Providing analysis and negotiation support for a municipal utility (Strategic Economic Analysis)
“The negotiation process with the incumbent utility in our zone went very well. MCR’s modeling results proved we should be building the transmission substation in order to obtain investment neutrality. Without their expertise, we would not have been able to accomplish what we accomplished.”
—General Manager, municipal utility
Background
A municipal utility was preparing to conduct negotiations with the incumbent utility in its pricing zone over the construction of a large proposed substation that would nearly triple the net book value of the client’s total transmission investments. The pricing zone participants and our client faced rapidly rising zonal transmission rates. The client requested MCR’s help to determine whether it should be entitled to build the substation based on a desire to be neutrally invested in the zone (i.e., when transmission network zonal revenue offsets the zonal tariff paid). In addition to the analysis, the client requested MCR to participate in the actual negotiation meetings with the incumbent utility.
Solution
MCR conducted a thorough analysis of the financials of the proposed substation project. Prior to the negotiations, MCR produced a report for the client that discussed the assumptions and forecasted results of the neutral investment analysis. MCR and the client then prepared for and participated in a series of meetings and conference calls with the client and incumbent utility, including the legal counsels of each party, to review the results of the analysis and begin negotiations related to the substation. MCR worked closely with the incumbent to reconcile its results to the modeling results of the incumbent.
Results
The final reconciled results showed that MCR’s client was currently underinvested in the pricing zone and will continue to be underinvested even after they make the proposed substation investment. After reconciling the modeling assumptions, the incumbent utility agreed to the results, leading to a formalized substation construction agreement and an ongoing coordinated planning agreement between the parties. The planning agreement codified the goal of having our client be entitled to a level of ongoing transmission investment that will ensure it will be neutrally invested in the future, thus offsetting anticipated increases in zonal transmission rates.