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<title>Overhauling the Power Paradigm 98 Transmission</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 1998</u></b></p>
<b><font FACE="Palatino" SIZE="5"><p></font><font face="Arial" size="6">OVERHAULING THE
POWER PARADIGM 98 TRANSMISSION</font></b></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:
05/98</em>)</font></p>
<p><b> </p>
</b><font SIZE="3" face="Arial"><p ALIGN="JUSTIFY">A quick test drive of the Paradigm 98,
the newest model electric car, through New England, the most advanced deregulated region,
reveals a disturbing pattern of traffic congestion and potential road rage with national
ramifications.</font><font size="3"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial" size="3">Essentially, the New England power
structure is fragmenting into a few large wire holders (currently the formerly integrated
utilities); a relative handful of major generation suppliers (positioned via success in
asset auctions and a few major greenfields transactions); and a used car lot of unsold,
still serviceable nuclear plants. The public policies expected to be served by this
scenario in the region are reduced prices through competition and expansion of capacity to
meet the emerging requirements resulting from nuclear shutdowns.</font><font size="3"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial" size="3">Certain troubles in deregulation
paradise seem to be emerging. While estimates of near term future need are well over
20,000 MW, there is considerable foreboding that actual availability will be considerably
less and that the overall timing of actual arrivals of such availability as there may be
delayed. In part, this reflects current ISO New England rules -now being challenged at
FERC - which provide "first in time - first in right" cue up for scarce
transmission rights. In part, it reflects the reality of a transmission constrained system
and one in which the existing transmission system lacks the necessary interchanges to
service the new merchant plant generating load centers. (It has also been suggested that
it may reflect the potentially low highly competitive prices which utilities can now offer
into the new power exchange, sourced from their unsold residual nuclear capacity, sold
over the wires which the _______ still control.)</font><font size="3"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial" size="3">Attention all would-be Paradigm 98
buyers - lovers of the open road; these scenarios - wires companies vs. would-be merchant
suppliers; transmission constrained new suppliers vs. transmission unconstrained existing
suppliers (the keepers of the "native load") - are fated to be replayed with
appropriate regional variations throughout the country. The key emerging issue for
Paradigm gas dealers therefore is: whether the transmission system can be counted on to
right itself subsequent to integrated utility unbundling simply through provision of
satisfactory regulatory policy guidance by FERC traffic cops? From a would be merchant
power privateer developer’s perspective, it may be phrased more dramatically: Will
highway transmission constraints stall out otherwise present Paradigm ’98 sales
possibilities?</font><font size="3"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial" size="3">FERC is seeking to refute this
possibility. The well established "affiliate abuse doctrine is one launching pad. In
a recent decision involving Wisconsin Public Services, Wisconsin Power & Light and
Illinois Power (E2 98-2,7,11, 29) Chairman Hoecker flagged the issue that
"transmission owners are stalling the process to competitive markets." The case
involved the limitation of available transmission capacity to third parties by utilities
in favor of their own power marketing affiliates. The utilities argued that transmission
capacity needed to be reserved to support its merchant function, through option contracts.
The would-be seller merchants (in this case a public power firm utilizing a power
moderator) accused the utilities of being in effect nefarious "Gates-keeper,
protecting their own solely at the expense of third parties, even though sufficient
capacity was available.</font><font size="3"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial" size="3">FERC agreed. Its remedy, keyed off
the finding that sufficient transmission capacity was available, was provision of open
access (rather than, as it had proposed in its earlier Washington Water Power case, the
possibility of a ban on the affiliate’s use of the parent’s grid for a period of
time). The opinion was read as a Commission nudge to utilities to join ISOs (a result
which there is question that FERC can compel). (It is pertinent to be aware too that FERC
cannot upset grandfathered retail arrangements to serve native load by utilities.)</font><font size="3"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial" size="3">To further preclude transmission
abuse, FERC also voted on the same day as this decision to order grid owners to post the
source and destination of planned power sales, in order to facilitate FERC’s efforts
to be knowledgeable enough to preclude grid owner favoritism. In doing so, FERC
established a policy priority for marketplace integrity over individual customer
protection of information. All of those developments are helpful but not dispositive.</font><font size="3"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial" size="3">Can the cop clear the traffic jam?
Does FERC’s clear awareness of the transmission constraint problem point toward its
solution? Perhaps only to a limited extent. Preservation of fairness is no remedy in
itself for basic transmission shortage and only a short term remedy for short term
transmission bottlenecks. ISO - governance of transmission constraint issues will only
result in improved transmission access for merchant facilities where the minutiae of ISO
rules are subject to sufficient oversight to assure that they do not, as in New England,
have the effect of protecting the status quo. Most basically, case by case FERC policing
and improved ISO governance of fairness is insufficient as a remedy in the absence of
policies focused on injecting true competition into entire regions and overseeing the
transmission constraints among regions. The governmental system is not set up to provide
these results.</font><font size="3"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial" size="3">The usual position of deregulation
proponents is that deregulation through unbundling is what it takes to achieve untrammeled
flows of power. What recent experience seems to be demonstrating is that for merchant
power suppliers to be able to sell Paradigm 98s off the lot, the buggy’s transmission
may need more of a regulatory overhaul than was anticipated.</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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