joseph l. welch president and ceo, itc holdings corp. july 16, 2007
TRANSCRIPT
Joseph L. WelchPresident and CEO, ITC Holdings Corp.
July 16, 2007
Joseph L. WelchPresident and CEO, ITC Holdings Corp.
July 16, 2007
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Who Is ITC?Who Is ITC?
ITC Holdings Corp. (“ITC”), through two of its operating subsidiaries, ITCTransmission and Michigan Electric Transmission Company, LLC (“METC”), operates fully-regulated, high-voltage transmission systems covering most of Michigan’s Lower Peninsula.
In January 2007 ITC Midwest LLC signed a definitive agreement to acquire the transmission assets of Interstate Power and Light Company, an Alliant Energy Corporation subsidiary, in Iowa, Minnesota, Illinois and Missouri.
ITC Great Plains and ITC Panhandle Transmission were formed in July 2006 and June 2007, respectively.
Rate regulation by the Federal Energy Regulatory Commission (“FERC”).
Operational subsidiaries are members of the Midwest Independent Transmission System Operator (“MISO”) and Southwest Power Pool.
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ITC and its subsidiaries are singularly focused on electric transmission.
ITC is committed to investing in the transmission grid to improve reliability, reduce congestion, enable a competitive, wholesale energy market, and lower the overall cost of delivered energy.
Only publicly traded company engaged exclusively in the transmission of electricity in the U.S.
Largest independent transmission company and currently 8th largest transmission company overall in the U.S. in terms of energy sales. (1)
The Independent Transmission CompanyThe Independent Transmission Company
(1) Based on annual electric retail sales in the service territory as found in “Edison Electric Institute Profile: Rankings of Shareholder-Owned Electric Companies”, May 2006.
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ITC is not a market participant; its only business is transmission. — ITC doesn’t care whose electrons travel over its wires.
Transmission is the backbone of the electric system.— A reliable transmission system is critical to the success of any renewable
portfolio standard policy or demand response program.
Pure Focus on TransmissionPure Focus on Transmission
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WIRES is the Working Group for Investment in Reliable and Economic Electric Systems (www.wiresgroup.com).
Serves as the voice of the electric transmission infrastructure industry, created in response to the urgent need for transmission identified by Congress in the Energy Policy Act and the electric industry.
Member companies include: — California Independent System Operator— Great River Energy— ITC Holdings Corp.— Infrasource— Midwest Independent Transmission System Operator, Inc.— National Grid— Oncor— PJM Interconnection— ScottMadden— Trans-Elect— Vinson & Elkins (counsel)— Wesco.
WIRESWIRES
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Fact #1: Electric reliability is driven almost solely by the condition of the transmission grid.
Fact #2: Planning individual transmission systems without regard to the region will lead to negative results.
Fact #3: The transmission grid is critical in addressing issues such as “capacity”, reliability, competitive markets, demand response and renewable resources.
The FactsThe Facts
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The U.S. remains the largest consumer of energy, but China is gaining by leaps and bounds.
World Energy ConsumptionWorld Energy Consumption
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
1980 1990 2000 2004
Year
Tota
l Energ
y C
onsum
ption
(Bill
ion k
Wh)
Former U.S.S.R.
Germany, West
United States
China
Japan
Russia
India
Germany
Canada
France
Brazil
United Kingdom
Italy
Source: Energy Information Administration, International Energy Annual 2004
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U.S. Regular Conventional Retail Gasoline Prices ($ per Gallon)U.S. Regular Conventional Retail Gasoline Prices ($ per Gallon)
Source: Energy Information Administration (http://www.eia.doe.gov)
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
With the increasing world-wide demand on oil and petroleum, energy prices will only continue to increase for this resource that is becoming increasingly scarce.
The industry said that renewable resources were unable to be justified back when the price of gasoline was $1.00/gallon and later $2.00/gallon; prices have already gone past $3.00/gallon.
Renewable resources are inevitable; we must start today in order to reduce dependency on foreign oil and mitigate environmental impacts of fossil fuels.
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Electric CarsElectric Cars
Electric cars are gaining momentum.
For example, Ford and California Edison recently announced a partnership to test rechargeable hybrid cars in order to speed up mass production.
