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<title>October 2002: "Fall Fashion Preview: Standard Market Design"</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>
October 2002</u><br>
</b></p>
<p><font size="6">"Fall Fashion Preview: Standard Market Design"</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">
</span></p>
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<p ALIGN="JUSTIFY"><b>Fashion Scene</b></p>
<font FACE="Palatino" SIZE="2">
<p ALIGN="JUSTIFY"></p>
</font>
<p ALIGN="JUSTIFY">The fall fashion show this year in the Austin (TX) Power
Boutique seems to have a retro bent. This was to be expected after the
debacles in the past two seasons, when the free-form deregulation look,
accompanied by high spike heels, proved just too extreme for customers. The
runway collapse of the much-hyped California show, and the resultant
crushing of such supermodels as Enron and Dynegy, just iced the cake. So
this year, FERC is unveiling a new, more structured look in the form of its
SMD line (that’s Standard Market Design, darlings, not "Silly Made-up
Diagrams"), Docket No. RM01-12-000. This pr�t-�-porter, one-size-fits-all
approach is supposed to eliminate the unsightly regional power market seams,
which last year’s RTO covered up but did not erase. By requiring uniform NAS
(National Access System) and firm, full network transmission tariff
stitching throughout, the new SMD line is intended to obsolete old standby
transmission fashion styles, including the Native Load look (a favorite of
priority-served local homebodies), and the bunchy Bundled Retail look
previously available only outside of FERC jurisdiction for every state in
the intrastate regulated trade.</p>
<font FACE="Palatino" SIZE="2">
<p ALIGN="JUSTIFY"></p>
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<p ALIGN="JUSTIFY">Critics of the new SMD have raised several basic
management complaints about the introduction of the new line, related to the
way it is being forced on the market; its treatment of existing fashion
styles; the extent of its fussy detail work and the possible impairment of
wholesaling of goods by some of the bigger, more powerful dealers. To alert
you to the possibility of mid-season corrections, a few words of more
technical explanation on all this follow.</p>
<p ALIGN="JUSTIFY"><b>Features of the SMD Line</b></p>
<u><font FACE="Palatino" SIZE="2">
<p ALIGN="JUSTIFY"></p>
</font></u>
<p ALIGN="JUSTIFY"><b>
Transmission Market Structure </b></p>
<font FACE="Palatino" SIZE="2">
<p ALIGN="JUSTIFY"></p>
</font>
<p ALIGN="JUSTIFY">FERC now proposes to delegate performance of transmission
control, transition dispatch, resource adequacy planning to Independent
Transmission Providers (ITPs), which will subsume RTOs, ISOs, ITCs – they
will have strict independence standards. Essentially, ITPs are a mechanism
to assure the demise of integrated utilities’ ownership of lines that offer
preference to native load and to subsume bundled retail transmission under
FERC rather than state jurisdiction. It is the ITPs that will be expected to
file the new uniform NAS tariffs. (It is notably these reforms that already
have led integrated utilities, notably in the South and Southwest, to take
strong anti-SMD stands.)</p>
<p ALIGN="JUSTIFY"> </p>
<font FACE="Palatino" SIZE="2"></font>
<p ALIGN="JUSTIFY"><b>
Transmission Tariff Features</b></p>
<font FACE="Palatino" SIZE="2">
<p ALIGN="JUSTIFY"></p>
</font>
<p ALIGN="JUSTIFY">NAS is to replace the variety of structures of pro forma
tariffs permitted under Order No. 888 with a standard form of universal
transmission service. To serve grandfathered loads, transmission owners are
now to take NAS from ITPs. Users, thereover, will have to revisit their
existing arrangements for firm transmission service. A level playing field,
therefore, will be created for all transmission customers. On a parallel
track, the way in which FERC resolves the issues under the interconnection
NOPR will collaterally affect the way in which NAS operates by defining
fairly the terms of accessorization. (It is no wonder that, while applauding
the spirit behind SMD, industrial and commercial users have expressed
concerns regarding its implementation as well as destroying hard-won
transmission access relationships.)</p>
