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<title>July 2000: e2e vs General Edison OnLine</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>July
2000</u><br>
</b></p>
<font FACE="Palatino" SIZE="5"><p></font><b><font face="Arial" size="6">e2e
vs. General Edison OnLine</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:
2000/08</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> </p>
</font>
<p ALIGN="JUSTIFY"><font face="Arial">To the power industry, 1984 came late.
In its Newspeak "deregulation" turns out to mean
"oligopoly." This is occurring at the same time a the internet
experience presents a different, better model of network organization.
Ironically, the result may be that in the power industry e-commerce will
become the captured tool of oligopolists (er... "deregulationists").
The facts behind the development are of fundamental importance; naturally
enough, they are not a significant part of this year’s legislative fight.
Perhaps a good reason for legislation fans to wait until next year.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">As background first, a power parable:
how big power got its groove back. The CSW/AEP merger creating the nation’s
preeminent diversified utility, spanning three non-contiguous service
territories has received FERC and SEC approval. According to a recent
newsletter report, Texas Governor Bush made this possible. Piqued at CSW’s
opposition to his effort to deregulate the Texas power market, he encouraged
the State PSC to slam CSW’s rates. Its share value declined. CSW was
driven into the arms of AEP. Texas opened its retail markets thereafter. But
AEP-CSW now stands athwart the mid-American corridor from Dallas to
Columbus. The PUHCA notion of a single contiguous service territory has been
laid to rest. So it goes: nominal deregulation gives way to oligopoly. Signs
of the emerging big ten or twelve national generators are everywhere. We can
chat about it on our next airplane flight.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Compare (at least for the time being)
the evolution, at least to date, of the internet. Its proponents say that
its emergence proves the inherent triumph of open architecture. They cite
the key to this as the internet’s underlying architectural principle:
"end to end"("e2e"): Keep the network simple and build
intelligence in the application ("ends"). Simple networks, smart
applications: a formula to encourage innovation. Why? Because simple
networks can’t discriminate among network uses – and because innovators
don’t need to negotiate with every network owner before a new technology
is available to all. Thus, the burden on innovation is kept small. [One
serpent in paradise, though: Professor Lessig of Harvard Law School has
pointed out that the e2e principle may now be coming under siege as
broadband transmitters (e.g., cable companies), which are allowed to
discriminate, have begun triumphal entry into the market].</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">How does this relate to electric
power? Certainly FERC’s goal in Order 2000 was to foster e2e in the power
industry. But major competing factors gravitate in the other direction.
First, the extent to which regulators (particularly since they are, to say
the least, unabated by Congress) can oversee markets with that objective in
mind is limited. Second, the creativity of would-be oligopolists in
integrating e-commerce into their offerings far outstrips government’s
interest in or willingness to pursue them.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The first point is aptly confirmed by
an internal memorandum circulated throughout FERC by a senior member of its
Office of Markets, Tariffs and Rates (OMTR) concluding that the agency is
essentially powerless to police the electric industry for market abuses (a
conclusion confirmed by recent independent studies and vigorously argued by
Federal legislative reform proponents). As always, at the mid-level
bureaucratic strata of the pyramid, the culprit is not jurisdictional
entities, it is anonymous, analyzable, neutral data: "We need actual
data, either real time or close to real time about bidding behavior and
transmission constraints and things like that" explained an aide for a
pro-deregulation Commissioner. Ah the numbing paralysis of innumeracy... .</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">What FERC needs, perhaps, is Mister
Data, direct from Star Trek, in light of what may be coming from private
(deregulated) firms as they seek to cope with the challenge to their
traditional market share and industry primacy and the potential of
e-commerce. From the perspective of an industry, profiting from electric
power’s every convulsion of deregulation, comes this basic observation
from Jack Welsh of GE, which is already transforming itself to the internet
age and is now bringing along its staid sidekick, the power industry:
"Why should I ask a dot com to come between my customer and me."
His mighty six sigma method has been deployed, using the web as the window
on his customer’s needs, and more importantly, to lure and advocate his
customers to use more of his services. For example, the New York Times
recently reported that several GE businesses have given their Websites
so-called "configurations and wizards" – "electronic guides
that enable customers to customize their own systems, be it a redone kitchen
or a lighting system for a new plant and even helping customers fix them in
the future."</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">What could this mean for the power
industry? Connecting the dots here isn’t hard. Savvy utility management
will seek large and larger market shares, and vertically incorporate
e-commerce to push more energy product and services. They will do so
directly in strategic alliance with major supplier players. They will do so
in convergence with cable-net-content providers. NewPower is in the air, so
to speak.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Very possibly, we should say good bye
to that Jeffersonian e2e dream for electronic industry innovation in any
configuration much different than oligopoly. Maybe that’s what
deregulation was meant to be. Certainly that’s the argument of Microsoft’s
economists: the so-called network effect creates a frantic winner-take all
race to be the dominant player, and the dominant player establishes the
industry standard (incidentally keeping a lock on the configuration
technology as well). War is peace, as Orwell would say.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The moral for proponents of true
Federal "deregulation" is that their message must be promotion of
true "e2e" for power. In addition, beyond their current energy
focus, protection of incipient uses of e-commerce in or in conjunction with
the electric industry needs to be an explicit focus. Otherwise, the national
electric power deregulation experiment will simply have been an exercise of
going the long way round from fragmented regional Power and Lights, to
"Baby Edisons" to "General Edison On Line." Not quite
the e2e FERC had in mind.</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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