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<title>January 2006: Monitoring the Urge to Merge</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 2006</u></b></p>
<p align="center"><font size="6"><b>Monitoring the Urge to Merge</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>006/04/01)<br>
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</span></p>
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<p class="MsoNormal" style="text-autospace: none">In the age when Sam
Scalito has refocused national attention on the “original intent” of the
Founding Fathers, FERC has essentially chosen a similar approach to the
primal utility corporate urge to merge. In doing so, FERC is to an extent
subordinating policy concerns about the health and functioning of the
national power system – and incidentally relegating those who bet on a
future merchant power model - to a backseat.<br>
<br>
There is obviously no question that the central reality of the electric
power industry in the coming year (and probably those to come) will be the
consolidation of utilities. Mergers do not, of course deal with the inherent
vulnerability of utilities in the absence of regulatory relief to recover
fuel costs nor assure an up tick in credit ratings simply by reason of
agglomeration of assets (see the early returns on the Constellation - FP & L
merger). Indeed some utilities such as Sempra, rather than focusing on
utility asset aggregation are said to be contemplating offloading the bulk
of their generation and focusing on more attractive businesses such as
liquefied natural gas and gas storage. No matter, utility mergers are not
regulated in terms of their contribution to the health of that industry any
more than are those of companies in any other line of business. That is just
not our political system.</p>
<p class="MsoNormal" style="text-autospace: none">With the passage of EPACT,
as Congressman Barton has thundered, this is more true than ever. The
shackles of special prophylactic policing of utility holding companies under
PUHCA was essentially cast off - not to be replaced, in his view by a new
surrogate FERC – enforced regimen. Overall, the regulatory impedance of the
national utility march to consolidation was to be streamlined and brought
more into line with the relatively supine standards applicable to the rest
of American business life.</p>
<p class="MsoNormal" style="text-autospace: none">Which makes it all the
more exceptional that FERC promulgated Order No. 669 to implement the EPACT
amendments to Section 203 (the Federal Power Act section dealing with
mergers and consolidation) . Issued in late December, Order 669 does not
loose sight of the fact that the preponderance of utility operations are
still the beneficiary of public rate regulation, that such regulation
creates the potential for intercorporate transactions and cross subsidy
arrangements which benefit utilities at the expense of those who pay
regulated rates. We find three basic facts emerging from evaluation of Order
No. 669.</p>
<ul>
<li>
<p class="MsoNormal" style="text-autospace: none">The FERC flag is still
there in the consolidation field and now flies over a broader jurisdiction
- for better or worse - in terms of entities regulated. Public power and
munis (except inter muni-mergers) are included. So far all FUCOs
(acquisitions of overseas utilities), despite Congressman Barton’s
protestations.<br>
</li>
<li>
<p class="MsoNormal" style="text-autospace: none">The market for
“institutional investor” trading in smaller utility ownership interests
below 10% by parties without interests in other power assets, is thrown
open, also, any room for unregulated upstream reorganizations is open a
crack.<br>
</li>
<li>
<p class="MsoNormal" style="text-autospace: none">The basic requirements
to consistency with the public interest, i.e., measurement of no harm to
competition, rates and regulation under FERC’s Merger Policy Statement of
effect essentially is intact. In the case of consumer protection it is in
some respects enhanced by an encrustation of PIHCA doctrine.<br>
</li>
<li>
<p class="MsoNormal" style="text-autospace: none">Through a blanket
exemption provisions of the Order, FERC has agreed to stay out of
intrastate, i.e., state commission regulated matters.</li>
</ul>
<p class="MsoNormal" style="text-autospace: none">What does all this mean
for “merchant power” – the injection of competition into the electric power
industry as a means of controlling prices and stimulating innovation. That’s
the merchant power whose prospects appear “dim” to S&P in its recent Report
except for IPPs with nuclear and coal base load plants, R.I.P. ____ Calpine.
Or even the “merchant power” which represents the assets in play among large
acquisition and hedge funds, at present, and which may well gravitate back
(read “flip”) to the utility sector in the longer run, like the assets of
Orion Power acquired by Madison Dearborn and U.S. Power Generating. How will
the regulatory environment affect the future flips?</p>
<p class="MsoNormal" style="text-autospace: none">For this subset population
of the power world, the effective operative, the effectively operative
principles of Order 669 appear to be these:</p>
<ul>
<li>
<p class="MsoNormal" style="text-autospace: none">All assets, even
“generation only”, are subject to jurisdictional review with the exception
of certain QFs.<br>
</li>
<li>
<p class="MsoNormal" style="text-autospace: none">Industrial organization
of QFs (including cogen and renewables) remains immune from the FPA � 203
standards. But acquisitions of QF interests by otherwise FERC
jurisdictional entities now are subject to FERC jurisdiction.<br>
</li>
<li>
<p class="MsoNormal" style="text-autospace: none">The significance of a
business entity’s exemption from the PUHCA 2005 requirements is irrelevant
to applicability of Section 203. (EWGs also appear to fall within this
jurisdictional ambit.)</li>
</ul>
<p class="MsoNormal" style="text-autospace: none">FERC’s 203 rules matter
Non-compliant transactions may be declared null and void by FERC. The
statutorily raised dollar threshold for exercise of FERC’s jurisdiction to
$10 million, has been in its effect mitigated by its definition of this
threshold in terms of “value”, i.e., nondepreciated costs (rather than at
asset value as it would be for rate base (ratemaking) purposes. FERC now has
significant civil penalty powers.</p>
<p class="MsoNormal" style="text-autospace: none">Order 669 is effectively
complemented by FERC’s recently announced determination to fundamentally
change its review of market manipulation to broadly follow on SEC type model
in future police the trading markets - yet another Congressional mandate
under EPAC - relatively broadly construed. Like FERC’s merger regulation
rules the market manipulation rules point toward enhancement of a
meticulously managed utility - dominated system. Will it be through a
sterile new world for merchant powers already reeling from EPACT’s
decimation of to PURPA, most recently bolstered by FERC in its NOPR
construing EPACT to specify that is mandatory QF buying utilities is not
required in RTO areas. We shall see.</p>
<p class="MsoNormal" style="text-autospace: none">So PUHCA is effectively
out. Some sustained FERC oversight of mergers is in. Competitive power
concepts are an afterthought, except as related to more vigorous transaction
police of the last standing players. FERC has chosen a formal legal
oversight approach to the urge to merge - “originalist” thinking if you
will. The merchant power will navigate the consequences remains to be seen.
Merchant power’s place is FERCs Eden, in which it is monitoring the slightly
sanitized urge to merge, remains unclear.</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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