ITC Holdings Corp.

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ITC Holdings Corp.

39500 Orchard Hill Place, Suite 200
Novi, Michigan 48375
U.S.A.
Telephone: (248) 374-7100
Fax: (248) 374-7140
Web site: http://www.itc-holdings.com

Public Company
Incorporated:
2002
Employees: 118
Sales: $126.4 million (2004)
Stock Exchanges: New York
Ticker Symbol: ITC
NAIC: 221121 Electric Bulk Power Transmission and Control

ITC Holdings Corp. (ITC) is a Michigan-based public company whose wholly owned subsidiary, International Transmission Company, is recognized as the first independent electricity transmission company in the United States. International Transmission's fully regulated, high-voltage system links generating stations in Michigan and neighboring areas to local distribution points, serving a population of nearly five million people in 13 southeastern Michigan counties, including the Detroit metropolitan area. Following a 2005 initial public offering of stock, ITC shares are traded on the New York Stock Exchange. ITC hopes to expand beyond Michigan by acquiring other Midwest electricity transmission systems.

Tracing Roots Back to the 1800s Invention of Electric Light

The transmission system that formed the backbone of International Transmission was once part of Detroit Edison. After Thomas Edison successfully introduced electric lighting in 1879, electric companies cropped up all over the country to provide street lighting as well as commercial and residential service. Even in the sleepy town of Detroit, years before the automobile industry transformed it into a thriving metropolis, a number of competing electric companies were launched and jockeyed for position. During the final 15 years of the 1800s, two companies emerged in the market: Edison Illuminating Company of Detroit, founded in 1886 to serve businesses and homes, and Peninsular Electric Light Company, established in 1891 to focus on street lighting. In January 1903 the two companies were combined to create The Detroit Edison Company. Like all utility companies at the time, it was a vertically integrated operation, controlling all aspects of the business, from power generation to transmission to distribution. Over the ensuing decades, Detroit Edison acquired smaller Michigan utilities, steadily increasing the area it covered, all the while adding generating capacity and a network of transmission lines. During the 1990s, however, 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 utilities to make their power lines available for the transmission of electricity generated by outside producers. Next, in 1996, the Federal Energy Regulatory Commission (FERC) established new rules regarding transmission, and a year later the industry was deregulated, eliminating the monopoly status only as it pertained to transmission access of such longtime utility companies as Detroit Edison, which by now had been reorganized into a holding company called DTE Energy Company. This new structure created separation between non-regulated subsidiaries and those business units that remained regulated, such as the power transmission system.

There was a clear advantage to the public for a company such as DTE to 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 for consumers in a specific service territory. In determining whether it could recover the costs of transmission through its rate base, a vertically-integrated utility looked only at the benefits which would accrue to its native load customers." As a result, there was little incentive to make improvements that would benefit the larger regional transmission 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, who of course would be footing the bill, it also had to consider the contribution of the investment to the regulated regional transmission network on which it depended. Consequently, according to the study, investment incentives were "more focused on improving the overall value of transmission than [were] those of a vertically-integrated utility. The return on equity for a transmission-only company [was] measured strictly from its transmission business, as opposed to the vertically-integrated company whose return on equity [was] measured from a portfolio of regulated and unregulated activities in generation and energy delivery." In short, an independent transmission company had more incentives than an old-guard utility company to make the kind of infrastructure 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 delivery of electricity.

Formation of the International Transmission Company in 2000

For DTE, transmission was not a growth business, a major reason why in 2000 DTE began the process of exiting from transmission, forming a new subsidiary called International Transmission Company. It then sought approval from FERC and notified the U.S. Securities and Exchange Commission regarding plans to spin off its transmission system into the subsidiary with assets worth $440 million. These assets included approximately 6,500 miles of both 120,000-volt cable and 345,000-volt electric cable, rights-of-way, and interconnections with other utilities. Although a subsidiary of DTE, International Transmission would become a common carrier, open to all suppliers of electricity. Some 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 higher rate, which opponents charged would discourage customers from choosing a different electricity supplier, in effect helping Detroit Edison to retain business. International Transmission disagreed, maintaining that it was not in the company's interest to hinder open access: In fact, the new company needed it simply to survive. In October 2000, FERC approved the rate request, imposing only minor modifications. The stage was now set for DTE's board of directors to approve the actual 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 for Detroit Edison. Welch earned a Bachelor of Science degree in Electrical Engineering from the University of Kansas and was a Licensed Professional Engineer in Michigan. He began his career at Detroit Edison in 1971 and worked his way up through the organization. Although International Transmission was a DTE subsidiary, it was understood from the outset that it was soon likely to be sold off and become an unaffiliated, separate company. It would be Welch who would be called upon to supply the vision for the new company finding its way in a new environment for the energy industry.

