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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>April 2009</b></u></p>
<p align="center"><font size="6">Cooperative Federalism</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: 2009/</em>04/28)<br>
</font></p>
<div>
<p class="style11">In the absence of <span style="mso-spacerun: yes"> </span>“Cooperative
Federalism” the development of so-called “Green Infrastructure,” as
contemplated both by the Stimulus Package and by the forthcoming
initiatives from the President and Congress in the areas of energy,
security, and climate change regulation, will be thwarted.<span style="mso-spacerun: yes">
<br></span><br>We are heading toward an impasse in practical legislation
unless this fact is addressed directly in the formation of the new
laws--and indeed, in the implementation of the Stimulus Package in an
effective way as well.<span style="mso-spacerun: yes"> <br></span>
<br>The absence of Cooperative Federalism is the insistent legal theme
embedded in the swirling policy and economic debate of how national
policy objectives should be achieved.<span style="mso-spacerun: yes">
</span>Issues of Federalism are often dismissed by proponents of policy
change as vestigial legacies of constitutional tradeoffs made long ago,
or as a smokescreen of arguments designed to conserve the political or
economic status quo.<span style="mso-spacerun: yes"> </span>
Conversely, sometimes they are ennobled as the protectors of the
intended liberty and rights of the individual and private enterprise.<span style="mso-spacerun: yes">
</span>In the energy/environment area, though, I would suggest that
there is one underlying pragmatic issue with which we all are wrestling:
<span style="mso-spacerun: yes"> </span>how can the profile and
technical operations of the electrical utility industry be adapted to
the energy challenges of the 21st Century within our Federal legal
framework of governance?<br><br>The legislative flashpoints are the
debates over Renewable Portfolio Standards, carbon cap and trade
legislation, and transmission reform.<span style="mso-spacerun: yes">
</span>In each case, the question is framed as Federal vs. state
governance.<span style="mso-spacerun: yes"> </span>The issue
ultimately is evolutionary:<span style="mso-spacerun: yes"> </span>
one of adaptation of the rules of governance so that our national engine
of private enterprise (in this case utilities) can operate in a manner
aligned with national needs.<br><br>Since the days of Thomas Edison and
Samuel Insull, utilities have been regulated, and they’ve operated on
the principle of minimized system cost (whether termed “locational,”
“marginal pricing,” “economic dispatch,” or simply “free market
economics”).<span style="mso-spacerun: yes"> </span>Much of this
regulation has been done at the state level and, while transmission and
some activities of some utilities have been Federalized over time, the
basic governing principle of minimized system cost has been embodied
there as well, save for a few special incentive-rate-type programs.<br>
<br>Come now certain interrelated developments which challenge the
adaptability of the first principle or regulation:<br><br>Concern with
greenhouse gases<span style="text-transform: uppercase"> </span>can only
be dealt with at significant cost, which euphemistically we now call
upon to be “internalized.”<span style="mso-spacerun: yes"> </span>
Similarly, “energy security<span style="text-transform: uppercase">”
</span>intrinsically has a cost, which will surely be increased if
grid-based electricity becomes a significant basis for automobile power.<br>
<br>At the present time (putting aside the nuclear debate, which itself
has Federal-state ramifications), the means to reduce GHG and increase
security appear to be<span style="text-transform: uppercase"> </span>
(and the Stimulus Plan has thrust them forward through incentives and
raw cash):<span style="mso-spacerun: yes"> </span>(a) renewables,<span style="text-transform: uppercase">
</span>and (b) associated transmission requirements--energy-efficient
“smart grids,” notably though not exclusively, in their distributed
generation form.<br><br>Unfortunately for utilities, these solutions
have a drawback more or less in common and, unless something is changed,
their marginal costs and state oversight impacts on utilities are both
negative.<span style="mso-spacerun: yes"> </span>Neither electrons
nor carbon molecules respect borders.<span style="mso-spacerun: yes">
</span>Consequently, if external costs are to be internalized
principally through targeted energy and emission legislation--as opposed
to blanket taxation--electric utilities will likely bear a significant
burden of these costs.<br><br>The matter is further complicated when new
Federal rules are proposed to overlay state regulation, because of the
rise of regionalism.<span style="mso-spacerun: yes"> </span>As
with most energy matters, effort to address cost internalization has
taken on a regional character;<span style="mso-spacerun: yes">
</span>the fuels, uses, and topography which utilities confront
obviously vary.<span style="mso-spacerun: yes"> </span>Moreover,
as a result of the last wave of reform,<span style="text-transform: uppercase">
</span>this regional character is overlaid by the fact that, while some
utilities operate on a fully-integrated basis, other have been subject
to more-or-less deregulation.<span style="mso-spacerun: yes">
</span>Since there has been an approximate vacuum<span style="text-transform: uppercase">
</span>in Federal regulation focused on the proposed
energy/environmental fixes, we have seen the emergence of various types
of regional responses, notably in the environmental field, but in the
