UPDATE 1-American Electric Power to invest in new grid company

FORT LAUDERDALE, Nov 2 (Reuters) - American Electric Power Inc (AEP.N) Chairman Michael Morris said Monday his company hopes to invest as much as $130 million in a new transmission company next year.

AEP will form a separate transmission company to pursue new transmission upgrades within its 11-state utility territory, according to a release.

Beyond 2010, Morris said investment in the company could quickly grow to $400 million annually for the next six to seven years.

Once approved by regulators, a separate company "will enable us to get a quicker regulatory return for our capital invested," Morris said on the sidelines of the Edison Electric Institute financial conference.

Last month, Chicago-based Exelon (EXC.N) announced creation of a transmission venture and other utilities are looking at transmission investment for growth because of attractive and regulated returns.

New power lines and technological "smart-grid" improvements are needed to accommodate the additional of renewable power resources, such as wind and solar, from remote locations to power-hungry cities.

AEP has already expanded its transmission business with two joint ventures with MidAmerican Energy Holdings Co, a unit of Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N). One joint venture, Electric Transmission Texas, has been assigned more than $800 million in grid projects as part of a $5 billion expansion plan to move more wind power from West Texas to the eastern half of the state.

The second venture, Electric Transmission America, is pursuing projects in the nation's mid-section.

The new AEP transco will seek state utility status wher e needed and will join the PJM Interconnection and the Southwest Power Pool as transmission owners, the company said.

AEP will file for a tariff from the Federal Energy Regulatory Commission before year-end with rates to become effective in mid-2010.

Using formula rates adjusted annually by FERC and passed along to states eliminates the regulatory lag for recovery and will improve access to capital, Morris said, a benefit for customers and shareholders.

Morris envisions a spin-off of the new entity down the road.

"Ultimately, we intend to take some part of this into a partial IPO to put a true value on this portion of the larger AEP portfolio," Morris said.

AEP owns the nation's largest transmission system, totaling 39,000 miles and the most 765-kilovolt extra-high voltage miles of any U.S. company. (Reporting by Eileen O'Grady; Editing by John Picinich)