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<title>March 2006: Quick QF Quiz Show</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>
March 2006</u></b></p>
<p align="center"><font size="6"><b>Quick QF Quiz Show</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">
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<p class="MsoNormal" style="text-autospace: none">In our wacky wi-fi world,
game show formats have gained increasing currency. The trend has now spread
to this column.<br>
<br>
Question. Is FERC:</p>
<p class="MsoNormal" style="text-autospace: none">(1) Dispensing regulatory
candy to RTOs?<br>
(2) Appeasing Congressional legislative authors as to its interpretive
abilities?<br>
(3) Selling out to the utilities by effectively trimming future QF
development?<br>
(4) All of the above</p>
<p class="MsoNormal" style="text-autospace: none">These are the unhappy
questions that are being increasingly asked after review of FERC’s recent
Order No. 671. The answer to this “Quick QF Quiz” is found in italics at the
end of this column.</p>
<p class="MsoNormal" style="text-autospace: none">In the process of
implementing the amendments to PURPA, enacted by Section 1253 of the Energy
Policy Act of 2005 (“EPACT”), the FERC may be slamming the door on any kind
of “competition” except some dimly remembered fossilized version of Standard
Market Design to which the FERC is clinging vainly. In doing so, FERC will
jeopardize the surge of innovation which renewables now promise and the
significant addition to national reliability which distributed generation
could provide - each of which is important to national security. From a
broader commercial standpoint, the costs and time required to be created for
merchant undertakings of projects of these types will re-erect the very
barriers to entry which Congress has declined to endorse, despite utility
industry pressure. In fact, barriers to which FERC has in fact been
sensitive to in other contexts such as market power. Here are some clues to
the answer to this Quick QF Quiz.</p>
<p class="MsoNormal" style="text-autospace: none">FERC has promulgated
Docket No. RM0G-10-000, implementing new PURPA Section 210(m) with respect
to those “new” qualifying cogeneration facilities under the significantly
modified Section 210 of the Federal Policy Act, which Congress was willing
to allow to keep standing. For the most part, in that regard, FERC was doing
its duly: Congress moved to quash “PURPA machines” without justifiable
thermal load purposes. FERC complied. It eliminated the utility ownership
requirements, and shortly hedged the arguably abused self certification
requirements.</p>
<p class="MsoNormal" style="text-autospace: none">However, FERC also
construed EPACT’s direction to review the broad exemptions of QFs under
Section 210(e) of PURPA, which included PUHCA (no small matter at the time
of PURPA’s enactment), the Federal Policy Act and state laws. At the time,
FERC asserts, these exemptions worked to remove the disincentives to utility
type regulations”; now, however QF sales should be subject to Sections 205
and 206. Why? Because then there was no market for electricity generators
but now such new wholesale markets have developed to the point that they are
unnecessary. Policing market power impacts in this supposedly crisp new
standardized world will not require a showing to FERC that QFs - even the
bobtailed type still permitted post - EPACT - lack “market power” (a
demonstration which is an expensive and time consuming proposition). Only a
fragment made up of state jurisdictional sales and perhaps really smaller
QFs (under 5 MW) escape this filing requirement.</p>
<p class="MsoNormal" style="text-autospace: none">FERC’s related Order No.
671 goes further – paradoxically by making a contrary assumption. Even after
Section 205 filing has been made by a QF, there remains the matter of rates:
the crux of the business model for QF development . Order No. 671 implements
the new PURPA statutory requirement that removes the mandatory purchase
obligation which provides in essence that no utility mandatory purchase
obligation exists either (i) in mandatory day ahead auction markets exist or
(ii) where an RTO exists and FERC determines that meaningful opportunity to
sell within that RTO “exists, taking into account evidence of transactions
within the relevant market”.</p>
<p class="MsoNormal" style="text-autospace: none">From this base, the FERC
made a terrific leap: a preliminary finding that QFs inter - connected with
certain named ISOs or RTOs were not entitled to benefit from PURPA’s
mandatory requirements. No market power there. A ringing SMD - like
endorsement of RTOs, at the very time in its recently issued Notice of
Inquiry regarding transmission the Commission is raising concerns about
continued discriminatory behavior. In effect the message to utilities is:
join an RTO, and your problems with QF sales are ended. In addition to
scrapping the mandatory purchase programs, FERC offers no assurance as to
how just and reasonable nature of backup rates to QFs will be set, in this
market-rate driven paradise.</p>
<p class="MsoNormal" style="text-autospace: none">Quick QF Quiz Answer:</p>
<p class="MsoNormal" style="text-autospace: none">Overall, the presumption
that QFs have non-discriminatory access to long term contracts in organized
markets - which, thereby, of course restricts evidence of discriminatory
utility behavior against them - is regulatory candy to the utilities in
exchange for modest relative RTO enhancement. It also has the appearance of
FERC appeasement of Congressional critics after the lambasting it took for
showing creativity in the new PUHCA rules.</p>
<p class="MsoNormal" style="text-autospace: none">The winning answer
therefore is “All of the Above”.</p>
<p class="MsoNormal" style="text-autospace: none">Now for some “Instant
Jeopardy”.</p>
<p class="MsoNormal" style="text-autospace: none">The answer is: a wide
range of cost effective, energy efficient QF applications.</p>
<p class="MsoNormal" style="text-autospace: none">The question is: Who is
the loser here?</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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