Itc Holdings Corp. Business Information, Profile, and History

History of Itc Holdings Corp.

ITC Holdings Corp. (ITC) is a Michigan-based public company whose who lly owned subsidiary, International Transmission Company, is recogniz ed as the first independent electricity transmission company in the U nited States. International Transmission's fully regulated, high-volt age system links generating stations in Michigan and neighboring area s to local distribution points, serving a population of nearly five m illion people in 13 southeastern Michigan counties, including the Det roit metropolitan area. Following a 2005 initial public offering of s tock, ITC shares are traded on the New York Stock Exchange. ITC hopes to expand beyond Michigan by acquiring other Midwest electricity tra nsmission systems.

Tracing Roots Back to the 1800s Invention of Electric Light

The transmission system that formed the backbone of International Tra nsmission was once part of Detroit Edison. After Thomas Edison succes sfully introduced electric lighting in 1879, electric companies cropp ed up all over the country to provide street lighting as well as comm ercial and residential service. Even in the sleepy town of Detroit, y ears before the automobile industry transformed it into a thriving me tropolis, a number of competing electric companies were launched and jockeyed for position. During the final 15 years of the 1800s, two co mpanies emerged in the market: Edison Illuminating Company of Detroit , founded in 1886 to serve businesses and homes, and Peninsular Elect ric Light Company, established in 1891 to focus on street lighting. I n January 1903 the two companies were combined to create The Detroit Edison Company. Like all utility companies at the time, it was a vert ically integrated operation, controlling all aspects of the business, from power generation to transmission to distribution. Over the ensu ing decades, Detroit Edison acquired smaller Michigan utilities, stea dily increasing the area it covered, all the while adding generating capacity and a network of transmission lines. During the 1990s, howev er, the longtime utility model became obsolete.

In 1992 the U.S. Congress passed the Energy Policy Act, which created competition in the wholesale sector of electricity by requiring util ities to make their power lines available for the transmission of ele ctricity generated by outside producers. Next, in 1996, the Federal E nergy Regulatory Commission (FERC) established new rules regarding tr ansmission, and a year later the industry was deregulated, eliminatin g the monopoly status only as it pertained to transmission access of such longtime utility companies as Detroit Edison, which by now had b een reorganized into a holding company called DTE Energy Company. Thi s new structure created separation between nonregulated subsidiaries and those business units that remained regulated, such as the power t ransmission system.

There was a clear advantage to the public for a company such as DTE t o spin off its transmission system into a separate company. According to a case study published in the Journal of Structure and Project Finance, "Transmission investments traditionally have been seen as a necessary, but largely uninteresting, segment of the vertically- integrated utility business. ... [focusing] only on reducing costs fo r consumers in a specific service territory. In determining whether i t could recover the costs of transmission through its rate base, a ve rtically-integrated utility looked only at the benefits which would a ccrue to its native load customers." As a result, there was little in centive to make improvements that would benefit the larger regional t ransmission system. An independent transmission company, on the other hand, operated under a different set of circumstances. While it was still concerned about the impact of an investment on its customers, w ho of course would be footing the bill, it also had to consider the c ontribution of the investment to the regulated regional transmission network on which it depended. Consequently, according to the study, i nvestment incentives were "more focused on improving the overall valu e of transmission than [were] those of a vertically-integrated utilit y. The return on equity for a transmission-only company [was] measure d strictly from its transmission business, as opposed to the vertical ly-integrated company whose return on equity [was] measured from a po rtfolio of regulated and unregulated activities in generation and ene rgy delivery." In short, an independent transmission company had more incentives than an old-guard utility company to make the kind of inf rastructure investments that benefited the public. FERC supported the idea of independent operators, which the agency believed were likely to make the kind of upgrades needed to ensure the reliability of the country's overall transmission system. In addition, FERC hoped that independents would have more incentive to eliminate the "bottlenecks" that existed between systems and lead to an overall smoother deliver y of electricity.

Formation of the International Transmission Company in 2000

For DTE, transmission was not a growth business, a major reason why i n 2000 DTE began the process of exiting from transmission, forming a new subsidiary called International Transmission Company. It then sou ght approval from FERC and notified the U.S. Securities and Exchange Commission regarding plans to spin off its transmission system into t he subsidiary with assets worth $440 million. These assets includ ed approximately 6,500 miles of both 120,000-volt cable and 345,000-v olt electric cable, rights-of-way, and interconnections with other ut ilities. Although a subsidiary of DTE, International Transmission wou ld become a common carrier, open to all suppliers of electricity. Som e protests arose, however, after International Transmission made its initial rate request from federal regulators. Customers who chose to buy power from a supplier other than Detroit Edison would pay a highe r rate, which opponents charged would discourage customers from choos ing a different electricity supplier, in effect helping Detroit Ediso n to retain business. International Transmission disagreed, maintaini ng that it was not in the company's interest to hinder open access: I n fact, the new company needed it simply to survive. In October 2000, FERC approved the rate request, imposing only minor modifications. T he stage was now set for DTE's board of directors to approve the actu al transfer of transmission assets to International Transmission.

