Transmission's biggest cheerleaders met last month in San Diego to talk about a subject near and dear to their wallets. During his presentation to his fellow speculators, Ray Wood, head of U.S. power and renewables at Bank of America Merrill Lynch said:
“Transmission assets, when they're already built, are goldmines,” he said. “They've got a long life, they're stable, and generally not as subject to tariff reductions as other asset classes because the percentage of the bill that ultimately goes to the end user that revolves around transmission is relatively light.”
Wood wasn't just bragging, however, but trying to convince everyone that transmission needs big, double-digit rates of return in order to attract capital.
According to Wood, funds for transmission are readily available, however transmission is so risky that no one wants to invest in it until a project has been awarded a "notice to proceed."
This is a lie. There is no risk involved in building transmission. Transmission incentives awarded by FERC routinely place all risk on consumers. One incentive awarded by FERC to all who ask is guaranteed recovery of 100% of prudently-incurred project cost. Another is the ability to collect a return on investment during the construction period (CWIP in rate base). The investor cannot lose if he is guaranteed to receive his entire investment back, plus a generous return, even before the project is constructed.
What Wood is whining about is that brief period of time between the day some transmission owner rolls out of bed with the idea to build a transmission goldmine, and the day incentives and a formula rate are approved by FERC. This is the only time when investment isn't earning a great big return. After that, it's all $$$$$!
Wood pretends that there's some further risk during other necessary approvals, such as a state CPCN or an environmental review. The investor is still earning during this time -- where's the risk? The only "risk" is that a project may be abandoned if it cannot buy necessary approvals, therefore the "sky's the limit" amount of investment that it was possible to make actually constructing the project is curtailed, and the investor is left with a smaller investment that is still earning around 12%. Oh, boo hoo.
And what about projects sponsored by transco spinoffs of gigantic investor owned utilities? These companies often self-finance the early cost of a project by borrowing at the parent company level at extremely low rates, and then earning a 14.3% return on that investment. In the case of the PATH project, the company never borrowed any money, however they still collected a 14.3 or 12.4 percent return on money they probably borrowed at 3 or 4%.
So, how do we fix this to make both Wood and electric consumers happy? How about setting limits on incentive rate of return periods to coincide with the "risky" periods of a transmission project? Transmission is only competing with other investments at the beginning. Once the investment is made and the project constructed, all risk disappears. So, what if incentive ROEs were gradually lowered over the life of the asset? As well, incentive ROEs should not kick in until an actual investment in the project has been made by an entity other than the company or its parent. Transmission owners are scamming us big time!
According to Wood, funds for transmission are readily available, however transmission is so risky that no one wants to invest in it until a project has been awarded a "notice to proceed."
This is a lie. There is no risk involved in building transmission. Transmission incentives awarded by FERC routinely place all risk on consumers. One incentive awarded by FERC to all who ask is guaranteed recovery of 100% of prudently-incurred project cost. Another is the ability to collect a return on investment during the construction period (CWIP in rate base). The investor cannot lose if he is guaranteed to receive his entire investment back, plus a generous return, even before the project is constructed.
What Wood is whining about is that brief period of time between the day some transmission owner rolls out of bed with the idea to build a transmission goldmine, and the day incentives and a formula rate are approved by FERC. This is the only time when investment isn't earning a great big return. After that, it's all $$$$$!
Wood pretends that there's some further risk during other necessary approvals, such as a state CPCN or an environmental review. The investor is still earning during this time -- where's the risk? The only "risk" is that a project may be abandoned if it cannot buy necessary approvals, therefore the "sky's the limit" amount of investment that it was possible to make actually constructing the project is curtailed, and the investor is left with a smaller investment that is still earning around 12%. Oh, boo hoo.
And what about projects sponsored by transco spinoffs of gigantic investor owned utilities? These companies often self-finance the early cost of a project by borrowing at the parent company level at extremely low rates, and then earning a 14.3% return on that investment. In the case of the PATH project, the company never borrowed any money, however they still collected a 14.3 or 12.4 percent return on money they probably borrowed at 3 or 4%.
So, how do we fix this to make both Wood and electric consumers happy? How about setting limits on incentive rate of return periods to coincide with the "risky" periods of a transmission project? Transmission is only competing with other investments at the beginning. Once the investment is made and the project constructed, all risk disappears. So, what if incentive ROEs were gradually lowered over the life of the asset? As well, incentive ROEs should not kick in until an actual investment in the project has been made by an entity other than the company or its parent. Transmission owners are scamming us big time!
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