The CAPX2020 Model - Part I

Recently electricity started flowing through a new power line between Monticello and St. Cloud, Minn. This 28-mile, 345-kV segment represents a major milestone for one reason: it’s the first wire to go live in the 700-mile CAPX2020 transmission venture.

CapX2020 is a unique collaboration of utilities with various business models -- investor-owned utilities, distribution cooperatives, generation and transmission (G&T) cooperatives, and municipals. The group is developing an ambitious set of projects that extend from western Wisconsin across Minnesota, into the Dakotas, and potentially into Manitoba. Various projects within the initiative are designed to serve various purposes, from supporting reliability to bringing new generation resources to the Midwest ISO wholesale market -- so-called “multi-value projects” (MVP) in the MISO planning process. The first group of projects in the CapX2020 plan is expected to cost nearly $2 billion.

“We reverted to the old model of collaboration, because we’d tried everything else.”
-Will Kaul, Great River Energy

One might guess that the diverse group of utilities involved with CapX2020 would encounter irreconcilable differences in fundamental areas -- from routing to cost allocation. But as Will Kaul, Great River Energy’s v.p. of transmission explained, a collaborative approach has allowed development to proceed quickly and smoothly, with surprisingly few setbacks.

FORTNIGHTLY What’s the status of the CapX2020 project?

KAUL Everything is going just fine. We have four projects, divided into different segments. Phase 1 of the Fargo-to-Monticello project [the Monticello-St. Cloud segment] was completed on time and under budget. And we just achieved a major milestone on the $700 million Brookings County-to-Hampton project; MISO [the Midwest ISO] approved it as part of its MVP [multi-value project] portfolio. That means the costs will be spread across the entire MISO footprint. Great River Energy is leading that project as construction manager. Also the Bemidji-to-Grand Rapids project is 50-percent constructed, and the last one, the Hampton-Rochester-LaCrosse project, is still in permitting stages. We’re waiting on a judge’s recommendation for Minnesota PUC approval, which we expect to get sometime in the first quarter of 2012.

FORTNIGHTLY How did CAPX2020 get started? And what’s been Great River Energy’s role in its development?

KAUL We’re in a unique position. As a G&T cooperative with a large footprint in Minnesota, we’re partners with several other utilities in that footprint -- including Minnesota Power and Xcel Energy. We’ve been partnering with them from the beginning.

After FERC issued Order 888, there was a primordial soup in our region and other regions, with a lot of different initiatives that came forward and failed. One of the grandest was TRANSLink, led by Xcel, with MidAmerican, Alliant, a couple of G&Ts, and some utilities from Nebraska. The participants in TRANSLink embraced an asset model rather than a regulatory RTO [regional transmission organization] type of model. But TRANSLink crashed, primarily because of the crash in the wholesale market. Enron went down and NRG -- then a subsidiary of NSP [Xcel predecessor Northern States Power] -- went bankrupt. It brought everyone back to vertically integrated models and core businesses.

CAPX2020 got started out of the ashes of TRANSLink. It began with a hallway conversation between Mary Fisher at Xcel and myself, at a MAPP meeting in the spring of 2004. We agreed we still needed to build transmission. Out of that conversation came a two-pronged approach. One prong was to develop a vision for transmission, which would provide the context for multiple projects, and would serve as a tool that we could use with legislators, regulators, and the public to communicate the need for transmission investment and how it all fit together.

The other prong was to get some regulatory reforms that were needed. This was critical. When we started in 2004, transmission wasn’t a favored investment at utilities. It suffered from a lot of regulatory lag, and if you couldn’t stand that, you had to bring rate cases before PUCs. Utilities were reluctant to do that because it was a small part of the business. We needed regulatory reforms to get formula rate treatment -- a transmission rider, so investments didn’t have to go through a rate case; and also forward-looking treatment for construction work in progress (CWIP) to pay for the expansion as we went. Also we needed some streamlining of the permitting process, and recognition of transcos in legislation that would allow us to transfer assets into the transco with PUC approval. We went to the Minnesota legislature in 2005 with a coalition of parties, including environmental groups, regulators, renewable energy developers, and others. We didn’t have any major opposition, and were able to get those regulatory reforms passed.

