American Electric Power (AEP) has signed a memorandum of understanding (MOU) with MidAmerican Energy Holdings Co. (MidAmerican) to form a joint venture company to build and own new electric transmission assets within the Electric Reliability Council of Texas (ERCOT).
Under the terms of the MOU, AEP will contribute AEP Texas transmission assets currently under construction valued at approximately $100 million to the joint venture company. A MidAmerican Energy Holdings Co. subsidiary will make a cash contribution to the joint venture company. The equity ownership of the new company would be split 50-50 between AEP and MidAmerican Energy Holdings Co. with an anticipated utility capitalization structure targeted at 40 percent equity and 60 percent debt.
AEP and MidAmerican intend for the joint venture company to invest in additional transmission projects in ERCOT. The scope of the future transmission investment will be determined by the board of the joint venture company, which will include two representatives from AEP and two from MidAmerican. Subject to completion of operating and service agreements by the end of 2006 and approval of regulatory filings in 2007, the companies anticipate up to $1 billion of projects could be included in the new company over the next several years. The joint venture would operate as a transmission utility and would be subject to the rules and regulations governing utilities within ERCOT. Initially, AEP will act as project manager and will develop, build and operate the transmission lines and facilities for the joint venture company.
“As the owner of the nation’s largest transmission system, we want to leverage our 100 years of expertise in planning, siting, building and operating transmission lines into a vibrant transmission business opportunity,” said Michael G. Morris, AEP chairman, president and chief executive officer. “We have identified approximately $9 billion in necessary transmission investment, within and adjacent to our footprint, over the next few decades that will increase the capacity of our nation’s transmission system and help continue reliable delivery of electricity, enhance electricity market efficiency, and support the growth of renewable and other environmentally responsible generation.
“The transmission investment needs in AEP’s Texas footprint alone are expected to exceed $1 billion over the next several years to address existing congestion and support development of additional generation, particularly renewables. ERCOT has a streamlined process for transmission recovery, and Governor Perry has indicated that his administration will work to ensure that sufficient transmission capacity is added to support development of new wind generation in Texas,” Morris said. “Partnering with MidAmerican, a company with a strong capital base as well as significant transmission operating experience, gives us the ability to expand AEP’s transmission investment in Texas to meet ERCOT’s needs at the same time that we are investing significant capital to enhance the environmental performance of our generating facilities.”
“We are pleased to join forces with a high-quality partner to make a significant investment in transmission infrastructure in the state of Texas,” said David Sokol, chairman and chief executive officer of MidAmerican Energy Holdings Co. “The increase in transmission capacity in Texas will support continued reliable electric service delivery, enhance the efficiency of the wholesale electric market and encourage the development of renewable generation in the state.”
AEP’s contribution to the joint venture will include transmission assets already under construction in the Laredo area that are designed to strengthen transmission grid reliability in South Texas and reduce the need for older reliability-must-run generation in that area. The assets include a variable frequency transformer (VFT), a device that will facilitate bidirectional power flow between the U.S. and Mexico transmission grids, and other associated transmission system facilities.
AEP and MidAmerican Energy Holdings expect to execute definitive agreements for the joint venture by the end of 2006. The joint venture will require regulatory approval from the Public Utility Commission of Texas (PUCT) and the Federal Energy Regulatory Commission (for the transfer of AEP Texas transmission assets to the joint venture). The companies anticipate the joint venture will begin operations in the second half of 2007.