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<title>September 2002: Green Line Tracks</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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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p><b><u><br>
September 2002</u><br>
</b></p>
<p><font size="6">Green Line Tracks</font></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:
2002</em>/11/27)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
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<p ALIGN="JUSTIFY">Energy policy these days looks like a Washington Metro
subway map. There are lines of development, there are hubs and
intersections. But it’s hard to know where all of it takes you. While
Federal energy policy has not, for not so inexplicable reasons, glided along
the "true blue" line of the Cheney "Energy" Plan, neither has it suddenly
veered onto an environmentally-sound or resource-conservative alternative
energy "green line" as a solution to the real long-term "energy crisis" of
fossil fuel dependence that never went away. FERC has been preoccupied with
fixing the broker and hodgepodge status of economic trading markets – not on
energy consumption patterns.</p>
<p ALIGN="JUSTIFY">So, like an increasing number of public policy matters,
it has been left to the fifty states by default to come up with approaches
that address key national policy issues. State programs for required
alternate energy portfolio use, and provision of special incentives and tax
credits for green developers, are necessary to move the ball in the right
direction, even though the states are heterogeneous and each has limited
jurisdictional reach. But even to be successful on their own terms in their
own markets, however, many individual state programs must come to grips with
the fact that other rules with respect to distributed generation within
their own boundaries may have the contradictory effect of constraining
alternate energy development. Small projects based on renewable resources
qualify as DG, if these resources are connected to the grid at the
distribution or sub-transmission level. While this issue of the interplay of
Federal and state programs is now in flux as a result of SMD, Federal
jurisdiction still does not extend, in all respects, to state oversight of
the utility distribution systems to which distributed generation is
interconnected. Those state utility distribution systems, in turn, not
surprisingly are focused on containing the impact of DG on their future
operations and economics, and highlighting to state commissions the
importance of conservative cost/benefit evaluation of system impacts versus
the potential policy advantages of distributed green energy sources. The
result is policy gridlock.</p>
<p ALIGN="JUSTIFY">The generic challenges that confront DG at the state
level – grid connection, grid dispatch and standby and backup changes –
represent green line roadblocks for alternative energy developers as well.
Here’s how resolution of DG issues could facilitate states’ efforts to in
some measure be green – or could frustrate alternative energy development,
if adversely resolved. The specifics may vary from state to state, but the
fundamental energy policy issues are present in them all. SMD should be
molded by the FERC to be consistent with these suggestions.</p>
<p ALIGN="JUSTIFY">Regarding grid connect issues, in response to the
requirements of good utility engineering practice to serve new loads via a
radial system, each utility has developed a somewhat unique customer service
system based on its system design. To capture the benefits of DG and the
potential of alternative energy systems, interconnection of DG units needs
to move toward performance standards rather than equipment specification,
preferably on a uniform statewide basis. Similarly, there should be a common
statewide market-grounded basis for determining the value of net-metered
energy.</p>
<p ALIGN="JUSTIFY">DG also needs grid dispatch measures that allows it to
compete with larger central station loads. These include authorization of
demand side bidding, demand sale back, and permitted bidding to aggregated
DG loads in order to qualify as a power block for grid dispatch. Creative
amalgamation of alternative energy project loads could be a result.</p>
<p ALIGN="JUSTIFY">The ability to reduce or eliminate the cost of obtaining
standby power is a key constraint in deciding whether to install alternative
energy. Presently, standby and backup services are priced in a variety of
ways by distribution companies. Standard and backup power should be priced
not on an embedded cost-of-service basis but on a long-term, marginal
cost-of-service basis, reflecting the effects of deregulation on the
commodity component and a formula for actual costs for the non-commodity
component. DG installation shopping for bilateral contractual arrangements
should be available. In addition, DG providers also should be afforded the
ability, if bilateral arrangements are not available, to contract for
standardized backup and standby fees from supply companies/delivery
distribution companies.</p>
<p>Issues affecting DG needed to be worked on at Federal, state and ISO
levels involving both the wholesale and the retail markets, and take into
account the ramifications of the new SMD rulemaking. There are policies at
the retail ratemaking level that can best capture the benefits of wholesale
competition for retail customers. Such policies </p>
<p ALIGN="JUSTIFY">include encouragement of energy marketers to offer
pricing options to retail customers that reflect market prices at the
wholesale level, and thereby afford customer options including time-of-day
and demand response pricing. Overall, DG works best when state regulatory
commissions provide bright line separation between regulated T & D
investment and operations functions on the one hand, and the deregulated
energy supply function (which may include DG) on the other.</p>
<p ALIGN="JUSTIFY">There are narrow specific and larger general conclusions
to be gained from examining the DG/alternative energy issue at the state
level. The specific conclusions are clear:</p>
<p ALIGN="JUSTIFY">- As long as fuels policy success is herein a secondary
derivative to competing electric industry regulatory policies, it is
improbable to assume that it will achieve important national stature.</p>
<p ALIGN="JUSTIFY">- As long as reconciliation of regulatory and fuels
policies is left at the fifty state level, there is not a high probability
that a cohesive national policy will emerge.</p>
<p ALIGN="JUSTIFY">- As long as Federal policymakers do not clearly
delineate their position on DG issues, so that the Federal/state
jurisdictional line remains blurred, another barrier to alternate energy
development will remain.</p>
<p>DG Green Line tracks are necessary, if an effective alternative green
power train is to roll.</p>
<p ALIGN="JUSTIFY">There is a larger philosophical point that emerges as
well: the importance of a "sustainable" energy policy consistent with the
long-term national interest. From a historical perspective, the national
reliance on market operations to set fuels policy effectively pits
short-term economics against the long-term national ability to act
internationally. In microcosm, the same issue is faced by states seeking to
web alternative energy and DG policy. As we enter the new round of FERC SMD
and the debate over Federal legislation, it is important to understand that
the Green Line is not just a local to the homes of a pampered few but a
trunk-line to ongoing American economic viability.</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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