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<title>DOE Privitization Tool Kit Gridlock</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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<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>JUNE 1997</u><br>
</b><font size="6"><strong>DOE PRIVITIZATION TOOL KIT GRIDLOCK</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">The Energy Department is still developing its blueprint for our
deregulated electric future — while states, companies, and consumers all rush pell
mell ahead of it.</font></p>
<p><font face="Arial">Potentially, however, DOE has another redeeming role, which it has
just begun to play, and whose expansion could be a model for many other applications. That
role would be to provide a sterling and viable model of how an energy efficient landlord
manages its extensive (and somewhat aging) facilities stock. DOE’s study
"Harrassing the Market" suggests that there is a hitch, however: DOE’s
contract rules today are not themselves compatible to any significant extent with this
attainable, common sense agenda.</font></p>
<p><font face="Arial">There is, perhaps, another hitch as well. The activity of creating
efficiency has, unfortunately, been labeled "privatization", because —
remarkably — it takes an entrepreneurial, incentivized private contractor to achieve
the full potential of energy efficiency savings, which form the basis for its profit. And
Secretary Pena (he of the Denver Airport and more recently the trust fund subsidized
public highways program) has not expressed any views on whether "privatization"
(in any of its myriad outsourcing of ownership forms), is any good. He is looking over his
shoulder at the unionized workers at the big, obsolescing polluted national laboratory
sites and reservations.</font></p>
<p><font face="Arial">Private power certainly could benefit from an enlargement of public
markets like that offered by the Federal Government. (If you doubt it, take a look at the
lists of the top 20 customers of many of the largest IOUs sometime). So this brief
presentation of the good, the bad and the woebegone in DOE’s efficiency/privatization
program should be of interest to it.</font></p>
<p><font face="Arial">The good stems from the synthesis of both public and private
initiative. At least one DOE Lab (Oak Ridge) has joined with a private company to permit
private conversion of one of its utility facilities to cogeneration and to integrate the
facility’s conversion into the overall economic requirements of the region the lab
occupies. While observers have questioned the efficacy of this integration, and some have
questioned the sufficiency of its link to energy Too bad neither supply nor demand can
fully avail of the private sector potential it has begun to tap. This "ugly"
fact stems from what superficially would seem to be two innocuous operative principles:
(i) if you want to provide energy services to DOE, you have to contract with it;
(2) if you want to secure capital market financing for the facilities you use to
provide DOE with energy services, your contracts have to assure lenders not only of
satisfactory prices, but also firm cash flow as well. Under ordinary DOE rules, absent
special waivers, applicable contract rules frequently won’t permit the provision of
such assurance:</font><ul>
<li><font face="Arial">They will allow the government to terminate for
"convenience" (i.e. not cause, but lack of Federal appropriation or simply lack
of further Federal interest) without necessarily making the contractor whole for the
entirety of its investment, e.g., interest, transaction costs, and actual lost profits.<br>
</font></li>
<li><font face="Arial">DOE utility contracts have term limits, without automatic renewals,
which fact may preclude the contractor from having enough time to realistically amortize
its new investment or necessary improvements.<br>
</font></li>
<li><font face="Arial">DOE rules may prevent government commitments to pay for the level of
contractor output which has been contracted for, and thereby deprive the contractor of the
needed firm payments to amortize its debt service, i.e., its capacity charge.</font></li>
</ul>
<p><font face="Arial">Some of these limitations were avoided in the TRWS nuclear
vitrification project — but they are still very much on the books. There are valid
general policies behind these rules; but there are valid policies for setting them aside
in a privatization context. These reasons extend beyond being a policy paradigm to being a
reasonably perspicuous proprietor of managing a building stock with staggering O&M
cost. There is no public interest justification for not dealing with the issue of removal
of legal barriers to energy privatization adjudged to be beneficial to the Department.</font></p>
<p><font face="Arial">That "woebegone" part. The Department can’t, if it
wants to, be an energy paradigm, without a specific effort of will at the top to modify
rules on the books. When it exercises that will, it can achieve wonderful things. But it
has, as of now, been reduced to calling privatization nothing more than a "strategic
management tool." And in that mind set, without top level policy expression,
privatization can neither be a capitalist tool or therefore a tool for demonstration of
cost effective energy policy.</font></p>
<p><font face="Arial">Perhaps in this context (as perhaps in energy policy) the Department
should lead, follow or get out of the way. So far it hasn’t even gotten the tools out
of the kit.</font></p>
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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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