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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>
March 2008</u></b></p>
<p align="center"><font size="6"><b>Regulation in a Time of Looming Darkness</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: 2008/06/01</em>)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
<div>
<p class="MsoBodyText" style="line-height:150%">Where are the
regulators? While the American economy reels, its linkage to
developments in the regulation of electricity is simply not a matter for
public notice. Yes, oil is up and the dollar is down, but the lights
still go on. Maybe an electric infrastructure is not geared for the
necessary responses to the need for electric vehicles and the ongoing
digital revolution demand for more and higher-powered data centers. But
we tried deregulation: power prices rising as caps come off, the
potential price impacts of renewables pass throughs are lurking;
reserve margins are shrinking, and it’s more politically prudent to
worry about noxious fuel fumes than attending to that knocking and
wheezing sound in the American dynamo.</p>
<p class="MsoBodyText"><b>The Challenge for Renewables Regulation</b></p>
<p class="MsoBodyText" style="line-height:150%">What should regulators
do? The challenge is to rethink regulatory policy to establish an
appropriate place in the energy “pie” for the next types of renewable
resources. The key to that rethinking needs to be not the introduction
of a single abstract principle or to pit utility regulatory bromides
against the “green hope” of renewables breakthrough. It is to focus on
establishing the right scale for different types of renewables in our
challenged US world. At what sizes and in what places should different
types of renewables be fostered by regulation as a key response to our
impending national dilemma?</p>
<p class="MsoBodyText" style="line-height:150%"><b>Avoid Single Slogan
Fixes</b></p>
<p class="MsoBodyText" style="line-height:150%">One touchstone of this
search should be that there is <b>no one</b> right standard which can
realistically be the basis for regulation:</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .5in">
<span style="font-family: Symbol">-<span style="font:7.0pt "Times New Roman"">
</span></span>Not “sustainability” - the motto of the renewables
movement. There are in fact many competing applications of the
sustainability standard, including:</p>
<p class="MsoBodyText" style="text-indent: -.5in; line-height: 150%; margin-left: 1.0in">
<span style="font-family: Wingdings">�<span style="font:7.0pt "Times New Roman"">
</span></span>optimization of energy production not only to address load
growth requirements but the requirements of a healthy economy;</p>
<p class="MsoBodyText" style="text-indent: -.5in; line-height: 150%; margin-left: 1.0in">
<span style="font-family: Wingdings">�<span style="font:7.0pt "Times New Roman"">
</span></span>optimization of the different components of our
environment: air, water, land;</p>
<p class="MsoBodyText" style="text-indent: 0in; line-height: 150%; margin-left: .5in">
<span style="font-family: Wingdings">�<span style="font:7.0pt "Times New Roman"">
</span></span>roll back of climate change due to GHG.</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .5in">
<span style="font-family: Symbol">-<span style="font:7.0pt "Times New Roman"">
</span></span>Not the operation “financial markets”: exuberant market
valuations of emerging companies, dour evaluations of project financial
cash flows, return based evaluations of otherwise unproductive roll up
efficiencies; these may lead or lag what are optimal future solutions to
the application of renewables;</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .5in">
<span style="font-family: Symbol">-<span style="font:7.0pt "Times New Roman"">
</span></span>Not the sometime-cousin of the financial standard --
“letting the market decide”-- which obscures or overlooks many types of
direct or indirect subsidies to different energy resources influencing
that decision, and which may, in the end, impede the implementation of
desired policies (like reduction of dependence on foreign energy
supply);</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .5in">
<span style="font-family: Symbol">-<span style="font:7.0pt "Times New Roman"">
</span></span>Not the collective “wisdom” of government planners
(whether legislative or executive branch) making bets which are likely
to be politically informed or market under-informed; </p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .5in">
<span style="font-family: Symbol">-<span style="font:7.0pt "Times New Roman"">
</span></span>Not the wisdom of “social entrepreneurs” whose policy
calculations are as accurate as the inputs to their programs and whose
collective belief is the cumulative wisdom of multiple bets by multiple
foundations showing a faith in the “invisible hand” which would make
even Adam Smith raise an eyebrow;</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .5in">
<span style="font-family: Symbol">-<span style="font:7.0pt "Times New Roman"">
</span></span>Not the marginal cost economic insight of the carbon
“lenders” that, if carbon is priced correctly and the true cost of fuel
externalists and energy efficiencies is clear, then renewables will be
set free to function in the greatest national interest.</p>
<p class="MsoBodyText" style="margin-left:.25in;line-height:150%">None
of these is a clearcut standard. Are we left with regulation of the
scale of renewables simply the residual byproduct of the general
regulatory effort to establish equity among classes of customers, making
least cost short and long run marginal cost calculations from the
consumer perspective while taking into account of capital requirements
of would-be suppliers offering competing technologies or using competing
fuels.</p>
<p class="MsoBodyText" style="margin-left:.25in;line-height:150%"><b>The
Heuristic Approach: The Envelopes of Regulation</b></p>
<p class="MsoBodyText" style="margin-left:.25in;line-height:150%">Not
necessarily, we are left with the pursuit of the beginning of wisdom of
a “heuristic,”<i> i.e.</i>, indicative approach, for establishing a
pragmatic methodology for the regulation of renewables in the electric
power sphere which reflects basic interlocking principals:</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .75in">
<span style="font-family: Symbol">�<span style="font:7.0pt "Times New Roman"">
</span></span>Acknowledge that regulation is serving several different
