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.
Progress in golf consists of two steps forward and 26.6 miles backward.
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
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
ISO and Electric Deregulation: Progress Towards A Better
World
Only one question: Who’s ox gets gored?
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
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
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
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.
VELCO LLC
What is it? Why did we do it? Who benefits?
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.
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.
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
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
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
VELCO C Corp% of Tax % of
Taxable Company: Taxable Total Exempt Total
Equity Investment 23,991 18,713 78% 5,278 22%
Equity Rate of Return % 11.5%
Equity Earnings 2,759
Income Tax Gross-Up Rate (1 - Income Tax Rate) 59.565%
Grossed-Up Equity Earnings 4,632
Income Tax Rate 40.435%
Income Taxes 1,873
After Tax Equity Earnings Allocation 2,759 2,152 78% 607 22%
Rate of Return % 11.5% 11.5%
LLC Direct Benefits% of Tax % of
LLC: Taxable Total Exempt Total
Equity Investment 23,991 18,713 78% 5,278 22%
Equity Rate of Return % 11.5%
Equity Earnings 2,759
Income Tax Gross-Up Rate (1 - Income Tax Rate) 59.565%
Grossed-Up Equity Earnings 4,632
Eliminate Gross-Up Related to Tax Exempt:
Tax Exempt % -22%
Income Tax Rate 40.435%
Eliminate Gross-Up of Tax Related to Tax Exempt (412)
Grossed-Up Equity Earnings Allocation 4,220 3,292 78% 928 22%
Owner's Books:
Equity Earnings Allocation 3,292 928
Income Tax Rate 40.435%
Income Taxes Paid (1,331) -
After-Tax Equity Earnings 1,961 928
Equity Rate of Return % 10.5% 17.6%
LLC with Tax Exempt Adjustment
% of Tax % of
LLC w/TE Adj: Taxable Total Exempt Total
Equity Investment 23,991 18,713 78% 5,278 22%
Equity Investment Swap - (1,679) - 1,679 -
Total Equity Investment 23,991 17,034 71% 6,958 29%
Equity Rate of Return % 11.5%
Equity Earnings 2,759
Income Tax Gross-Up Rate (1 - Income Tax Rate) 59.565%
Grossed-Up Equity Earnings 4,632
Eliminate Gross-Up Related toTax Exempt:
Tax Exempt % -22%
Income Tax Rate 40.435%
Eliminate Gross-Up of Tax Related toTax Exempt (412)
Grossed-Up Equity Earnings Allocation 4,220 3,292 78% 928 22%
Owner's Books:
Equity Earnings Allocation 3,292 928
Income Tax Rate 40.435%
Income Taxes Paid (1,331) -
After-Tax Equity Earnings 1,961 928
Equity Rate of Return % 11.5% 13.3%
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.
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
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
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