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Major AEP West Virginia-NJ Proposed Line Has $3B Price Tag

Calling it a proposed transmission "superhighway," American Electric Power (AEP) last Tuesday filed with FERC and PJM Interconnection to build a new 765-kV transmission line stretching from West Virginia to New Jersey. The projected cost is approximately $3 billion.

AEP said the proposed line will span approximately 550 miles and is designed to reduce PJM congestion costs by substantially improving west-east transfer capability by approximately 5,000 MW and reducing transmission line losses by approximately 280 MW. It also will enhance reliability in the eastern transmission grid, the utility noted.

The proposed transmission line, called the AEP Interstate Project, would originate at AEP's Amos transmission station in Putnam County, WV, connect through Doubs Station in Frederick County, MD, and terminate at the Deans Station in Middlesex County, NJ.

The proposed route follows a corridor conceptually identified by PJM as Project Mountaineer, a transmission route needed to address critical transmission congestion within the PJM footprint. Exact routing of the line would be determined after PJM approves the project. AEP will work with PJM, other affected transmission owners and stakeholders throughout the siting process.

AEP also has filed with the U.S. Department of Energy (DOE) to have the proposed route designated as a National Interest Electric Transmission Corridor (NIETC). The Energy Policy Act of 2005 provides for NIETC designation for areas that are experiencing electric energy transmission capacity constraints or congestion that adversely affects consumers.

In a conference call with investors, AEP CEO Michael Morris on Wednesday said that he expects challenges along the right-of-way in response to the proposed line. Given that, he underscored the significance of the project's proposed route being designated a NIETC by the DOE.

A new AEP subsidiary, AEP Transmission Co. LLC, will own the line and undertake construction of the project. The anticipated in-service date is 2014, assuming three years to site and acquire rights-of-way and five years to build the line.

Standard & Poor's Ratings Services (S&P) said that the news will not immediately affect AEP's credit ratings. "The long lead times and the considerable uncertainties surrounding the cost and cost recovery of such ventures make it premature to incorporate any possible effect into AEP's current credit profile," S&P said. "We anticipate that if the proposal does eventually proceed, the presence of other participants and the support of regulators will help limit AEP's risk."

"We must move forward and address the current inadequacies of our nation's existing transmission infrastructure. Congress and the Federal Energy Regulatory Commission have identified that investment in transmission is crucial to ensure the reliability of the electricity grid and the growth potential of our economy," said Morris in a prepared statement.

"It makes sense that AEP would be the first to step up and propose a new transmission superhighway to address issues plaguing the eastern transmission grid. AEP was the first utility in the United States to recognize the value of investing in a network of 765-kV transmission lines, the highest-voltage transmission ever built, to move power from remote generators to load centers. Today, AEP's 765-kV network, which stretches more than 2,000 miles, is arguably the most reliable, efficient transmission network in the United States.

"Additional high-voltage transmission highways are absolutely necessary to relieve congestion within the eastern grid. In 2004, PJM transmission congestion costs totaled approximately $800 million, and in 2005, congestion costs are expected to exceed $1 billion. These costs are reflected in higher wholesale electricity prices, particularly during peak demand periods, when available, lower-cost electricity can't be transported to where it is needed."

AEP's new line "will reduce those congestion costs, cut line losses, enhance reliability and provide the transmission capacity and flexibility that is critical for construction of new fuel-diverse generation, including renewables."

In its filing submitted to FERC, AEP said the proposed line will be a "major step forward" in the integration of PJM West into the historical footprint of PJM "in order to provide for more efficient and reliable operation of PJM as a single system and market area." The utility said that although PJM West has become part of the PJM-wide market, the eastern and western parts of PJM were never planned as a single, integrated system. "Transmission from west to east across PJM is limited."

In the filing, the utility asked the Commission to approve three incentive rate treatments in connection with the formation of AEP Transmission Co. LLC and the construction of the power line.

Part of what's interesting about last week's announcement is that AEP is not gun shy about pursuing such a massive project in the wake of a 10 years-plus odyssey to build a 90-mile, 765-kV transmission line connecting power stations in Wyoming County, West Virginia and Jacksons Ferry, VA.

Appalachian Power, an AEP unit, announced that power line project in 1989. In December 2002, the U.S. Forest Service made a recommendation that the power line be allowed to cross 11 miles of federal land. Appalachian Power began clearing rights of way for the project in late 2003, and started construction in April 2004.

Meanwhile, AEP last week reported 2005 year-end earnings, prepared in accordance with Generally Accepted Accounting Principles (GAAP), of $814 million, or $2.09 per share, compared with $1.089 billion, or $2.75 per share, for 2004. Ongoing earnings (earnings excluding special items) for 2005 were $1.063 billion, or $2.73 per share, compared with $924 million, or $2.33 per share, for 2004.

GAAP earnings for the fourth quarter of 2005 were a loss of $149 million, or a loss of $0.38 per share, compared with income of $177 million, or $0.45 per share, in 4Q2004. Ongoing earnings for 4Q2005 were $115 million, or $0.29 per share, compared with $167 million, or $0.42 per share, in fourth quarter 2004.

GAAP earnings were lower than ongoing earnings for the quarter and year primarily because of one-time charges related to AEP Texas Central Co. and the stranded cost true-up deliberations by the Public Utility Commission of Texas. The one-time charges totaled $279 million for the year, with $261 million of that total recorded in the fourth quarter.

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