Tuesday, November 5, 2013

Skelly and Clean Line Energy suggest changing the Transmission ROW Model

If landowners get annual payments for wind turbines, why not transmission lines?

Wow.  That’s an interesting interview from Michael Skelly, the President of Clean Line Energy and its many subsidiaries.  I wonder what the energy companies with their transmission subsidiaries think of this proposed idea.  Sure, ITC is a part of the Clean Energy Grid Coalition, but other than that, this organization is made up of wind companies … and Clean Line Energy.  It appears these guys are coming from a wind mindset rather than a transmission right of way mindset.  First, don't think about the per pole basis.  The landowner and eminent domain court will think on the total acres not the number of poles.  

Yes, as a landowner, I like the principles of the idea of powerline companies paying an annual royalty for the powerline, but Skelly’s numbers are quite paltry.  Their proposal is so insignificant many consider it a public relations stunt.

I would imagine the rest of the industry is sour to this idea.  For the Amerens’, MidAmerican Energys’,   and such, the idea of paying landowners annually for transmission is like free agency in Major League Baseball.  Once that door is opened, the question is how high can landowners go negotiating annual payments.  The theory of annual payments could easily become legitimate annual payments as soon as the first company negotiates it into a deal . 

Knowing Clean Line Energy, they are using this as a gimmick.  The numbers they are tossing around are incredibly low, especially for a Merchant Transmission Line model.  When the present market value of these annual payments is considered, the cash value is far better.  Clean Line’s numbers for annual payments are like the lottery the cash payout is better than the annual payment option. 

 Even still once this option is legitimately on the table, I wonder how it would play out in an eminent domain case before a jury and local judge.  Eminent domain cases aren’t heard in Washington D.C. or the state capital, but in the local county.  It could easily become a huge shift in Right of Way easement payments if the annual payment is on table when going into court for an eminent domain case as landowners attorneys argue for a reasonable annual payment plan.  

Clean Line Energy could easily change the payment plan for the entire industry by placing this option on the table.    Let’s do the math on a realistic scenario.
The powerline is 3,500 MWH
24 Hours in a day
365 days in a year.
RICL is using a capacity factor around 43% which is surprising.   Who builds a powerline and runs it at 43%?   But for argument sake let’s start at 43%.
If the powerline crosss a typical 160 rod X 80 rod field, this is about 6 acres of 200 foot wide right of way.
3500 X 24 X 365X .4 = 12,264,000 MWH = 13,183,800 MWH’s annually
RICL has tossed around a $25/MWH surcharge to the customers who buy energy off the line.   $3.00/MWH to the land owners sounds reasonable.   So that’s an annual payment of $39,551,400 to the landowners.  

There’s around 12,600 acres of ROW easement needed for this powerline.   With a starting total of $39,551,400 divided by 12,600   comes out to an annual payment of $3,139 per acre of ROW.   If the is 6 acres of ROW through a farm, we’re looking at an annual payment of $18,834.

So if a company pays $8,000 per acre of the initial easement plus the annual payment, a land owner could be looking at $48,000 as a one-time payment plus $18,834 annually regardless of the number of poles used on the farm.   If more MWH is used annually, the landowner’s payments would increase accordingly.   If the Merchant Transmission Line increases its rates by 5%, the landowner’s payments also increase accordingly for perpetuity.  

No this income is not comparable to cell towers.   It’s even less than what I hear for wind turbines, but it’s still giving the landowner $3,139/acre for the right to cross his land.   That still isn’t a bad deal for the landowner.   Compared to cell towers and wind turbines, it sounds a tad low.  

Yes, Merchant Transmission Lines for the intent to create new markets specifically for wind energy do not fall under the typical model.  The "need" here is for the creation of more wind energy.  The "need" here is to advocate a specific type of energy.  Yes, the government is playing "winners & losers" here, but for the land owners affected there should be a royalty plan.  It's unfortunate FERC is willing to stick their nose in state affairs.  FERC could at the very least have the decency to acknowledge to landowner here as someone who deserves a proper negotiation...and a royalty payment. 


Heck while were doing math story problems, lets do one more.  There is a 3,500 MW HVDC powerline.  If the company is charging $25/MWH with a capacity factor of 43%.  What's the gross income?  If you cheat and look above you see the answer.  $329,595,000/year! 

What are the expenses of operating a powerline?  

Labor?  It's a powerline for crying out loud!  How much labor does it take?  1 million?  

Operating exspenses?  Again, it a friggin powerline.

OK, lets take some loose numbers.  Can $20,000,000 annually cover salaries and operating expenses?  I think 20 million is a generous figure here.

So, if a powerline's net income is $300,000,000 while operating 3,500 MW powerline at 43% (who really operates at 43% capacity? That's the dumbest business plan I know.)  ...anyway with 300 million annual profit, and the project costs $2 billion dollars, whats the payback?

6 2/3 years! 

If you operate a 3,500 MWH powerline at capacity and charge $25/MWH,  The payback is almost 2 1/2 years.

Do The landowners of that 12,600 affected acres deserve a royalty for these kind of profits?

You betcha!


Michael Skelly and Clean Line Energy really need to ask themselves this question;

Do we really want to open this door to landowner royalties?

Do you really want to go there?  Maybe my numbers or off.   Clean Line Energy won't share there numbers publicly and gleaning numbers here and there, I feel pretty comfortable with these number.

I don’t know what the transmission industry would think of the idea of annual payments, but a plan like this almost seems reasonable to me   It wouldn’t surprise me this would be an easy and reasonable sell to a jury in an eminent domain case.   However, once the door to annual payments for perpetuity is opened and a president is set, a deal like this might put the industry’s undies in a bind.

4 comments:

  1. So, here's their biggest lie: Only towers impact land use. If that were true, then the company would only need an easement for the land under the tower. Of course, that isn't feasible, the company needs to control land under the wires as well. Therefore, the entire easement impacts land use and should be paid for equally.

    Do you ever wonder, Scott, just how much money there is to be made with this project when the company keeps promising untold riches to landowners, businesses, local governments? If they've got that much money to throw around, there must be a bottomless well for the affected landowner to tap into. I think your proposal sounds reasonable. How about we require the company to make its financials public and pay an annual percentage of profits to affected landowners, making them true partners in the project's success or failure? How about we make participation completely voluntary, like it is for wind turbines? If the company has to zig and zag and/or bury the line to please landowners, so be it. A merchant project depends on markets, and the market price of this project is what it can negotiate in a free market with willing landowners. When the company has the power of eminent domain to take land cheaply by force, it is no longer a merchant project.

    Oh, and can you recalculate using a 700 MW capacity factor? That's RICL's currently approved safe limit to inject into PJM. How would that look on RICL's balance sheet?

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  2. This reminds me of one of my boss's favorite quotes. He can be a real prick and willing to walk over anybody. He like to say

    Don't like my numbers? Then show me yours. Let's see what you have."

    Until Clean Line opens their "confidential" books, I think these numbers are fair and reasonable projections. Any royalty payment to land owners should be based off profit of an easement.

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  3. 700 MW into PJM? Ouch. That really hurts the RICL business model! That's like 1/5 of 3,500 MW's.

    Who builds a powerline and runs it at 1/5 capacity?

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  4. Read rebuttal of ComEd's Naumann on the docket. Lots of new material!

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