We had a harmonic convergence of interests. We’d also had the Northeast blackout, with a wide recognition of the need for building up the grid. And renewable portfolio standards (RPS) were taking effect in our region, so there was a lot of interest in facilitating that development, and that got renewable groups and regulators on board. We were fortunate in our timing.

Great River Energy’s role has been pretty pivotal all along. I became chairman of the CAPX2020 leadership group, and we’ve always been in the middle. That’s due to the fact that we’ve had good business relationships historically with other utilities.

FORTNIGHTLY How does the CapX2020 collaboration work? What’s each utility’s role in development and financing for each segment?

KAUL We started out with four utilities, and we went out and talked to others, trying to gauge their interest. We have every business model represented, all the food groups -- cooperatives, G&T, municipals, and IOUs. It became a powerful organization, with all those different groups aligned together.

Everyone was involved in the planning process; that’s what CAPX2020 does. It develops project plans, facilitates permitting, and brings projects through the certificate-of-need process. Each project has its own set of investors -- as it happens, each of the current projects have five investors. Great River Energy is involved in four of them, Xcel is in all of them, and some utilities are in only one or two.

Way back when we were looking at these projects, we used a poker-chip exercise. Everyone sat down and we divided up development responsibilities with respect to each player’s share of load. Great River Energy has 15 percent of the peak demand, Xcel is about 50 percent, etc. At the time we didn’t know how many investment dollars would be required, so we put a bogey on it, and the poker chips represented each utility’s share of the total pool. Great River Energy decided we wanted a piece of the Fargo-St. Cloud line, because that’s in our territory. We also wanted into the Bemidji and Brookings lines. We divided our chips on those three projects, and then we moved a few chips here and there to make sure every project was fully funded, and that’s basically all there was to it. We had an understanding about how each project would be paid for. Once the projects were defined and the partnerships were agreed to, each project had its own governance and management.

FORTNIGHTLY What’s the reason for such a large collaboration, with nine different utility companies involved? What do you see as the most important benefits of this kind of multi-utility effort? And what are the biggest challenges?

KAUL Remember the primordial soup we came out of? We’d had a bunch of failed initiatives, attempts to form RTOs and transcos. MISO emerged as an RTO, but that didn’t get us where we needed to be to get transmission built. So I think we just reverted to the old model of collaboration, because we’d tried everything else.

What bound us together in the beginning was something simple: the obligation to serve. We’d seen some blackouts and close calls, and everyone was motivated to get transmission built. It was a handshake kind of deal to begin with. We were successful because we had a shared vision and we needed to get transmission developed. And with so many utilities involved, it ended up being a very powerful organization.

We were able to get regulatory reforms done because we agreed it needed to happen, and we were able to get environmental groups involved. We got everything we asked for -- and we got some things that others were afraid to ask for.

Plus we have the lowest overhead of any organization on this scale. We have a couple of people working on it full time, and a few contractors. Our overall budget is something like $500,000, which is almost nothing for a project of this scale.

Also no one had to restructure their business or form a transco or sell their assets. The vertically integrated utility model was thriving at the time, and CAPX allowed that to continue. I’d thought we’d form a transco once we had a plan established, but I realized later that we already had one. It was just an effective structure based on cooperation and collaboration.

You’d think it would be a fragile organization, but it hasn’t been. In fact it’s been very resilient. Over the last eight years, we’ve seen phenomenal changes in the industry, and yet this model continues to thrive. When we were first planning and permitting the lines, it was for reliability, and now everything is for the market, and we have tariffs in place. When we started, utilities were saying, ‘I guess I’ll invest [in transmission] if I have to.’ And now you have people fighting over shares of transmission investments. The world has changed radically.

At the time we began, MISO had just promulgated its RECB1 tariff [the regional expansion criteria and benefits tariff, which incorporates the ISO’s methodology for allocating costs]. That enabled us to embrace the MISO tariff for three of the projects. Now we’re working with MISO to get tariffs for a project that’s driven by renewable energy development. The MVP process resulted from many years trying to figure that out.

