With competition for resources that are perpetually scarce – particularly financial resources – utilities are increasingly pursuing joint ventures and “pay-to-play” arrangements to build necessary infrastructure projects.
According to TransmissionHub, North American transmission investment alone is expected to close in on $170bn by 2020. The U.S. power industry is facing potentially $1.5T of infrastructure investment over the 2010-2020 period, according to a 2008 Brattle Group study.
The advantages of JVs include sharing of cost and responsibility, resulting in reduced demand on both capital, and human, resources. Advantages can also include leveraging the scale and expertise of one or more of the partner organizations.
Duke-American Transmission Co. (DATC), a joint venture (JV) formed in 2011 between Duke Energy (NYSE:DUK) and American Transmission Co. (ATC), is one JV capitalizing on several of these advantages.
“When the joint venture was formed, both Duke and ATC felt as though we each brought something unique to the partnership,” John Flynn, DATC’s vice president of strategic planning and project development, told TransmissionHub on May 30.
“Duke brought a sophistication and a level of scale and a national presence that was attractive to ATC,” he said. “ATC had probably developed as much or more transmission than anybody else in the country. Bringing those resources together in a symbiotic way, we felt at the time would benefit us as a combined organization.”
Advantages can also include access to a broader knowledge base if the partner organizations have expertise in disparate areas.
“When we first started the DATC, we focused where we felt we had the most experience, which was within RTOs or ISOs where we understood the ground rules quite well and had some planning experience,” Flynn said. “We really have a broader view now and are willing to consider different project types, different scales, and different regions of the country based on a set of fairly disciplined project metrics.”
While DATC’s model is two organizations that primarily work with each other, other models for JVs have also proven successful.
An active player in the joint venture space, American Electric Power (NYSE:AEP) does “multiple joint ventures with parties so we can move forward with specific projects,” both incumbent and competitive, AEP President and CEO Nick Akins told TransmissionHub March 20. A month later on April 20, AEP announced a joint venture with Great Plains Energy (NYSE:GXP) called Transource.
Similar to DATC’s proclivity to focus on projects within ISOs and RTOs, AEP prefers to minimize the number of transmission counterparties involved in the process, as doing so usually can also require fewer regulatory approvals and simplify cost allocation issues, Akins said.
While AEP’s approach is to join with different partners for different projects, Duke and ATC primarily work with each other. However, their arrangement allows both companies the freedom to look for other partners unilaterally if either believes it would be beneficial.
“ATC currently has a joint development agreement with Minnesota Power to look at a line that is really more geographically relevant to ATC and Minnesota Power than it is to DATC and to Duke,” Flynn said.
Making more projects possible
In addition to the advantage of reducing the fiscal pressure on individual organizations, cost-sharing can also mean building projects that, if not for the partnership, would not be possible.
For example, BC Hydro has entered negotiations with developers of renewable energy generation sources in the eastern portion of British Columbia that would have the generators pay for the transmission necessary to tie their plants into the existing grid.
As well as facilitating the incorporation of additional renewable energy with minimal costs borne by the utility, the new transmission would have the additional benefit of enhancing reliability in the area.
In Washington state, three public utility districts (PUD) and the Bonneville Power Administration (BPA) are planning to split the cost of building a new 230-kV transmission line, with the three PUDs splitting the line’s capacity on an essentially pro rata basis.
Two of the PUDs currently have single-utility projects that they need to serve their own load. However, “Those projects, in and of themselves, make the congestion [in the area] a little bit worse,” Chad Bowman, Chelan PUD’s transmission and compliance director, told TransmissionHub on May 29. “This joint project integrates the whole into a single plan of service that works very nicely for everyone.”
Though the Washington state project is still currently working through the approval phase, it’s a project that, but for the joint venture, would not be built.
A spokesperson for the Douglas County PUD went straight to the heart of the matter: “If we can’t get a cost-sharing agreement, we simply won’t be able to build the line.”
An electrically-charged marriage
Like any relationship, getting it right is crucial. Organizations considering a JV need to do their due diligence before entering into an agreement.
“Make sure you select the right partner,” Flynn said. “Select somebody who has experience, who has credibility in developing transmission.”
Choose carefully. “You have to live with them for a long time, kind of like a marriage quite frankly, and over time a relationship can sour,” Flynn cautioned.
But in Flynn’s assessment, the potential rewards are worth the risks.
“Clearly a lot of transmission needs to be built in this country,” he said. “It’s a great opportunity to be involved in that, and to create a symbiotic relationship with someone to get something done that, quite frankly, you otherwise wouldn’t have been able to do on your own.”