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<title>August 2004: Code Orange for Power Competition</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>
</u></b><u><b>August 2004</b></u></p>
<p align="center"><font size="6"><b>Code Orange For Power Competition</b></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>005/01/08)<br>
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<p>The signal from Washington is that at home and around the world the
highwater mark for deregulation and competition has passed, and the question
is how to fine-tune the role of the traditional regulated power companies
and their relationship with “unregulated” affiliate cousins. Or is it?<br>
<br>
Domestically, FERC conditionally approved the acquisition by Oklahoma Gas
and Electric of a majority interest in a powerplant in its service territory
previously owned by a bankrupt NRG affiliate, NRG McClain. Its earlier
intransigence in doing so had been seen as an indication of its desire to
prevent reabsorption of IPPs into the regulated utility ambit. The new
verdict, permitting the acquisition based on the presence of “sufficient
mitigation measures,” seems likely to a harbinger of change. The mitigation
measures consist, as Chairman Wood emphasized, in reliance on the frequent
advice of anti-trust agencies to rely on structural, rather than behavioral
remedies to mitigate market power. He placed little weight on the potential
for simply monitoring market power, although a beefed-up market monitor was
one requirement of the ruling. By “structural,” though he seems to have
meant infrastructure, not ownership patterns. This all might sound like good
cracker barrel wisdom, until it is learned that the plaintiff, Intergen, was
arguing that the “structural” remedy - a permanent transmission bridge
between OG&E’s control area and Intergen’s generation facility - was not
nearly enough to reverse larger market power concerns, because it served
only to replace generation eliminated from the market - not to restore OG&E’s
market concentration to pre-acquisition levels. Therefore, Intergen argued,
the mitigation measures would effectively block their ability to be
competitive, while enhancing regional utility market power.<br>
<br>
Ironically, at about the time of the decision, one of the now more heeded
antitrust agencies, the Federal Trade Commission, was weighing in with a
dissonant view on a related issue; discrimination by utilities in favor of
their own affiliates in competitive solicitations (a situation whose
jurisdictional assumption by FERC Chairman Wood termed “awkward”.)
Remarkably, the FTC perceived a very real possibility of affiliate abuse. It
urged the FERC to return to its Order No. 2000 deregulation roots, by
supporting independent evaluation of possible abuses by third parties. This
approach, it suggested would make the review process more objective and
“reduce” the risk of evasion of economically appropriate rate regulation
through discrimination in purchases from affiliates or in cross-subsidizing
of affiliates’ costs.<br>
<br>
Probably, however, a whistle in the wind. As a practical matter, as FERC
continues to levitate among potential screens for market-based rates; seek
compromises on the application of its merger standards; and equivocate on
issues of affiliate purchases from parents (all core facets of its overall
deregulation scheme), there exists a real possibility that over time, market
power control standards will be vitiated, the stated goal of competition
will disappear like a Cheshire cat; the domestic profile of deregulation
will continue to diminish as consolidation quickens.<br>
<br>
As American faith in its deregulation/privatization wisdom seems to wane, so
too does the vigor with which it is trumpeted as a panacea by the
international financial institutions, which once exported it so vigorously.
Such diminution in its former true belief is OK, indicated the World Bank’s
recent research report , "Reforming Infrastructuring Regulation and
Competition" in which Paul Jaskow and Michael Klein participated. “As with
all economic elixirs, privatization [of critical infrastructure] has been
oversimplified, oversold and ultimately disappointing. The Report, not
surprisingly, highlighted the California experience: market liberalization
under conditions of tight demand can lead to serious problems; unacceptable
market clearing prices; and derailment of radical liberalization attempts.
Interestingly, however, the World Bank report did note, as a key to
effective deregulation, that making economic structural approaches - such as
the degree of vertical and horizontal integration, and the clarification of
market rules - most notably providing essential safeguards against market
power - were essential first steps to a successful deregulation program. It
suggested that “uncoordinated and injudicious regulatory interventions
in [a decentralized market] and an interconnected system can have perverse
effects on interregional electricity trade.” It said nothing about
regulatory ad hoc support for “mitigating” transmission bridges.<br>
<br>
So what is Washington telling us? What is the future for the structure of
the electric power industry structure, in this new age after the fall of the
great liberalization of the grid? Perhaps an unsuspected answer comes from
an unbidden Washington quarter, reflective of our times. The Department of
Homeland Security has announced the proposed development of a National
Electric Grid Monitoring System. “The purpose of ‘NEGMS’ is to aid the
situational awareness of the state of the nation’s electrical grid and to
share this information with the electricity sector.” A first tentative
expression of the concern and the belief that in these perilous times power
system oversight may ultimately be too sensitive to leave management
entirely either in the hands of consolidating private utilities or the
unrestricted operation of independent free trading markets. At least a code
orange in the ISO control rooms, the world of OG&E bridges and, indeed, the
World Banks’ Pacific Vision.</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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