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<title>Near Beer on Pike's Peak</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>December 1998</u><br>
</b></p>
<b><font FACE="Palatino" SIZE="5"><p></font><font face="Arial" size="6">NEAR BEER ON
PIKE'S PEAK</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:
12/98</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> </p>
</font><p ALIGN="JUSTIFY"><font face="Arial">By ordinary economic logic the Midwest should
be an important "emerging market" for private merchant power; that would
certainly be the lay non-conspiracy interpretation of the price "spike" of the
past summer. The Midwest business opportunity should be the beneficiary of all of the
institutional market-shaping work that has whipped the New England market into a booming
state.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">However, whether this will in fact be the case will
be a function of the extent to which a regulatory "transition gulch" which
precludes new investment development can be avoided while the new market is structured
there. Far from being a replication of the New England debates, the Midwestern
transmission issues are of a new second generation order, reflecting unresolved old
arguments and new private project sponsor thrusts.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Key questions remain to be answered:</font></p>
<ul>
<li><p ALIGN="JUSTIFY"><font face="Arial">Has FERC properly assessed the causes of the price
spike?</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">How important is the push toward introduction of
retail markets?</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">Are ISOs or private transcos the best way to
foster necessary market transmission growth and stability?</font></p>
</li>
</ul>
<p ALIGN="JUSTIFY"><font face="Arial">Two key data points in accessing the situation are a
recent critique of the FERC Spike report in <u>Public Utilities Reports</u>, and the
emerging ISO/ Transco debate currently swirling over the Midwest.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The first data point relates to problem definition.
Writing in the Nov. 15 issue, Judah Rose challenges the hypothesis that the Midwest price
spikes were an aberration. While accepting the main hypothesis that there was no price
manipulation associated with them, his bottom line is: "The region is... close to
having future blackouts next summer – so close that regulators and others should make
it a primary concern to remove all impediments to deregulation and take proper steps to
manage generation reliability during the transition to full deregulation." Unlike New
England where NEPOOL planning, designed to assure reserve margins sufficient to protect
end users and enforced by clear penalties, is in place, the Midwest has looked to open
market operations to achieve market equilibrium. Market reliance, of course, carries with
it the potential for rolling generation shortage-caused blackouts, especially in urban
areas. The basic problem in the Midwest states, Rose asserts, is that utilities are
unwilling to build new plants when the pattern of deregulation is so much in a state of
limbo.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The second data point relates to market response.
Recently the members of the MidContinent Area Power Pool (MAPP) rejected a proposal by the
reliability council to establish an independent systems operator (ISO) in the region. The
stated reasons of objectors to the proposal was its lack of incentive for construction of
necessary transmission. Some companies (like those in Wisconsin which are required to join
an ISO by June 2000), may be pushed to join the Midwest ISO. Other ISO possibilities are
still presented. But the tide seems to be moving toward mechanisms which provide market
incentive for transmission provision.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The implications of the new initiative away from
ISOs and toward independent transcos in the Midwest needs to be given greater attention by
private power. Alliant Energy has now joined Northern States Power in a proposal for an
independent transmission company, which would be spun off as a publicly traded independent
company. It would offer an open access tariff. Meanwhile, American Electric Power has
announced that it is joining First Energy and Virginia Power in a proposal (the
"Alliance") for a regional transmission entity. It would be a competitor of any
Midwest ISO. It is contemplated to have both ISO features (e.g. member inclusiveness) and
also be a "transco lite." </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">For those more into Bud and Amstel, more information
is useful as to what kind of "near" beer in a rose tinted bottle is transco
lite. It does not own all the wires; it operates them all. It makes a profit on its
operations. Presumably its therefore motivated to de-congest transmission (at a price).
Its rates are set at auction: when the market is ready to pay for more transmission,
presumably it will provide it. Anybody can join ("munis and coops too); but
presumably ownership reflects transmission asset contributions. In the new Alliance
proposal, the three founders own 34,500 miles of transmission lines and serve 17 million
people in 9 states. Question for other would-be players: care to up the ante?</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The juxtaposition of uncertainties as to the cause
of the Midwest price spike and the impact of the impending Midwest Transco revolution is
this: Are the developments consistent, in the short run and the long run, with fair
opportunities for new regional private power developers? Spike is driven by generation
(and perhaps to a lesser extent transmission) capacity shortage Lite is driven by desire
for reward for transmission development (and just possibly for generation hegemony as
well). In principle, in the long run, all free market initiatives should produce a
consumer friendly market clearing initiative. In the near term, Lite could present a
constraint to realization by generation capacity of the economic rewards it desires for
its development. In the long term, in principle, open access will be available to all for
all generation opportunities. In the near term (and conceivably into the future), private
transcos could provide de facto market power to their ultimate owners, and deregulated
utility gencos could enjoy unfair market power. The Justice Department has expressed this
concern. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The essence of the matter, in my mind, is that there
is ultimately only one economic rent in play –for both new generation capacity (if,
as many think is the case, it is needed) and for providing transmission in a constrained
transmission environment. The pattern of allocation of that economic rent will be a
function of the transmission management debates. This is not necessarily the best backdrop
for merchant plant development.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The issue is gaining momentum, if not clarity before
the FERC, whose own views are in transition. Commissioner Massey recently announced he is
joining Commissioner Hebert in favoring transcos. Chairman Hoecker still supports ISOs.
Commissioner Bailey and Breathitt are undeclared.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Atop the Midwest spike’s peak then, a battle is
shaping up, as the transco lite brigade sweeps toward the crest. It is no longer a matter
of classic regulation vs. deregulation rhetoric debate. It is an issue which will govern
how – and whether – private power can benefit through deregulation. A time to
find out what "proof" transco lite really can offer.</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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