Allegheny Energy chief pushes power transfer (Pittsburgh Tribune-Review)
This appeared in the Pittsburgh Tribune-Review two years ago. Now we know the plan. Let’s hope we don’t get in his way:
From By Rick Stouffer
TRIBUNE-REVIEW
Sunday, February 19, 2006Thirty months ago, the largest power blackout in U.S. history struck the Northeast, placing an exclamation point on cries by power industry experts that new transmission lines are needed.
Now that Allegheny Energy Inc. Chief Executive Paul J. Evanson has cleaned up his organization’s finances and placed the Greensburg-based energy company on a profitable track, he wants to get involved in long-distance power transmission.
Over the next three years, Allegheny Energy must spend $1 billion on new equipment to reduce power plant emissions. Then, look for the company that three years ago was contemplating bankruptcy to either partner with other companies or go solo constructing new power transmission lines.
“With transmission, you get a good rate of return,” Evanson said. “Some companies have split out their generation, transmission and distribution (lines to your home), but I like having all three parts of the business.”
The typical rate of return on transmission is 10 percent to 12 percent, and since transmission/distribution remains a regulated business, utilities like Allegheny Energy are permitted to pass the cost of system additions or upgrades to customers.
“Everyone today is interested in investing in transmission,” said Tia Barancik, a partner at law firm King & Spalding, New York. “Private equity firms have a tremendous amount of money they want to invest in transmission due to the relatively good rate of return (on investment) relative to the lower risk. They are looking to partner with utilities.”
Even if Allegheny Energy wasn’t interested in new transmission, its larger utility neighbor to the west, American Electric Power, in late January opened its eyes and those of the power industry, proposing construction of a $3 billion, 550-mile-long transmission line. It would stretch from southwest West Virginia, through Northern West Virginia, Northcentral Maryland, Southeastern Pennsylvania, into central New Jersey. The line would move low-cost power generated by coal-fired plants to the power-deprived East Coast.
About half of the Columbus, Ohio, company’s proposed electric freeway goes through Allegheny Energy’s service territory.
“Half the AEP line runs through our territory; we will have the right to invest in, own and operate the line,” Evanson said.
“When your next-door neighbor suddenly decides to build a highway through your neighborhood, it gets your attention,” said Daniele Seitz, an energy analyst in New York who follows Allegheny Energy for Dahlman Rose & Co. LLC.
In addition to possibly partnering with American Electric, Evanson is interested in building new transmission lines, stretching from near its Hatfield’s Ferry plant on the Greene-Fayette County border, east into eastern Maryland.
“It’s a billion-dollar investment, and we’d probably do it ourselves, although if we needed help in financing, I’m sure there would be other utilities interested,” Evanson said.
Analysts and consultants said such expenditures make economic sense, particularly when your customers are paying the bill and there is money to be made moving low-cost power to high-price areas.
“Companies always are looking for growth and growth potential,” said Michael Worms, an energy analyst in New York with Harris Nesbitt Gerard. “One way to grow earnings is to add to the rate base. And, there are good incentive mechanisms in place by FERC (the Federal Energy Regulatory Commission).”
Rate base is the value of a utility’s property upon which the company is permitted by regulators to earn a set profit. Evanson said the usual 10 percent to 12 percent return on transmission-line investments could climb into the 14 percent range.
“With Allegheny Energy, even if building transmission didn’t help its unregulated business, it would help its rate base,” said Olaf Karstens, a director with Navigant Consulting, Chicago. “With Allegheny, transmission would help its rate base, help its unregulated generation move power and upgrade the overall (power grid) system.”