FORTNIGHTLY What lessons have been learned from this process? What would you do differently if you were starting over?

KAUL I’d do it all over again the same way.

We came into this with some lessons already learned, through the failures. But we learned two critical things. First, we had a vision that was bigger than any of our own individual corporate imperatives. It wasn’t like an IOU that went out and pursued corporate objectives and their stock went up. The vision went way beyond that, and that’s what won the day -- it was durable, it enabled us to convince the legislature and PUC to enact regulatory reforms, and approve $2 billion in investment. To this day, the PUC and others think the project is just great. They’ve supported us every step of the way and haven’t wavered at all. Having the vision was the key thing.

The other lesson really arose out of something back in the 1970s. We had an absolute disaster of a transmission project, with Great River Energy’s DC line from North Dakota. We had a lot of angry people, a lot of civil disobedience, and ultimately we had to use the police power of the state to enforce the law. It was a tragedy. I’d just started working for the cooperative and I was involved in the cleanup. We all knew we had to treat the public and landowners fairly, and do a great job of communicating. We sent the A team out there, and they spent two years meeting with anybody and everybody, from Chambers of Commerce to the Kiwanis Club, going on the radio and talking to newspapers. We listened to people and made adjustments. So because of that lesson, the CAPX2020 project hasn’t had any big issues. In fact George Crocker, one of the leaders of the protest movement in the 1970s, has been involved through the environmental group that he leads. When we went to the legislature, he was one of the collaborators. [Editor’s note: During Fortnightly’s fact-checking process, Crocker confirmed this is true, but he added caveats that indicate he’s disappointed with the outcome.]

FORTNIGHTLY How has CapX2020 planning been integrated with MISO’s regional planning process?

KAUL The MISO planning process has matured substantially over the last seven or eight years. MISO was pretty new back when we started. At the time, the organization was getting set up and learning how to exercise its function as a planning authority. They were compiling plans from utilities as a package, and that’s when CAPX2020 plans were being developed. We did a lot of studies and planning work, and forwarded that to MISO.

Now, MISO is clearly the planning authority, doing all kinds of sophisticated work that’s frankly beyond our capabilities. They’re looking at a broad area, involving 130,000 MW of generation, spread across a 12-state footprint. They do market analysis and system analysis that goes beyond what we’ve been able t do when just looking at how to keep the lights on. We’ve seen an evolution there that’s very impressive.

The next group of projects that we’re looking at now came from MISO, not from us. That’s how much it’s changed in the last seven or eight years.

The MISO planning process is very transparent. This portfolio of MVP projects has been in front of all the utilities for several years, and we’ve supported MISO’s adoption of them. We’re familiar with the projects, and we know which ones are going to be ours. In the MISO agreement with transmission owners, there’s language about who builds which project.

FORTNIGHTLY Now that the Monticello-St. Cloud segment has been energized, what’s next for Great River Energy in terms of transmission development?

KAUL For Great River Energy, the Brookings-Hampton line is a huge undertaking. It’s a $700 million project, and we’re putting all of our energy into making it successful. But we’re also looking at three or four other projects on the horizon. One goes from Big Stone, S.D., down to Brookings, and another goes to Ellendale, N.D. Both of those are among the MVP projects that MISO just approved. A third goes from Madison to La Crosse, Wisc. Those three projects will have CAPX2020 participation.

The final project that wasn’t in the group approved by MISO, but is being studied, is an interconnection to Manitoba Hydro, which is doing a $20 billion expansion of its hydro generation resource. They’re working on three different projects, totaling 2,000 MW, and MISO is the primary market for that generation. There probably will be a 500 kV transmission line planned and built somewhere in the 2020 time frame or thereabouts -- and that’s likely to be a CAPX2020 project.

ABOUT THE AUTHOR Michael T. Burr is editor-in-chief of Public Utilities Fortnightly. For the second installment in this series of interviews about the CAPX2020 initiative, he spoke with Teresa Mogensen, v.p. of transmission for Xcel Energy.