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<title>Steaming: The Merchant Power Legislative Situation</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>December
1999</u><br>
</b></p>
<font FACE="Palatino" SIZE="5"><p></font><b><font face="Arial" size="6">Steaming:
The Merchant Power Legislative Situation</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:
2000/01</em>)</font></p>
<p><font FACE="Palatino" SIZE="2"> </p>
</font>
<p ALIGN="JUSTIFY"><font face="Arial">What can one say about the energy
deregulation bill that couldn’t; a bill that Congressman Ed Markey at
one point summarized as one for which all stakeholders representing
competition have serious problems and which all monopolies support; one
that has set many Congressmen to wondering whether any bill at all is
necessary?<br>
<br>
The answer: private power must rethink and repackage what is being sold;
critique opposition on objective standards; and redefine the supporting
coalition. Obviously easier to say than implement, but necessary to avoid
protracted gridlock. Here’s a roadmap.<br>
<br>
First, restate the analytical premises of deregulation legislation in a
more concrete and coalition-broadening manner. The litmus test for
effective Federal legislation should be whether it facilitates the
emergence of competitive new merchant plants. That is because the measure
of competitiveness of these plants will in significant measure be all - in
per unit price for the fungible electric commodity and collective
flexibility in providing different classes of energy customers with
different demand profiles with more cost effective service than before.
Unleashed marketing innovation, using new technologies, and engineering
and transmission improvements will all find their expression if these two
metrics are being met. In short, if Federal legislation achieves these
goals, deregulation would be good for consumers and would be laudable.
Otherwise it would be an exercise in theoretical economics and system
building in which some players got bigger and rich; others were stripped
of their assets; and many ultimately unproductive transactions took place.<br>
<br>
Second, identify what problems Federal legislation must deal with if it is
to be of value to merchant plant development. Such plants face uncertainty
and volatility because of their dependence on competitive markets, often
on a real time basis, that sets them apart from the PURPA IPPs. They face
a level of regulatory uncertainty not faced by the traditional utilities,
because they must operate in a setting of on-going transition from
regulation to competition. The playing field with the traditional players
has not been leveled. Where existing traditional players retain
significant market share or customer access, their competitiveness is more
problematic.<br>
<br>
Consequently, developers of merchant plants must evaluate the impact of
legislation on four key criteria: (a) risk sharing, (b) market structure,
(c) project economics and (d) transaction structure. Corresponding
criteria for deregulation legislative evaluation are appropriate and
should be established.</font></p>
<font FACE="Palatino" SIZE="2">
</font>
<p ALIGN="JUSTIFY"><font face="Arial">Third, translate these criteria into
the topic titles used in Federal legislation. It is apparent that the
questions that drive the future of merchant plants can roughly be
categorized as follows:<br>
<br>
(a) How large and uniform in characteristics is the market for plants,
retail access and interstate retail wheeling.<br>
<br>
(b) How accessible is that market to new players, free of barriers to
unfair competitive practices and policed effectively? Regulation of
mergers and corporate structure; regulation of former PURPA beneficiaries
and Federal power systems.<br>
<br>
(c) How much residual uncertainty is left as to how individual State or
regional markets may be governed? Electric reliability and transmission
governance.<br>
<br>
Fourth, without self-flagellation, analyze the specifics of how the
Administration’s pro-competition proposals got thoroughly mangled in the
House. Here’s the breakdown:<br>
<br>
(a) </font><u><font face="Arial">Market Size<br>
<br>
</font></u><font face="Arial">The Administration proposed one market,
indivisible, with FERC liberty and justice for all. Sounds attractive for
merchant plants seeking to firm up their competitive potential. Something
happened in the House... No hard landing date for retail competition; FERC
jurisdiction over public power rates cut back to a "comparability
requirement; no FERC jurisdiction over bundled sales; bright distinction
between the use of the interested transmission grid between
"bundled" retail sale of energy and the "unbundled"
sale of the interstate transmission component of electric energy, which
threatens truly comparable terms for all users of the grid.<br>
<br>
(b) </font><u><font face="Arial">Market Access and Unfair Competition<br>
<br>
</font></u><font face="Arial">As a means of protecting players from
