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<title>April 2001: The Calm Before The Perfect Storm</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><br>
April 2001</u><br>
</b></p>
<p><b><font face="Arial" size="6">The Calm Before <br>
The Perfect Storm</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:
200</em>1/05/06)<br>
</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The "Energy Crisis" which
is now brewing is not the one the Administration would have us believe.
That crisis is the "policy" explanation for various forms of
assistance to the oil and gas industry.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The real one is the Perfect Storm
coming out of the West and moving as fast as the summer thermal gradient.
It is the confluence of three "climactic" influences: the
failure of various forms of deregulation to produce workable, competitive
markets in the Western states; the possibility that deregulation will be
tarred as a cover for market manipulations both of power prices and of its
ingredient, natural gas supply (as The New York Times strongly has
inferred); and the exaggerated fuel use imbalance (toward natural gas, a
fuel whose supply and sufficiency of transportation both are questionable)
which is being produced by it.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">It is a storm that has the
capability to seriously harm the economy in several ways which even the
vaunted $1.6 trillion tax cut likely cannot affect, even if it were spread
more equally among the entire consuming public. It will result in higher
power prices adversely affecting some industrial production. It will
further harm consumer confidence by raising living expenses and
diminishing available discretionary income. It will lead to a
consumer-inspired, pro-regulatory backlash that will harm the prospects of
the "new power companies" – the companies that have best
responded to deregulation (thereby becoming the current favorites of the
stock market), and the source of power industry innovation.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">It has been argued that such a
Perfect Storm is a cleansing force: that the emergence of clearly
price-defined markets, at some point in time, will provide the right
supply incentives and that sufficient capital and other energy
transportation infrastructure improvement will flow into the energy
marketplace. Far from a discrediting of deregulation, we are told we have
a validation that California’s partial deregulation and effort to be
responsive to all of the state’s constituencies, i.e. flawed
deregulation, was foolhardy, and that the Governor’s battle to avoid
raising rates is a validation only of the population’s parochial desire
to have its cake and eat it too. It is a "giant too big to fail"
scam.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">But that was a more telling argument
before investigative reporting on the sources of the crisis (and of the
manner in which FERC investigated, or did not investigate the crisis)
suggested that market manipulation (or at best legal, but dubious,
exploitation) may well have been at play. Not because that exonerates the
Governor’s now abandoned effort to freeze rates, but because it raises
the issue whether, even if configured differently than California,
deregulation can be self-policing, where either market power or power
shortages prevail. If the public ceases to believe in deregulation –
because the results it sees are not only distasteful but also demonizable –
then various forms of price management may be anticipated, even though it
is ultimately unrealistic to "put the genie back in the bottle."
The result will simply be market distortions, c.f. oil regulation in the
‘70s.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">When the Administration’s
comprehensive energy bill solution arrives, if it addresses power at all,
there are certain areas where one may expect skepticism of the broadest
sort: PUHCA repeal; deprivation of states’ rights to protect consumers
against deregulation and interstate retail wheeling; wholesale delegation
of authority to FERC to police free market abuses; lack of focus on
conservation issues.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">It would be a great loss if
intelligent, time-phased, price-monitored power deregulation were to stall
out this long, hot summer. Deregulation also comprises part of very
different potentially climactic events, the sunny emergence of expedited
innovations: new power company models based on information age trading and
consumer service; the development of new distributed generation
technologies and facilitation of real time resource management-based,
information system-based technologies; the newfound regulatory emphasis on
use of incentives to reward actual system improvements (in areas such as
transmission). Free market innovation has begun to unleash these forces,
and creative Mergers & Acquisitions and structured finance
transactions have the further potential to make them possible.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">But this longer term, low pressure
front will be no match for the high pressure force majeure imperiling
deregulation, which is emerging in the Administration’s tactical
passivity in the face of the California/Western catastrophe.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In evaluating refund possibilities,
FERC chose to interpret the California situation as one of "bad
times," i.e. periods of price spikes rather than "bad
actions," i.e. overaggressive market behavior by some suppliers.
Perhaps it was correct to do so. Certainly, witch hunts for "bad
actors" don’t solve structural problems. But by eschewing efforts
to help contain and channel the Western price situation (possibly, for
example, as a quid pro quo for some give for state pricing and siting
actions), FERC raises the probability of a re-regulation storm which may
not be held back by the Rockies.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Tough love for California is one
thing; free market absolutism, on the other, runs the risk of being
perceived as ill-considered passion, not for Ronald Reagan but for Herbert
Hoover, if it spreads to the energy economies of other states. The right
question is: What actions can be taken in the short run in California that
will shore up confidence nationally that market deregulation may continue
as a creative structural force in the long run? That public confidence in
deregulation is wearing thin and threatening to dump the new power
companies in the whirlpool market vortex of the New Economy, just when the
new power companies and Merger & Acquisition transactions
emerging from deregulation have the promise to provide innovation
comparable to that which telecom deregulation ultimately has provided.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">It is, in short, the moment when the
Administration should recognize that the "bad times" it is
worrying about in California are the Calm before The Perfect Storm.</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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