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<title>Seeking Spike’s Sire (Desperately)</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>August 1998</u></b></p>
<b>
<p><font face="Arial" size="6">SEEKING SPIKE'S SIRE (DESPERATELY)</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:
08/98</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> <br>
<br>
</font><font face="Arial">Reddy Kilowatt has a new, juvenile
delinquent, possibly illegitimate brother, "Spike". Like a leading character on
the TV cartooncom "South Park", his parentage is both uncertain and a matter of
great speculation. Who bred Spike in ’98? Will there be a proliferation? Since Linda
Tripp could not get through to FERC Chairman Hoecker, there is no star witness, but merely
a series of finger pointing accusations. Numerous deregulation - based commercial
initiatives could be impacted: a matter of great significance to a variety of project
privateer sponsors.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Whether the demise this year of the Schaefer
deregulation bill on the Hill was the result of a certain nefarious non-gavel wielding
Michigan Democrat (as the Republicans charged) or not, its Lazarus-potential quotient
surely will be a function of the Spike Sire issue.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The deregulation legislation’s godparents ELCON
and the great industrial power users, "know" who spawned Spike: it was large
utilities that ignored their tight supply situation and the absence of workable Midwest
wholesale markets or any retail markets. The fix for this problem, then (drum roll
please): accelerated deregulation of utility-owned generation, more independent system
operators and a wholesome (fatalistic?) tolerance of the fact that price spikes are a
known risk of competitive markets. (Presumably, the industrial’s know whereof they
speak, at least as it relates to them: for the first time since 1990, the retail rate for
industrial consumers was considerably lower than the price IOUs paid for firm power.)</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Perhaps, deregulation is the answer. But in
California, the first goloconda of competition, the message from the ISOs is that slavish
focus on deregulation may be a problematic conclusion. The California ISO sought and
received from FERC the go ahead to cap prices on ancillary services at any level and based
on whatever factors it determined was necessary, in order to attract services into the
market. The California ISO Board acknowledged that power price "caps" are not
popular, but indicated that until it could learn why bids of such vast disparity had
occurred during hot afternoon deliveries, it was an operational necessity.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">How you feel about such caps on spikes, it seems,
depends on whether you are the hammerer or the hammeree. Dynegy announced that it may sue
the California ISO for capping prices on ancillary services. In its view, that will
prevent the market the opportunity to give correct price signals by functioning properly:
the ISO should therefore stick to its reliability knitting.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Don’t tell either the ELCON or the Dynegy
theory to the heat waved - and economically burned - utilities. In blasting FERC’s
"studied" response, the Chairman of Western Resources asserted his company had
been subjected to price gouging: it had been forced to pay usurious rates because of its
surviving public interest obligation to buy expensive marketplace power to serve
traditional customers. He promised to visit the Justice Department. But, in deference to
market principles, his proposed fix was to emulate the NYSE’s special rules for
dealing with erratic markets, rather than the imposition of price caps.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Not even so moderate in their rhetoric were Democrat
politicians such as Sen. Durbin and Congressman Dingell. They raised the gut issue: Are
markets ready to make a smooth transition to full retail competition and, under the
circumstances, should Congress pass legislation to compel States to adopt competition?
Those embroiled in challenging proposed mega-mergers, like The Electric Clearinghouse went
further challenging the AEP-CSW merger with alleged malfeasance via "hoarded
capacity." (To the delight of those of us condemned to follow power instead of
Washington’s normal preoccupation, sex, merger opponents also managed to uncover
trading tapes which needed to be saved as evidence in the proceedings.)</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Of course, all of these competing allegations about
Spike’s parentage may have more than a grain of truth. But then obscure the still
small voice of objective observations about the physical characteristics of the utility
system on which the market is based and the limits of any system of regulation to mold it
seem to get lost in the general hullabaloo. EIA’s recent report, Changing Structure
of the Electric Power Industry, Selected Issues 1998 highlights two of these:</font></p>
<ul>
<li><p ALIGN="JUSTIFY"><font face="Arial">Opening generation to competition while keeping
siting and licensing procedures for new power plants and transmission lines may limit the
benefits of competition, i.e. facility owners could try to recover higher prices at times
due to congestion on existing transmission lines.</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">Not all utilities in each region are participating
in ISOs, and this incomplete coverage may limit the gains expected in operating
efficiency.</font></p>
</li>
</ul>
<p ALIGN="JUSTIFY"><font face="Arial">Moreover, as Robert McCullough suggests in Public
Utilities Fortnightly: "Open access gives small bulk power suppliers an opportunity
to obtain small amounts of capacity from larger-scale units. But this advantage is only as
good as the availability of transmission and the success of OASIS. "(For all its
market blood lust, Enron would seem to have a good awareness of this possibility too. It
is challenging FERC’s rules established to enable native load transmission providers
the ability to cut off transmission by other energy suppliers into or across its service
territory. McCullough asserts that utility self-favoritism with respect to home grown
generation may have been a contributor to the Midwest summer’s needle peaks.)</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Finally, as a Justice Department official recently
observed: under Order 888, the transmission owner still has the ability to discriminate
and it is very hard to structure meaningful remedies for time sensitive transactions under
those circumstances. . . "The Antitrust Division is skeptical about behavioral
remedies such as those by FERC . . . to solve structural long-term, permanent
anti-competitive effects of a merger." In short, deregulation without structural
oversight may result in Spike-spawning syndrome.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">There is thus an emerging school of thought,
transcending the self interested finger pointing, that something remains unsound in the
way deregulation is being approached and implemented.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">So, the question we all face is whether is the
squirt Spike is slated to grow up to be the bad seed whose behavior squelches future
substantive deregulation - including major Federal action? Or merely a troublesome tike,
highlighting for alert businessmen, as Enron has recently suggested, where the generation
(note, not the transmission - construction) opportunities lie? The answer is obviously
significant to private power developers because it affects the extent to which merchant
plant receptive; national dispersed energy; and market share redistributive auction
purchase strategies evolve.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">It is reasonable to suspect that the ultimate answer
will be political - reflecting far more the interest groups heard from in this
summer’s debate (among others) than the views of arguably petulant, self-seeking
grid-fixated professorial analytic types. But it seems possible that one consequence of
Spike’s notoriety is that future debate will focus not just on supply shortage/price
run-up scenarios, but on the deficiencies in transmission and regulatory transmission
policy to respond in a timely manner to the stresses deregulation is placing on the
system. In other words, far from being a rambunctious toddler, Spike may really be an
adolescent whose growing pain problems are systematic of on-going regional differential
growth problems in dealing with deregulation.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">It is important for private power developers to
focus on these issues with these possibilities in mind, or the legislative/regulatory
prospect at least in some venues, or it could be for private power developers be
"Spike Three, You’re Out."</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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