Utility executives see future profits in transmission

After spending decades on the industry's backburner, the power grid is expected to emerge as the sector that will gain the most investment over the next five years, according to the energy consulting firm GF Energy's "2004 Electricity Outlook."

GF Energy's findings are based on telephone surveys administered to 72 U.S. and Canadian industry officials between Oct. 22, 2003, and Nov. 13, 2003. Seventy-five percent of the respondents were in senior management, and 56 percent responded to the survey.

Most of the U.S. executives who participated in the survey said transmission is the area where utilities can profit the most, assuming the Federal Energy Regulatory Commission follows through on a proposal to boost a utility's return on equity to 15 percent when it participates in a regional transmission organization (RTO) or makes other investments in the grid.

"Transmission is where the most money can be made, the most profitable business to be in," said Roger Gale, president and chief executive officer of GF Energy.

In the last decade or so, competition in wholesale electricity markets and an increased demand for power has expanded the use of the grid. As a result, a majority of utility officials said reliability has decreased. Gale called the link between competition and declining reliability a "smoking gun," and said it is putting more pressure than ever on utilities to establish tougher reliability standards.

Last week, directors of the utility industry's main lobbying arm, the Edison Electric Institute, approved a resolution calling on the industry-based North American Electric Reliability Council (NERC) to form new reliability standards, with FERC "supporting and providing oversight to the NERC initiatives."

NERC sets reliability operations standards industry-wide. By contrast, FERC historically has not involved itself in reliability issues because it was not granted explicit authority over reliability under the Federal Power Act.

But after last year's blackout and the failed passage of the energy bill, which includes language expanding federal authority over reliability standards, FERC is exploring ways to extend its regulatory reach without congressional action (Greenwire, Jan. 12).

"The battle is now under way to see if FERC or NERC manages reliability in the United States and Canada," Gale said.

The survey also found that industry leaders think FERC's standard market design (SMD) is dead, at least for the next four years. FERC's plan would have grouped power markets into RTOs, a proposal rejected by utilities and lawmakers from the Pacific Northwest and the South.

The energy bill, rejected by the Senate in November but expected to be back again later this month, expressly forbids FERC from ordering utilities to join RTOs. The bill also delays implementation of FERC's SMD policies for at least three years (Greenwire, Jan. 12).

"FERC has been stopped in their tracks, for better or for worse," Gale said.

Most executives who were surveyed also said the old-fashioned, vertically integrated business model is now the most viable strategy for utilities. Sixty percent of those surveyed said they believe that large integrated utilities will own much of the next generation of power facilities.

Industry leaders also expressed concern over high natural gas prices and compliance with the Clean Air Act.