POWER POINTS: Demand Drop Delays High-Voltage Line Projects

High-voltage power-line projects are becoming the latest victims of slumping power demand.

Three major transmission projects in the nation's largest power market face new questions about their need as the economic downturn, growing power-curtailment programs and electricity conservation curb demand-growth projections. Two of the projects in the PJM Interconnection, a 13-state power market in the eastern U.S., have been put on hold. A third faces additional scrutiny from regulators.

The opportunities for utilities to boost returns through transmission projects remain as the U.S. looks to upgrade its aging electric grid and access growing amounts of wind and other renewable generation from mostly rural areas. But reliability projects - built to relieve strains on congested high-voltage lines - could face growing delays following a two-year slump in demand.

"There is certainly potential for the projects to be pushed back," said Paul Flemming, director of power and gas services at Energy Security Analysis Inc., a Wakefield, Mass., market research firm.

Possible delays have emerged in recent weeks after PJM provided a preliminary outlook of updated transmission needs to Virginia regulators. In response, Allegheny Energy Inc. (AYE) and American Electric Power Co. Inc. (AEP) withdrew an application in the state for a $1.8 billion transmission line from West Virginia to Maryland. The utilities had believed the 275-mile line would be needed by 2012 or 2013, but it now looks like 2016 is a more likely date.

The move prompted Pepco Holdings Inc. (POM) to ask Maryland regulators Friday to suspend a review of a 150-mile, $1.2 billion transmission line through the state. Approvals for both projects are on hold until PJM completes a more comprehensive study by early summer. At the same time, New Jersey regulators are delaying a vote on the state's section of a nearly $1.3 billion line proposed by Public Service Enterprise Group Inc. (PEG) and PPL Corp. (PPL) as they review the recent developments.

Transmission projects are tempting for power companies because of the favorable returns allowed by federal regulators and the straightforward nature of their construction. Winning support from landowners - and the elected officials who represent them - traditionally has been the major hurdle in developing new lines.

But in the last two years the recession has sapped power demand as industrial production slowed and some households cut back. Although demand is expected to grow this year, U.S. electricity consumption dropped for two straight years and growth in demand peaks that often drive infrastructure projects slowed.

In PJM, some states have stepped up conservation programs, while the number of businesses willing to curtail use at times of peak demand has grown considerably. Environmental groups point to the demand-side gains when arguing against the three transmission projects. They warn the projects could provide a means to bring cheaper, but emissions-heavy, power generated by coal-fired power plants in the Midwest and Southeast to markets in the Northeast.

Utilities say weakened demand likely would cause them to delay rather than cancel their transmission work, an assessment Flemming agrees with. Still, the pullback by Pepco on its Maryland project drew the attention of analysts at Barclays Capital this week. They issued a note to clients warning the transmission line likely would be delayed a year or two from its original 2014 in-service date.

"We are somewhat concerned with this development," they wrote.

Pepco shares recently were trading at $16.97 apiece, down 2.4% from a 10-month high reached in mid-December, while Public Service Enterprise Group shares were down 3.2% from a five-month high reached in late-December, recently trading at $32.69.

(Mark Peters covers the power and coal industries and environmental markets for Dow Jones Newswires. He can be reached at 212-416-2457 or by email at mark.peters@dowjones.com.)

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