The Federal Energy Regulatory Commission’s (FERC) Order 1000 is driving changes in the competitive landscape of the U.S. electric transmission sector, according to Moody's Investors Service. Order 1000 will increasingly become more relevant through the removal of the right of first refusal (ROFR) from regional tariffs, where historically, incumbent transmission providers had been given a preference on transmission projects in their existing territories.
Still, Moody's believes incumbents will maintain an edge in bidding on their home turf because of long-held relationships with regulators; existing rights of way; proven operational track records; and knowledge of the network in their service territory.
Large transmission owners are best positioned to win new transmission projects put up for competitive bids. Large owners like American Electric Power Co. (AEP), ranked by Moody's as Baa1 stable, Duke Energy Corp. (ranked A3 stable), Berkshire Hathaway Energy Co. (A3 stable), and ITC Holdings Corp. (Baa2 stable) have developed sizable transmission networks across several states.
By developing and running efficient and effective transmission systems through economies of scale, these transmission providers gain an advantage in submitting competitive bids likely in the lowest cost tier or by offering the best technological solution.
Divergent utility strategies to compete for transmission projects. Many utilities are creating transmission-only (transcos) subsidiaries as a means to bid for new transmission projects and take advantage of higher FERC regulated returns. Additionally, we expect more transmission providers to enter new service territories by teaming with incumbents already established in that region through joint ventures or partnerships.
Some states like Minnesota, North Dakota and South Dakota are ensuring that incumbent utilities continue with exclusive (or semi-exclusive) rights to build by codifying ROFR laws in the state legislature. This will limit the competition on certain transmission projects intended by Order 1000.
Despite the elimination of ROFR, we believe the incumbent transmission provider maintains an edge when bidding for transmission projects on its home turf. Advantages come from long-held relationships with regulators; already existing rights of way; proven operational track records; and knowledge of the network in the service territory.
The advantage for incumbents comes despite Order 1000’s aim to level the playing field for projects that have regional cost allocation in the competitive bidding process to reduce costs and find the most effective resolution to regional transmission needs such as relieving congestion, bolstering reliability or bringing distant renewable energy sources onto the grid. With that said, incumbent utilities with a record of poor performance or a particularly contentious relationship with regulators or regional coordinators could be at a disadvantage.
Ideally, the Order 1000 competitive process would work similar to the Competitive Renewable Energy Zones (CREZ) in the Electric Reliability Council of Texas (ERCOT) system. The transmission system within ERCOT does not fall under the FERC domain and, therefore, is not subject to Order 1000 requirements.
In 2008, after a long evaluation process, the Public Utility Commission of Texas (PUCT) identified five regions within the state for wind power generation, along with several thousand miles of transmission lines needed to deliver over 18,000 MW of energy capacity to consumers. The CREZ bidding process resulted in 10 utilities, including incumbents and non-incumbents, winning bids on several different projects.
To date, only a handful of transmission projects have been put up for bidding under Order 1000. The California Independent System Operator (CAISO) put a 59-mile, 230 kV Gates-Gregg transmission line up for bid in 2013. Although a few non-incumbents bid for the project, CAISO selected the incumbent joint venture between Pacific Gas & Electric Co. (PG&E: A3 stable) and MidAmerican Transmission, the transmission subsidiary of Berkshire Hathaway Energy Co.
CAISO selected the PG&E/MAT JV because of its significant experience developing and operating transmission projects as well as knowledge of the siting and permitting requirements in California. CAISO stated it would be more costly and time consuming for non- incumbents to obtain the rights-of-way that the PG&E/MAT JV already owned.
Another competitive transmission project under Order 1000 involved the PJM Interconnection, LLC’s (PJM: Aa3 stable) Artificial Island facility, which was the Regional Transmission Organization’s (RTO) first competitive bid request. In the 2012 Artificial Island request for proposal, PJM asked for a solution to address a reliability need between the Hope Creek and Salem nuclear units located in southern New Jersey. The bid process initially resulted in 26 proposals submitted by eight different transmission developers, including incumbent and non-incumbent utilities as well as independent investment groups.
The estimated cost of the proposals ranged from just over $100 million to $1.5 billion. The revised proposals submitted by Dominion Resources, Inc. (Baa2 stable) and incumbent Public Service Electric and Gas Co. (PSE&G: A2 stable) were given the top scores in the analysis done by PJM.
Even though the bid was not the lowest, PJM planners selected the nearly $250 million PSE&G proposal because of the incumbent’s existing rights-of-way to be used in the development of the transmission line. Although PSE&G will need to expand the right-of-way an additional 8.5 miles, PJM considered that it would be an easier task than a non-incumbent having to acquire the right-of- way for the entire route.
With intense criticism from bidders, state officials and others about favoritism, PJM has delayed finalizing its selection of PSE&G and allowed bidders to revise their bids for further consideration. PJM expects to make its final decision by the end of the year.