Entergy CEO: Transmission system planning will change following ITC transaction

The transmission system in the Midwest will be planned differently following the transfer of Entergy’s transmission assets to ITC Holdings than it is currently planned within, and by, the Midwest ISO (MISO), Leo Denault, Entergy chairman and CEO, said during the company’s 1Q13 earnings call April 25.

The transfer of Entergy’s (NYSE:ETR) transmission assets to ITC (NYSE:ITC) will help facilitate the creation of a more reliably, technologically advanced and interconnected grid with better access to generating resources than is currently accomplished through regional transmission organizations, Denault added.

“Historically, the fragmentation of the industry and the focus on connecting load and resources within limited regional boundaries have frustrated this objective” of a more modern system, he said. “The addition of regional transmission organizations to the mix has had a positive impact but is not, in and of itself, enough.”

Adding 15,700 miles to ITC’s existing 15,100 miles of transmission lines, making it the second largest transmission company on a miles-served basis, will help facilitate the development of a more state-of-the-art transmission system by putting transmission under the control of a concern with the ability and flexibility to reshape the existing system into a more efficient, effective model, he said.

“MISO doesn’t do the actual bottom-up planning, so they’re not in the same position to have the desire to create that across customer boundaries, across regional boundaries, across RTO seams that ITC will,” Denault said. “The intent of the ITC transaction is to put in place a structure that will create a different transmission system.”

ITC shareholders approved the merger with Entergy’s transmission business on April 16, marking one of the key steps in the proposed transaction. Federal regulatory approval is still needed from FERC, and antitrust approval from the U.S. Department of Justice or the Federal Trade Commission. The IRS must approve the tax-free nature of the reverse Morris trust transaction. 

Transferring Entergy’s transmission assets to ITC in a reverse Morris trust transaction and having its operating companies join MISO comprise the company’s “first strategic imperative” for the remainder of 2013 and will result in savings that will benefit customers as well as the company, Denault said.

“Savings to customers lowers their bills,” he said. “It improves our ability to fund future investment [and] also reduces risk for owners and other key stakeholders by transferring functional control to a mature entity.”

The second facet of that strategic imperative, specifically, the integration of Entergy’s operating companies into MISO, will result in estimated savings of $1.4bn for Entergy and its customers. The cutover to MISO is targeted to take place on Dec. 18.

Denault said a transmission system planned and constructed by “people who are not market participants” will result in quantifiable benefits. The challenge is that it is difficult to put a number with the fiscal benefits of the spinoff of Entergy’s transmission business, he said.

“It is a little more challenging to convince people because you can’t run a model on today’s transmission system with today’s generation and come up with $1.4bn in benefits,” he said. “But, it’s not impossible to see that future because that’s exactly what Congress and the FERC intended when they put in place the structure that brought about a company like ITC coming into existence.”

Should the spinoff to ITC fail to win the needed regulatory approvals, “The transmission system of the future that Congress and the FERC envisioned when they put all of this in place isn’t going to come about [and] customer benefits would not be realized.”

Denault outlined six additional strategic imperatives in the utility, Entergy Wholesale Commodities (EWC), and corporate areas including continuing to grow utility earnings, developing and implementing productive regulatory relationships, and improving EWC results.

Overall, Denault said Entergy had a “very solid first quarter” with consolidated as-reported earnings of $0.90 per share compared to a loss of $0.86 per share during 1Q12.