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<title>May 2000: Please Don't Sqeeze The X-Factor</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>May
2000</u><br>
</b></p>
<font FACE="Palatino" SIZE="5"><p></font><b><font face="Arial" size="6">Please
Don't Sqeeze <br>
The X-Factor</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">As private power entrepreneurs are
learning, there is a parallel universe to e-commerce, called e-law.
Enshrined on the e-law.com web site is the newly digitalized, but
longstanding first rule of power regulation: "When technology
outstrips regulation, preserve the power of the regulator." Hard
cases based on this principle make just as bad law digitally as they did
in hard copy. The Courts have most recently made this point, and thereby
perhaps rendered more complex practical efforts to allow deregulated power
to be market-regulated.<br>
<br>
Recently, FERC asserted jurisdiction over the Automated Power Exchange,
Inc. ("APX") as a public utility under the Federal Power Act and
required it to file information about itself (and also to pay an annual
fee – an issue now being separately reviewed). The DC Circuit now has
affirmed FERC’s decision more or less on the basis of applying the noble
traditional administrative law principles that there should be deference
to colorable agency jurisdiction, where certain minimal due process type
tests are met - which is not to say the decision was correct as a matter
of good policy. Indeed, the decision provided sufficient explicit fodder
for the following alternate conclusion: Congress never knew (and could not
have known) about automated exchanges when it passed the legislation FERC
is administering. Since the overall purpose of all of FERC’s initiatives
is to replace regulation with the operation of free markets whose
regulation must be honest (as should any commodity exchanges) but not
subject to the incessant oversight of regulators, regulation should be
very light handed. While publicly created exchanges may be
"jurisdictional", in the sense that they are part of the
architecture government is creating to remold the industry, private
computer-based electronic commerce arrangements among freely consenting
parties who can go elsewhere to do their trades, do not fit this mold. If
Congress wants to extend regulation to these operations, FERC can
certainly bring their existence to its attention and encourage it to do
so.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The nub of the FERC/Court decision
was that while APX was not a pure "broker", which never took
power title for resale (a regulatory exempt category under FERC decisions)
neither was it a mere "information management agent" as APX
argued. While it did not own archetypal FERC jurisdictional facilities
(generation facilities and transmission facilities; or even the paperwork
related facilities (which had previously been deemed to make power
marketers jurisdictional), APX was held to be an "integral part"
of trading transactions, which exercised "effective control"
over them, in that buyers and sellers were subject to compulsory
matching/transaction closure if their bids/offers fell within the
then-applicable band established by the applicable APX algonthins –
uniformly applied to all transactions. (Those algonthins, FERC noted, were
not made available to the public.) "Consequently, the phrase
"market price" when used in relation to the APX marketplace,
asserted FERC describes the price APX’s computer estimates to be most
likely to clear the market, rather than the most common meaning in other
contexts, i.e. "a price which willing sellers and buyers have agreed
to trade". It was more, in short, than a pure bulletin board type
system where transactions voluntarily might be transacted, which FERC had
adjudged to be non-jurisdictional.<br>
<br>
By reaching this decision, FERC (as affirmed by the court) lumped the APX
with the Cal PX which aggregates supply and demand, matches buyers and
sellers and therefore previously had been held to control sales and be
jurisdictional. No distinction was found to exist between APX, in which
parties voluntarily participate, and the Cal PX, to which the State
utility commission directed the three largest investor-owned utilities to
sell their entire supply through 2001. To ensure adequate power supply
availability in the "fledgling market" PX is an integral part of
the overall system restruction.<br>
<br>
The finding of FERC jurisdictionality of APX is no slight burden! APX must
file a "detailed description and explanation of its services,
including the calculation of market price, fees and all relevant
terms""- arguably, for a competitive business, the guts of its
operations.<br>
<br>
Why did FERC really do it? The operation of the new deregulated markets
has already outrun the limited operations first of power brokers and now
of power marketers. Power marketing has become the core of the operations
of major utility unregulated subsidiaries – not just daring cutting
edge, marginal players. The original marketers have acquired utilities
themselves. Thus, we have the prospect – as in the securities industry
– of dueling markets wherein the best price can be obtained. Some of
these markets are wholly regulated; some are not, when they simply enable
buyers to obtain best prices. The existence of multiple markets has,
itself, become a forcing function of competition.<br>
<br>
In the power context, it is not insignificant that the supplier rebellion
against the FERC sanctioned-ISO in New England has taken the form of a
call for the operation of multiple power exchanges. Bringing on the .coms,
as they seek, means challenging the government sanctioned pricing
monopoly. Conversely, governing APX and the Cal PX in the same way has the
effect of reestablishing the FERC as the competition Czar. Perhaps
ultimately, this is the way to assure that order and not chaos will
prevail in the markets. There may be another FERC motive as well: simply
to prevent the several States from mucking up trading exchange regulation
even more than FERC might do itself. For those who doubt this possibility,
we have NARUC’s recent wish list to Congress, which includes the
following pertinent treaties: Congress should not preempt jurisdiction in
the states to address market power concerns... NARUC advocates a continuum
of options, such as accounting conventions and codes of conduct, and urges
Congress to preserve <u>state flexibility</u> to use those options... FERC
should have jurisdiction over transactions between suppliers and retail
customers located in different states and it should be required to defer
to states acting on a regional basis.<br>
<br>
Unfortunately, perhaps, too, however, a yet more fundamental principal of
power regulation is in play. The one alluded to at the beginning of this
column. Put succinctly it is: regulators want to regulate. Unfortunately
their urge to squeeze the market "X" charge factor may seriously
constrain the very market-base regulation which they now purport to
champion. Private power should emphatically join e-commerceurs in the
rallying refrain: "Please don’t squeeze the x-factor."</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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