowly evolving but it will take a few years.”
MISO put its transmision planning procedures in place over the last year and expects to issue its first competitive solicitation as part of its 2015 Transmission Expansion Plan. In that solicitation is what could be MISO’s first competitively bid project, the 345 kV Duff-Rockport-Coleman line.
It has 48 qualified developers among its stakeholders. The list includes developers that are competitive transmission companies (TransCos) wholly or in part affiliated with utilities, incumbent utility developers, and independent developers. At least two-thirds are utility affiliates.
“All transmission developers have to meet the same criteria to be qualified,” Patel said.
Transmission planning is about the project, she said. It can be “bottom-up,” with load serving entities or transmission owners recommending projects, or “top-down,” with MISO making project recommendations and working with stakeholders on approaches to them.
“Not all the projects we select will be competitive,” Patel said. "A baseline reliability project would not be considered competitive. A market efficiency project (MEP) or a multi-value project (MVP) would, and could be built by a competitive transmission developer.”
Bids are evaluated on multiple criteria, including their cost and specificity, the degree of cost, performance, and operations predictability they provide, and the extent to which the developer’s guarantees, commitments, and assurances minimize risk.
The May 5 SPP request for proposals included its first competitive upgrade, the 115 kV North Liberal-Walkemeyer project in Kansas.
From his perspective at SPP, Nickell agrees with Hoecker's point that many competitive companies were formed to seize market opportinities created by FERC Order 1000 and earn FERC-guaranteed returns on infrastructure builds beyond regulated territory boundaries.
“We can structure financial products to best fit the need for each project without impacting the companies’ vertically integrated regulated activities,” Penzig acknowledged. “We think it is best to keep both activities separate and distinct.”
Others TransCos were formed because company leaders see opportunities where regional organizations like SPP “have gotten good at identifying regional transmission needs,” Nickell added.
Some regional organizations limit competition to the planning process, and some limit it to the build out, but SPP uses competition in both phases, said Nickell.
“We identify transmission expansion needs and developers are given the opportunity to propose solutions,” he explained. “After SPP chooses the best plan, we solicit their construction proposals, giving bonus credit to the developer who made the planning proposal.”
SPP continues to build. Since its official designation from FERC, it has invested over $5.5 billion in regional transmission and has $5 billion more in early development stages, Nickell said.
It has completed only one round of transmission planning studies since Order 1000 went into effect, with only the North Liberal-Walkemeyer project in the works. From this limited experience, it has started to learn.
“The number of independent transmission developers who are members of SPP or qualified RFP participants in planning has nearly quadrupled to 23 since before 1000,” Nickell said. “And there will be more. Some companies are probably waiting for our process to prove itself before they come in.”
The increased activity has demanded much due diligence from SPP but also creates stakeholder buy-in, which is important to the organization, he said. “It has expanded the number of good new proposals and good ideas we get to evaluate.”
There will also likely be the need to assure that competitive transmission builders meet SPP’s standards for construction quality and customer service, Nickell said
More transmission to come
“It is too early to talk about trends,” Patel said. But the transmission expansion planning for 2011, which targeted renewables mandates in the MISO footprint, was likely a landmark.
“We have had a pretty steady slate of projects year after year until it spiked with MTEP 11," the MISO exec said. "That included our first MVP slate of projects. It was a $5 billion to $7 billion investment and included 17 MVPs.”
Patel believes the factors driving utilities to move to competitive transmission development subsidiaries could cause another spike.
“We anticipate that as we assess the system needs for compliance with the Clean Power Plan (CPP) and other environmental regulations there will likely be a transmission buildout spike that will be of some significance, though it is too early to say how much,” Patel said.
Investment at the state and regional levels in transmission over the last few years has paid off in new wind and solar projects, Skelly said. In addition, “the two biggest proposed transmission projects in the country in many decades are currently up for federal review this year.”
The Anschutz Corporation-backed TransWest Express would deliver 3,000 MW of Wyoming wind through Las Vegas to load centers in the Southwest. The CLEP-developed Plains & Eastern line would deliver 4,000 MW of Oklahoma wind through Memphis to the Southeast.
With the CPP and other environmental regulations, “things are changing and companies are adapting to the new playing field,” Patel said. Regional planning authorities and forward-thinking utilities are preparing, she acknowledged.
The general expectation is that implementation of the CPP, whether through state or regional compliance, “will change the resource mix enough that new transmission development will be necessary,” Nickell agreed.
SPP’s study on transmission needs for compliance in its region will be completed in January 2017. “Until we see the results, we won’t fully know but there is a general anticipation,” he added.
“To the extent that SPP and MISO are looking at how the Clean Power Plan will affect their need for new transmission, it could very well have an impact,” Penzig said.
Between environmental regulations and the CPP, Westar expects the generation make-up will change more rapidly in the future than it has in the past,” she added. “These changes to the generation fleet will require additional build-out of the transmission system.”
The three filings for the new transmission utility affiliates represent a response to FERC’s longtime effort to increase competition in the transmission building space but not the response it intended, Hoecker said.
Instead of “truly independent transmission developers, it is getting TransCos that are basically affiliates of integrated utilities. That makes a lot of sense, but the FERC may not have expected these to be so potentially dominant in this market.”
Competition has not reduced the transmission building needs for protracted time and ample money that make utility-affiliates among the few with resources enough to play, he said. It has, however. brought utilities into a competitive market.
“All the old guarantees are disappearing but they are learning to take different kinds of risks in exchange for the potential of greater reward,” Hoecker said.
Pressure from new technologies and private players is precipitating change that is forcing utilities to evolve, he said. “The disturbing thing is that even though the utility business model is changing, the regulation of it isn’t changing much at all, and that is slowing things down.”