Project Compass Charts a Course to Investor Owned Utility Profit

Investor owned utility PPL has taken what it calls the first step in segmented approvals for its "Project Compass" that was announced during its earning call in the summer of 2014.

The original 2014 plan was a 725-mile line connecting New York, Pennsylvania, New Jersey and Maryland that looked like this:

The project announced last week only includes 475-miles of line in Pennsylvania and New York, and looks like this:

What happened to the New Jersey, southern Pennsylvania, and Maryland sections of the project?  In the Fall of 2014, PPL had this to say about its ginormous plan:

On a last quarterly call, we had just announced Project Compass, a proposed 725 mile transmission line through the shale gas regions of Pennsylvania and into New York and New Jersey and Maryland.

We’ve been meeting with officials at the state PUCs and governor's offices in the states where customers will benefit, Pennsylvania, New Jersey, New York and Maryland. Those meetings have gone well overall and we plan to have continuing dialogues on the project benefits. We're also meeting with other key agencies and other transmission operators in the region. We will continue to update you as we reach project milestones.

I guess those meetings didn't go as well as PPL thought they went, because those segments sort of well... disappeared, at least for the time being.

So, last week PPL said the "full project" consisted of 475-miles of transmission (down from 725) from western Pennsylvania into southern New York.  They claim to have applied for interconnection to the NYISO transmission region.  PPL claims that Project Compass will:

“This transmission line provides a significant opportunity to improve reliability and grid security and also provides benefits to customers,” Paul Wirth, spokesman for PPL Electric, said this morning. “When you add another path for power to flow, then that increases reliability because you are not relying as much on a single substation or power line.”

Another goal is to provide an estimated savings of at least $200 million per year for New York consumers by reducing transmission congestion.

But that's only the fox's opinion of the state of affairs in the chicken house.  This isn't how we plan for needed transmission!

A need for new transmission is recognized by regional transmission organizations (such as NYISO or PJM) for either reliability, economic, or public policy purposes.  Under FERC's Order No. 1000, the RTO next puts the transmission problem out for bid to transmission developers, who develop proposed solutions that are considered by the RTO in a competitive process.  This ensures that we only build needed transmission and that the transmission we build is the most cost-effective.

Instead, PPL has dreamed up a solution that needs a problem to fix.  Project Compass has not been deemed "needed" in any regional transmission organization's coordinated plan.  And only a project that is included in a RTO plan and deemed the most competitive solution can recover its costs through regionally allocated transmission rates.

The exception to this process is what's known as a merchant line.  In that instance, the transmission developer shoulders all risk and burden of building its project and then collects its costs from users through negotiated rates.   Is this what PPL is building?  You wouldn't know it from the way the company describes it to investors and the public:

Who will pay for the first segment of Project Compass?

According to the FERC guidelines for cost allocation, those who benefit from a new power line should pay its costs. The first segment would be paid for by electric customers in New York who will get the benefit of lower power prices. The costs would be paid over a period of many years on customers’ electric bills.

Wait a minute -- cart before horse!  According to FERC guidelines for cost allocation, only a project included in a regional plan is eligible for cost allocation.  According to FERC guidelines for negotiated rate authority, however, only those customers who agree to use the line pay a negotiated rate to do so.  There is no guaranteed cost allocation recovery for a merchant project.  And because there is no guarantee that costs will be recovered from consumers, the project's investors can lose their entire investment if the project does not go forward or attract customers.  Doesn't sound like a very solid investment, when there are plenty of transmission projects included in regional plans with guaranteed recovery where the investor could plunk down their money instead.

Furthermore, PPL believes it can avoid all that messy competition in the regional planning process by segmenting its project:

Shah Pourreza - Guggenheim Securities LLC
I appreciate the new disclosures around the Compass Project. So how should we think about the remaining miles? Are you looking to potentially segment the rest? And then, is there an opportunity to potentially JV with some of the neighboring utilities to smooth out the process?

William H. Spence - Chairman, President & Chief Executive Officer
Sure. I think in both cases the answer would be yes. So there's an ability to continue to segment the line as well as partnering with adjacent or utilities that the project goes through their service territory. So I think in both cases we would look to do that.