Widespread usage of electric vehicles will lead to an increase in energy consumption and demand on the grid.
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Renewable ResourcesRenewable Resources
Renewable resources, such as wind, biomass and solar, make good public policy.
However, many impediments still exist:— Cost— Location – not located at or near load
centers— Lack of robust transmission
infrastructure— Size and scale
Current transmission interconnection standards do not facilitate the development of renewable resources; high barrier to entry.— Barrier to entry puts wind energy at a
competitive disadvantage to incumbent generation.
Transmission is the enabler for delivering wind energy to load.
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Abundance of Wind in Central/Western U.S.Abundance of Wind in Central/Western U.S.
Source: U.S. Dept. of Energy
U.S. Annual Wind Power Resource and Wind Power Classes
U.S. Annual Wind Power Resource and Wind Power Classes
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Aside from Chicago (“the Windy City”), wind typically occurs in abundance in areas with low electric demand.
Many states have implemented Renewable Portfolio Standards (“RPS”) within their state.— For example, Michigan has called for 25% RPS by
2025. Peak load for Michigan’s Lower Peninsula is more
than 22,000MW, therefore a 25% RPS represents 5,500MW.
Only 600-1,000MW of optimal wind sites in Michigan.
— Other states have more wind potential than the total load in the state.
— States will be dependent on the transmission grid to support renewable resources.
— Some will need to export while others will need to import renewable resources.
Similar limitations exist for biomass.
Limitations of Wind / RPSLimitations of Wind / RPS
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U.S. Utilities by Peak LoadU.S. Utilities by Peak Load
Source: Edison Electric Institute research, FERC Form 1
The large majority of U.S. utilities have peak loads of less than 8,000 MW.— These utilities typically do not have the resources or may choose not to invest in
renewables but rather depend on the grid to import renewable resource-based energy.
0
20
40
60
80
100
120
140
160
Peak Load (MW)
Nu
mb
er
of
Uti
litie
s
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Biomass CapacityBiomass Capacity
Source: U.S. Dept. of the Interior
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Transmission is the enabler for demand response programs.
For example, at a specific point in time (hour, day, etc.), assume that Chicago has reduced load due demand side management but that Detroit requires additional energy to support demand.
The grid must be able to reliably accommodate the resultant change in energy flow.— The grid must be able to
withstand variations across the region.
Demand Response ProgramsDemand Response Programs
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Given the lack of investment in the grid over the last 30 years coupled with the doubling of demand over the same period, now is opportune time.
As an industry, we must be focused not only on improving reliability within our own respective service territories, but we must also plan the grid:— With a regional view; — In consideration of future
demands; and— To facilitate the
development of renewables and demand response.
System in Dire Need of InvestmentSystem in Dire Need of Investment
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Policy changes are necessary to bring the benefits of renewables and demand response programs to consumers. — Interconnection standards— Cost allocation policies— Long-term focus and policies— Plan as a region
SummarySummary
Additional SlidesAdditional Slides
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Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5