The momentum for separating transmission assets from power companies was blunted somewhat, due in some degree to the financial difficulties 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 assets that no longer fit in with the company's new strategy, one of which was International Transmission. In preparation for a deal, ITC Holdings Corp. was formed in November 2002. On January 1, 2003, DTE announced that it had a buyer in New York City investment firm Kohlberg Kravis Roberts & Co. and asset management firm Trimaran Capital Partners LLC, which teamed up to acquire International Transmission for $610 million. The deal closed on February 28, 2003, and International Transmission became a stand-alone transmission company. It would go on later to be recognized as the first fully independent transmission company in the country when it completed the last piece of transition of maintenance, construction, and operations responsibilities from DTE in early 2004.

Key Dates:

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

International Transmission had been a stand-alone transmission company for less than six months when it became caught up in the major power outage of August 14, 2003 that affected a large portion of the northeastern United States and eastern Canada and some 50 million people in all, the third largest blackout in North American history. The outage began in Ohio around 2:00 p.m. when a generating plant owned by FirstEnergy shut down in Eastlake, Ohio, resulting in transmission line failures that caused a cascading series of events. As voltage dipped 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," according to Northeast Power Report. The publication also reported that International Transmission told the Michigan Public Service Commission in a Powerpoint presentation that after the FirstEnergy transmission lines failures, "Northern Ohio becomes electrically isolated from 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 than 10 seconds the flows on the International Transmission-FirstEnergy intertie jump by 2,000 MW. FirstEnergy starts to pull the equivalent of 20% of Detroit Edison's load from Michigan. The blackout is inevitable at this point. Flow around Lake Erie reverses, pulling power from New York and Ontario through Michigan."

In light of the August outage, International Transmission began reassessing its 2004 spending plans to upgrade its system. "What is it going to take, if an event like this happens again, so that the state of Michigan isn't impacted?," Welch commented to Crain's Detroit Business. According to Crain's, "Improvements to make the transmission system more reliable, relieve congestion, meet customer needs 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 its budget for improvements on its system as well as sharing in the cost of a regional, multistate transmission upgrade. All told, International Transmission was likely to spend three to four times as much on the transmission system than had DTE, but FERC also allowed it to charge 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 and completed in 2005, the substation removed a traffic jam in the system. As a result, all utilities in Michigan could switch more quickly to cheaper sources of electricity as they became available, something that could not be done previously because of congestion. Cheaper power, of course, translated into lower rates for customers. Other improvements to the system during this period included an $8 million control center and a $16.1 million project to install new cable in downtown Detroit. In the summer of 2004, International Transmission also hosted a meeting with a number of midwestern transmission and electrical utility companies to help prevent the kind of blackout that visited the country the previous year. According to Energy User News, "The group examined ways to restore the electrical system from 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 million and net income of $2.6 million, ITC took another major step in its development in 2005 when the company made an initial public offering of stock, raising more than $330 million. Kohlberg Kravis Roberts remained the majority shareholder, owning a 55 percent stake. With its share of the proceeds, ITC paid down some of its debt, which was 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 as currency to fund the purchase of other Midwest electricity transmission 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; New York Transmission Holdings Corporation.

Further Reading

Bell, Dawson, and Chris Christoff, "Ohio Left Michigan in Dark, Utility Executives Say," Detroit Free Press, September 3, 2003.

Bodipo-Memba, Alejandro, "ITC Offering Surpasses Expectations," Detroit Free Press, July 27, 2005.

Lane, Amy, "DTE Asks for Approval to Spin Off Detroit Edison Transmission System," Crain's Detroit Business, June 26, 2000, p. 1.

, "Edison Spinoff's Rate Proposals Raise Customer's Ire," Crain's Detroit Business, September 11, 2000, p. 21.

, "ITC Holdings Aims to Juice Up Its Profits by Acquisition," Crain's Detroit Business, August 22, 2005, p. 4.

, "Transmission Company Plant to Spend More on Grid," Crain's Detroit Business, August 25, 2003, p. 24.

"Search for Sources of Blackout Continues As FirstEnergy Seeks to Deflect Blame," Northeast Power Report, August 25, 2003, p. 1.

Sikora, Martin, "Transmission Carve-Outs Generate M&A Transactions," Dealmaker's Journal, January 1, 2003.

Tabors, Richard D., "Evaluating the Benefits of Independently-Owned Transmission Companies," Journal of Structured and Project Finance, Winter 2004, p. 48.

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ITC Holdings Corp.

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