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<title>April 2000: Shiekawatts vs. Negawatts</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<td width="75%" valign="top"><img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" WIDTH="375" HEIGHT="75"><p><b><u>April
2000</u><br>
</b></p>
<font FACE="Palatino" SIZE="5"><p></font><b><font face="Arial" size="6">Sheikawatts
vs. Negawatts</font></b></p>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
2000/05</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> </p>
</font>
<p ALIGN="JUSTIFY"><font face="Arial">Plots repeat themselves first as
tragedy and then as farce. First the tragedy. Oil prices rise, and
Washington flees to short term, parochial fixes. The possibility of
structural change is ignored for the palliative of short term promises
(even absurd ones like gas tax revocation). Root causes are ignored and
intersectional rivalries are politically exploited. It is, one hopes, a
blip on the landscape, although it has the seeds of a secular American
tragedy. It seems make believe free markets with strong suppliers and
fragmented consumers can have very real world consequences for prices and
economics.<br>
<br>
Now the farce. The prospect of summer’s power spike is upon us early
this year. But there is no "big battery" to rival the Strategic
Petroleum Reserve, whose spigot can be opened if the thermometer gets too
hot. Somehow the projected emergent inventory of new generating facilities
has not emerged as projected. (Or it has, but those with power in
electricity supply markets like those in oil markets seek profit
maximization in it, with market equilibrium a later, derivative and poorer
relation.)<br>
<br>
While PJM, New England and California all face analogous circumstances,
focal point for the problem in the nation - possibly with election
overtones - is the Midwest (the ECAR Region). The prediction of a tight
summer comes not just from the pundits, but from the wholesale power
markets themselves. Enron Power Marketing already has pulled its offers
for July/August into Cinergy markets, and has not made any offers since
then. Future market prices continue to hit highs – the expectation is
that capacity margins and peaks will be the same as last summer.<br>
<br>
What to do? Three theories have been articulated recently, but they all
stem from the same root. Chairman Hoecker of FERC has raised the
possibility of "bold" action – a national system of
reliability based on private contract presumably instead of based on a law
setting standards and enforcements. (Perhaps that is a way of saying,
since Congress won’t or can’t legislate, FERC will have to try to bite
the bullet itself. In other words moderation in the face of
non-reliability (or just unattractive price spikes) is no vice.....break
out the NRA purple eagle for power.</font></p>
<font FACE="Palatino" SIZE="2">
</font>
<p ALIGN="JUSTIFY"><font face="Arial">That approach seems to suit the mood
of a coalition of Midwestern retail and wholesale consumers, who have
petitioned the presidential candidates to provide relief based on the
mandatory creation of a super regional transmission organization, not
based on voluntary utility participation, as is the punches pulled FERC
RTO proposal.<br>
<br>
Suits the views of the big marketers too, who are petitioning FERC to
combine the three Northeastern ISOs into one RTO. Some such players, like
Dynegy would also like an Interregional Transmission System Coordinator to
overlay the regional RTOs.<br>
<br>
So for their own reasons, each of the big players have chosen to think
that reliability governance will alleviate foreseeable spike crises.
Perhaps it is time to reread the hearings following last year’s crises,
which attributed at least some of the price developments to strategies of
market players or simply to the way immature markets work. But no matter,
the FERC Chairman has told us our only option is to push ahead (ed note:
like lemmings) with the "reinvention" of markets.<br>
<br>
It is interesting that while there has been emphasis on improved
transmission, through reliability arrangements, there has been no
suggestion that conservation – in the form of mandatory load reshaping
– might be the optimal response to excessive peak use. Shades of our
enlightened national approach to the pending oil crisis: or, as it might
be termed, SUV-diplomacy. This is particularly striking, given that Elcon
recently pointed out to its members, that this was an optimal way to
actually profit from deregulation. Similarly PJM has sought to improve
reliability and avert a spike by initiating a demand side bidding program,
whereby industrial customers get paid to cut back use. Local citizens
groups suggest that things would be even brighter if suppliers came up
with incentive programs for small business and residential users to get
offline. Striking to observe, particularly in that conservation/demand
management was one of the few effective strategies during the last oil
crisis.<br>
<br>
So here is a puzzle: if it is justified to meet the upcoming spike with a
non-statutory solution as FERC suggests; and if the market-based way is
the American way to do it; why not go "negawatt" and put profits
in the hands of those who directly alleviate the crisis than and reward
those in control of production for skillful market gamesmanship selling
"sheikawatts" on a transmission constrained grid. You don’t
need the moral equivalent of war or the economic equivalent of Adam Smith
to reach that conclusion.</font></p>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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