functions in addition to ratemaking and prevention of discrimination,
for example, resource planning; stimulation of infrastructure
development not otherwise incented by the system (<i>e.g</i>.,
transmission), system load shaping, externality identification and
capture accounting.</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .75in">
<span style="font-family: Symbol">�<span style="font:7.0pt "Times New Roman"">
</span></span>Define the appropriate relationship of economic regulation
to the roles which different types of non-regulatory government
financial incentives might play with respect to different renewable
technologies at different levels of commercialization.</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .75in">
<span style="font-family: Symbol">�<span style="font:7.0pt "Times New Roman"">
</span></span>Recognize that policy implementation of institutional
change through regulation will only be as effective as it is smoothly
interfaced with the on-going roles of the current on-going large scale
infrastructure holders and central delivery institutions at the core of
the operation of the American energy economy.</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: .75in">
<span style="font-family: Symbol">�<span style="font:7.0pt "Times New Roman"">
</span></span>Stop making policy for electricity renewables as though
they were a single homogenous mass. While clean tech breakthroughs can
-- and hopefully will -- scramble the picture, it is useful for policy
purposes to categorize renewables by the role they play in the energy
economy.</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: 1.25in">
<span style="font-family: Symbol">�<span style="font:7.0pt "Times New Roman"">
</span></span>Large scale, suitable for baseload, substantially
commercial and reasonably foreseeable technology applications.</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: 1.25in">
<span style="font-family: Symbol">�<span style="font:7.0pt "Times New Roman"">
</span></span>Distributed generation: smaller scale, possibly required
economic aggregation for commercial, frequently offering collateral
environmental benefits.</p>
<p class="MsoBodyText" style="text-indent: -.25in; line-height: 150%; margin-left: 1.25in">
<span style="font-family: Symbol">�<span style="font:7.0pt "Times New Roman"">
</span></span>Emerging technologies -- with longer term breakthrough
potential, whose future demonstration could fit new or existing
technologies into one of the first two categories.</p>
<p class="MsoBodyText" style="line-height:150%">This type of sorting
serves to focus attention on the need to define different envelopes of
market regulatory incentives for each different category and with some
view as to which players will most likely actually make use of them.
Each type of resource (in the particular application in question) may
benefit from different regulatory incentives. Too often, in the
political desire to “do something that show progress,” the potential
value of targeted “policy entrepreneurship” is overlooked.</p>
<p class="MsoBodyText" style="line-height:150%">Finally, particularly in
the field of regulation, once refined envelope/technology targeting has
taken place and the analytic results have been packaged into envelopes
of potential targeted market regulatory incentives, the final step is to
identify the governmental level at which these regulatory incentives are
best applied, and what the appropriate interaction among governmental
regulatory authorities should be with respect to these incentives. The
possibility of following this approach is potentially facilitated by the
fact that, at least in the past decade, rather than Federal cram-downs
of policy through what have been treated as regional and state “delivery
systems,” bottom-up innovation (and some collaboration) has been in play
with respect to many electric power regulatory issues. Now there is
more need for focus on the roles of the regulatory players seen from the
perspective of purveyors of different renewables technologies.</p>
<p class="MsoBodyText" style="line-height:150%">To do this, some basic
differentiation of envelope implementation responsibilities follow these
guidelines:</p>
<p class="MsoBodyText" style="text-indent: -.5in; line-height: 150%; margin-left: 1.25in">
(i)<span style="font:7.0pt "Times New Roman"">
</span>Federal. Provide declining economic safety net for different
commercializable technologies; provide standardized metrics for
calculation of the internalization of externalities in all energy
regulation; provide for continuity in regulation incentives for an
extended period, subject only to emergencies.</p>
<p class="MsoBodyText" style="text-indent: -.5in; line-height: 150%; margin-left: 1.25in">
(ii)<span style="font:7.0pt "Times New Roman"">
</span>Regional (<i>cf</i> RTO). Define comprehensive, regionally
appropriate resource plans, incorporating appropriate renewable
technology-oriented incentive oriented measures; focus on regional
provision of infrastructure to implement these plans (<i>e.g</i>.,
transmission); assure that any regional incentives to particular
technologies are complementary to those provided at the Federal level.</p>
<p class="MsoBodyText" style="text-indent: -.5in; line-height: 150%; margin-left: 1.25in">
(iii)<span style="font:7.0pt "Times New Roman"">
</span>State. Afford presumptive assumptions of validity to RTO
recommendations regarding capacity and resource planning regarding
renewables; focus on making local land and resource use regulation
compatible with the overall policy objectives established at the Federal
and regional levels.</p>
<p class="MsoBodyText" style="line-height:150%">To sum up: power
regulation faces a time of looming darkness. Power regulation,
particularly with respect to renewables, is of fundamental importance to
national economic recovery, which is in a condition of limited
confidence in the ability of our national system to effectively provide
for our future national economic competitiveness. Bumper sticker policy
slogan fixes harm the need for coherent action. A good way to light our
energy efficient lightbulb in the darkness would be to focus on how
regulation can best put the right size of renewables in the right
places, so that the overall US energy economy is equal to the challenges
it is now facing. In this way, regenerative energy policy can be
regenerative economic policy as well, and all the talk about “green
jobs” can have some greater substance.</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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