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Transco, ISO, RTO, LTTR, Lions, Tigers, and Bears

Transco, ISO, RTO, LTTR, Lions, Tigers, and Bears. Oh my!. Applying Golf Lessons to the ISO. If your opponent hasn't played the course before, don't be a spoilsport and ruin all the surprises. The score a player reports should always be regarded as his opening offer.

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Transco, ISO, RTO, LTTR, Lions, Tigers, and Bears

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  1. Transco, ISO, RTO, LTTR, Lions, Tigers, and Bears Oh my!

  2. Applying Golf Lessons to the ISO • If your opponent hasn't played the course before, don't be a spoilsport and ruin all the surprises. • The score a player reports should always be regarded as his opening offer. • Progress in golf consists of two steps forward and 26.6 miles backward.

  3. De-Regulation in New England Quick History • Good Old Days of Vertical Integration • FERC 888/889 • ISO-NE and divestiture of generation • OATT • ISO-NE RTO • RMR’s, LICAP, and LTTR’s

  4. About ISO-NE • ISO New England helps protect the health of New England's economy and the well-being of its people by ensuring the constant availability of electricity, today and for future generations. ISO New England meets this obligation in three ways: by ensuring the day-to-day reliable operation of New England's bulk power generation and transmission system, by overseeing and ensuring the fair administration of the region's wholesale electricity markets, and by managing comprehensive, regional planning processes. • http://www.iso-ne.com/aboutiso/index.html

  5. ISO and Electric Deregulation: Progress Towards A Better WorldOnly one question: Who’s ox gets gored?

  6. Vermont • 14th State in the Union • Home of Ben and Jerry’s Ice Cream • 20 retail distribution companies • Part of NERC and ISO-NE • State load is ~4-5% of ISO-NE • Comprehensively regulates public power • Vertically integrated in a de-regulated market • Home of VELCO

  7. VELCO • State-wide transmission company • First ever transmission-only company in US • Formed in 1956 • Initial 224-mile 115kV system placed in service in 1958 • Manages ISO-level transmission cost-sharing for Vermont through OATT

  8. VELCO Today • 610 miles of transmission • 200 MW back-to-back HVDC converter • Extensive fiber-optic network • Owned by Vermont DISCOs • 1991 Operating Agreement • Recently-implemented LLC ownership structure

  9. 1991 Operating Agreement • 30 years to negotiate. • Effective at midnight November 1, 1991. • Cost allocation and transmission billing formula. • Determination of specific and common facilities within transmission projects. • Planning and development obligations.

  10. VELCO LLC • What is it? • Why did we do it? • Who benefits?

  11. VELCO LLC • Until June 2006, VELCO was a C Corp with stock ownership limited to Vermont distribution utilities. • Paid dividends of 11.5% to shareholders and income taxes on all dividends, regardless of ownership structure. • LLC structure reduces income taxes by factoring in ownership structure.

  12. VELCO LLC • Capital spending of $265MM over next 3-4 years. • Equity investments in VELCO by Vermont DISCOs of at least $87MM on an annual retail revenue base of $637MM. • Income tax provisions will increase from approximately $600k in 2003 to an estimated $9MM in 2008.

  13. VELCO LLC • Treated as a partnership for tax purposes. • Tax status of partners recognized for revenue requirements purposes. • Annual tax savings estimated at $2.3MM: • $1.7MM for member’s tax status • $600k double taxation on dividend payments

  14. VELCO LLC • Membership units, not stock. • Members receive distributions, not dividends. • Owners can use a variety of accounting methods to recognize investment: • Cost • Equity • Full consideration

  15. VELCO LLC • The negotiations: • Relative size of the players • IOU’s are 78%; public power is 22% • Determination of benefits • No benefits without public power participation • Allocation of benefits • Strengths and weaknesses of players • Design of the model

  16. VELCO C Corp

  17. LLC Direct Benefits

  18. LLC with Tax Exempt Adjustment

  19. LLC Draft Model Issues • Increased equity investment required by public power to make model work. • Cumbersome to use and update. • Potential IRS and FERC concerns.

  20. VELCO LLC – Final Model • A Membership Units and B Membership Units available. One vote per unit. • A Membership Units: • Pay 11.5% ROE and income tax gross up • B Membership Units: • Pay premium return and no income tax gross up • Purchase in lots of 25 Units: ratio of 14 B Units for every 11 A Units

  21. VELCO LLC – Final Model • VELCO is Managing Member of LLC. • Employees remain VELCO employees. • LLC reimburses VELCO for VELCO’s costs. • 1991 Operating Agreement remains intact and in place. • Ownership rests with Vermont DISCOs

  22. VELCO LLC • $1.6MM or 70% of the economic benefit flows to the rest of New England through the ISO. • $700k or 30% of the economic benefit flows to Vermont ratepayers. • Objectives: • Template for New England • Protect current benefits and rights under 1991 Operating Agreement • Regulatory and IRS approval

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