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<title>National Power League: Zebras Under Pressure</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>October 1999</u><br>
</b></p>
<b><font FACE="Palatino" SIZE="5"><p></font><font face="Arial" size="6">NATIONAL POWER
LEAGUE: ZEBRAS UNDER PRESSURE</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:
11/99</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> </p>
<p ALIGN="JUSTIFY"></font><font face="Arial">The latest news from the National Power
League is the proposed merger of the Bears (Unicom) and the Eagles (Peco): the first of
the major inter-urban mergers. Under direction of local politicos, each team had
previously released all of their offensive team except a few aging power runners
("nukes" in NPL jargon). Together, with some (na�ve?) British capital, they
hope to tear up the League. One problem: the remaining Bears’ (transmission) line has
demonstrably developed holes, and it is not clear how the merger strategy deals with that.
(The brownouts after each Cleveland game are terrible.) Which prompts this Redskin
bleacher seat observer of power football, to raise the following questions, which are
basic to the future of electric regulation:</font></p>
<ol>
<li><p ALIGN="JUSTIFY"><font face="Arial">How are the NPL Board of Directors (Congress)
addressing the biggest consequence of its rush to deregulation – reconglomeration?</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">Do the NPL Zebras (FERC) have enough peripheral
vision or rulebook authority to deal with the trend without Congress?</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">Should the NPL be a self regulatory body to the
same extent as its predecessor the Federated Franchise League effectively was? </font></p>
</li>
</ol>
<p ALIGN="JUSTIFY"><font face="Arial">Some background on the first question: At the
beginning of training camp this year, $229 billion of energy mergers had been recorded
since last year, and the pace is quickening, as deregulation and convergence have become
accepted realities/strategies. Increasingly the pattern seems to be one of consolidation
to a smaller number of very large power/fuel combustion players and their musical
chairs’ acquisition of ownership of old assets previously held by companies from
other regions. The old guard still own the wires, try to defend their turf and, perhaps,
dream of their wires somehow becoming multimedia cables. A few hardy upstarts from the old
PURPA Association nimble unregulated subsidiaries of the NPL giants and monster members of
the Gashouse Gang provide the competitive marginal cost edge with semi-merchant plants.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Two public policy questions remain for the NPL Board
of Directors: will any fans besides large industrial users benefit materially? Will system
reliability and price stability be protected – or will we have more poster child
Unicom blackouts and Cinergy trade burnouts?</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Basically the view of Congressional deregulation
proponents seems to be that these are structural problems to be resolved by FERC, with
some additional powers statutorily vested. Even in the Administration bill, however, the
agglomeration governance powers are somewhat sketchy – and Republicans (especially
Dixiecans) like them a lot less. States rights’ concerns seem to be wearing down
ideas like drop dead dates for State deregulation initiatives.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Which leaves FERC, whose douty leaders seemed
prepared to tip toe up to at least the reliability aspect of issues through its RTO NOPR.
It does contemplate (though not drop any flags on the field for), mandatory regional
regulation; it leaves open the Transco/ISO dispute for private initiative; it contemplates
overall measures of regulatory performance standards. But the FERC zebras face two major
mega problems and one conceptual problem in taking charge of the game deregulation and
avoiding flagrant mergers most foul.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The first is, the merger guidelines it is applying,
per its Order No. 888 were prepared by the hoary Walter Camp Playbook of power ball, the
Herfindahl-Hirschman Index (HHI). Not only does HHI require complex analysis with
substantial data needs, it is very sensitive to assumptions on cost and access, (which, in
any case, in this rapidly changing world, are themselves problematic). It is hard to
identify what "safe harbor" of merger conduct is or is not appropriate. The
playing field can be tilted at the wrong times.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">This problem may be made more complicated by the
fact that FERC’s authority to make calls at all, under certain circumstances, is
being challenged, principally by NPL home teams in the name of their fans (their
"native load" as they affectionately refer to it). First, Northern States Power
("NSP") successfully challenged FERC’s requirement that NSP curtail native
load on a comparable basis with firm point-to-point service. The 8th Circuit suggested in
that case that aspects of FERC’s authority under Order No. 888 which
"affected" retail service exceeded its authority. Piling on, Entergy then
challenged FERC’s interference with its reservation requirements as they affected
retail load. VEPCO currently is arguing the need for priority service to its bundled
retail and Southern is seeking to vitiate the "comparability" requirements of
Order No. 888.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In the absence of Federal legislation, if FERC
doesn’t have authority, its RTO delegees don’t either. If they don’t, are
their "market areas" good definitions of concentration for merger analysis?
Under those circumstances, can the RTO NOPR defitively put an HHI-based analysis on a
better footing than it is today?</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Perhaps the proper rejoinder to all of this
handwringing about acquisitions is a hardy "so what". As the Dutch said to the
Gipper (or possibly Edmund Morris): "The business of America is business." The
question, which both competitors of "inappropriate" mergers and critics of
regulation each should ask, from their own vantage points simply is: Are we creating a
marketplace that achieves the service objectives envisaged? This is consumer oriented
rather than a corporate strategy oriented question. It is, in fact, the question Professor
Joskow of MIT raised in his RTO NOPR comments; in a related but different context: Joskow
was concerned whether transmission regulatory reform (specifically excessive ROE
allowance) would be used, (inappropriately in his view) to entice reluctant utilities to
form and participate in RTOs. The larger question is if consumer protection analysis is
deferred to statistical examinations in RTO regions, (formulated on a transmission-driven
basis), and effectively centralized at the Federal-delegee level, will the realities of
merger impacts be adequately analyzed? Transmission costs, after all, are only a small
component of power prices to consumers.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">When the Bears and Eagles merge, how will brownout
protection at the home fields be enhanced? How will needed transmission lineman be
acquired? What policies will be pushed toward favoring native load? Will benefits of
multi-regional presence gained by merger be assured by operation of the markets? The free
market, on which the new system ultimately will rely, and which ultimately is the most
efficient, works only as well as the alignment of private incentives with public
interests? Who will be looking at that as the agglomeration/musical chairs trnds further
outstrips the conceptual and legal framework of Congress and FERC. Evidently not the
NPL’s expansion members (EPSA) who recently excoriated those ISOs which intervened
this summer when imperfect markets spiked like end zone grandstanders. Their view:
"[ISOs] should be indifferent to the price at which the commodity they transport
clears the market."</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">As we begin the new NPL season, let’s hope the
League’s Board and its zebras are intelligent in recognizing when a team’s
merger market move is offside – or at least have started developing recommendations
for those to whom they pass the responsibility for making the decision (or at least
penalizing field position).</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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