Daniel Eggers - Credit Suisse Securities (USA) LLC (Broker)
Okay. Very good. I got that. And then just on Compass real quick. I know it's ways off, but does this get caught up in this Order 1000 workout because it's an economic line instead of a reliability line? Do you get more competition, and people prospectively bid away the cost of capital? Or how do you think you're going to be able to reserve some sort of competitive advantage in this line?

William H. Spence - Chairman, President & Chief Executive Officer
I'll let Greg take that question.

Gregory N. Dudkin - President, PPL Electric Utilities, PPL Corp.
Yes. So the way this is set up currently under New York law, this would not be considered a FERC 1000 Project, so we are going and making interconnection requests and will be filing our Article VII now. So if the approval path goes down that path there may be an opportunity for competition, but the probability is little bit lower. If the PSC opens up economic window next year then there could be competition, so we'll see how it plays out.

William H. Spence - Chairman, President & Chief Executive Officer
I think relative to the competitive nature of this, obviously just having completed a very major line essentially in the same region, I think our capability to be very competitive should we get to that point should be strong.

Don't you think, PPL, that segmenting your project in order to avoid competition under Order No. 1000 is going to draw any number of valid complaints at FERC?  Someone doesn't have their thinking cap on!  And I really, really hope you're not planning to run this line anywhere on federal property that would require an Environmental Impact Statement under NEPA.  Segmenting a project to avoid NEPA is sort of... well... illegal, isn't it?

It's nice to see that PPL has finally recognized that running its badly planned project through urbanized parts of Pennsylvania, New Jersey and Maryland isn't going to happen.  But it's still off-base to think that restricting it to rural parts of Pennsylvania and New York is gonna fly.  It's not.  My Spidey Senses tell me that lots of people in Pennsylvania and New York caught last week's announcement and are investigating.  Opposition begins!

PPL's idea for a transmission project is leveraged on Pennsylvania's current Marcellus shale gas glut.  PPL believes that, instead of building underground gas transmission lines to transport gas from where it is collected to gas-burning generation plants located near eastern load, that gas-burning plants will develop near where the gas is collected that will depend on long-distance overhead electric transmission lines to transport electricity to load. 

However, what I would say is the compass project, which is not included in our CapEx program, would be a program or a project if you will that would take advantage of some of the opportunities in the Marcellus shale to basically instead of bringing the gas pipelines across, we'd be bringing electric lines across to the potentially new power stations that could be built. So that would be our opportunity, if you will, that's shale gas-related.

This is a really stupid idea left over from the last century, where "mine mouth" electric generation plants burned coal where it was mined and transported the electricity hundreds of miles to load because the load didn't want any of those dirty coal plants located in their neighborhood.  This solution simply doesn't work any more.  It's a lot easier to build a gas transmission line (and the fracking and exploitation of Pennsylvania to collect this gas is going to happen either way) than it is to build an electric transmission line.  What a truly stupid idea.

PPL's audacious Project Compass still has so many hurdles to jump, they might as well just quit now:

What approvals will be required for the first segment?

The first segment will require approval from various regulatory and regional planning entities including the public utility commissions of Pennsylvania and New York, New York Independent System Operator, PJM Interconnection, and FERC. Siting and construction of the line will require permits from appropriate environmental and resource agencies.

FERC, you say?  But FERC doesn't have authority to permit transmission lines.  It only has authority over transmission rates.  So, either PPL is planning to ask FERC for negotiated rate authority for a merchant line, or it's planning to ask FERC for some rate incentives for its cost allocated project.  Which is it?

And what kind of approval are they looking for from NYISO and PJM?  Is it an interconnection for a merchant project, or is it inclusion in a regional, competitive transmission plan?  Does PPL even have a clue what it's trying to accomplish?  This has to be the dumbest transmission plan I've ever seen, and it's based on both the public and investors being equally dumb.  I don't think the RTOs and state commissions are supposed to be dumb, because they're not.

Since PPL answered the last question this blog posed about where it came up with the name "Project Compass"

Where does the name “Compass” come from?

This project charts a new course in the way we think about and plan the electrical grid of the future.

we will expect them to answer the current questions about just what in the heck they're trying to accomplish with approvals as well.

The only course Project Compass is charting now is one of confusion that they hope will lead to corporate profits.  I think the needle is still pointing toward failure.