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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>October 2004</b></u></p>
<p align="center"><font size="6"><b>Eye of the Hurricane</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 first winds of a hurricane can be mistaken for a breeze... In May,
2004, Pepco published a study it had commissioned from an independent firm
experienced with crisis management, which evaluated its performance in
response to Hurricane Isabel, which caused significant system outages.
The frame of reference chosen by that consultant should be a wake-up call to
the industry: a review of “the utilities preparation for its response to the
event in the larger context of what it takes to rapidly and efficiently
restore damaged areas into functional communities, including what others
were doing during the restoration process (emphasis added). The major
findings of the study struck a new note regarding the interface of public
policy with utility management. Its findings:<br>
<br>
- There had been an insufficient appreciation that the outage was a
community event, not just a utilities event<br>
<br>
- There was a need for the emergency management function to have a higher
priority, of emphasis on developing operating concepts and support systems
that can be scaled to respond to both routine and mass outages <br>
<br>
- There was a need, in short, for sharper focus on customer service in a
disaster environment </p>
<p>The report was, in effect, a call for the recognition of a new role for
public-private partnerships. The idea of “public-private partnerships” has
been around for several decades, though not identified with the energy area.
There have been various “privatization” proposals, but the emphasis was more
on movement of assets to the private sector then on a partnering. Concern
with the reliability of the nation’s electric transmission system and more
generally with the vulnerability of our electric-powered and power
electronics _ controlled economy has been far more recent. Their convergence
has been driven by the need for government to create markets for the new
technologies to provide system continuity and resiliency, which can respond
to our new environment. But aren’t regulated utilities one of the original
public-private responses to government requirements? As with many issues in
contemporary energy policy, that remains to be seen. Utilities must lead,
follow or get out of the way. It’s a much more dramatic remake of the
Federal energy conservation story, summarized below, and actually has some
of its roots in it.<br>
<br>
The blackouts focused attention on the fact that power deregulation, which
created multiple new, unrelated users of transmission lines, and less
revenue for the generation-de-nuded distribution companies, had provided
limited financial incentive to expand and repair the grid which the
situation required. Large scale businesses, particularly with cyber-impacted
facets which had already begun to install equipment to fend for themselves,
began further independent strengthening of their support “critical nodes”.
Governments began examining whether civic emergency planning was sufficient
and whether, in the event of an emergency, power could be restored and
sustained in both private and public critical facilities. It also began to
focus on whether there was adequate protection against cyberterrorism;
sufficiency of critical “spares” and better technical and economic
integration with on-site assets.<br>
<br>
In this context, the role of “distributed energy” - which includes not only
on-site power supply, but also improved systems controls, power
conservation, storage and power management - crossed over from being a
subject of interest to a segment of the energy community to being an issue
for which it made sense to put public financial muscle behind private
engineering initiatives. As this occurred, the issue of whether electrical
utilities would become the new constructive public-private interface to
address these issues came into focus and question.<br>
<br>
What policy makers found were two seemingly intractable and incompatible
facts. Focused, as they had been directed, on overall system efficiencies,
centered around large central stations, connected by long distance
transmission wires, and more recently segmented into discos and transcos,
utilities were simply not constituted _ nor compensated by the existing
regulation system _ for emergency operation of the several tiered power
utilization system for which governments are now called to provide overall
protection. Indicia of that fact are the regulators _ skirmishing on issues
such as allocation of cost and procedures for interconnection; rights to
utility DE ownership; feasibility of aggregation of production from DE owned
generation and conservation facilities. These regulatory struggles continue,
but their significance is exacerbated by the financial characteristics of
DE, which generally smaller cost items (certainly relative to power plants),
with cash flow subject to variations beyond their control; and involve risks
presented which the project sponsor cannot carry. Aggregation of cash flows,
of suppliers warranties and compliance risk would seem basic to providing DE
to meet the kind of problems described.<br>
<br>
In the Federal buildings shared savings area, Congress simply decided to
deal with these problems by creating a financeable market. The government,
as customer, stood ready to purchase multiple smaller improvements in
multiple units with demonstrated energy savings values. The supplier
market was filled by major equipment providers and innovative financiers
also securitized the aggregated obligations. Utility special purpose
subsidiaries were significant players, but utilities did not provide the
basic market framework for the undertaking. The issues surrounding assurance
of electric power security reliability and security are, to be sure,
significantly broader and more complex than those surrounding energy
savings. But the more sophisticated energy security management tools bear a
relationship to those used for energy savings. And if utilities do
notinvolve themselves in working with both the owners of DE at
critical nodes and with government security planners, they create a
situation where they may have dealt themselves out of one of the key energy
games of the next decade. Creative use of DE can deal utilities back into
the game.<br>
<br>
And it is not a game which utilities are as insulated at playing as in the
past. While traditional tariffs established “gross negligence” as the
applicable standard, that criterion has been eroded by bilateral contracts
and FERC “negligence” standards for transmission. While power has
historically been treated as a service rather than a good or a
product, with attendant liability implications, those protections are
eroding. The lawsuits currently faced by First Energy could set new
precedents.<br>
<br>
Overall, utilities will be facing the consequences of recommendations such
as those that emerged from the Hurricane Isabel study:<br>
<br>
“(PEPCO”) established service priorities that are logical and defensible
from the utility engineering point of view. It may be, however, that
different priorities result when health and safety is viewed from a
community perspective . . . [R]estoration priorities should result from a
collaborative process with the political leadership of the serviced
jurisdictions, including the public utility commissions”. <br>
<br>
It’s up to the utilities to catch the winds of Isabel-driven change or twist
slowly in the winds of bureaucratic envelopments by governments concerned
with security.</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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