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<title>April 2005: Don't Know Much About History</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>
April 2005</u></b></p>
<p align="center"><font size="6"><b>Don't Know Much About History</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>005/05/05)<br>
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<p class="MsoNormal"><span style="color: black">Not so long ago, the long
march toward deregulation was launched. The departure of Pat Wood from FERC,
who led the good fight for deregulation, signals an appropriate time to
consider what profit we can learn from the experience. In particular, it
would be useful to consider it implications for on-going environmental
market-based experiments and green political initiatives. What happened?
Will it happen again? Is Charley Brown running to kick a football which Lucy
is teeing up, to yank away?</span></p>
<p class="MsoNormal"><span style="color: black">Analysts have emphasized how
different the power experience has been from that of other networked
industries. They have focused on the lack of central Federal control, the
physically less integrated nature of the electric transmission/distribution
network, and the political stress of simultaneous efforts to tackle the
retail and wholesale markets at once. In effect, an all fronts campaign was
launched without sufficient logistics in place to support it. New power
capacity was delivered, but so was congestion; not delivered for the most
part were lower prices or an expanding coordinated sustainable whole grid.</span></p>
<p class="MsoNormal"><span style="color: black">Inevitably, however,
formalistic, formulaic explanations of the fate of deregulation like these
leave out the important real world business factors which inevitably morph
the elegant intellectual frameworks which scholars and regulators seek to
put in place.</span></p>
<p class="MsoNormal"><span style="color: black">What did the players want
from the game? The initial large industrial customers pushed deregulation,
as a means flowering utility prices-they were not pursuing the greatest good
for the greatest number. Neither were the clever utilities, which turned
deregulation on its head, into a model for offloading stranded costs, for
fielding their own unregulated expansionary subsidiaries, and policies for
consolidation. The “deregulated” power proponents (whether utility or
non-utility) were focused on penetration of formerly insulated utility
service territories at prices below those at which the “home town” players -
their feet anchored in regulatory concrete - could compete. The new power
trading companies wanted to increase the volume of transactions regardless,
of where, as in California, flawed systems might take them - or be
manipulated into taking them. And many utilities (and their regional
political supporters) did not want their vertical integration disturbed, and
were also seeking to prevent the export of their relatively low cost power
to other regions, which deregulation demonstrably would impose on them.</span></p>
<p class="MsoNormal"><span style="color: black">In the event, all of these
industry developments were blurred by the understandable propensity of those
in the business of marketing capital to support schemes to achieve the
respective goals of which ever parties supported growth or consolidation or
other deals - right up to the point where the market overheated — and then
schemes to tap the residual financial potential of distressed asset
divestiture. The whole era should not, in short, be stylized or styled as
one of the progressive supporters of “competition” against the recalcitrant
suppliers of “regulation.”</span></p>
<p class="MsoNormal"><span style="color: black">Back in the heyday of
deregulation, the environmental sector was concerned that prevention of
environmental benefits would be trampled in the flight to market-based lower
cost resources. It was then that the drive to special public service
changes, mandatory resource performance standards and the precursors of RECs
(green tags) first began to develop. A candid appraisal of the green
movement’s success during the period in which large scale non-polluting
combined cycle facilities were in vogue mustbe that its impact was marginal.</span></p>
<p class="MsoNormal"><span style="color: black">Which leaves the question:
Is there anything that green power advocates should learn from the saga of
power deregulation and its tenuous relationship to it?</span></p>
<p class="MsoNormal"><span style="color: black">They are, of course, faced
with a very different energy market fuel structure than when deregulation
took hold. There are renewable technologies which in the current market
(taken together with tax and other incentives) are roughly competitive for
smaller power production requirements. But, as with the deregulating power
market, the renewables industry confronts many rate-based utilities with a
limited voluntary appetite for change; a transmission infrastructure not
well designed for the operating patterns of renewables; and, above all, the
fact that Federalism has been pressed into the service of those with the
strongest interests in their respective states. As with deregulation, it
isn’t a case of complete alignment of perceived virtue and public policy:
Nukes and clean coal meet some of the environmental criteria which small
biomass projects do, and their proponents now seek to have us believe in”
blue power.”</span></p>
<p class="MsoNormal"><span style="color: black">Is there an approach for the
renewable industry to overcome these problems? Only one ultimately works in
America: make the energy economy an offer it cannot refuse. Make the
transmission of green RECs across State lines a simple, uniform process and
define those Rocs to have significant environmental points of any type into
“scores”, i.e. economic value provided they meet any of several potential
green goals. In short; provide incentives for uniformity in REC tracking,
measurement and securitability.</span></p>
<p class="MsoNormal"><span style="color: black">But there needs to be more .
. . The green movement should seek to encourage development of “plugin”
hybrid cars which can use conventional power supplements, produced from the
resulting green power. By doing so, the utility industry would be brought
into play in meeting our national security/imported oil displacement
requirements. In short, the green movement seeks incentives for consumer
benefits as well as costly consumer internalization of externalities.</span></p>
<p class="MsoNormal"><span style="color: black">It would appear that the
lessons to be learned by supporters of renewable energy from the brief,
brutal history of deregulation are:</span></p>
<p class="MsoNormal"><span style="color: black">• Support national goals,
not abstract economic or environmental principals;</span></p>
<p class="MsoNormal"><span style="color: black">• justify uniform federal
policies not fragmented multi-state regulation which only does what is
needed piecemeal and ultimately fragments;</span></p>
<p class="MsoNormal"><span style="color: black">• create as many profitable
opportunities for as many of the energy sector players as possible: though
trading and investing swell as manufacture and consumption;</span></p>
<p class="MsoNormal"><span style="color: black">• keep your plans simple and
your expectations realistic, and do not resort out of frustration to
“commandant control” if they aren’t realized.</span></p>
<p class="MsoNormal"><span style="color: black">Perhaps the green-power
effort can look in the fun-house history of deregulation mirror and extract
some lessons. As Santayana (the philosopher not the rocker!) might have said
had he been a Washington lawyer: “Those who do not learn from energy history
are going to spend a great deal of money to learn it again.”</span></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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