transmission field as well.<br><br>In the absence of Federal regulation
in some areas, states have taken action<span style="text-transform: uppercase">
</span>individually, <i style="mso-bidi-font-style: normal">e.g</i>.,
Resource Portfolio Standards.<span style="mso-spacerun: yes">
</span>In some cases<span style="text-transform: uppercase">,</span>
through, regional organizations have propounded their own solutions,
<i style="mso-bidi-font-style: normal">e.g</i>., carbon regulation and,
in some cases, in a partial relationship<span style="text-transform: uppercase">
</span>with Federal regulators, <i style="mso-bidi-font-style: normal">
e.g</i>., transmission.<span style="mso-spacerun: yes"> </span>In
still other cases<span style="text-transform: uppercase">, </span>
through, what has emerged are strategies for Federal delegation<span style="text-transform: uppercase">,
</span><i style="mso-bidi-font-style: normal">e.g</i>., energy
efficiency, with advisory Federal guidelines.</p>
<p class="style11">Consequently, the Federalism issue is not one of
writing on a blank slate, either in practice or in legal theory.<span style="mso-spacerun: yes">
</span>Consequently, the need for “Cooperative Federalism<span style="text-transform: uppercase">”</span>
is even greater than would naturally be assumed to be the case.<br><br>
That said, for the 21st Century utility and its state regulators, what
will this “Cooperative Federalism” look like?<br><br>I would suggest
that reference to the emerging “Smart Grid<span style="text-transform: uppercase">”
</span>case might be one starting point to illustrate creative new
approaches.<span style="mso-spacerun: yes"> </span>The potential
of the Smart Grid is clear:<span style="text-transform: uppercase">
<span style="mso-spacerun: yes"> </span>i</span>t ranges from
traditional possibilities such as monitor and control of
intermittently-generated renewable resources, like wind and solar, to
those notably associated with efficiency,
<i style="mso-bidi-font-style: normal">e.g</i>., scheduling the charging
and discharging of distributed storage.<span style="mso-spacerun: yes">
</span>The theoretical means<span style="text-transform: uppercase">
</span>by which the Smart Grid could operate is clear, too:<span style="mso-spacerun: yes">
</span>some kind of integration of one or more “platforms” through which
signals or integration can allow the information received from
individual control applications to run, charge, or discharge utility
response.<span style="mso-spacerun: yes"> <br><br></span>However,
there are not only technical but political constraints to be overcome.<span style="mso-spacerun: yes">
</span>Above all, the utility must receive, from regulators, market
signals which definitely reward it for its appropriate behavior.<br><br>
As the Stimulus Package implicitly recognizes, investments must be made.<span style="mso-spacerun: yes">
</span>Regulated utilities cannot themselves, within the parameters of
their framework of operation and regulations, afford to make these
investments.<br><br>The NARUC/FERC Smart Grid Collaborative Proposed
Funding for the “Stimulus Package” Smart Grid Matching Grant and
Demonstration Program general criteria, addresses the issues of how
cooperative Federalism and utility contribution to national energy goals
can be reconciled, including:<br><br>(a)<span style="mso-tab-count: 1">
</span>Funding--how has the project minimized the possibility of
stranded investment by designing for the ability to be upgraded?<br><br>
(b)<span style="mso-tab-count: 1">
</span>Overarching criteria--including regional diversity and
representation of urban, rural, and suburban settings<br><br>(c)<span style="mso-tab-count: 1">
</span>Technology criteria--including an open architecture that can
become the basis for interoperability with multiple applications<br><br>
(d)<span style="mso-tab-count: 1">
</span>Rate design-<span style="text-transform: uppercase">-</span>compatibility
of existing or proposed rate designs with the purposes for which a
project is designed<br><br>(e)<span style="mso-tab-count: 1">
</span>Regulatory<span style="text-transform: uppercase">--</span>coordination
of the project with the RTO and/or system operator<br><br>(f)<span style="mso-tab-count: 1">
</span>Information/data requirements<span style="text-transform: uppercase">
</span>designed to measure performance and also to measure receptivity
of customer response<br><br>This type of guideline points the way to two
basic conclusions:<br><br>(1)<span style="mso-tab-count: 1">
</span>The 21st Century utility must be one which delivers new “smart”
technologies, which is to say, it is adaptive to Federal policies and
regional requirements.<br><br>(2)<span style="mso-tab-count: 1">
</span>The Cooperative Federalism necessary to develop green
infrastructure suitable to our changing society not only must be
oriented toward ongoing receptivity to new technology, but also adaptive
to regional differences without adopting a one size fits all model.<br>
<br>In sum, the answer to modern national energy infrastructure needs
will not be found in the Supremacy or the Commerce Clause, or
preservation of state regulators’ cost allocation and siting powers.<span style="mso-spacerun: yes">
</span>The keys will be:<span class="style2"><br><br>•</span><span class="style2" style="mso-tab-count: 1">
</span><span class="style2">Flexible technology criteria; <br>•</span><span class="style2" style="mso-tab-count: 1">
</span><span class="style2">Regional adaptivity;<span style="mso-spacerun: yes">
</span>and<br>•</span><span class="style2" style="mso-tab-count: 1">
</span><span class="style2">Focus on on-going financial sustainability.</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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