New Xcel Energy transco to focus on West Texas, eastern New Mexico

Xcel Energy (NYSE:XEL) is in the planning stages of creating a transmission subsidiary, or transco, that would allow the company to develop transmission competitively under the mandates of FERC Order 1000, company officials revealed.

“We are planning to form the transco investment structure,” Teresa Mogensen, Xcel Energy’s vice president of transmission, told TransmissionHub Dec. 6. “We are working on it now and we think it will take about a year to complete.”

Company officials see the transco as a strategic tool that will give it the ability to deploy a transco investment structure under FERC jurisdiction where it’s appropriate to do so, thus enabling it to take advantage of the opportunities for developing transmission competitively under Order 1000.

Once the new entity is complete, Mogensen expects the transco – which has not yet been named – to make its first competitive bids in the three different FERC Order 1000 regions in which Xcel Energy operates. Specifically, those are Southwest Power Pool (SPP), the Midcontinent ISO (MISO), and WestConnect. The first competitive bidding opportunities in those three regions will begin at the beginning of 2015 for the planning cycle that will be going on in 2014, she added.

Initially, she expects the focus to be on developing transmission in the area of West Texas and eastern New Mexico that is undergoing rapid expansion of the oil and gas extraction industry, and which needs additional transmission infrastructure to support it.

“There is a significant amount of transmission infrastructure that will be required to serve that area’s load and there’s not a lot of existing infrastructure in that area, particularly in New Mexico,” Mogensen said. “Quite a bit needs to be done.”

Studies are underway in SPP to quantify the area’s transmission needs to serve this additional increment of load and still meet all of the reliability requirements for the regional grid. Once those projects are identified and notices to construct are issued, Xcel Energy may ultimately utilize the new transco financial structure to compete for those investments, she said.

Other companies that have found quantifiable benefits to employing transcos include American Electric Power (NYSE:AEP), which has operational transcos in six states and pending transcos in two others. The company in August 2012 announced it had created Transource, a joint venture with Great Plains Energy (NYSE:GXP) specifically formed to take advantage of the competitive mandates of Order 1000. The final FERC rule requires that right of first refusal (ROFR) language for new transmission projects be removed from tariffs, opening up the landscape to nonincumbent entities. 

“As separate companies, the transcos help take the capital obligation for transmission project financing off of the operating companies,” an AEP spokesperson told TransmisisonHub Dec. 6. “The transcos allow us to improve the reliability of the system for customers and get better financing terms for those transmission investments, ultimately lowering the overall cost of a project.”

During the company’s investor conference Dec. 4, Xcel Energy chairman, CEO and president Benjamin Fowke acknowledged the value of the transco could be affected by the final wording of Order 1000, which is still in flux. In addition, numerous challenges to Order 1000 must still be decided by the courts, and those too could change the landscape. Still, officials believe the company needs the additional tool of a transco.

“Some of that will depend on how the bidding rules and other things come out, but we don’t want to not have that vehicle if that turns out to be a competitive advantage,” Fowke said. “If we’re going to be in the game, our transco is just something that you need to have so you’re on an even keel.”

Competing for and winning competitive projects will require both flexibility and multiple approaches, Mogensen said, noting that the transco will not supplant other methods of developing transmission.

“We do not have a plan to use the [transco] structure for all investment going forward; this is meant to be a tool to be applied where it’s most appropriate for it to be used,” she said. “We plan to develop transmission just like we’re doing now, and we plan to utilize that transco investment structure where it might make sense, one of those being if competition occurs under FERC Order 1000. Either way, we will continue to develop transmission.”

Xcel Energy is one of the largest U.S. transmission utilities with transmission assets and operations in 10 states. It is currently executing over $1bn of transmission capital investment in 2013, with numerous projects under construction and in the pipeline. The company plans to spend an additional $4.5bn over the next five years: $950m in 2014, $770m in 2015, $790m in 2016, $945m in 2017, and $1.04bn in 2018. Company officials have emphasized that the figures reflect real projects with planned spend and do not include the additional possibilities that may occur as energy policy changes and the industry evolves.