TBS in the Press

Energy Central Article - IllinoiSeminars

Making the Grade at the Transmission Business School
Kathleen Wolf Davis
 You may have never heard of Transmission Business School. Started by the University of Illinois at Urbana-Champaign and run annually by IllinoiSeminars in a building next to the Willis Tower in Chicago—which makes their building look miniscule by comparison— Transmission Business School offers classroom-style learning that the power industry doesn’t much see these days.
If you wanted to know all the details of risk and electricity markets, the inner workings of economics of PJM or personal profiles of ATC or ITC, you’d be raising your hand quite a lot in this week of classroom learning.
Martin Lin with The Lin Group dissected electricity markets and risk management one Wednesday morning of the school. Lin began by discussing how the system organizations have evolved from independent, isolated power providers to interconnected providers with economic transfers, although the markets those providers work in can vary greatly as the regulatory bodies vary greatly by location.  
Lin reviewed market details and how credit has become more important in this market.  
“People didn’t care much about credit pre-Enron,” he added. “But now they do.”
Lin added that while price risk is most discussed, there are other areas of risk that participants should keep an eye on—including credit (and liquidity, operational, legal/regulatory and political).
Now to measure the risk you’re dealing with, Lin talked VAR (and not in the volt-ampere reactive sense, but in the value-at-risk sense). This sense of VAR is the maximum loss a portfolio
will experience over time, but this concept relies on assumptions of “normal” market conditions when no one can promise those markets will be normal because they aren’t always and extreme events are still possible. For example, one risk not measured by VAR is one this industry sees a lot—namely transmission congestion, although there are transmission congestion products available.
In the end, Lin suggests a few simple ways to manage your risk. First, identify those risks and what you want your exposure to be. Then develop a risk policy, looking at available tools and the limitations that VAR possesses. Finally, measure that risk and enforce your risk policy.
Lin also called for a cultural change and an acceptance of third parties in these markets. “There is a role for speculators,” he said. “Getting the buyer and the seller, who are both naturally exposed, to hedge at the same time is nearly impossible. That’s where the speculator can help.”
The discussion of transmission, markets and economics continued with a talk from the chief economist of PJM, Paul Sotkiewicz who noted that the ISO is “trying to maintain reliability through markets.”
That may mean fewer large-scale transmission builds in the future, Sotkiewicz added.  
“I’m not sure I’ll see another major transmission project in my career,” he told the class, pointing out that this in, in fact, aligned with load growth trends we’ve already seen, including that lesser growth being a major contributor to the cancellation of some major “backbone” transmission projects, such as MAPP and PATH.
And while he admits that the large volume of generation retirement is leading to needed upgrades, he sees them as more local rather than the backbone transmission once considered the norm.  
In fact, Sotkiewicz believes that a lot of new transmission in the system will come from new entrants rather than the old guard—those investors with skin in the game in the areas of new generation who see the $15 or $20 million needed to connect that generation to the system as “chicken feed.”
Sotkiewicz and other speakers from Transmission Business School—along with University of Illinois faculty members—came together at noon for a luncheon panel to dive more deeply into some of the issues discussed in previous sessions.
The first question discussed the possibility of a transmission build-out in North America.  Sotkiewicz jumped right now with his idea that backbone transmission is dying but that he does see some smaller stuff on the local scale.
“We are building 500kV stuff, but it’s not long stuff. It’s not backbone. It’s smaller stuff. A lot of people assume there will be large backbone projects. That I just don’t see,” he started.
Harry Singh, vice president with Goldman Sachs, agreed with Sotkiewicz on both the low backbone need but higher regional need.  
“It’s not correct to say we won’t have transmission, but we’ll see more regional builds,” he said.
“There’s going to be quite a bit of transmission built,” Mike Rowe, president of American Transmission Company, added to the discussion, taking a new tack.  “We’re seeing a lot of build out, but, no, it’s not backbone. So, it won’t be as big, and permitting may delay things, too.”
“Eventually we’ll have to access wind and solar from various parts of the country to answer the load need,” said George Gross, professor of engineering, at the University of Illinois at Urbana-Champaign and director of the Transmission Business School. “In the West, they’re sitting on all that wind, and we’ll need an answer to get all of that to the East Coast.”
“There are still years of historical underinvestment we haven’t made up for,” added Nisha Chopra, director of M&A, at ITC Holdings. “We’ll see those investments going forward.”
Sotkiewicz noted that we’re really talking footprints here—where it’s going to be put short-term or long-term. If transmission is built on a merchant basis on the same way gas pipelines are currently built, he added, that undercuts the need for that backbone transmission.  
“It’s a fallacy that you have to bring the wind all the way to the East Coast,” he argued. “I’m going to argue with George here. You don’t have to build ties all the way to New Jersey. That’s not cost effective.”
“I don’t completely disagree,” Gross replied.