<u><font FACE="Palatino" SIZE="2"></font></u>
<dir>
<dir>
<p ALIGN="JUSTIFY"><b>Rate Structure</b></p>
<font FACE="Palatino" SIZE="2">
<p ALIGN="JUSTIFY"></p>
</dir>
</dir>
</font>
<p ALIGN="JUSTIFY">SMD contemplates a heavy emphasis on bilateral
contracting, but also requires ITPs to provide day-ahead and real-time
markets, and to assume responsibility for balancing and certain other
ancillary services. Ultimately, whether zonal license plate or region-wide
postage stamp rates will be charged at the transmitter’s option, it is
transmission customers who ultimately will pay for transmission services by
the ITPs on a locational marginal pricing (LMP) basis, <i>i.e.</i>, users in
load pockets will pay more for receipt of service and transmission cost no
longer will be "socialized" (or rolled in) among all users. Pancaked rates
will be precluded. (It is no wonder that regulators in low-cost production
states are concerned that the removal of transmission barriers may have the
collateral effect of leading to low-cost power exports to other states and
the increase of power costs in their jurisdictions. Both they and
legislators from their states have begun to express concern in that regard.)</p>
<dir>
<dir>
<p ALIGN="JUSTIFY"><b>Market-Based Rates/Market Power Mitigation</b></p>
<font FACE="Palatino" SIZE="2">
<p ALIGN="JUSTIFY"></p>
</dir>
</dir>
</font>
<p ALIGN="JUSTIFY">Most basic of all, however, the introduction of SMD
reflects a change in approach to the treatment of market-based rates (MBR),
which essentially have been available to utility affiliates (as well as
independents) whenever their parents have acceded to open access tariffs on
their systems. SMD reflects FERC’s recognition that the exercise of market
power (defined as "the ability to raise price above the competitive level")
exists both in areas where either withholding physical power (physical
withholding) or inflated bids (economic withholding) are options available
to generators. (FERC’s prior efforts to ascertain the presence of market
power that would preclude the award of MBR through the establishment of new,
more stringent economic screens remain the subject of considerable
controversy, and no final orders.)</p>
<font FACE="Palatino" SIZE="2">
<p ALIGN="JUSTIFY"></p>
</font>
<p ALIGN="JUSTIFY">Under SMD, FERC is seeking to deal with those
circumstances where competitive market power is not present by propounding a
combination of requirements for reliability must-run agreements for certain
units, "safety net bid caps" on their rates under non-bilateral contracts,
and mandatory ITP long-term regional generation resource adequacy analysis
requirements (in recognition that spot market prices may not be indicative
of market competitiveness). The possible use of automated market mitigation
procedures similar to New York’s is approved. ITPs are to develop market
mitigation procedures through independent market monitors, which apply to
mitigation measures applicable to products traded under bilateral contracts
outside the ITP’s spot markets. (It is not surprising that IPP merchant
plant developer operators, and financial institutions that have invested in
them, have begun to take note of this consequence of SMD and become nervous
about these consequences for market-based rates.)</p>
<p ALIGN="JUSTIFY"><b>Fashion Forecast</b></p>
<font FACE="Palatino" SIZE="2">
<p ALIGN="JUSTIFY"></p>
</font>
<p>We expect much additional controversy regarding the suitability of the
SMD line, even though it’s at least superficially keeping with the overall
"back to basics" theme of the season. We expect efforts to accessorize it so
that it will be more broadly appealing to more customers. We don’t think
that those who favor the even more retro Regulation Utility Suits
(particularly popular in lighter weights in the South and hydroproofed
numbers in the West) will be lured into this fashion. Catty critics have
even begun calling it a "cry for help." All of this fashion debate may be
moot, however, if rumblings that the Power Boutique’s holding company,
Hawque USA, is bringing out a new line of camouflage fatigues turns out to
be true.</p>
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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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