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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 align="left"><b><u><br>
</u></b><u><b>February 2008</b></u></p>
<p align="center"><font size="6"><b>Lilliput Now</b></font></p>
<p><strong>by Roger Feldman --
</strong><b>Andrews Kurth, LLP</b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2008/03/01</em>)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
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<p class="BodyText05DS">Gulliver got tied down because he was out of
scale with the circumstances of Lilliput. More and more frequently we
see headlines like “Thrust of Power Shortages Generating New Urgency” in
several regions of the nation. Being tied down like Gulliver, as our
power regulators are, seems like the inevitable consequence of being in
a democracy with competing economic interest vying for favor. Is this
inevitable, or is there a way to think ourselves out of this problem?
</p>
<p class="BodyText05DS">Being the right scale is a classical ideal. But
it’s not very American. We may want change, but we sure don’t want
diminution. Double the latte, double the fun. Proponents of
“conservation” and “its ecological benefits” are often identified as
critics of our way of life calling for uncomfortable, cramped
life-styles. At the same time, there is something of a paradox in this
mindset because the hallmark of much of American’s economic success and
progress in the last half century has been the result of
miniaturization, massive multiplication of productivity, and consumption
of resulting goods based on getting more “powerful,” “robust” product
results for the buck.</p>
<p class="BodyText05DS">In electric power business (as, by the way, in
the surface transportation business), America is grappling with this
dichotomy between our expansive mindset, based on 20<sup>th</sup>
century technologies and the corporate institutions they spawned, and
the adaptive recognition of the potential 21<sup>st</sup> century
technologies and the disruptions in the breaking Business which they
spawn. Our 20<sup>th</sup> century solutions all require building more
and larger generating and transmission assets, at increasingly massive
capital costs. In some instances even certain proposals for renewable
power sources reflect the same mindset: if we have enough projects and
they get bigger, and we invest in their massive transmission hook-up,
the US can stay ahead of the ever upwardly increasing power curve, which
reflects the disruptive new power demands of 21st century technology.</p>
<p class="BodyText05DS">Approaching this problem in a 21<sup>st</sup>
century way, the challenge is not to put a cork in the bottle of growth,
but to seek to retrofit as many aspects of the power system as possible
to minimize the needs for ever more costly infrastructure, with
ancillary environmental difficulties. Thought about in this way, the
goal should be not to supplant utilities with many competitors so that
they will compete harder and prices will fall (been there, seen the
results of this 19th century optimism). The goal should be to goad
systems planners (whether utilities or RTOs) into cost effective
strategies which take advantage of emerging technologies whose use
enhances net power availability. </p>
<p class="BodyText05DS">Some gestures in this direction were made by
Congress in EPACT 2005 and were modestly built upon further in the
language of the recently enacted Energy Act. States were called upon
though amendments to PURPA to assess demand response, advance metering,
and smart grids in the light of a series of statutorily specified
criteria. While the outcome of its implementation is not likely to be
the next QF revolution, it is instructive to policy makers, developers
of products and services, and the utilities (collectively potentially
the gatekeepers of change) to assimilate the lessons of FERC’s <u>Demand
Response and Advance Metering</u> report, completed last September, as a
means of crafting meaningful adaptive response to rising prices and
concerns with power scarcity -- not to mention consumer anxiety with
rising prices. </p>
<p class="BodyText05DS">It can be seen in the study that DOE has moved
in its definition of “Demand Response” from one exclusively emphasizing
a curtailment/austerity standpoint, <i>i.e</i>., changes in electric
usage by end use customers from their normal consumption patterns in
response to price changes or incentives, to one which recognizes the
potential of “energy efficiency” to, in effect, be a source of
additional power available to overall grids. One example is ISO New
England which has adopted FERC-approved rules that allow energy
efficiency proposals to be bid into forward capacity markets. In
addition to supporting reliability, New York ISO has demonstrated that
operation of demand response can facilitate interstate sales as
emergency energy to other regions.</p>
<p class="BodyText05DS">FERC Order No. 890 specifically modified its
Open Access Order (No. 888) to allow for the incorporation of demand
response in local and regional planning processes, “if they are capable
of providing the functions assessed in a transmission planning process,
and can be relied upon on a long term basis.” The emergence of
successful third party corporate aggregators providing demand response
via contracts to utilities is an important longer term market
development. However, as the FERC study observed, “the need for greater
real time coordination and real time sharing of demand response
activities run by ISOs, utilities and unregulated providers” remains a
barrier to demand response programmatic success.</p>
<p class="BodyText05DS">That is why FERC is calling for increased
attention to advanced metering infrastructure (“AMI”), including:
customer consumption monitoring, record collection, and frequent
transmittal to a central collection point, utilizing digital electronic
and fixed network communication technologies. AMI is significant not
only because of its potential to provide cost savings resulting from
operating efficiencies, it is a key enabling technology for demand
response programs. AMI can also provide utilities and grid operators
with the capability to monitor electric usage by an individual or group
of customers and thereby perform load control and distribution system
operation and maintenance. Moreover, AMI and smart grids can be
expanded to multiple in-home appliances connected together as part of a
home-area network (“HAN”), and there is significant utility movement
toward AMI systems. A major debate continues regarding the
configuration of HAN-to-AMI systems connections. Reduced to its basics,
that debate whether deploying AMI with connection to HAN switches should
make those gateways part of the utility-provided metering solution, or
ought to be an activity for competitive third party players. </p>
<p class="BodyText05DS">This debate leads us back to the core question:
the on-going role of utilities’ adopting the optimal energy use of
their available 20<sup>th</sup> century infrastructure to 21st century
requirements. There are, of course, advocates on both sides of the
business issue. A few things are clear. Because of the intimate
linkage of system planning, new capacity sourcing, carbon footprint
shrinkage, and the immediate problems of power price and power
availability, the nation cannot afford to leave the matter to the
extended working of the administrative process over a long period of
time. In particular, the resolution of issues related to the
integration of renewables into the existing utility grid should not be
allowed to defer or confuse the pressing need so many regions face to
deploy energy efficiency solutions. The issues are complementary: the
right scale for renewables is facilitated by the right scale operation
for AMI deployment in utility systems. Unless as much attention and
incentives are given to energy efficiency purveyors as to renewables,
inevitably there will be, by default, an influx of non-renewable based
central stations with questionable environmental characteristics.
Gulliver will nevertheless be tied down by all of the consequences, and
the problem-solving potential of Lilliput will be passed over. </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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