Transmission M&A Slowed by Stalemate

With this summer’s electrical blackout in the Northeast and Midwest weighing on the minds of energy-sector dealmakers, it might seem logical to expect increased investment and consolidation in the Achilles’ heel of the North American power grid – transmission. But that reasoning may be premature, according to utility experts. No one is denying that the blackout plus longstanding Federal Energy Regulatory Commission (FERC) policy aimed at increasing financial rewards for companies that run transmission lines will eventually result in renewed investment in the sector. But the impact of deregulation and the failures of wholesale power trading models have made transmission the often-neglected stepchild of the industry. “I don’t think you’ll see much movement on structural changes in the grid until companies see whether Congress passes an energy bill this year,” says David Dismukes, a professor of regulatory affairs at the Louisiana State University Center for Energy Studies. Passage of a power bill is uncertain because of the complex regional and special interests that must be balanced in order to get it through both houses. Holding back after Enron collapse Dismukes adds that after the Enron Corp. debacle and the California power crisis, utilities are not looking outside their own fences and are hesitant to launch any aggressive asset purchase plans. And Dismukes says that another disincentive to investment in reorganizing the country’s transmission grid is the Public Utilities Company Holding Act (PUCHA), which ostensibly forbids mergers between utilities whose service areas are not contiguous. He notes that while industry insiders have tended to look at the 1930s-era law as a technicality that could be worked around, recent court decisions have increased the uncertainly surrounding the law’s restrictions. He pointed to a PUCHA-based ruling that will create problems for the merger of American Electric Power Co. and Central and South West Corp. that was completed in 2000. “I don’t think it will reverse the merger, but the court’s upholding of some of the PUCHA strictures will only add to the uncertainty that’s already out there,” Dismukes comments. He adds that the confusion surrounding the pending energy bill in Congress and the PUCHA regulations may loom even larger for foreign power companies that are looking to invest in the U.S. system and for potential financial buyers of utility assets. FERC does plan to boost financial rewards for companies that make upgrades to their power systems. These can include constructing new power lines or employing new technologies that don’t involve wires. But these policies run up against the finger-pointing and political squabbles that characterize the industry. Another utility policy specialist, Julie Simon, Vice President of Policy at the Electric Power Supply Association in Washington, says that ongoing conflicts between federal and state regulators will slow the pace of transmission consolidation. “The movement of centralizing control of the grid strips state regulators of some of their pricing power so you have a political struggle between the grid’s overseers.” Simon says that issues around coordinating grid control among different utilities in a geographical area also add to the lack of clarity surrounding the future of the transmission world. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com