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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 1999</u><br>
</b></p>
<b><font FACE="Palatino" SIZE="5"><p></font><font face="Arial" size="6">HIGH STAKES/HIGH
WIRES</font></b></p>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
07/99</em>)</font></p>
<p><font face="Arial"><br>
Transmission system governance has emerged as
the largest regulatory issue in Washington. Generating asset functionalization and sale
proceeds apace,. On the other hand, the regulation (and the divestiture) of utility-owned
wires has been shifted by the FERC NOPR to a regulatory venue. It remains in a state of
dynamic political tension and comparatively little substantive action.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">A number of competing perspectives and developments
deserve notice. They suggest the value that a Congressional, rather than a FERC solution,
would have for the underlying twin issues:</font></p>
<blockquote>
<blockquote>
<blockquote>
<blockquote>
<p ALIGN="JUSTIFY"><font face="Arial">(1) ISO vs. Transco; and<br>
(2) Non-profit vs. for-profit operation</font></p>
</blockquote>
</blockquote>
</blockquote>
</blockquote>
<p ALIGN="JUSTIFY"><font face="Arial">Citizens for State Power has been more clear eyed
than many in recognizing the breadth of the proposed NOPR. It has also, however, been a
good deal more obstreperous than most, terming FERC a power grabbing bureaucratic agency
with grandiose plans to strip generators of ownership rights with respect to their assets,
place them in RTOs, and regulate their rates. It appears that states rights equals utility
rights, in this formulation.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Clear eyed too, but with a far different
perspective, is the American Public Power Association, concerned that absent extensive RTO
– regulation, their old friends the investor owned utilities, will use ISO/RTO
governance to crush wires access and viability of public power. Its concern is that the
NOPR has not gone far enough: it has identified the problems, with the currently partially
deregulated system but stopped short of prescribing the regulatory answer. It fears
voluntarism-based, jerry-built markets that have the net effect of being consumer
unfriendly.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Propounding the merit of its middle of the road
position, Chairman Hoecker of FERC has highlighted FERC’s rationale: ISOs are better
anti-discriminatory devices than are transcos, but transcos (i.e. privately owned, profit
making entities) are better at raising capital for needed transmission. Hoecker points
favorably to the experiment proposed in Wisconsin, for the IOUs to sell their grids to a
for-profit transco (in return for State-sponsored end to investment caps on regulated and
non-regulated earnings).</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The Congress is hearing more from that portion of
the utility industry that want to keep its grid but are pro-transcos, because they . The
theme is simply that ISOs are bureaucratic, and that while they can plan, but have no
capital to spend and are not profit-oriented, they will not serve effectively. It is
recognized that ISOs may be easier to set up than transcos. They require FERC, State,
Hart-Scott Rodino anti-trust, PUHCA and possibly nuclear approvals. In addition, since
transcos are new companies, there are employee benefit, labor and tax issues to be worked
out, as well. One theme struck as a compromise in this regard has been to start with ISOs
and move to Transcos. That approach may, however, sound better in theory than it is likely
to be in institutional practice, given the propensity of established bodies such as ISOs
to survive once established. Chairman Hoecker, however, believes that this pattern might
be established.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">There is a great deal at stake for all involved in
the utility industry. Most obvious is that of bondholders in existing utilities. Duff
& Phelps, a leading rating agency has asserted that from a utility’s credit
perspective, it is irrelevant whether a Transco or ISO exists, as much as that one or the
other does, i.e. utilities unable to achieve resolution of their presence in one or the
other will become less competitive than those who have.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Boring down a level, it’s useful to understand
what is at stake in the ISO/RTO debate for individual companies strategies. In an
insightful article in Public Utilities Fortnightly, Messrs. Cicchetti and Long suggest
that it is nothing less than a fundamentally different focus on what is to be sold, and at
what price. ISOs are focused on the preservation of free network use, and deal with
congestion and the need for system expansion as adjuncts to the planning process, not as a
part of their "product definition". They are trying to design tariffs to
compensate all incumbent utility owners. Transcos, are autonomous from generation owners,
and are focused on pricing the product of the transmission access paths that they have
control over. System expansion is viewed in this light. Therefore "(a)s an
independently owned business, most transcos would be less likely to be based on the
products that are created by the club-like or equalitarian atmosphere of measured ISO-use
pricing."</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">There is, however, a whole additional dimension to
this debate necessarily unreflected in its tunnel focus on the governance of the
utilization of the electric transmission wires system. That dimension is the convergence
of telecom and electricity in the wires network field. It has ramifications for the
importance of retention of control of wires and their associated rights of way. While
electrical wires are sometimes called "dumb" since it is cable and TV wires that
carry data, voice and pictures, electric utilities own many smart wires and the rights of
way to site many more. In fact, already, a four utility, eight state alliance to link
fiber optic networks to provide greater access to higher bandwidth advanced voice and
video communications service has been announced. Hook ups with other major electric
utilities to develop a competitive national network is contemplated by it.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The use of utility rights of way is not some next
century blueprint on a planners desk. Consequently, the ISO/Transco decision must be
evaluated with the telecommunications dimension involved. It has, for example,
ramifications for wires/right-of-way ownership; the role of for-profit entities in
directing new wires construction; and the rights of non-wire owners to participate at all
in the electricity/telecommunications convergence.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In sum, there are high stakes in the high wires game
beyond the management control structure of the power industry. Stay tuned as Washington
catches up with reality.</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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