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<title>July 2006: Nuggets in the EPACT Pan</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>
July 2006</u></b></p>
<p align="center"><font size="6"><b>Nuggets in the EPACT PAN</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>006/10/27)<br>
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<p ALIGN="LEFT">The Energy Policy Act (“EPACT”) may have been a gold mine
for certain clean technologies from an incentive standpoint. It clearly
hasn’t been from a regulatory standpoint, given its strongly pro-traditional
industry bent. Merchant power entrepreneurs need to soberly absorb this
lesson and then focus on finding the nuggets which may be buried in EPACT,
or the Reports and proceedings implementing EPACT. For those seeking to turn
energy efficiency enhancement into profitable business ventures, areas of
promise do exist.</p>
<p ALIGN="LEFT">To begin, let’s understand the state in which EPACT left the
markets for merchants, from a regulatory standpoint. In the EPACT, Congress
directed a multi-agency task force to report on the status of wholesale
electric and retail markets in the United States. The intent of report
proponents, which has now been released for comment [<a href="http://www.ferc.gov/legal/staff-reports/competion-rpt.pdf">http://www.ferc.gov/legal/staffreports/competion-rpt.pdf</a>.] was not merely to provide another
dusty tome, but to establish a record for evaluating potential responses to
key issues which have plagued the power industry: wholesale price spikes;
the merits of capacity payments in organized wholesale markets; the need for
construction of more transmission facilities and the evaluation of
traditional regulation (i.e., the looming prospect of re-regulation in the
retail market). More basically it addressed the consequences of the obvious
gap between the 30-year federal effort to balance competition by promoting
innovative regulation and the disparate evolution of regional wholesale
power markets (or lack thereof).</p>
<p ALIGN="LEFT">The Report’s conclusions, while carefully couched in
bureaucratese, are pro-Federal innovation at the wholesale level:</p>
<p ALIGN="LEFT">* Regions principally reliant on bilateral sales
arrangements (i.e., non-ISO/RTOs) are less efficient (i.e., further from
least cost) relative to regional generation dispatch governance scenarios;</p>
<p ALIGN="LEFT">* Specifically, the former regions have greater capacity
constraints, lower transmission access, and therefore fewer least cost
supply options;</p>
<p ALIGN="LEFT">* On the other hand, while RTO/ISO regions have more
efficient trading and provide better signals for generation construction,
they pose other issues related to long term transmission construction, with
sometimes high commodity price levels.</p>
<p ALIGN="LEFT">On the other hand, the Report acknowledges that, as price
caps in seven key states are just ending, overall retail sales programs have
been a failure in bringing competition and lower prices to the market. Some
industrial customers have more choices, but even where multiple suppliers
serve retail customers, not only have prices not decreased, but the range of
new products and services (other than some green energy products and
customized energy management products for large commercial and industrial
customers) has been limited. One collateral benefit: power suppliers have
made efforts to solicit large customers, which has created incentives for
customers to cut consumption during peak demand periods.</p>
<p ALIGN="LEFT">The Report provides the action backdrop not only for FERC’s
new NOPRs clarifying transmission and market based rates rules as ways of
dealing with abuses - without basically changing industry structure - but
also for creative state and non-regulated utility action in response to the
“Smart Metering” provisions also contained in EPACT. Section 1252 of EPACT
contains a requirement that states and other regulatory bodies must make a
finding as to whether they should require utilities to offer time-based
rates (“DR”) and advanced metering (“AMI”) to all customers. While there has
been uncertainty as to the timing of this EPACT requirement, the current
dates appear to be August 2006 for commencement of consideration, and August
2007 for a state’s completion of a determination on whether to adopt the
requirement (a rough analog to the original implementation of PURPA).
Previously conducted state proceedings, e.g., California, are subject to
grandfathering provisions.</p>
<p ALIGN="LEFT">Consideration of the Demand Response and AMI requirements of
EPACT � 1252, will not be conducted, against a completely blank record.
EPACT also requires FERC to prepare an annual report beginning in August
2006 which identifies the saturation and penetration rate of advanced
metering and demand response programs. The Congressional intent was for this
Report to provide a foundation for decision makers by responsible policy
makers.</p>
<p ALIGN="LEFT">Municipal utilities and rural coops are jurisdictional all
under EPACT � 1252. Evidently they believe it will be a plus for their
entire service offering package to offer AMI to their customers, and they
are conducting training sessions for their members. Perhaps they believe
such programs ultimately will enhance their competitiveness relative to
investor-owned competitors for new markets.</p>
<p ALIGN="LEFT">There has been good initial state response to EPACT � 1252
implementation— including states where retail deregulation has not been a
successful process. Different states are taking different approaches to
EPACT �1252, as they are permitted to do under the law. However, not all
IOUs are being as positive in their willingness to let public process rather
than their internal operations define AMI and DR programs.</p>
<p ALIGN="LEFT">What does all this mean for potential merchant entrepreneurs
in the changing electric power market. Simply this: EPACT was not enacted,
nor can FERC turn it into a reincarnation of the original model of open
access deregulation which had such promise (at least partially realized) for
merchant power. But it does provide in �1252 and other identifiable isolated
contexts, a framework in which strategic teaming to exploit economically
competitive technical initiatives is a very logical strategy. Seeking to
influence the regulatory environment to create a favorable climate for
merchant initiatives is, of course, a proven useful strategy. It certainly
should be pursued vigorously.</p>
<p ALIGN="LEFT">Panning for nuggets in EPACT in the areas of demonstrated
energy efficiency and productivity is potentially significantly as or more
productive than relying on EPACT regulation of utilities or scams of
EPACT incentives to create new business.</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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