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<title>Convergence Commoditization: A Survival Guide For Corner Grocery Store Owners</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>JULY 1997</u><br>
</b><br>
<font size="6"><strong>CONVERGENCE COMMODITIZATION: A SURVIVAL GUIDE FOR CORNER
GROCERY STORE OWNERS</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" size="3">The announcement of the recent Pacificorp acquisition of
The Energy Company, itself a fuel and power marketing amalgam, served to emphasize to the
private power industry, an ascending ladder of realities:</font><ul>
<li><font face="Arial" size="3">The PURPA-based IPP industry is history (Old news)</font></li>
<li><font face="Arial" size="3">Linkage of power marketers and fuel suppliers is a logical
development (Accepted wisdom)</font></li>
<li><font face="Arial" size="3">"Convergence" of energy supply techniques will be
the foundation of the new consolidated energy industry (Rapidly accepted wisdom)</font></li>
</ul>
<p><font face="Arial" size="3">To cling to this newest rung of the ladder, private power
industry members face a classic quandary: finding an appropriate response to the
deregulation genie whose escape from the regulatory bottle it has so long promoted. The
challenges are clear enough: prevent unfair exercise of competitive advantage by the new
convergence mega-companies; facilitate merchant project financing in the new world of
shorter term energy arrangements; reestablish a useful, functional role in the
foreshortened energy food chain. In short: figure out what to sell from the corner grocery
once the supermarket comes to town.</font></p>
<p><font face="Arial" size="3">The trick, of course, is to do all of these things without
taking positions or establishing strategic business alliances which inadvertently have the
effect of perpetuating the old regulatory order.</font></p>
<p><font face="Arial" size="3"><strong>Securitizing the Grocery Store – Regulatory
Needs & Commercial Fundamentals</strong></font></p>
<p><font face="Arial" size="3">The underpinning to achieving these results is to
institutionalize responses to the underlying "commoditization" of the industry
which convergence accelerates. On the regulatory front, this means recognizing the fact
that BTUs, not Kwh or Matz, are the new stuff of energy commerce, and therefore that the
current legislative focus on assuring electric transmission access, because electric
supply competition already exists, is too narrow. Assurance of fair, full service ESCO
(multi-energy) competition in a broadly defined BTU market needs to be the target. With
respect to FERC regulation of mergers, it means an examination of the potential for undue
concentration of market power arising from regional vertical integration. It even may
suggest reexamination of the possibility of exercise of BTU market power by the ESCO
affiliates of combination mega-utilities.</font></p>
<p><font face="Arial" size="3">But such ornery populism would serve only limited purposes
for the private power industry, if it did not serve to this the competitive energy
thickets for new types of project finance by private power developers who have not (yet?)
engaged in convergence. For that to be the case, private power must itself sponsor a
variety of innovative financing measures, keyed to participation in the unencumbered
emerging competitive BTU markets.</font></p>
<p><font face="Arial" size="3">For a source of such innovation, looking backward - to
technologies used in natural resource financing - may be more productive than looking
"forward" to seeking to finance with multiple short term contracts as security.
Perhaps private power should seek to share that type of market risk with its larger
convergent brethren by becoming their suppliers. The reason is that this approach would
open up new opportunities for "securitization".</font></p>
<p><font face="Arial" size="3">Future power production is really a natural resource,
producing pools of receivables - income streams to be monetized through public offering in
the same manner as more familiar mortgage loans, credit cards, etc. Such
"securitization" takes place through a special purpose vehicle purchase
("SPU") - whose credit rating is separated from that of the sponsor, or indeed
from any individual contract (to make financing arrangements which characterized old-style
IPPs). Such separation allows potential investors in private power project packages to
focus on the economic risks presented by the private power company’s portfolio,
(including such hedging and other power marketing arrangements it may have made), without
having to factor in the credit risks and restructuring, default and bankruptcy profiles
presented by the private power company itself.</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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