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<title>May 2007: When Barbie Met RECs</title>
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">Robert A. Olson is a partner in the law firm of
Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law,
public utility law and related commercial transactions.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
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<p ALIGN="left"><b><u><br>
<br>
May</u></b><u><b> 2007</b></u><font size="6"><b><br>
</b></font></p><b>
<p class="MsoNormal" align="left"><font size="6">When Barbie Met Recs</font></p>
<p class="MsoNormal" align="left">By Robert A.
Olson, Esq. and Becky Oleson<strong>-- Brown, Olson and Gould, P.C.<br>
</strong>
</b><font face="Arial" size="2"><i>(</i><em>originally published by PMA OnLine Magazine:
2008/01/19</em><i>)</i></font></p>
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<p class="TitleBoldLeft" align="left"><b>Introduction</b></p>
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<p class="BodyText05DS" align="left" style="text-align:left">Barbie has gone
virtual -- from vinyl idol to computer-based avatar for on-line purchase by
her worshipers of a whole new world of goods. Now you can go on line and
shop for what Barbie likes to wear -- shop with virtual dollars that you
bought with real ones. So, too, can green energy buyers.</p>
<p class="BodyText05DS" align="left" style="text-align:left">Can legal
draftsmen follow the suit of the computer-based consumer culture into the
energy/environment “space,” without developing policy schizophrenia? That
is the issue which the pursuit of RECs “monetization” through development of
a Master Energy Certificate Purchase and Sale Agreement (the “Master
Agreement”) presents today.</p>
<p class="BodyText05DS" align="left" style="text-align:left">To apprehend
this issue, it is first necessary to understand the process the humble RECs
Scriveners went through, what the resulting contract is, and what the
ensuing policy issues may be, as the use of RECs flows into the larger
fermenting energy/environment commerce stream and policy world.</p>
<p class="BodyText05DS" align="left" style="text-align:left">Grasping and
evaluating the “Master Renewable Energy Certificate Purchase and Sale
Agreement” leads one to pass through the stages of human intellectual
growth:</p>
<p class="BodyTextIndent0" align="left" style="text-align:left">(1) basic
absorption of operative facts;<br>
(2) the leap of faith into abstraction;<br>
(3) the harvest of the benefits (through commerce) of a regime of
faith-imposed order on unruly reality;<br>
(4) the development of existential doubts about the faith and angst over
the outcomes of the ordering.</p>
<p class="BodyTextIndent0" align="left" style="text-align:left"><b>I.</b><span style="font-style: normal; font-variant: normal; font-weight: 700; font-size: 7.0pt; font-family: Times New Roman">
</span><b>The Facts</b></p>
<p class="BodyText05DS" align="left" style="text-align:left">Renewable
Portfolio Standards (RPS) have been enacted in 23 states and have surrogate
regimes in several more. Essentially, each state’s RPS requires utilities
to obtain specified percentages, or absolute amounts of production, of new
power from renewables (even specified types of renewables) by specified
dates. Failure to do so generally results in fines or penalties.</p>
<p class="BodyText05DS" align="left" style="text-align:left">The “Renewable
Energy Credits” arising from renewable power production are not allocated
among parties and are not given values but, since they can be used by
utilities to meet statutory requirements, they are subject to value through
trade. There are also voluntary (non-state-compliance) programs creating
analogous “green tags” for renewables, based on private certification.
