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<title>January 2003: The Big Sweep</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>
January 2003</u><br>
</b></p>
<p><font size="6">The Big Sweep</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: 2</em>003/06/14)<br>
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<p ALIGN="JUSTIFY">It is almost a law of nature that new ideas and
developments, whether public policies or sitcom plots in a ratings sweep,
either achieve a critical mass of acceptance and go on to command their
fields, or be swept away by opponents and critics and end up in some dustbin
of history. So it goes with the SMD Policy, and the larger deregulation
movement it is designed to salvage.</p>
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<p ALIGN="JUSTIFY"></p>
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<p ALIGN="JUSTIFY">As we enter the new year, the headlines are on the fierce
struggle to Congressionally curtail FERC’s efforts to effect SMD, and
thereby, by its current lights, implement its vision of nationwide effective
deregulation. Meanwhile, as this battle rages, the meaningfulness of the
deregulatory reforms championed by FERC have been called into question, and
the relative merits of state commission oversight as consumer protector are
being championed in many collateral arenas.</p>
<p ALIGN="JUSTIFY">In effect, the road to deregulation is being eroded in
the guise of support for, or deference to, federalism. Even if the
Congressional SMD battle is won, the ambit of deregulation as a model for
the electric power industry seems likely to shrink.</p>
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<p ALIGN="JUSTIFY"></p>
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<p ALIGN="JUSTIFY">With trading markets sidelined as a casualty of player
behavior, two major providers of deregulation remain: (i) the introduction
of new technological innovation as a consequence of grid access, as
exemplified by the distributed generation ("DG") movement; and (ii) the
reduction in consumer prices through retail choice, bolstered by mitigation
resources preventing market manipulation. Each provides an example of how
the erosion to which I refer is occurring.</p>
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<p ALIGN="JUSTIFY"><b>Distributed Generation</b></p>
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<p ALIGN="JUSTIFY"></p>
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<p ALIGN="JUSTIFY">Distributed generation, using new or conventional
technologies, was supposed to flourish in the deregulated world overseen by
a stern but benign FERC presence. At the insistence of the industry, FERC
issued an ANOPR (RM02-12) proposing new interconnection standards for small
generators. It has been an observation of DOE and various independent
experts that resistance to interconnection had long been a mechanism of host
utilities to preclude effective market entry. While the original proposal
was an artificial but apparently widely subscribed to consensus document,
the recent comments on it reflect the retro-splintering into the
deregulation cause.</p>
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<p ALIGN="JUSTIFY">Leading, supposedly "pro" DG ISOs (California, New
England and PJM), all responded with emphasis on the benefit of
sensitivities to regional market requirements – and the distastefulness of
prescriptive rules, which might be overly complex. The need for evaluation
of true regional impacts, rather than "rigid standards," was invoked. NARUC,
although a part of the group that developed the consensus, now emphasized
the preferability of its own model and related forms of agreement. More
pointedly, NARUC zeroed in on the fact that its model would not transfer to
FERC jurisdiction, which the states currently have (because DG does not
directly involve sales for resale), and that regulators were the ones with
"substantial regulatory expertise [in] local electricity markets." EEI and
regulated utilities supported this position. It was left only to the
industry organizations that sought the consensus to continue to emphasize
the need for national uniformity, as well as the fact that if
interconnections took as long as a year (favored by industry), the results
of the rulemaking could "take on the quality of a cruel joke." In effect, it
has been left to the FERC alone to decide whether to defend the territory it
earlier had sought to occupy.</p>
<p ALIGN="JUSTIFY"><b>Retail Choice</b></p>
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<p ALIGN="JUSTIFY">Of course an even larger benefit of deregulation was to
be the emergence of retail choice that, in turn, would improve consumer
prices and, perhaps, even service adequacy. SMD was championed as a means of
breathing some potential life into retail choice, which clearly has not
become the robust reality it was projected to become. Now, the Virginia SCC
in a report has challenged SMD as the very development that will extinguish
the flickering candle, which is consumer choice in the Commonwealth. In
fact, it has suggested that since retail competition is not providing
meaningful benefits anywhere in the nation, it might be beneficial to
suspend retail choice if SMD is implemented. There is a broad policy reason
for this finding: SMD adoption could result in states’ involuntary (or
perhaps inadvertent) loss of day-to-day authority over the price and
reliability of electric service for their citizens. And where would
reaffirmation of this policy manifest itself, despite the abandonment of
retail competition. Well, for example, in the states’ effort to encourage
the interconnection of distributed generation and expedition of small power
projects, of course. (Otherwise, since all of the Commonwealth’s utilities
either have or are about to join PJM, these kinds of responsibilities will
all disappear into the RTO maw that SMD creates.)</p>
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<p ALIGN="JUSTIFY"><b>Mitigation Measures</b></p>
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<p ALIGN="JUSTIFY">One could take the above assertions – that deregulation
with SMD and attendant FERC national rules on interconnection is not only
anti-consumerist but also grounds for dismantling the agency’s efforts to
assert jurisdiction in the name of competition – as a clarion call to the
agency to clearly apply its authorities to broadly protect against
anti-consumerist exercises of market power. However, judging from its
decision on ISO New England’s transition to new Standard Market Design
(ER02_2330; EL00_62), FERC has decided to render itself less controversial
by confining the application of SMD market mitigation measures to those
contexts where areas are shown to be affected by system constraints and
structural problems are well defined: a careful moderate ground. Only
Commissioner Massey pointed out that market power could be exercised, even
where the system was unconstrained to drive up prices. The Commissioner also
urged the broader principles of empowering RTOs to have the power to
discourage anti-competitive conduct broadly and to effect consistency in
mitigation arrangements among RTO regions. That is to say, to emphasize the
broadly national benefits that effective implementation of SMD could bring
to pass, if not blocked by Congressional or state action.</p>
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<p ALIGN="JUSTIFY">In short, SMD faces passage to the dustbin of history,
unless its rationale is connected to a consistently held philosophy that,
properly implemented, it really will do good things for the public
bureaucratic compromise – leaving power management balkanized, while
preserving the figment that public policy has been enacted, is policy that
ultimately will be eroded in any case. We will have RTOs; we will have State
commissions; and we will have limited competition or innovation.</p>
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<p ALIGN="JUSTIFY"></p>
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<p>As we enter 2003, the message for FERC and deregulation proponents seems
to be: sweep back or be swept out.</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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