Transmission profiles: ATC vs. ITC - IllinoiSeminars

Kathleen Wolf Davis  
The ATC story
“We’re barred from distributing, generating and marketing electricity,” said Mike Rowe, president and CEO of ATC revealed when telling the tale of ATC to the audience at Transmission Business School.
“We’re a transmission-only company. That’s what we do. So, we better do it well,” Rowe said.
“We’re owned by the IOUs, co-ops and munis. Everyone rolled their transmission assets together,” he added. With a service area reaching into Minnesota, Michigan, Wisconsin and Illinois, the company is 88 percent owned by investor-owned utilities (those IOUs) with costs split across by load share (and with the load paying the price for any line loss in the transmission portion of the system).
ATC is still a very unique story: the first multi-state, transmission-only utility in the U.S.  that owns and operates more than 9,350 miles of transmission lines and 530 substations.
ATC has grown from $550 million in assets when it started in 2001 to $3.8 billion this year. They’ve upgraded more than 1,824 miles of lines, improved 165 substations and built 48 new transmission lines.
“During those first few years, we replace a lot of aging infrastructure,” he said. “Literally, we had towers on our system that were bought from Sears Roebuck.”
The cash to fund those upgrades comes from a tariff regulated by FERC with a forecasted rate base and a forecasted cost of service. Theirs is a prospective tariff rather than the traditional lagging or back-end rate case.
“This makes financial planning easier, but it puts a burden on us to prove we’re spending that dollar in the right place,” he added.
Going forward, ATC will spend $3.3 billion or more on additional investments in projects, maintenance, and capital projects, including $500 m on regional multi-value projects such as the Badger-Coulee 345 kV project a joint project with Xcel Energy approved in April 2015 and the Cardinal-Hickory Creek 345 kV joint venture with ITC Midwest.
“We don’t believe in running things to failure. We try to get it replaced before it fails,” Rowe said when laying out where those dollars will go.
And while reliability is a main investment driver, Rowe also added that security will be a big chunk of investment in the future, which is rather new for them.
Rowe sees ATC’s strengths in the areas of planning, routing and siting, regulatory relations, construction, customer service, asset management, environmental responsibility, and innovation and improvements.  
“We work diligently with different government agents to leave the areas we’re working in just as good or better,” he added when discussing environmental responsibility at ATC.
When looking at innovation and improvements, ATC employs the concept of strategic flexibility to better determine the merits of transmission projects. Rowe added that this means, basically, that they look at multiple “futures” (meaning what could happen—lots of renewables on the system, more gas on the system, where generation will be located). Since transmission planning takes such a long time, rather than the traditional five-year future timeframe, ATC has to look much farther out and then bring together ideas that will cover the most logical future or even multiple future options.
“If a project is beneficial in a majority of future scenarios, that’s a good project for us,” Rowe added.
The ITC story
ITC has been around since 2003, starting in a corner of Michigan with $750 million in assets. Today, they are in seven states with $7.1 billion in assets.  Like ATC, they’re transmission-only as well.
“We’ve grown in scale. We’ve grown in size, and we’re solidified our place in the industry as a leader in transmission,” said Nisha Chopra, director of M&A, at ITC Holdings at Transmission Business School.  
ITC is unique in this aspect: independence. They have no affiliation with market participations and no restrictions on share ownership. Their sole capital focus is transmission development.
They have four operating companies: ITC Transmission, METC, ITC Midwest and ITC Great Plains. Their formula rate is FERC-approved and forward-looking, similar to ATC.   
ITC stresses that transmission charges are a small part of a customer’s bill (approximately 9%).
Looking out to ITC’s future, Chopra discussed how Order 1000 will shape things.  She noted that the Order establishes a framework for more comprehensive planning and evaluation and that it closes the gaps in the planning process regionally.
The slow factor of Order 1000 is the ROFR element for non-incumbent developer reforms. These will require regions to remove the right of first refusal, hence the name. Order 1000 isn’t alone in that future-shaping for ITC however. Historical underinvestment, power market dynamics, reliability, the changing generation fleet and renewable portfolio mandates, along with storm-hardening needs, will all be factors. (In the next five years, they expect $4.5 billion of capital investments.)  
“Every time we plug in our laptops and charge our phones, we understand the importance of power today. At ITC, we do believe that—despite the capital investments in the last 15 years— there’s still quite a lot to do,” said Chopra. “And there is still a need for efficient interconnections to get generation to load.”
Chopra sees ITC doing a number of things well: safety, reliability, advanced tech apps and being cost-efficient. They believe, also, that investments in existing systems drive results and there are development opportunities to drive future growth as well.  
“Today our development portfolio is large, but it’s focused on U.S.-regulated transmission opportunities, such as merchant transmission,” said Chopra, noting that ITC is working on becoming a national presence and break out of their current regional focus, though she admits that they haven’t done merchant transmission in the past. It’s a new push.
“Our development efforts have been a bit slow with Order 1000, but we are working on expanding and diversifying,” she added.