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<title>Applying the Latin American Development Model to North America</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 1998</u></b></p>
<b><font FACE="Palatino" SIZE="5"><p></font><font face="Arial" size="6">APPLYING THE LATIN
AMERICAN DEVELOPMENT MODEL TO NORTH AMERICA</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:
07/98</em>)</font></p>
<p><b> </p>
</b><font FACE="Palatino" SIZE="1"><p ALIGN="JUSTIFY"></font><font face="Arial">At the
academy, the view has been for several years that the UK experience will set the model for
the U.S. deregulation. And in regulatory theory, in the U.S., this may ultimately be the
case, outside of the strongest traditional integrated utility bastions.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Glancing up over the scholarly journals, however,
practical observers of industry realpolitik see a different model: oligopoly. FERC, has
mainly focused on the use of market power by home team suppliers to limit local
competition. The reality (as Leonard Hyman recently observed) is more likely to be one of
coalescence at the local market level of three of four energy providers, - major pipeline
and power companies reaching into service territories and vying with the local gas and
electric distributors which will be bulking up. The larger issue, Hyman suggests, is
whether, as in the department store and banking fields, the energy market will go at least
regional and possibly national. He suggests that these are the probable growth patterns
for emerging growth companies.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Not veddy British economist, that. But very like the
outlines of the strategies emerging South of the Border, where a mixture of privatization
and demand growth is giving the opportunity for bold and suggestive play to the strategies
which the larger utilities and the forward vertically integrating oil companies are
undertaking. In fact, to see the future profile of their would be hegemory U.S. regulators
would be wiser to look South than East.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The key trends in Latin America, which are now
distinguishing it from Asia (and perhaps preserving it from the fate facing isolated Asian
IPPs, which depend on state utilities as customers) are the following:</font></p>
<ul>
<li><p ALIGN="JUSTIFY"><font face="Arial">Driving the development process are national
privatizations in the form of concessions, which, in turn, may ultimately prove to be the
seed beds of individual privatizations;</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">Many Latin nations have been proceeding with the
privatization of distribution and transmission systems along with or in advance of
generations;</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">Production of new sources of power at the margin
may well be from transported hydrocarbons from remote sources. Gas and oil transportation
concessions thus have become a converging basis for power competition.</font></p>
</li>
</ul>
<p ALIGN="JUSTIFY"><font face="Arial">Against this background, many of the largest U.S.
competitors - both combination utilities and oil companies - have begun to inveigh against
host country strategies of individual BOOT competitions. They have marked out regions in
which they will at least be dominant and in the best case will be monopolist. In some
cases, that is the stated goal.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In pursuing this strategy, pardoxically, one of
their worst enemies from a business return standpoint, is the application of the U.K.
model. A pure economic dispatch model can be very harsh on such a strategy. It will tend
over time, to penalize the existing facilities - those who bet on an acquisition strategy.
In the near term, it will confront new development with daunting challenges from fully
depreciated existing capacity. A rapidly declining price curve confronting a demand curve
not rising steeply enough can be a strategic problem - see Argentina if you doubt it.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In a nation with exploding demand, the issue may be
whether energy transportation is priced to facilitate new market entrants, rather than
simply to be equitable in the way in which it provides open access. If it is not,
monopolists may have their way with the market. The more remote the market from an energy
transmission standpoint, the truer this will be. Countries like Brazil, engaged in a
crabwise movement to entice private capital into new facility investment, leave each
potential player with uncertainties as to exactly what type of regulated transmission
market it will find itself in.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In short, the view from the academy of multiple
short term marginal cost suppliers competing through deliveries into a price transparent
grid, may be supplanted in reality in Latin America by a model of a few substantial
mini-monopolies providing all forms of regional service and drawing on - or competing with
- outside sources only at the margin. Introduction of retail open access does not by any
means put a lock on the case and the nostrums of the academy may be anachronistic burdens
on needed developments.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The Latin American experience to date tends to
confirm Hyman’s vision of the power business going the regional/national way of
banking and mass retailing, rather than the model of franchising by multiple competitors.
The energy commodity is too homogeneous, in many cases even with its new bundling
potentiality, to provide a Pizza Hut, a Burger King and a Taco Bell on the same power
switch. A central commissary (ISO) that allows competitors to offer fries with their pizza
may not modify this situation.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">This suggests that U.S. strategies over the longer
pull may well emulate those being implemented as South America (and indeed that some
utilities are already beginning to do so). The elements of this strategy - which may,
incidentally, become an objective of PUHCA reform legislation, are:</font></p>
<ul>
<li><p ALIGN="JUSTIFY"><font face="Arial">Integration at the retail level of gas and
electric activity</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">Greater focus on the value of acquisition of
distribution and transmission (notwithstanding open access)</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">More emphasis on a range of projects in a regional
setting</font></p>
</li>
</ul>
<p ALIGN="JUSTIFY"><font face="Arial">Three corollaries which major Latin American
competitors have noted to their strategy of seeking to create businesses, not simply
projects, which have yet to be fully reflected in contemporary form in the American scene
are:</font></p>
<ul>
<li><p ALIGN="JUSTIFY"><font face="Arial">The need for becoming a high profile good
corporate citizen;</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">The value of intense marketing in terms of overall
corporate acceptance;</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">The importance of integration of energy
businesses: discos; gencos; gas</font></p>
</li>
</ul>
<p ALIGN="JUSTIFY"><font face="Arial">Each of these activities goes beyond the good
corporate public relations and the specialized product branding which thus far have
characterized the U.S. market. The implication: managing the U.S. national market through
a series of competitive regional subsidiaries is a challenge leading power privateers must
gear up further to meet.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The skirmishes in New England over transmission
priority and siting should be seen as the precursor of competing efforts to implement a
Latin American strategy in the region. Power privateers focused on a series of individual
projects should take note. Would-be major market entrants should take note of the greater
challenge that lies beyond the asset auction doors if they are to optimize the value of
their position.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The day is coming when North America must be
understood as South America. The tune of the American Revolution: "The World Turned
Upside Down".</font><font FACE="Palatino" SIZE="1"></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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