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<title>February 2006: FTRs: How Square is the New Deal</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>
February 2006</u></b></p>
<p align="center"><font size="6"><b>FTRs: How Square is the New Deal</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>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
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<span style="color: black">In the beginning when deregulation spelled a new
deal for merchant power generators, transmission constraints were something
disaggregating utilities had to deal with so the new functionally divided
system would work. As a result of the “functional unbundling” which it
mandated, network and point to point transmission were to be available to
all would-be power suppliers utilizing the grid, pursuant to utility fell
open access tariffs (“OATTs”). After finding a few years later that despite
its efforts discrimination and congestion lumps nevertheless remained in the
transmission oatmeal, FERC Order 2000 began the gestation of supervisory
RTOs, to ensure that the FERC’s newly mandated market mechanisms handled
transmission congestion and afforded adequate market monitoring.</span></p>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">Most of the RTOs and ISOs subsequently formed and
now make use of Locational Marginal Pricing (LMP) to measure the cost of
congestion between transmission points and “Financial Transmission Rights”
(“FTRs”) designed to enable market participants to hedge their volatile
transmission costs, which reflect the impacts of deregulation. It has turned
out, however, that FERC’s highly economically calibrated FTR model also
resulted in the new improved markets not offering the old one did, this has
lead to further reexamination of how FTRs should be made available described
below.</span></p>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">All of the mandated institutional change did not
alter transmission capacity to deal with the market design new model FERC
introduced: transmission constraints remained and multiplied. Indeed, the
system was further stressed by new change. As the NOPR contained in Docket
No. RM06-8-000 (Feb. 2, 2006) stated “Market participants (are), seeking to
obtain rights that replicate the transmission service that were available
prior to the formation of the organized electricity market and remain
available today in regions with organized electricity markets. The principal
concern of these market participants is “the inability to obtain a fixed
price long term level of service under pricing arrangements that hedge the
congestion cost risk that they face in electricity.” (emphasis added)</span></p>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">Why the sudden insight by FERC of the possible
fallibility of the Commission’s market structure mechanics?</span></p>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">The answer is 1233(b) EPACT, which added Federal
Power Act Section 217(b). It directs the Commission to enable load serving
entities to secured firm transmission rights (or equivalent tradable or
financial rights) on a long term basis for long term power supply
arrangements made, or planned, to meet such needs. (The translation of which
seems to be: “fix the system so utilities can function on a long term
contract basis in RTOs”)</span></p>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">To this Congressional directive, in lengthy NOPR,
the Commission appears to have replied:</span></p>
<ul>
<li>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">We will give preference to utilities which have
long term service arrangements<br>
</span></li>
<li>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">We will set guidelines so that the Financial
Transmission Rights (“FTRs”) to achieve this result can be made available
by different RTOs in ways which can accommodate regional differences.<br>
</span></li>
<li>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">We are doing this because we want to increase
the market certainty so that both needed new transmission investments and
long term power-supply arrangements will be made.</span></li>
</ul>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">All of which is good public policy, until we get
to the point where the rubber meets the road; paying for transmission
improvements:</span></p>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">“The Commission’s policies that market
participants that request or support an expansion or upgrade . . . must be
awarded long term transmission right for the incremental transfer capacity
created by the expansion or upgrade “- equal to life of the new facilities.</span></p>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">Further, under the NOPR traditional “native load”
preferences will continue to prevail. One of the eight guidelines for RTOs
proposed is that: “Load serving entities with long term power supply
arrangements to meet a service obligation must have a priority to existing
transmission capacity that supports long-term financial transmission rights
required to hedge such transactions.” FERC indicates that it wishes FTR’s to
be available to both those financing their service obligations and also
those who seek transmission to finance investments in new transmission
requirements or power purchase contracts. But this may not always be
possible. In, either case, does not seem too cynical to suggest that the
cost of FTRs will be tacked by transmitting load serving utilities into the
bills of would be merchant suppliers. If this is the case, it does seems
reasonable to inquire: how will this affect new renewable projects built in
remote areas. How it will affect the negotiating balance of those classes of
“merchants” providing new lines which interconnect with existing systems?
How it affects those classes of entrepreneurs proposing to offer
transmission conservation to PTOs and utilities, via technology enhancements
over existing lines and realize a return on the valuable service offered.</span></p>
<p class="MsoNormal" style="text-autospace: none">
<span style="color: black">Congress has issued, essentially, a call to order
in aspects of the transmission field. FERC has responded, with some
sensitivity to regional requirements. Innovation, however may not receive as
square a deal as the utility beneficiaries of the new deal for FTRs under
the new NOPR.</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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