At first pass, electric transmission lines appear to lack the thrill of next-of-kin generating plants and gas pipelines. An efficient and assumedly ethical producer of energy won't have a difficult time finding someone to buy electricity. And at least gas pipes are low down or buried, unlike the eye-jarring towers that bear drooping, humming lines over the countryside.

But against the backdrop of an ageing US electric transmission infrastructure in sore need of overhaul, expansion and new build, the question arises who will desire these unloved assets enough to do the job. Further, who pays, who profits, and what do the rules say about how much. As the Federal Energy Regulatory Commission (FERC) pushes for the separation of the electric transmission business from generation, a diminutive coterie of player-investors is taking the plunge into transmission asset acquisition and ownership.

Washington DC-based Trans-Elect (TE) recently acquired a 10% stake as general partner in AltaLink, a four-partner Canadian consortium that purchased for C$850 million Alberta's largest transmission grid system from TransAlta. The move comes in the wake of TE's 2001 purchase of Michigan Electric Transmission Co. (METC) from the Consumer's Electric division of CMS in which TE also became the general partner in a $290 million deal that included equity investor and limited partner GE Capital. While still a relative newcomer and small fry in the transmission business, Trans-Elect's chartered commitment to and focus on owning transmission assets, along with its industry expertise, is striking.

On a grander scale, UK-based National Grid Group plc, which owns and operates the transmission network in England and Wales and earlier this year finalized the $3-billion acquisition of Niagara Mohawk Holdings, is taking a fancy to the electric transmission sector business. The company already owns the biggest transmission and distribution network in the New England/New York market.

Meanwhile, in the state of California's electricity market, Trans-Elect appears to be nearing finalization of its bid to finance about 83% of the assets of Path 15, the notoriously congested transmission corridor north of San Francisco. Pacific Gas & Electric is slated to develop two substations and both Western Area Power and TE are responsible for developing the lines. The upgrade project would ratchet up transmission capacity between the Los Angeles area and northern California.

?This is a new venture for the government,? says Trans-Elect Executive Vice President Bob Mitchell, since it's a federal project in the transmission sector using a public/private partnership. TE will finance 100% of the line development to the tune of $250 million, with Western involved on the property, management, and construction side. In addition to a preliminary FERC filing for the project, parties have also submitted interventions and protests. Although the California PUC has not yet completed its evaluation of the project, TE is convinced that Path 15 currently represents the direst transmission congestion in the country and that lack of expansion of those lines helped bring on the 2001 blackouts.

Mitchell cites the expected significant savings to consumers featured in government research on Path 15 and terms the project a ?potential model? for future TE acquisitions in the company's plan to help remedy the US electricity transmission deficit.

Trans-Elect's goal is to acquire other systems similar to those it has already reeled in and to garner efficiencies ?through common procurement practices, standardisation of design, improved operating practices, and installation of advanced technology ... in the form of better data gathering on asset conditions? to utilize assets better, according to Paul McCoy, senior vice president of transmission operations at Trans-Elect.

McCoy notes that the presence of locational marginal pricing, or artificial price differentials stemming from transmission congestion, suggests a need for grid expansions. ?In the United States, we've identified 40 possible expansions in the May reports of the White House; ... not all those projects may be economic, but many will,? and TE is eyeing the related construction opportunities, he says. The trick is getting approval in order to get recovery through regulated rates, McCoy adds.

Further, TE appears to have more than one potential electric transmission acquisition pending in the pipeline. Mitchell declines to elaborate on deals not yet public. However, TE is now involved in private bidding to finance the construction of 18 different projects totaling more than $1.1 billion at the invitation of the Bonneville Power Administration, a project package ?built on the Path 15 model,? he says.

GE Capital Global Energy managing director Jim Burgoyne says the recent dramatic increase in activity related to the erstwhile dowdy business of running transmission businesses is no mystery. Transmission has seen less investment than electricity generation over the years.

?You can have all the most wonderful generation in the world but if you can't get it to market it doesn't matter,? says Burgoyne. It's virtually axiomatic that a boost in transmission investment has to come about and the real issue is ?how you get the right mix of investors to do that efficiently,? he says.

Utility industry equity research analyst Paul Patterson, currently an independent consultant, also agrees that building new transmission lines makes sense. ?It's a lot more economical to do, ...what we really need is more transmission and what transmission does is it makes the whole system more efficient,? he says. A market with ten generators is much more reliable than one with five and ?more transmission enables you to connect all those plants and enhance efficiency for the whole system,? Patterson says.

All of this is not lost on the FERC, which appears earnest about making the transmission business more owner-investor friendly. TE's Mitchell explains that while a utility can own its transmission business and hand it over to an RTO for operation, the independent ownership model that TE embodies ?fits? the FERC model. Because the independent model supports a true separation of generation from transmission, the FERC offers incentives to independents that exceed those available to transmission businesses owned by utilities, he says.

The upside of being independent in a business with a regulated rate of return is that Trans-Elect can try to ?entice a higher rate of return? from the FERC and can gain synergies by owning multiple systems, according to McCoy.

