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<title>Retail: The Halls of Montezuma</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>November
1999</u><br>
</b></p>
<font FACE="Palatino" SIZE="5"><p></font><b><font face="Arial" size="6">Retail:
The Halls of </font></b><b><font face="Arial" size="6">Montezuma</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:
12/99</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> </p>
</font>
<p ALIGN="JUSTIFY"><font face="Arial">In the month when Con Ed announced
its proposed acquisition of Northeast Utilities, as part of its mega pipes
and wires-company strategy and the American for Affordable Electricity
(pro-choice) changed its ad theme to reflect progress on competition
legislation, it’s timely to examine what has been learned about retail
competition in those "laboratories of democracy" which have
already actually begun its implementation. Not that we may expect
Congressional legislation in this remarkably bipartisan year, in which
Senator Murkowski in a recent introduction of legislation noted with
respect to the conduct of Hearings: "If there is no consensus, we all
have better things to do with our time." Rather, this is a chance to
reflect upon the somewhat hyperbolic advice by the Electric Power Supply
Association to legislators regarding the merits of retail deregulation;
"On the other shore is a brave ‘new world’ of possibilities for
your constituents, almost as valuable, perhaps, as a share of Aztec
Gold."<br>
<br>
Well maybe. But what should the objective legislator be aware of in
examining the record to date. How should the legislation be structured to
get the great Cortez machine running in America?<br>
<br>
In Massachusetts, there has been no miracle. The number of shoppers who
have switched vendors is 0.13% of the customer total. Residential prices
have come down a penny, but that reflects the standard offers imposed on
utilities. Open markets haven’t driven customers to new providers;
perhaps that will change as the standard offer price creeps gently upwards
over time. Rhode Island, the first state to deregulate is following a
similar pattern. So too is California.<br>
<br>
The word from Pennsylvania, at the moment, is that the model at least
works, but overall competition keeps declining. There has been a movement
of 450,000 customers (three times California) and there has been price
competition, notably in Philadelphia. As in several states, there has been
a movement to "green power" branding – this is highlighted as
a retail buyer’s benefit. However, in less power/expensive regions of
the State, not surprisingly, the amount of shifting has been limited. As
in the other deregulated jurisdictions, commercial load shifting is
outstripping the residential consumer’s exercise of choice.<br>
<br>
One key problem in Pennsylvania has been educating consumers how to shop.
While $100 million is slated to be spent over the next 4 years, and 95% of
Pennsylvanians know competition exists, only 45% know how to exercise that
choice. A similar problem has shaped up in New Jersey, where host
utilities, not anxious to encourage change, have not distributed the most
edifying of materials. Nevertheless, more marketers are seeking to enter
the residential sector. Again, because standard offers are slated to
decline over time anyway, the extent of savings available may seem
problematic to many residential customers.<br>
<br>
One key factor which may, over the long run, nevertheless increase the
relative amount of competition in New England compared to that in
Pennsylvania is that native load utilities were required to divest assets
there, while they were not in Pennsylvania. The surviving utilities in
Pennsylvania have begun to exercise their clout, literally coming to
customers on radio spots with this message about their upstart
competitors: "You made me promises, promises you knew you’d never
keep". Not only that, but the switching statistics may be misleading.
They fail to reveal, for example, how great a percentage of utility’s
consumers have switched to the same utility’s unregulated subsidiary (Peco
consumers, for example, now being served by its unregulated supplier
Exelon Energy). The Consumer Advocate (!) is treating the specific figures
regarding Pennsylvania’s largest single unregulated electric generator
supplier as "proprietary information".<br>
<br>
Proponents of deregulation California-style emphasize this difference as
well. They avow that while state stranded cost policy has limited consumer
shifting now, ultimately in the long run California will move ahead of
Pennsylvania in retail competition, because California’s regulators and
legislators opted to allow cost recovery of stranded costs more quickly to
get it over with, while in Pennsylvania the process will be dragged out
over time. The early initial Pennsylvania consumer migrations, in short,
will be more than offset over time in California (whether this is true,
however is problematic. One Pennsylvania Commissioner has argued that
during the long wait for true market rates in California, the incumbent
utilities will have several years to solidify their dominant position –
and hence competition will not ultimately be as robust in California when
it finally does come).<br>
<br>
What, if anything, is to be inferred in the halls of Congress about the
retail Halls of Montezeuma, where the former pipes and wires moguls have
divested their assets, only to be succeeded by new supplier moguls from
out of town. How well will market competition bring down prices, when part
of the acquirers’ strategy necessarily is to backstop their trading
capability with generating assets? More fundamentally, if retail
competition is the goal, how much variation is healthy. And if it is not,
what prescription for retail competition is best? The debate perhaps
should not be about fixed date soft landings and states rights (out of
tender concern for local regional differences) as much as cool appraisal
of how parties will act, depending on economic incentives, anywhere in the
country.<br>
<br>
The other key question as to the efficacy of retail deregulation was
raised by Rep. Markey (D. Mass.) with respect to the latest Barton bill,
slated to be marked up just as Congress heads for home. Does it establish
a structure which in addition to adequately disciplining the market also
encourages innovation? Electric power innovation seems to one likely to be
in four areas: web based (more transparent and efficient) energy
marketing; provision of converging telecom/communication services;
promotion of dispersed generation and promotion of use of cleaner
technologies. As regards the answer the encouraging model is telecom
deregulation – which has been a source of significant technical
breakthroughs. As regards the answer, the discouraging model is telecom
deregulation – the source of ever increasing multi-media agglomeration
of power in fewer hands, with limited public programming benefit. Perhaps
it would be helpful for Congress to reexamine the potential for consumer
"Aztec gold" in the related context of telecom’s experience.
Especially, is this pertinent since ultimately electricity may become just
an incidental vertically integrated product of mega-utility service firms
– a wire into the home, or just juice in someone else’s plug.<br>
<br>
In the past two decades, we have deconstructed regulation in this country
and are in the midst of seeing whether what we have created a modern
replay of the monopolistic 19th century or a new web netted model for the
21st. In revamping retail markets, the record suggests that the three
areas requiring special legislative and administrative care are:</font></p>
<ul>
<li>
<p ALIGN="JUSTIFY"><font face="Arial">Prevention of backdoor
re-monopolization of services;<br>
</font></li>
<li>
<p ALIGN="JUSTIFY"><font face="Arial">Creation of meaningful retail
customer choice;<br>
</font></li>
<li>
<p ALIGN="JUSTIFY"><font face="Arial">Assurance that technological
innovation can and will be rewarded in the marketplace.</font></li>
</ul>
<p ALIGN="JUSTIFY"><font face="Arial">These goals are not necessarily
addressed simply by structural industry modification.<br>
<br>
</font>U<font face="Arial">nless attention is paid to these factors, by
empirical reference to experience, Aztec Gold can turn out to be iron
pyrites.</font></p>
<font FACE="Palatino" SIZE="2">
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<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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