Last week’s announcement by Montana Power that it is getting outof the energy utility business may be the start of a new push toseparate electric transmission and distribution, with an increasein merchant transmission proposals, spurred by both shareholdersand regulators of the utilities, according to one of the nation’sfirst merchant power transmission companies. U.S. electrictransmission systems collectively represent a $70 to $90 billionset of assets.

The depressed stock prices for merged and consolidated energycompanies, along with FERC Order 2000’s incentives for”independent” transmission ownership, are pushing the U.S.inevitably toward so-called “transcos,” for-profit, nonutilityowner/operators of the nation’s major electric transmission lines,said Fred Buckman, chairman of Washington, DC-based Trans-Elect, inprepared remarks for a regional conference Thursday in Florida.

“Where ISOs (independent system operators) happen, they willonly be a transition to a Transco-dominated industry,” saidBuckman, a former president at PacifiCorp, emphasizing that hethinks merchant transmission companies, such as Trans-Elect willbetter meet the needs of customers, regulators and shareholders.

“The move to divest transmission and distribution is reallygoing to have a pretty profound impact on other utilities,” saidRobert Mitchell, an executive vice president and one of thefounders of Trans-Elect. “It highlights how under-performingtransmission is for investor utilities. (There are several casesbefore FERC seeking greater authorized returns for transmission.)”

Mitchell said it is still uncertain whether his firm will bid onMontana Power’s electric transmission assets, but he noted thatthey would “certainly be taking a hard look at it, and one way oranother, it is a positive move for us.” He said Trans-elect isconcentrating on some of the utility holding companies, such asFirst Energy in Ohio, that have already announced they are exitingthe power transmission business. Merchant power companies can offer”attractive alternatives” to spinning off the assets intoaffiliated companies or ISOs, Mitchell said.

Although unsure of what eventual organizational form it takes,new transmission will likely be built because there is a lot of”pent-up demand” for it, according to ABB’s Raleigh, NC-based RanaMukerji, vice president of electric systems consulting.Case-by-case and region-by-region approaches will finally unfold,and in many cases, it will be a choice between what makes mosteconomic sense-new high-voltage electric transmission ordistributed generation with new natural gas pipeline links.

“If you cannot build electric transmission, people will belooking more into the fuel cells and distributed generation,”Mukerji said. “If there are not the right (price and regulatory)signals for building more power transmission, you will see amovement toward distributed generation.”

Trans-Elect’s Buckman will tell his Florida audience that thereis a “dark side” to the attractiveness of ISOs long term, givenwhat he calls their “passive” (third party) ownership that hethinks discounts asset values in an environment where there areinsufficient incentives to replace traditional control and tocontrol capital investment.

As a result, Buckman argues that those utility holding companiesthat have converged, merged or diversified for the most part havestocks selling close to their 52-week lows; compared to MontanaPower and Duquesne Power, which are both selling close to their52-week high stock prices. The so-called “disaggregators” areleading the utility performance curve, Buckman said.

In the months and years ahead, the key question for utilitieswill be whether to spin off or sell their transmission assets,which traditionally equate to about 80% of the generation holdingsof vertically integrated electric utilities.

“The advantage that we have is that FERC sees us as completelyindependent and completely new in ownership and operations,” saidTrans-Elect’s Mitchell, who acknowledged that his companyinterprets FERC Order 2000 as incenting more merchant owned andoperated transmission.

Richard Nemec, Los Angeles

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