Their purchase and retirement by third parties yields non-monetary psychic
or PR benefits. These Green Tags are also susceptible of being part of a
market. Definitions of RECs differ and compliance regimes differ. This
reflects the ongoing reality that enacting states and other certifiers have
several overlapping but different goals of reducing dependence on foreign
energy supplies, reducing utilization of polluting energy sources (notably
carbon), and providing economic assistance to certain local resources based
within their borders.</p>
<p class="BodyText05DS" align="left" style="text-align:left">For any of
these reasons it is desirable for Renewable Energy Certificates to be
readily tradable and have their values identifiable, so that the resulting
cash flow can strengthen project feasibility. It is readily perceived that
standardization of the terms of trade which overcomes the current
balkanization of markets is desirable. That premise, implicit in the
Interstate Commerce Clause, has already been tangibly demonstrated in the
“cap and trade” SOX and NOX<sub> </sub>trading markets. These motivations
led to the development of a “Master Agreement” which is intended to enable
the process of REC sales to move from a cumbersome bilateral process to one
where increasingly trading -- and the development of derivative valuations
based on trading -- can be realized. In the absence of a royal Rex or a
regal Webmaster managing the virtual universe, innovation -- born of legal
scholastic ingenuity -- is required.</p>
<h1 align="left" style="text-align:left">II.<span style="font:7.0pt "Times New Roman"">
</span>The Leap of Faith into Abstractions</h1>
<p class="BodyText05DS" align="left" style="text-align:left">The leap of
faith involved in a commercial contract for the purchase and sale of a
material commodity is limited; it relates mostly to the transparency of the
process. With an adequate set of commercial rules, if a REC were a bundle
of firewood, a Phoenician could trade it, as long as the weights and
measures, the rights of the parties, the bookkeeping and, only slightly more
sophisticated, the credit and collateral of the parties and the means for
dispute resolution are clear. This store is not virtual; Barbie can shop
there.</p>
<p class="BodyText05DS" align="left" style="text-align:left">But there is a
leap of faith when the physical product being sold, “power,” is said to
possess an “unbundled,” separate, and tradable attribute. Specifically that
its “green-ness” (as legally defined) may be pulled from the power bundle of
sticks and bought and sold separately.</p>
<p class="BodyText05DS" align="left" style="text-align:left">Once the
feasibility of such unbundling is deemed possible, it is only a further
intellectual leap to treat a REC to being further splinter-able into its
green attributes; voluntarily at first, based on the scientific word of
verifers, and then even legally, if a binding legal compass is adopted to
trade single attributes of the REC as well. Most notably, the carbon
reduction value of a REC can, in principle, be unbundled and separately
traded. </p>
<p class="BodyText05DS" align="left" style="text-align:left">In our
electronic age, where people can postulate such virtual avatars and trade in
parallel computer reality universes, it’s not a large step to ascribe
reality to digits on a screen. Barbie’s accessories can be bought and sold,
why not credits for energy production or carbon diminution? This no longer
seems the leap of theology it once may have been. But there remains a need
for a rulebook as to how the system shall unbundle RECs from power, and
enable them to trade. That is the grail which the Master Agreement quest by
the RECs Scriveners has been all about.</p>
<p class="BodyText05DS" align="left" style="text-align:left">Review of the
Master Agreement, therefore, immediately focuses on the Product definition,
and then to confirmation of trades, allocation of risk, treatment of default
and enforcement mechanisms which it offers. However, whether the noble
Master Agreement construct will have practical meaning depends on whether
merchants will use it to trade their newly created products on exchanges
established to trade the virtual rights. The path to a better mousetrap
must be trodden down through frequent use.</p>
<h1 align="left" style="text-align:left">III.<span style="font:7.0pt "Times New Roman"">
</span>From Faith To Commerce: “Monetization”</h1>
<p class="BodyText05DS" align="left" style="text-align:left">The key to the
journey from faith in a concept to value in the marketplace is the concept
of “monetization”: in this case, the ability to easily capitalize as a
tangible revenue stream the fact that power is derived from a green source
(or, better even a green source which reduces global warming) if a regimen
for trades is designed for that purpose. To an economist, this
“monetization” is the internalization of previously external costs -- to a
banker, it is the ability to realize a firm cash flow stream from a deal --
to a broker this is the basis for reward for facilitation -- and to a
lawyer, it is the scaffolding of a commercial temple in which either future
financing security interests may be created and/or disputes with respect to
them may arise.</p>
<p class="BodyText05DS" align="left" style="text-align:left">If it works as
a monetization device, the Master Agreement provides the predicate to move
from multiple bilateral green credit transactions to the trading market
wherein the value of electrons being green can be formally recognized as,
for example:</p>
<ul>
<li>
<p class="DashIndent" align="left" style="text-align:left">collateral
for loans whose future value rests on the firmness of the obligation,
price, terms and customer credit worthiness reflected in the Agreement;<br>
</li>
<li>
<p class="DashIndent" align="left" style="text-align:left">
<span style="font-style: normal; font-variant: normal; font-weight: normal; font-size: 7.0pt; font-family: Times New Roman"> </span>potential
implicit equity value from future cost free revenue sources which can be
anticipated in assessing IRR compliance;<br>
</li>
<li>
<p class="DashIndent" align="left" style="text-align:left">auctions by
states with a view to assuring a flow for green power within their
respective borders to jurisdictional utilities (and ideally beyond those
borders to embrace national markets)<br>
</li>
<li>
<p class="DashIndent" align="left" style="text-align:left">auctions by
