Electric Utilities See the Value in the Pipes (AEP, AYE, BRK/A)

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American Electric Power Company (NYSE:AEP) expects to increase the company’s profit by building new power transmission lines. The company plans to spend more than $7 billion to add new high-voltage lines in Texas, the Midwest, and the Washington, D.C. area.  Allegheny Electric Inc. (NYSE:AYE) is a partner in the expansion intoWashington, and Warren Buffet’s Berkshire Hathaway Inc. (NYSE: BRK-A) unit MidAmerican Energy Holdings is joiningAEP in Texas.

According to Bloomberg, AEP sees difficulty in financingand getting approval for new coal-fired power plants. But new powertransmission lines will deliver electricity more efficiently fromexisting plants, and, the big plus, enable renewable generationprojects with wind and solar in more remote areas of the US.

In Texas, AEP and MidAmerican have proposed spending $1.2 billion tobuild 745 kilovolt lines from the Panhandle, where T. Boone Pickens,among others, have proposed building new wind farms. New windgeneration is also being built in the Dakotas and eastern Montana. Solargeneration expansion is also being planned in the southwest. Withouttransmission lines, none of these projects will be constructed because themarkets for the power lie hundreds, if not thousands, of miles fromthe generation point.

AEP already owns and operates more than 39,000 miles of high-voltagetransmission lines in the US. The US Energy Policy Act of 2005guaranteed, among other things, a return on equity for new powertransmission lines at the high end of regulated rates and full recoveryof construction costs in rates. That’s a pretty sweet deal.

There are a few issues. Right-of-way is one. High-voltage lines goingthrough populated areas are expensive and usually generate some publichub-bub. In remote areas, wildlife migration corridors can become anissue as power lines criss-cross unpopulated regions. Neither of theseis usually a show-stopper, though, and AEP knows it.

Combined with the Obama administration’s economic stimulus proposals,which include electricity generation infrastructure renewal,electricity transmission could prove to be a winner. Upgrading the USelectricity grid could cost up to a trillion dollars. And a journeyof a trillion dollars has to start somewhere.

Paul Ausick
January 26, 2009