Rate Base Rate BaseBeginning Balance 550$ 600$ 650$ 700$ 750$ Beginning Balance 550$ 600$ 608$ 615$ 623$ 630$ Additions to Rate Base 50 50 50 50 50 Additions to Rate Base 50 8 8 8 8 8 Depreciation (100) (115) (131) (148) (166) Depreciation (100) (115) (130) (144) (157) (170) Ending Balance 500 535 569 602 634 Ending Balance 500 493 486 479 473 468
Return on Rate Base (@ 10.5%) 53 56 60 63 67 Return on Rate Base (@ 10.5%) 53 n/a n/a n/a n/a n/a
Expenses 30 30 30 30 30 Expenses 30 n/a n/a n/a n/a n/aDepreciation 15 16 17 18 19 Depreciation 15 n/a n/a n/a n/a n/aIncome Taxes 22 24 26 27 28 Income Taxes 22 n/a n/a n/a n/a n/a
Total Revenue Requirement 120$ 126$ 132$ 138$ 144$ Total Revenue Requirement 120$ 120$ 120$ 120$ 120$ 120$
Revenue 120$ 126$ 132$ 138$ 144$ Revenue 120$ 120$ 120$ 120$ 120$ 120$
Current Year Total Revenues 120 126 132 138 144 Current Year Total Revenues 120 120 120 120 120 120
Operating Expenses (30) (30) (30) (30) (30) Operating Expenses (30) (25) (26) (26) (27) (27) Depreciation (15) (16) (17) (18) (19) Depreciation (15) (15) (14) (14) (13) (13) Interest Expense (11) (12) (12) (13) (14) Interest Expense (11) (11) (11) (10) (10) (10) Income Taxes (22) (24) (26) (27) (28) Income Taxes (22) (24) (24) (25) (25) (25)
Net Income 42$ 45$ 47$ 50$ 53$ Net Income 42$ 45$ 45$ 46$ 46$ 46$
Net Cash Flow 1$ 5$ 8$ 12$ 15$ Net Cash Flow 1$ 47$ 47$ 47$ 47$ 46$
Return on Equity 13.88% 13.88% 13.88% 13.88% 13.88% Return on Equity 13.88% 15.34% 15.59% 15.83% 16.06% 16.27%
Depreciation > $15 million for all five years
Illustrative Example:Independent Transmission Company (13.88% ROE)Illustrative Example:Independent Transmission Company (13.88% ROE)
Additions to rate base = $50 million per year — Greater than
depreciation
ROE = 13.88%— Remains steady
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Year 1 Year 2 Year 3 Year 4 Year 5
Frozen Rate Test
Year Year 1 Year 2 Year 3 Year 4 Year 5
Rate Base Rate BaseBeginning Balance 550$ 600$ 650$ 700$ 750$ Beginning Balance 550$ 600$ 608$ 615$ 623$ 630$ Additions to Rate Base 50 50 50 50 50 Additions to Rate Base 50 8 8 8 8 8 Depreciation (100) (115) (131) (148) (166) Depreciation (100) (115) (130) (144) (157) (170) Ending Balance 500 535 569 602 634 Ending Balance 500 493 486 479 473 468
Return on Rate Base (@ 10.5%) 53 56 60 63 67 Return on Rate Base (@ 10.5%) 53 n/a n/a n/a n/a n/a
Expenses 30 30 30 30 30 Expenses 30 n/a n/a n/a n/a n/aDepreciation 15 16 17 18 19 Depreciation 15 n/a n/a n/a n/a n/aIncome Taxes 22 24 26 27 28 Income Taxes 22 n/a n/a n/a n/a n/a
Total Revenue Requirement 120$ 126$ 132$ 138$ 144$ Total Revenue Requirement 120$ 120$ 120$ 120$ 120$ 120$
Revenue 120$ 126$ 132$ 138$ 144$ Revenue 120$ 120$ 120$ 120$ 120$ 120$
Current Year Total Revenues 120 126 132 138 144 Current Year Total Revenues 120 120 120 120 120 120
Operating Expenses (30) (30) (30) (30) (30) Operating Expenses (30) (25) (26) (26) (27) (27) Depreciation (15) (16) (17) (18) (19) Depreciation (15) (15) (14) (14) (13) (13) Interest Expense (11) (12) (12) (13) (14) Interest Expense (11) (11) (11) (10) (10) (10) Income Taxes (22) (24) (26) (27) (28) Income Taxes (22) (24) (24) (25) (25) (25)
Net Income 42$ 45$ 47$ 50$ 53$ Net Income 42$ 45$ 45$ 46$ 46$ 46$
Net Cash Flow 1$ 5$ 8$ 12$ 15$ Net Cash Flow 1$ 47$ 47$ 47$ 47$ 46$
Return on Equity 13.88% 13.88% 13.88% 13.88% 13.88% Return on Equity 13.88% 15.34% 15.59% 15.83% 16.06% 16.27%
Depreciation = $13-15 million
Illustrative Example:Vertically Integrated Utility Under Frozen RateIllustrative Example:Vertically Integrated Utility Under Frozen Rate
Additions to rate base = $8 million per year — Less than
depreciation
ROE continues to grow due to lack of investment in system
Rate base steadily declining
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Result of Underinvestment Over TimeResult of Underinvestment Over Time