load serving entities seeking least cost solutions to their RECs
compliance problems (or analogous arrangements in the voluntary spheres)<br>
</li>
<li>
<p class="DashIndent" align="left" style="text-align:left">auctions by
green power vendors to maximize the future value of resource streams.</li>
</ul>
<p class="BodyText05DS" align="left" style="text-align:left">The greater the
standardization, the larger the market scale, the longer term the
obligations can be, the more revenue, the more projects . . .</p>
<h1 align="left" style="text-align:left">IV.<span style="font:7.0pt "Times New Roman"">
</span>Existential Doubts and Angst</h1>
<p class="BodyText05DS" align="left" style="text-align:left">We’re not there
yet. First, because the essential simplicity of the Master Agreement
remains to be divined generally beneath the diverse complexity of the types
of different types of Certificate trades it purports to make possible and
the flexibility in doing so. In addition existential angst has begun to
hover over the effort at the policy level. Each is now a topic of
consideration by the ongoing successor Clean Trades Working Group to the
original ABA-EMA-ACORE effort.</p>
<p class="BodyText05DS" align="left" style="text-align:left">At the
functional level, while all of the benefits of trading standardization
mentioned above are now conceptually within reach under a functioning Master
Agreement, reality seems to fall short. What the Master Agreement offers
today is at best a framework for a simultaneous translation device for a
willing buyer and seller who check the same product boxes and willingly
check the same transactional description boxes. Complexity is added to this
by the fact that the Master Agreement addresses the Voluntary as well as the
Compliance market. In the Master Agreement’s Exhibit P, a range of
potential reimbursable attributes and verification devices are addressed, as
possibilities. This may only be a seeming (and possibly even a transient)
complexity. However, absent a single Rex in the form of a Federal program,
Master Agreement proponents must winnow down this giant “portable” phone to
a more palm-sized device which even Barbie could use to call home.</p>
<p class="BodyText05DS" align="left" style="text-align:left">But even as the
contractual menu shrinks and the market presses toward standard definitions
of RECs and their attributes, there remains a larger question -- a source of
existential angst: is the path toward easily-traded, unbundled, unitary
RECs related to green power the path of the future or merely a diversion
from the “true” path to the trading a smaller unbundled carbon credits which
represent a single more purely attributable environmental “essence of RECs”?
Are RECs the “right thing” to be traded? RECs fulfill a compliance need;
but what if that need is superseded by the further division of the REC into
its environmental attributes? Falls then the shadow: is facilitation of
the sale of RECs not legally stripped of environmental benefits, in fact
simply an impediment to the monetization of the “true” carbon market,
dedicated to green house gas reduction?</p>
<p class="BodyText05DS" align="left" style="text-align:left">There are many
possible answers. One possibility that must be considered is that a Master
Agreement which evolves out of the current RECs Master Agreement to serve
the carbon market must be satisfied with the lesser objective of
facilitating bilateral trade and not aspire to move further, until such time
as greater Product definition can be obtained. It is an issue with which
the Clean Trades Working Group is now struggling. </p>
<p class="BodyText05DS" align="left" style="text-align:left">Even a larger
existential question is raised: is the goal of carbon trading and GHG
control better served by abandoning the unitary universal REC trading ideal
as an anachronism -- even if that means sacrifice of one of the few unifying
supports for development of all renewables as an asset class?</p>
<p class="BodyText05DS" align="left" style="text-align:left">Put as an old
fashioned public policy matter: can the preservation of “optionality” via a
Master Agreement supporting the notion of a unified trading floor work
against either the desire for optimum development of green power
technologies or the emergence of an optimum carbon reduction environment?
In particular, it may be that RPS-linked RECs may not be the most efficient
way to promote carbon reduction, which can be better done by promoting
energy efficiency or even non-renewable energy generation technologies.
Perhaps in fact, focus on carbon reduction is best not done by bypassing
RECs monetization altogether. Providing “optionality” to trade unified RECs
or their attributes may be short term good business, but it may be long term
bad policy.</p>
<p class="BodyText05DS" align="left" style="text-align:left">It is an
existential question the Clean Trades Working Group currently is also
addressing. However, its resolution cries out for the guidance of a (still
hypothetical) King James, and the devil, of course, is in the details.</p>
<p class="BodyText05DS" align="left" style="text-align:left"><u>Time</u>
magazine literally recently counseled green-sensitive Barbies to “wear green
eye shadow.” Like Barbie we live in a material world, and always will. But
now we can live in a virtual world as well, to facilitate new kinds of
trading markets. While the two can be reconciled in computer entries, they
may not be as easily reconcilable in terms of the policies which they
respectively encourage.</p>
<p class="BodyText05DS" align="left" style="text-align:left">These are the
issues with which lawyers, traders, and policy makers from the Clean Trades
Working Group implicitly grapple as they seek to both refine and expand the
Master Agreement for Renewable Energy trading.</p>
<p class="BodyText05DS" align="left" style="text-align:left">When Barbie
meets RECs, will they become hopelessly lost in the seductive Optionality
Woods? Can’t wait to see the movie.</p>
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<blockquote>
<p align="left"><font face="Arial">
<small>Robert A. Olson is a partner in the law firm of Brown, Olson &
Gould P.C.
which maintains a nationwide practice in energy law, public utility law and related
commercial transactions. He can be reached at:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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