Where natural gas and power transmission intersect

By Teresa Hansen
Editor-in-Chief

I recently attended a conference in Washington, D.C. called TransForum East. It was organized by PennWell through one of its latest acquisitions, TransmissionHub, a research, analysis and news portal. As the name implies, the conference deals with electricity transmission, but this year the low price of natural gas and how it is affecting the electric power sector was a hot topic.

Kent Knutson, TransmissionHub's director of data strategy and content, said transmission investment in the U.S. is growing. During the first nine months of 2013, nearly $6.7 billion was invested in transmission projects, up considerably from the $5.6 billion spent in all of last year.

Knutson expects continued growth through 2015. Most activity is in 345 kV projects being driven by Texas competitive renewable energy zone (CREZ) and Western Interconnection projects. A fair amount of activity is also occurring in the Midwest and PJM independent system operators and the Northeast Power Coordinating Council territories.

As in other areas of the electric power industry, uncertainty is prevalent in the transmission sector. Changing technologies, cyber and physical security threats, regulations, siting issues and customer expectations are to blame for much of that uncertainty.

Cheap gas becomes a transmission driver

The changing power generation mix, however, is perhaps the biggest culprit. Electricity generated by wind and solar energy is rapidly being added into the mix. Coal plants are being retired because they can't meet EPA regulations. Cheap natural gas is resulting in a build-out of new gas-fired combined-cycle generation to replace retired coal plants and back up intermittent renewable energy.

New transmission is needed to connect renewable energy with load centers, plus load forecasting and balancing technologies must be added to manage this intermittent supply. New gas-fired generation being built in areas with inadequate transmission capacity is also driving new transmission construction. In addition, in some areas, especially the northeast, gas-fired plants are being built in areas with constrained gas pipeline capacity.

Transmission operators are concerned that these plants, which they count on for supply, could fall off the grid if pipeline capacity is used for other demands such as home heating. Because many new gas-fired plants are owned by independent investors and merchant generators, differing opinions and uncertainty exist about who will pay for needed electric transmission infrastructure as well as gas pipeline infrastructure.

Will FERC address uncertainty?

Many look to the Federal Energy Regulatory Commission (FERC) for clarity on these issues. FERC Commissioner Philip Moeller, who spoke at TransForum, acknowledged that transmission owners and operators face many hurdles. Moeller said FERC knows the lack of a federal policy allowing transmission owners to build across state lines is a problem, but he doesn't foresee a federal law changing siting issues for interstate transmission lines in the near term.

He also said that uncertainty surrounding return on equity (ROE) exists. He said FERC has created much of this uncertainty, but his only words of encouragement came when he said ROE is a "live" issue for FERC.

Low- to moderate-priced natural gas, which Moeller said will stick around for some time, will continue to drive gas-fired generation and transmission growth. Better coordination between gas suppliers and electricity generators must be addressed, he said.

Longer-term issues, he said, such as who pays for the gas infrastructure to secure supply to generators, are more vexing. A big part of the solution involves the two industries learning more about how the other one works, he said.

Even with the uncertainty, Moeller said he is "bullish" on transmission and "it's an exciting time" in the transmission industry. "If the issues were easy, someone else would have already solved them. You need to stay active and involved," he said.

Moody's puts Energy Future Holdings on bankruptcy watch

Moody's Investors Service, one of the Big Three credit rating agencies, has given Energy Futures Holdings Corp. until the end of the year before the energy company declares for bankruptcy protection and restructures itself.

In an analysis of its own call, Moody's says this would be one of the top 10 largest non-financial corporate bankruptcies in the U.S. since the 1980s. In terms of debt, it could be one of the biggest of all time, ranking with Enron, WorldCom, General Motors and Chrysler. The holding company reportedly has more than $41 billion in debt.

The electric utility company's assets include a power generation portfolio that consists mostly of nuclear energy and coal-fired power (through Luminant), a power transmission business (through Oncor Electric Delivery) and a retail power provider (through TXU Energy).

The company was bought out in 2007 in what was at the time one of the largest leveraged buy-outs in history when a group of Wall Streeters (including Goldman Sachs, KKR and TPG Capital) paid $45 billion for what was then known as TXU Energy.

The idea was that even though the private equity firms that bought up TXU would be taking on a significant amount of debt, the notoriously unstable price of natural gas would surely soon peak, helping the financiers turn a profit. As we now know, this hoped-for spike did not occur, and instead we saw sustained record-low prices for natural gas. The gamble also anticipated that coal-fired electricity would remain inexpensive and high-profit. Hindsight, as they say, is 20/20.

Energy Future Holdings has been carrying a large amount of debt for some time now, leading analysts to speculate about its future. Moody's downgraded the company's credit rating from Caa1 to B3 in August 2013.

From the end-user's perspective, should the worst happen for EFH, the power will continue to flow because of a survival blueprint already plotted out back in April 2013. One potential bankruptcy restructuring plan would forgive billions in debt owned by Luminant in exchange for a large share of the company. The investors, in this scenario, would get the short end of the stick — an estimated return of 50 percent or less. However, subsidiaries like Oncor and Luminant could be preserved.

You can read more about that debt restructuring plan in this story.