Selected to serve as International Transmission's president and chief executive officer was Joseph L. Welch, the manager of transmission f or Detroit Edison. Welch earned a Bachelor of Science degree in Elect rical Engineering from the University of Kansas and was a Licensed Pr ofessional Engineer in Michigan. He began his career at Detroit Ediso n in 1971 and worked his way up through the organization. Although In ternational Transmission was a DTE subsidiary, it was understood from the outset that it was soon likely to be sold off and become an unaf filiated, separate company. It would be Welch who would be called upo n to supply the vision for the new company finding its way in a new e nvironment for the energy industry.

The momentum for separating transmission assets from power companies was blunted somewhat, due in some degree to the financial difficultie s caused in the industry by the Enron scandal and the time needed to adjust to the new relaxed regulatory environment. In 2001 DTE merged with MCN Energy Group Inc. and a year later was eager to sell off ass ets that no longer fit in with the company's new strategy, one of whi ch was International Transmission. In preparation for a deal, ITC Hol dings Corp. was formed in November 2002. On January 1, 2003, DTE anno unced that it had a buyer in New York City investment firm Kohlberg K ravis Roberts & Co. and asset management firm Trimaran Capital Pa rtners LLC, which teamed up to acquire International Transmission for $610 million. The deal closed on February 28, 2003, and Internat ional Transmission became a stand-alone transmission company. It woul d go on later to be recognized as the first fully independent transmi ssion company in the country when it completed the last piece of tran sition of maintenance, construction, and operations responsibilities from DTE in early 2004.

International Transmission had been a stand-alone transmission compan y for less than six months when it became caught up in the major powe r outage of August 14, 2003 that affected a large portion of the nort heastern United States and eastern Canada and some 50 million people in all, the third largest blackout in North American history. The out age began in Ohio around 2:00 p.m. when a generating plant owned by F irstEnergy shut down in Eastlake, Ohio, resulting in transmission lin e failures that caused a cascading series of events. As voltage dippe d in Ohio, and Pennsylvania utilities disconnected to save their own systems, a massive amount of power, about 2,500 megawatts, was drawn out of Michigan through the International Transmission system, which was given no warning. "'We got hit by the equivalent of a tsunami and we didn't have a clue that it was coming,' said Joseph Welch," accor ding to Northeast Power Report. The publication also reported that International Transmission told the Michigan Public Service Comm ission in a Powerpoint presentation that after the FirstEnergy transm ission lines failures, "Northern Ohio becomes electrically isolated f rom the rest of Ohio. FirstEnergy is suddenly 2,000 MW short and the shortest route for the power to flow is through Michigan. In less tha n 10 seconds the flows on the International Transmission-FirstEnergy inter-tie jump by 2,000 MW. FirstEnergy starts to pull the equivalent of 20% of Detroit Edison's load from Michigan. The blackout is i nevitable at this point. Flow around Lake Erie reverses, pulling powe r from New York and Ontario through Michigan."

In light of the August outage, International Transmission began reass essing its 2004 spending plans to upgrade its system. "What is it goi ng to take, if an event like this happens again, so that the state of Michigan isn't impacted?," Welch commented to Crain's Detroit Bus iness. According to Crain's, "Improvements to make the tra nsmission system more reliable, relieve congestion, meet customer nee ds and reduce energy costs are the backbone of the business plan for ITC." Now the company began to think that it would have to increase i ts budget for improvements on its system as well as sharing in the co st of a regional, multistate transmission upgrade. All told, Internat ional Transmission was likely to spend three to four times as much on the transmission system than had DTE, but FERC also allowed it to ch arge higher rates to make those types of investments.

An example of upgrades that benefited the public was the building of a $9.5 million substation in Washington Township. Begun in 2004 a nd completed in 2005, the substation removed a traffic jam in the sys tem. As a result, all utilities in Michigan could switch more quickly to cheaper sources of electricity as they became available, somethin g that could not be done previously because of congestion. Cheaper po wer, of course, translated into lower rates for customers. Other impr ovements to the system during this period included an $8 million control center and a $16.1 million project to install new cable i n downtown Detroit. In the summer of 2004, International Transmission also hosted a meeting with a number of midwestern transmission and e lectrical utility companies to help prevent the kind of blackout that visited the country the previous year. According to Energy User N ews, "The group examined ways to restore the electrical system fr om a wide area perspective, reviewed emergency and system restoration plans, and conducted a tabletop drill."

Public in 2005

Coming off a year in which it generated revenues of $126.4 millio n and net income of $2.6 million, ITC took another major step in its development in 2005 when the company made an initial public offer ing of stock, raising more than $330 million. Kohlberg Kravis Rob erts remained the majority shareholder, owning a 55 percent stake. Wi th its share of the proceeds, ITC paid down some of its debt, which w as reduced to $508.5 million. It also earmarked money for capital improvements, expected to total $105 million in 2005 and grow to $120 million in 2006. ITC also looked to make use of its stock a s currency to fund the purchase of other Midwest electricity transmis sion systems. No immediate deals were in the offering, but there was every reason to expect that in the near future ITC would be expanding beyond southeast Michigan.

Principal Subsidiaries: International Transmission Company; Ne w York Transmission Holdings Corporation.

Chronology

• Key Dates:
• 1903: Detroit Edison Company is created.
• 1996: DTE Energy Company is formed as a holding company for De troit Edison and other subsidiaries.
• 2000: DTE forms subsidiary International Transmission Co. to h old transmission assets.
• 2003: ITC is sold to investment firms.
• 2005: ITC goes public with an initial offering of stock.