competitive abuses, the Administration would have somewhat Federalized the
policing of the national marketplace, notably by providing FERC with
enlarged oversight over mergers, particularly with respect to retail
competition and enlarged powers to take remedial measures. Indeed, in
areas of market power oversight, FERC would have been vested with the
power to override the states. Anti-trust and FERC coverage would have been
extended as well to the Federal power systems. In effect, the
Administration proposed that to assure liberal open markets conducive to
merchant power, more centralized Federal power better capable of dealing
with the perceived ever present possibility of market stifling.<br>
<br>
States rights concerns (notably advocated by utilities poised to defend
their potentially invaded service territories) led the House bill to
endorse reduced FERC approval rights over mergers; limited FERC’s
authority to react to allegations of market abuse; and shifted consumer
protection from the FERC to the States.<br>
<br>
(c) </font><u><font face="Arial">Reliability and the Structure of
Governance<br>
<br>
</font></u><font face="Arial">The Administration’s proposals for the
creation of a National Electric Reliability Organization which delegated
responsibility to regional organizations sought to provide for
rationalization of regional system control areas through requiring
mandatory utility participation in ISOs, in a manner which facilitated
dealing with key issues such as congestion management, which affect the
siting and the success of merchant plants.<br>
<br>
While not precluding the development these concepts, the House bill would
eliminate mandatory RTO participation requirements and increase the
ownership rights of existing transmission owners in RTOs, without
affecting their deemed ability to meet independence requirements for the
organization.<br>
<br>
In sum, congress has left merchant plant developers with major residual
issues as to market size, fairness and certainty of operation. Clearly
Congressional inaction is not stanching localized merchant plant
development, which is relying on state deregulation and specific regional
cooperation initiatives. As long as growth, replacement or substitute
power needs are present, whenever a market emerges in this ad hoc fashion,
enterprise will follow. Coupled with State deregulation progress, that may
be largely why Congressional intensity on the issue is not what it once
was.<br>
<br>
At the same time, given the optimum requirements for use of merchant
plants as articulated in the above criteria, it is clear that Federal
gridlock over a protracted time will at the least impede the extent of
merchant plant growth, and thus, silently subject consumers to a higher
cost and more erratic power system, even as deregulation proceeds. In
addition, combinations and arrangements may be permitted to occur that
make sense for individual firms, but may actually obstruct the productive
development and use of merchant plants. They are challenging enough to
develop that they only take root in fertile soil, let alone in
circumstances where transmission grid management and market receptiveness
are in flux.<br>
<br>
Therefore, a new plan is necessary informed by the above analysis, focused
on strengthening the intellectual base and broadened coalition of support
for deregulation legislation. To succeed private power must make the case
Federal deregulation legislation is based on what merchant plant
development can do for consumers, rather than the theoretical benefits of
competitive markets. The public has seen competition result in consumer
unfriendly situations as consolidation occurs, and as retail advertising
has been confusing. It must focus on the merits of broad market creation
in a stable environment as the key to obtaining those benefits and
emphasize how merchant plants can flourish in this environment, even while
their sponsors are willing and able to accept the uncertainties which
resulting competition can produce. It must actively publicize activities
of incumbents which have an anti-competitive effect to the public and to
regulators; how that affects the merchant plant services beneficial to the
public; and how legislative change may be necessary to address the
problems presented.<br>
<br>
In short, solutions become more palatable when it is clear what problems
they are solving. Private power must meet the opposition head on. Be
prepared to rebut criticism of "re-regulation" and convince
consumer advocates to embrace their course.<br>
<br>
Today’s merchant power fleets are (or are perceived by the public to be)
like mid-nineteenth century ships that have both sails and steam power.
They are haltingly becoming steamer lines, but will have a great deal of
difficulty in achieving that status unless Congress chooses to treat them
that way. It is quite clear that - after this Congress - private power
clearly needs to pick up steam to achieve that result.<br>
</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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