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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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<td width="75%" valign="top"><img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" WIDTH="375" HEIGHT="75"><p><b><u>JANUARY 1997</u><br>
</b></p>
<p><font size="6"><strong>AIR WARS</strong></font></p>
<p><strong>by Roger Feldman -- Bingham, Dana and Gould, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
04/98</em>)</font></p>
<p> </p>
<p><font face="Arial">Wars among energy providers have been fought in air quality
environmental guises for decades: Natural gas against coal; Nuclear against fossil;
Eastern coal against Western coal. Comes now the millennium: In the age of open access and
humming wires, sound economy not fuels choices, environmental externalities will drive the
profile of the power business. Think again: The "air wars" between lower priced
Midwestern and higher priced Eastern power has commenced. As with all of the earlier wars,
the result is certainly in doubt and frequently likely to be steeped in tortured
compromise.</font></p>
<p><font face="Arial">The charges against Midwestern power are of two related types.
First, that open access will lead to increased air pollution transport from Midwest
powerplants market-induced to pump more power (and hence more pollution) eastward. The
result: ozone nonattainment exacerbation in the Northeast and in the Mid-Atlantic States,
because, as a Republican Congressman from new Jersey has charged, the Clean Air Act does
not apply equally to restrict pollution by all utilities in all regions of the country,
because it contains so many grandfathering loopholes. Second, that utility companies
operating in the Northeast Ozone Transport Region (OTR) will suffer competitive
disadvantages if transported ozone and ozone precursors (nitrogen oxides and volatile
organic compounds) from states outside the OTR negate their pollution control efforts.</font></p>
<p><font face="Arial">Three different types of responses already have been formulated to
these allegations, which have been presented by an intriguingly unusual combination of
higher power priced Eastern utilities and environmentalists, who have discerned their
common interests.</font></p>
<p><font face="Arial">The first, from utility industry restructuring major general
Republican Thomas Bliley (Va.), is to brand the pollution transport charge a "red
herring." After all, Midwestern utilities must comply with the same Clean Air Act as
Eastern utilities. Moreover, competition will lower </font></p>
<p><font face="Arial">prices, improve productivity and repeal the "monopoly tax"
resulting from regulations.</font></p>
<p><font face="Arial">The second, from the Midwestern utilities, is an argument of a
different hue. A "green smokescreen" is what AEP Executive Vice President Lloth
recently accused his Northeast utility brethren of hiding behind. His concern extends to
alarm at the counterattack which he perceives to have been launched by EPA through its
announcement of an advanced rulemaking notice of new NOx-reduction requirements for
electric utilities. Presumably these would have the effect of upping Midwest power
generation costs (or, "leveling the playing field", as the Eastern utilities
would have it). Congressman Bliley has rattled his saber at EPA’s initiative, stating
that Congress will expect the agency, which is within its purview, to justify the cost of
the new regulation according to its risk.</font></p>
<p><font face="Arial">A more balanced approach has been suggested by the President of GPU
- - an Eastern utility in favor of restructuring (as long as it is accompanied by a
non-bypassable transition charge). The basis for his argument is the fact that scientific
assessment of ozone transport is still incomplete. He favors a program of incremental
steps toward achieving ozone attainment while the scientific assessments are being
completed. </font></p>
<p><font face="Arial">A recently published article by the Director of Harvard Kennedy
School’s Environmental and Natural Resources Center, highlights the ambiguities of
the issue. It points out that the Northeast will only face undesirable environmental
impacts of NOx if it relies on the Midwest not just for short term energy supply, while it
is capacity short, but for capacity to meet incremental demand. It points out that the
relationship between NOx emissions and ozone production is still the subject of research.
It also points out that until transmission access issues are resolved, speculation as to
the extent of transmission of Midwestern power to the East necessarily is speculative.
Finally the article acknowledges that early nuclear plant retirement could exacerbate
environmental problems in the Northeast by increasing reliance on Midwest fossil
generation. Its recommendation: The creation of a tradable permit program within the Ozone
Transport Assessment Group (OTAG) (which includes representatives of the 37 Eastern
states). Given the number of caveats, the efficacy of this recommendation at least is
problematic.</font></p>
<p><font face="Arial">Power privateers beware: The force that through the green haze
surges, may surge at thee. It may impair the competitiveness of generating assets acquired
from restructuring utilities. On the other hand, properly responded to, concern for local
air quality could lead to state regulatory encouragement for new, more efficient merchant
capacity, and correlative renewed enthusiasm for open access as a greenworthy activity.</font></p>
<p><font face="Arial">Look up in the ozone, your future is in the air wars.</font></p>
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<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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