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<title>A Matter of Surprising Significance</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>March 1998</u><br>
</b><font size="6"><strong>A MATTER OF SURPRISING SIGNIFICANCE</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:
03/98</em>)</font></p>
<p><b> </p>
</b><font face="Arial" size="2"><p></font><font FACE="Arial" size="3">Stock props of the
deregulation consultant’s patter to private generators are phrases like: unbundle and
recombine your services, be attentive to customer requirements, be nimble, etc. The
unstated question looming in the background has been: "How feasible is that scenario
if deregulation principally involves the transfer of selected packages of assets from the
original hometown Goliath to out-of-town Goliaths?" The first hint, perhaps, is the
"surprisingly significant order" FERC issued recently to Houston Lighting and
Power in connection with its acquisition of several of Southern California’s
generating facilities.</p>
<p>The facilities acquired (some of which were must run and some of which were not) were
granted market based rates treatment because of a finding that (with certain minor
correc-tive steps) because they met the requirement that the seller and its affiliates did
not have, or had adequately mitigated market power in generation and transmission.
HL&P market power was found not to be enjoyed with respect to generation either in the
pertinent geographic area or in the line of business.</p>
<p>For these findings, there is FERC’s well developed (if perhaps somewhat
mechanically applied) "affiliate abuse" standards. HL&P will engage in no
self dealings and will upgrade its "code of conduct" to include simultaneous
sharing of all (Commission emphasis) market information between itself and its power
marketing entity with non-affiliates. Why then is there any issue regarding the ancillary
services which HL&P wishes to also be able to provide at market based rates (e.g.,
reactive power; voltage control; spinning, nonspinning and replacement reserves;
blackstart services)? The reason is that while the capability to provide the services
necessarily came with the generation, the services are "transmission re-lated
products" for which the Commission was unwilling to provide market rate authority
without market power analyses. Emphasizing that HL&P might be uniquely positioned to
supply at least some of the services (e.g. reactive supply, voltage control), the
Commission emphasized HL&P’s need to conduct case-by-case analyses.</p>
<p>HL&P did not meet this test. It referenced its share of the total generation
nameplate capacity in the California-Nevada market, and a SoCal Edison study from which it
inferred it did not have market power in reserve services. (Unfortunately for HL&P,
this was the exact same study on the basis of which in 1997 FERC had declined to extend
market based services to PG&E in 1997.) It provided no analysis at all with respect to
blackstart services. HL&P did not "conduct . . . an in-depth analysis of
spinning, nonspinning and replacement reserve ancillary services or the characteristics of
plants which are conducted to the grid."</p>
<p>The Order then lays out the approach for requests to offer an ancillary service at
market-based rates (which in most particulars could be derived from a textbook; viz.
definition of relevant product market (including substitutes comparable in price, quality
and availability); description of the relevant geographic market in which the ancillary
service is sold (e.g. potential suppliers, quality of facility, cost of service, prices of
potential suppliers); supplier market shares (as a basis for calculating market
concentration); ease of market entry which could obviate the potential exercise of market
power. Each ancillary service is deemed to be a separate product.</p>
<p>Several possible reactions are possible to this Order. First, it is merely a
transitional document: a methodology and formulation for dealing with the issues will
follow. Certainly, it is analytically consistent with prior commission analysis. Second,
it may be a small gift to the economic consulting and appraisal industries: every asset
sale will have to be accompa-nied by either a seller's or buyer's separate evaluation of
asset value in terms of the ancillary services prices which they can command.</p>
<p>A final reaction (for which admittedly technical corrobora-tion is required) is that
this is a fine example of FERC fine-tuning of its conceptualizations. While the
fundamental viabil-ity of its deregulatory architecture remains in some question: whether
this assertion is true turns on several issues.</p>
<p>- Has Order No. 888 functionalization led to major modifi-cations of market power by
the major wholesale utilities?</p>
<p>- Has ISO governance been so well established that the impact of Order No. 888 on
market power can be assured in the future?</p>
<p>- How significant to market power exercise are ancillary services? Even if judged
important, is it the type of activity best overseen by command and control or complainant
exception than by elaborate (and certainly suitable) review of market power constructs?</p>
<p>- If FERC analysis is conducted in this way, will it, in fact, be conducive to the
nimble and frequent competitive offering of ancillary services which it set out to render
feasible?</p>
<p>In short, is FERC approaching market power issues of tactical significance like
ancillary services or of strategic sig-nificance, like industry profile, that - over a
five year time horizon - those who would be nimble will continue to have a meaningful
place alongside those who are large and will be larger.</p>
<p>Perhaps this is the "surprisingly significant" question.</font></p>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
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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