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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 1999</u><br>
</b></p>
<b><font FACE="Palatino" SIZE="5"><p></font><font face="Arial" size="6">POWER DEREG:
ANOTHER SEASON, ANOTHER REASON ...</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:
10/99</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> </p>
<p ALIGN="JUSTIFY"></font><font face="Arial">Ah the joys of linear thinking in legislating
electric power reform. Twenty five years ago, the United States had a regular seasonal
fright – the Winter Curtailment season – the disappearance of available natural
gas (sometimes known as "Let the Yankees freeze in the dark"). Now gas gushes
from hitherto unknown quarries to our burgeoning fleet of merchant powerplants in
deregulating electricity markets. Now we have the annual summer’s Big Spike: the one
that causes price spurts and brown-outs and let’s Mayor Guiliani of New York make
believe he is Spike Lee.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The solution to gas curtailments was gas
deregulation. So now we are told the solution to these Big Spikes is full, laissez faire
power deregulation: Competition will increase, power supply will increase, prices will
decline. New innovation will benefit consumers in many new ways – look at telecom,
now you can even buy services to screen out the slammers trying to sell you new telephone
service.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">There remains among the public at large that native
skepticism of the consummeratti, born of slivers of fact and of knowledge of how
competitive markets tend to contract in number of players. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The objective foundations of the opposition seem
clear. Half of all auctioned generation assets have been purchased by 5 companies. Major
electric utility mergers now span different, non adjacent service areas of the country.
State legislatures in certain parts of the country allow utilities either to have merchant
and non-merchant plants in their service territory or to buy back the plants they are
selling. Large industrial users push for three major RTO regions embracing all generation
suppliers. Federal legislation would remove traditional PUHCA constraints and leave the
FERC as a lightly armed police observer. It is on this perhaps populist skepticism that
the private power industry is having to exercise its suasion as it pushes in Congress for
its version of deregulation.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The result is that various spats have broken out
among those who would benefit from certain types of power deregulation, but are concerned
that some continued checks be placed on certain others, lest unfairness reign in the
marketplace and/or Big Spikes will continue to be the order of the day. In these spats may
be found the seeds of the current legislature deregulation stalemate. Two key areas of
deregulation debate, in which recent developments are discussed below, are (i) the locus
of power governance and (ii) the regulation of power marketers. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Deregulation has been a Federal play, although there
has always been recognition that the United States does not have a national grid –
and that the absence of such a grid in fact one of the sources of "spike"
problems. Proposed Federal legislation reflects some deference to the States in that
regard. Not enough, apparently, for the U.S. Chamber of Commerce which recently rejected a
federal role for restructuring and instead called for a states rights approach. In effect,
it echoed the denunciation of FERC for "unleashing a torrent of federal
regulation" by Citizens for State Power. A surprising bedfellow for the Chamber, Big
Labor, agrees, asserting "In a preposterous turn of events, advocates of
federally-dictated electricity deregulation suddenly claims that the problem – the
crunch on transmission system [that is, the Spike] infrastructure precipitated by
deregulation – is now the cure to emerging reliability challenges." It is not
surprising that private power’s Alliance for Affordable Energy has snapped back in
rejoinder that only Congress can guarantee a reliable, nationwide electricity marketplace.
It is some indication of the newfound homogeneity of most of private power – and
mildly amusing to those who know their more customary stances – to find the hard core
congressional denizens of the right chiming in publicly in a letter to their erstwhile
blood brethren at the Chamber, that as to Federal electric deregulation: "Congress
would simply be directing the States to act in the best interest of interstate
commerce."</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Far from this madding political crowd (not very),
FERC has, in addition to pressing its RTO NOPR objectives, been forced to take a look at
whether the new deregulatory order it is seeking to wrought will, in fact, be a fair one
for all those who wish to participate. A key area in which the proposed new legislation is
silent is the field of power marketing. In a recent case involving Southern Company
Services, FERC chose to increase the standard for reporting by power marketers to that of
utilities, i.e., requiring a public filing of all long term agreements, rather than
reducing that of utilities to that of power marketers, as they requested. Now, all parties
with market based ratemaking authority i.e., utilities and power marketers, have been
invited by FERC to participate in rehearing of the case. In another recent analogous case,
AES was required to file with the Commission its Tolling Agreement with Williams which was
the basis for its West Coast powerplant acquisitions, even though it reasonably alleged
that commercially sensitive information was contained in it. It certainly does appear that
FERC has recognized: the importance of broad public market knowledge in an increasingly
competitively centralized market environment, even if the Congress has made no gestures in
that direction.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">It’s not clear, however, that FERC fine-tuning
at the edges of the deregulating market will be sufficient (or even legally available) to
deal with special competitive problems which power deregulation appears to inevitably
bring in its wake. Recently, the 8th Circuit U.S. Court of Appeals issued an order in a
transmission case which "affected" retail service, in which it stated that FERC
had overstepped its jurisdictional bounds in Order No. 888 in addressing transmission open
access. While rehearing is being sought in the case, it does highlight the reason why
ultimately Federal legislation - not judicious exercise of administrative discretion - may
be necessary to address potential competitive flaws in power deregulation in a coherent
manner.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Seasons of discontent – gasless winters or
powerless summers – ultimately produce action. But as the public debate and
regulatory scene highlight, the details in structuring power deregulation are, in fact
different than those which confronted natural gas, and a respect for the operational
details, rather than simply a blanket press for Federalization of regulation may turn out
to be a necessary compromise on the part of private power proponents. Another season,
another reason.....</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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