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<title>A Merchant Power Fable: The Englishmen's Patient's</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>October 1997</u><br>
</b><br>
<font size="6"><strong>A MERCHANT POWER FABLE: THE ENGLISHMEN'S PATIENT'S</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">Not so long ago, two wise but indigent English brothers, both
economists with Doctorates in power deregulation, set sail to the Western Hemisphere in
search of the land where power could flow so freely and vigorously under their wise
tutelage that there would be no difficulty in the creation of new "merchant
plants". Each dreamed of becoming a power privateer, earning enough gold from the
merchant plants to return to hallowed university halls and develop yet more arcane
software. In mid-Atlantic their ships were separated by errant gusts from El Nino. One
landed on the rocky, somber banks of Massachusetts and the other on the sunny, carefree
shores of Brazil. Each brother set to work to introduce an open access, competitive power
model, with the expectation that merchant plants would spring from the fertile fields of
competition thus. </font></p>
<p><font face="Arial">Each unfurled his unbundled genco-transco-disco chart; sketched an
ISO in the middle; framed the picture with wavy lines of open access. Each pointed to
power market facts about the country in which he had landed. That assured, he declared,
the success of his deregulation model:</font></p>
<p><font face="Arial">• Large new capacity requirements were present in each country
(in Brazil, from rapid growth; in Massachusetts from nuclear death and fossil
disintegration and dismemberment).</font></p>
<p><font face="Arial">• Each country’s power economy needed to introduce new
cost effective combined cycle gas plants to supplement traditional, but high new capital
cost energy sources (hydro for Brazil; nuclear and oil for Massachusetts).</font></p>
<p><font face="Arial">• Each power economy needed to import fuels and needed new
fuels transportation infrastructure if its growth needs were to be met.</font></p>
<p><font face="Arial">• Each needed to do this upon, over and around the still
looming hulks of major pre-existing utilities (state owned in Brazil; state regulated in
Massachusetts).</font></p>
<p><font face="Arial">However, to his dismay each brother discovered that the natives in
the country in which he had landed would not simply take his plans for a competitive
market economy in which he could be a merchant plant privateer in the form he had brought
to them from ye olde countries.</font></p>
<p><font face="Arial">• The Brazilians kept talking about the continued need for
governmental investment; concern over the impact on national fiscal policy of energy
policy; concern with disparities in regional development and relations among States; and
their distaste for importing Spanish-speaking electrons/molecules.</font></p>
<p><font face="Arial">• The Massutins kept carping on the fairness of requirements
that they bear the transition costs experienced by utilities under the plan; the need for
equitable universal service, the desirability of producing "green" electrons;
and their fear of low cost French- speaking electrons destroying their domestic power
commerce.</font></p>
<p><font face="Arial">In short, the plan for England’s fully served and thermally
powered land could not be lifted wholesale and applied without shrewd political adaptation
to other lands.</font></p>
<p><font face="Arial">The brothers each became depressed: the model of which each was an
apostle was not being accepted in the form they had sought to transplant it. Gloomily,
each predicted that the sky of his country that would turn from blue to brown (out) to
black, as a plague of lost opportunity revenues would strike their unbelieving lands,
leaving red ink strewn in its wake, throughout their economies.</font></p>
<p><font face="Arial">And then, entered into each host country, dashing and unafraid, some
persons of a different ilk: true power privateers. In Brazil, they began buying up
existing state companies (still quite bundled, with large distribution system components),
who began exploring sale of newly generated power to their newly acquired
"captive" companies as well as the host country good. In Massachusetts, they
began plunging equity into strategically located plant sites, such as those where gas
pipes crossed transmission wires or where transmission congestion was low, confident that
they would not only reach the consumer market, but thrive in it, as the old nuclear plants
which had serviced it toppled one by one. They simply assured that regulation did not come
between them and their markets. The brothers were pressed into service by them to make
eloquent speeches in various public forums about the virtues of competition, while they
got on with the job.</font></p>
<p><font face="Arial">The brothers each returned to Albion, a bit wealthier from their
efforts than when they began. But each secretly nursed the knowledge that he had not
become the conquistador of the power currents he had dreamed to be and that the
fundamental reason was that his model required special accommodation in each setting.
Neither admitted it, each brother was full of bluster, proclaiming that his intellect had
triumphed over the aboriginal regulatory primitiveness of the local power poobahs of the
lands each had visited. Brazil and Massachusetts (unwitting power analogous under the
skin) lived happily ever after - as did the power privateers which served them.</font></p>
<p><font face="Arial">There are three morals of this fable:</font></p>
<p><font face="Arial">• No restructuring model is any better than its applicability
to the facts to which it is applied.</font></p>
<p><font face="Arial">• It is better to seek to apply some model than to muddle along
in the regulated darkness.</font></p>
<p><font face="Arial">• Capitalism will then find a way to make the model work, but
the merchants it breeds may bear scarce resemblance to those which its intellectual
progenitors imagined.</font></p>
<p><font face="Arial">To use a cinematic paraphrase: "Given half a chance, capital
merchant plants will find a way." The Brazilians keep on smiling, the Massutins
intently frowning, and the power privateers serving each keep on quietly chuckling as they
develop risk management strategies for deeper market penetration. Each market shows every
prospect of sustained growth.</font></p>
<p><font face="Arial">As one power privateer put it: "Ideas travel faster and wider
than the specific reality which they address these days. It is fine to start as an English
Doctoral patient, but it is foolhardy to be patient too long with an English Doctor’s
(economic) models. </font></p>
<p><font face="Arial">Summer at the cape; winter in Rio. That’s for me."</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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