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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 1999</u><br>
</b></p>
<b><font FACE="Palatino" SIZE="5"><p></font><font face="Arial" size="6">REAL TIME OPEN
ARCHITECTURE RULEMAKING</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:
06/99</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> </p>
</font><p> <font FACE="Palatino" SIZE="2"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial">The FERC NOPR on Regional Transmission
Organizations (Docket No. RM 99-2-000) represents the logical and significant extension of
Orders 888, 889, in the face of the system issues which, predictably, the implementation
of these Orders created. It raises new questions particularly for those utilities which
keyed their strategy to a wires retention and augmentation game, and for those who would
seek to join them. It clearly impacts those generating acquisition strategies which were
predicated on the present or future locational value of generation assets, and potentially
realigns new merchant plant investment analysis as well.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Part of the reason for the strategic uncertainties
is what could be termed the "real time open architecture" of the NOPR: its clear
statement of prescriptive purposes and its tentative and pluralistic delineation of how
private parties may comply with these prescriptions. Likely, this was intentional. There
are no unanimous FERC votes delineating the new structure of regulation of an industry
without them. Proponents of "deregulation, now," have some point, therefore, in
criticizing it as a halfway measure.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Thus, within the framework of mandating that every
utility must, in effect, join an RTO or let FERC know the reason why, there remain major
questions. Are RTOs to be not-for-profit or for profit? Will they own transmission assets
or merely operate them? May they incorporate power exchanges, or is that incompatible with
regulation? Are they expanded ISOs, in terms of governance or can they be more focused
trancos? Do they include public power systems, or can public power (notably power
marketing agencies) be the core of its own RTO? Are they delagees of FERC authority, or
merely administrators of FERC guidelines? The answer to all of the above questions is:
"Yes". (At least for now.)</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Yet, for all this ambiguity at the same time, there
is steel in the velvet glove. FERC has identified the shortcomings of utility
functionalization in the absence of mandatory divestiture: the potentials for subtle forms
of affiliate abuse related to transmission line owners stated available transmission
capacity and reservation of capacity. FERC has noted the slowdown in transmission
construction, and recognized that unless the RTO can influence future transmission
planning its ability to provide congestion relief – and more broadly to cope with the
vastly different use of the grid post-deregulation will be limited. It has recognized the
need to strongly push the introduction of RTO congestion management pricing and the need
to mandate RTOs of a size and scope to deal with loop flow issues. Above all, it has
recognized that more centralized transmission management is necessary in a deregulating
markets to avoid more price spike attacks like those last summer.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">FERC also has been shrewd enough to tantalize the
electric power operation community with visions of grants of FERC candy in reward for RTO
membership. Proposals on which comments are sought include higher ROE on transmission
plant; retention of shared savings; accelerated recovery for costs of transmission
expansion; rate recovery based on replacement cost. The NOPR goes so far as to suggest:
"Where an RTO or independent owner purchases transmission assets and pays a price
that reflects such an enhanced valuation of assets, the Commission may want to consider
allowing the RTO to include in its rates an acquisition premium that reflects the enhanced
value." FERC might even consider providing levelized rate methods, it goes on to
suggest. Provision for cost recovery in the larger RTO service territories will be made.
All on a case-by-case basis, however, and presumably as FERC deems necessary in its
discretion.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Finally, the Commission has gazed Janus-like in both
directions as to RTO regulation. On the one hand, it has sketched out a serious program
for regional regulation. On the other, it has clarified its legal basis for establishing a
small number of RTOs, becoming more aggressive in compelling membership, and providing
protection against anti-competitive practices.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">For FERC to have achieved NOPR publication in thirty
days, is comparable to the still standing Book of Genesis’ world standard of six
(plus a day for internet distribution and posting on OASIS).</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The strategic implications of the NOPR remain to be
sorted out. Entities holding wires and subjecting them to RTO oversight (with regional,
non-pancaked rates, subject to fairness review) may not realize the level of revenues for
operations otherwise anticipated – unless rates are somehow appropriately adjusted.
Sale of transmission assets may be an option for some generation owners or other
utilities, but the return is hard to judge. Creation of a "for-profit" transco
simply to include it in the RTO does not seem to have high return appeal. But creation of
an RTO as a for-profit transco, cf. National Grid, benefiting from appropriate
performance-based incentives, and spreading across an enlarging geographic market is not
necessarily ruled out. "Outsourcing" by an operator of RTO non-regulatory
responsibilities is another possibility, which is not ruled out by the NOPR, could be an
attractive variant.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Moreover, there are some benefits which may commonly
be realized from the NOPR by proponents of each of these options. Systems today face the
possibilities of operational losses – even, perhaps, catastrophes – as a result
of lack of coordination among themselves. Systems face uncertainties as to the timing and
shape of change – and necessarily an unwillingness to commit themselves to capital
improvement investments while their competitors hold back. Systems need to consider
further, while the competitive situation is fluid, how they will handle unbundling.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Investors need a more rapidly evolving transmission
environment for rational economic evaluation of merchant plant development or refinancing.
They have faced uncertainties in transco evaluation – particularly in regions where
transmission has been balkanized among public and private power; merging and private power
systems, and vying ISOs. In some measure, the NOPR provides (or at least, when implemented
should provide) for a set of rational expectations as to how already dated FERC orders on
transmission may evolve. The NOPR does not provide certainty for them, but it certainly
points in the directions in which power and market opportunities may flow.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">There obviously remains substantial uncertainty as
to how the NOPR’s implementation will unfold, particularly because of the
regulatory/political environment. Certainly State regulators – especially those not
offered RTO positions – may feel that under the NOPR they have been left to implement
retail access while the question of the shape of wholesale governance has just been
delegated elsewhere, i.e. very unhappy. Utilities which planned to remain substantially
vertically integrated, for example, within transmission constrained or holding company
territory domains, may be expected to weigh in on just what shape RTOs should take, so
that their embedded option asset values are preserved. Big industrials and power marketers
may see negotiating swamp rather than granite foundations in the Order. Congressmen may
see unauthorized usurpation (regardless of their views or deregulation).</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The questions then: FERC virtual, virtuous or
victorious? Investors: comforted, colicky or just confused? Such are the virtues and vices
of the NOPR’s trying to solve current problems, leaving open the future and
refereeing the present. Privateers can catch cold from the drafts blowing through real
time open architecture rulemaking.</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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