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<title>All Power To Lilliput: The Emerging Ground War For Competitive Markets</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>September 1997</u><br>
</b><br>
<font size="6"><strong>ALL POWER TO LILLIPUT: THE EMERGING GROUND WAR FOR COMPETITIVE
MARKETS</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">All beer may be a commodity (American brands anyway), but
microbreweries are flourishing. All power may be nothing but electrons; and all service
territories may disappear; but increasingly all markets are local. For private power
intent on retail access, which it has long regarded as the final mile of its journey back
to prosperity, it is clear that commercial success is dependent on developing smaller
local area markets and persuading regulators to assure their actual (as opposed to
theoretical) long term availability. In fact, it is a matter of critical strategic
importance for the next five years. </font></p>
<p><font face="Arial">More is going to be involved than saturation TV advertising. Four
factors, each recently highlighted, emphasize this uncomfortable reality: aggregation,
municipalization, multi-service convergence and privatization. These are not just
"megatrends," but locally focused expressions of keen local competition focus.
Recent key examples of each of these trends - certain to be proliferated - include the
following:</font></p>
<p><font face="Arial">Aggregation: The Building Owners and Managers Association of Chicago
and its suburban counterpart (60% of the office space market) have issued RFQs to seek
ESCOs to reduce costs now pre-deregulation, as well as in the hereafter. It does not
represent that its members will adopt proposals it receives, but it does commit itself to
seek participation commitments. The prospect of ultimate state-sponsored deregulation is
not enough to make real estate owners sit still today, when the possibility of near term
cost reduction is present.</font></p>
<p><font face="Arial">Municipalization: While restructuring on Long Island, through public
takeover of LILCO’s distribution system and private absorption of its viable
generation may seem to work to local pols, individual residential communities, for whom
resulting rates are not slashed sufficiently, have turned to the creation of a municipal
utilities as their salvation. Undaunted by its small load (20 MW), Farmingdale, NY has
issued its own RFP. Another referendum on municipalization is slated for the upstate
Rochester area.</font></p>
<p><font face="Arial">Full Service Convergence: The bundling of telecom and security
services with power delivery by your friendly local, new full service restructured
utility, has graduated from announcements of grand national alliances (e.g. Utilicorp) to
matters-of-fact bulletins from regionally focused utilities (e.g. PEPCO) and focused joint
venture alliances (e.g. BECO). New in the neighborhood? Get one wire, one bill - and one
market-blanketing provider. Get it now; get the benefits of retail access later - maybe.
It’s a blandishment any other power privateer must confront.</font></p>
<p><font face="Arial">Privatization: Even the lumbering Federal establishment has caught
on to the local aggregation now(!) theme. The Government’s landlord, GSA’s
National Capital Region, has solicited input for an upcoming RFP regarding (as it puts it
in turgid governmentalese), "feasible strategies for short term cost savings in
federal fiscal year 1998 and an innovative program over the next 5 years for optimal
electric power acquisition and management in a competitive electric market." This RFP
will affect many of its "customers": 72.6 million square feet housing 325,000
odd DC-area government employees. Technology innovation in management is a key focus of
GSA - as it will be for many landlords: implementation of advanced metering; managing
electric account payment and usage data; balancing of over and under deliveries in a
competitive electric environment.</font></p>
<p><font face="Arial">The commercial message for private power therefore is: reach out for
local markets now, and do not assume they will still be there when retail regulation
comes. The political message for private power therefore is: support measures to perserve
local market availability, and do not assume that uninhibited deregulation will result in
optimum local market structures. The underlying message is the need not only for a
strategy, but for grass roots communications. As a recent article in Energy Markets put
it: "Through grass roots communications, the ability to mobilize smaller
constituencies, one side or another will gain a tactical advantage - the support of the
infantry. This is where the deregulated market will be deregulated or thwarted."</font></p>
<p><font face="Arial">While power privateers focus on preserving recovery of stranded IPP
contract costs, at least some governments are seeing the future and getting the message of
the need to protect local markets as well. The Missouri Public Service Commission recently
petitioned FERC to defer additional so-called market based rate orders until protections
against exercise of utility vertical market power was in place. It focused on complaints
in the implementation of utilities’ OASIS systems, and made an important point: until
defects in transmission pricing are rendered, the just and reasonable character of
unregulated prices is not necessarily knowable. This observation means skepticism that
full scale deregulation by itself will provide local markets with the type of deals which,
through self help measures of the type illustrated above different types of localized
entities are pursuing.</font></p>
<p><font face="Arial">Substantive responses to this observation are possible. The GSA
National Capital Region, one such "local entity", has highlighted this fact in
its functionally oriented request for two types of information inputs from potential
respondents to its RFP:</font></p>
<p><font face="Arial">- Analyses and "techniques for discussion" in support of
its electric cost reduction goals with relevant public service commissions, current
utility suppliers and related customer groups.</font></p>
<p><font face="Arial">- Actions that could be taken by the Federal Government to reduce
adverse economic impacts of retail competition on residential and other customer groups.</font></p>
<p><font face="Arial">Here in local Lilliput, all over the USA, power supply by private
providers is one variable in the complex energy market, for whose change customers are not
willing to wait. Successful power privateers must use all the commercial and political
tools at hand to make aggregation, municipalization, multi-service convergence and
privatization tools for their own aggrandizement. A tall order, but one of critical
importance, since, as Energy Markets points out: "Electricity restructuring will play
out as a ground war, fought in every home and business in America." All Power to
Lilliput!</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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