?From a business plan standpoint, we desire to be only regulated by the federal government,? McCoy says, adding that FERC would set the company's rates and the terms and conditions under which others would use Trans-Elect's assets, with states limited to setting technical and safety standards. The FERC is currently setting up four independent regional transmission organizations (RTOs) in the United States to operate transmission grids that will ensure equal access, fair administration, and proper planning and growth of the transmission system, thus fostering open competition and lower prices.

AltaLink Executive Vice President and CFO James Harbilas, who advocates a performance-based rate making incentive, sees National Grid as the model for getting it right in the United States, where the transmission owner is spurred by rate payers to keep excess profits. He calls this a ?win-win situation,? in contrast to the older flow-through cost-of-service method in which even if an owner keeps the excess permitted by utility, profits are elusive. On the other hand, performance-based rate incentives enable both the customer and utility to reap benefits, he says. National Grid and AltaLink, moreover, ?sing from the same song sheet? in terms of sought-after efficiencies and economies of scale in their transmission businesses, Harbilas adds.

Another key financial statement element, depreciation, plays a significant role in AltaLink's transmission business. Harbilas says that depreciation accounts for up to C$40-50 million of AltaLink's revenue requirements. At Trans-Elect, Mitchell says his company plans to reinvest in transmission systems ?roughly at the rate of depreciation.? Even though FERC has allowed accelerated depreciation, in the case of Path 15, TE has chosen not to use accelerated depreciation, although Mitchell adds that it could be utilized in the future.

?In the regulated world, accelerated depreciation really means something,? says Patterson, ?and it's about to happen with a few of these guys ? everything is hunky dory while they are accelerating depreciation, getting good returns and cash flow that they can use now, but there is a day of reckoning ? ?OK guys, its been 10 years' and the asset is no longer on the books for $100 million, instead its on for $50 million and the market value could be higher. Most likely the regulated world deems you've charged customers for all this and earned adequate returns, so where does that benefit go when you have to sell the asset? Usually the idea is back to rate payers,? Patterson says.

On the other hand, the notion of ?high rate of return? in the transmission business can be deceptive in terms of an attractive financial investment, Burgoyne of GE Capital says. ?It's not so much high return on equity as it is relatively predictable rates of return? that investors have to consider. Proper due diligence should enable an investor to rest easy with how much can be earned over time. GE Capital's cost of capital as a financial investor should be lower than most industry participants because of its leverage as a financial institution, Burgoyne adds. ?These rates of return are attractive within that context,? he says.

If GE Capital is pleased to have predictable returns, it likely finds the projected size of the market attractive as well. The net book value, or total depreciated value of electric transmission systems in the United States is about $75 billion in total, according to Trans-Elect sources, with about three-quarters of that in the hands of investor-owned utilities. TE's Mitchell says that an EEI study has identified $56 billion in transmission infrastructure needs over 10 years. The report also determined that utilities plan on doing approximately $25 billion of transmission work on identified projects. Trouble is, Mitchell says the utilities have ?absolutely no idea how they're going to fund them. Further, the FERC has identified an immediate need for $12 billion in electric transmission projects, according to Mitchell.

In addition to the two acquisitions that Trans-Elect has done so far, other projects are in the pipeline and the company is discussing financing with several institutions, but indicated GE Capital will likely be an investor in ?a significant majority of acquisitions going forward.? Both CIBC World Markets and Deutsche Banc have worked with Trans-Elect on recent acquisitions in both a debt and advisory capacity. CIBC worked with the seller, TransAlta, during the acquisition by the AltaLink consortium.

?We are a happy investor with them,? says Burgoyne on the relationship with TransElect, adding the transmission sector has long looked potentially attractive to GE against the background of its global portfolio of energy industry investment activities. Burgoyne adds that TE's solid expertise and planning capacity enables it to execute and open up a host of opportunities. ?As part of our ongoing relationship with them we will have the ability to look at those financings with them,? Burgoyne says.

Altalink CFO James Harbilis says Teachers underwrote 60% in the form of debt bridge financing and the rest was equity from sponsors. The bridge will be refinanced within the year with a debt capital markets issue in Canada, mainly in form of debentures, he adds. Altalink will be doing road shows in the third quarter 2002.

AltaLink, which comprises SNC-Lavalin (50% stake), Ontario Teachers' Pension Plan (25%), and Macquarie North America (15%) is eyeing more transmission assets in Alberta in the wake of the TransAlta deal, Harbilas says, including two city-owned utilities and a division of a national operation. AltaLink's CFO also points to Alberta's significant transmission build and possible electricity exports to the United States so ?we could easily double the size of our assets in the next 5-10 years just from greenfield development if congestion management rolls out the way it's supposed to.?

Outside Alberta, Harbilas says that the government of British Columbia is examining how to privatize parts of its integrated utility and that AltaLink expects other provinces to follow suit. While most of the consortium's focus is in-country, Harbilas adds that AltaLink will also check out quality assets that come available in the US Pacific Northwest. They're ?in our backyard,? he adds.

For near-term acquisition financing, Harbilas sees debt capital markets as ?wide open? given the current Canadian market, which he says is hungry for the type of bonds that AltaLink would issue. ?It will be low-cost financing, so that's definitely going to be our first source,? Harbilas says, adding AltaLink may look at cross-border leases but that execution would depend on regulatory approval from the Alberta Energy and Utility Board.