March 2000

Ready For Reddykwh.com?

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2000/04)

Suddenly Washington has been again reminded that electricity regulation is just part of energy policy. DOE Secretary Richardson has been dispatched to negotiate with the Gulf potentates.

It is just a "warmup", however, for his work this coming summer when one shining day peak prices go through the roof in New England or the Midwest. California too is likely to face recurrent power supply shortages during peak summer demand period this year according to industry leaders, and not receive much help either from the Pacific Northwest which also faces high load demands.

As always, as with the oil price "crisis" there are four alternative proactive approaches for the Federal establishment in Washington to follow in response to this looming problem. All derive from "Project Independence" (which Kids, you can look up on the internet; it was circa 1973 and a bust).

• Unleash the Energy Secretary.
  

• Pass a new law letting the "invisible hand" of free markets, freely interconnected, sweep aside the problem.
  

• Put new dentures in FERC’s RTO administered integration.
  

• Specifically focus on the impact of new e-commerce technology as a path out of existing free market-fixes.
  

• The first three are Old News; the fourth, perhaps is Good News.

Old News

1. The first possibility is likely to be spoken for by the fact that this is an election year. There is a reason Mr. Richardson holds his cabinet position. It has to do with electoral votes. And that is probably just as well.
   

2. (2) Comes then the Congress: the last gasp, one way or the other, of the classic hard deregulatory right. There does not appear to be a burning new consensus for the rekindling – HR 2944, which went down in the flames of what must be termed its "deliberalization" in the waning days of the last session. Mostly there are proponents of components of that bill such as doing away with PUHCA and PURPA. Most recently there are proposals keyed exclusively to enhancement of grid reliability, which the partial administrative deregulation to date has thrown into some jeopardy. The predictable responses to this legislation have been that is only partial fix which would leave stranded other important issues unaddressed and in proposed forms leaves too much unregimented regional variability in play. To paraphrase the Democratic nominee for the New York Senate seat: "It takes a blackout [to make Congress act].
   

3. (3) Still on duty at the helm of the Lame Duck power boat is the FERC, having issued Order 2000 and trying to use it to chart a course. To do that, it is having to both provide discipline and guidance to the existing ISOs, and deal with the unruly competitive battle to establish ISOs in as yet ungoverned regions.

New England has been a focus of an RTO tea party that ultimately may prove only to have been a tempest in a teacup -–or could signal a fundamental challenge to "neutral" ISOs by the emerging power generation-rich class which constitutes one of its major stakeholders’. There, a coalition including several of the largest owners have complained of heavy handed ISO interference with market prices, with resulting adverse impact on the depth and liquidity of forward markets. The Coalition wants generators closing prices regularly set on the basis of generators’ actual costs. It recommends the permitted competitive operation of multiple independent power marketing exchanges. While admitting the ISO has "inherent flaws", the ISO has asserted its need for all NEPOOL members to band together to support market changes to deal with them.

Meanwhile, in the tumultuous Middle West, the concept of for profit independent transmission companies (ITCs) operating within the framework of a larger MISO is being propounded by the other major stakeholder in RTOs: the utility transmission owners still in possession of the gird. These transco proponents cast their entity as the solution to the needs for market organization and congestion management.

FERC meanwhile, in recent rulings and utterances, has, supported limited RTO price interference, floated a trial balloon of mandatory interconnection (son of PURPA) and kept the faith that guided pluralistic democracy can provide sound technological governance. (Good thing it doesn’t control telecommunications.)

Hard to imagine old news providing solid solutions in the near term.

New News

No one has said much, however, about the supporting the potential of the emerging "fourth way": bringing to bear the capabilities and sophistication of the new e-commerce economy on the constraints to deregulated markets which has resulted in disheartening headlines like: "New Jersey’s Competition Plan Gets Less than 1% Enrolled in 4 Months".

There are a few blips on the screen which suggest where the electric power world can be going to meet its needs:

• A House Committee request to EIA to study the effects of rising e-commerce on future power demand.
  

• A FERC proceeding on the need for standards and procedures in the internet sale of energy.
  

• New private joint ventures for use of data transmission to control "smart appliances" over power lines.
  

• A new pilot program being packaged by Elcon to enable large industrial power users to reduce their load during periods of high demand and sell the electricity into the wholesale market via private electricity trading markets.

In short, the emergence of a technologically-based new energy management, through what might be termed dispersed generation may be the way out of some of the looming term energy management crisis which lawmakers seem to clumsy or polarized to deal with. Perhaps it is on energy management that lawmakers should put their attention. Emphasis of the use of the internet to promote "liberalized" operation of our economy has shifted from the anti-government right to the pro-competitive left, as is illustrated by the work of Professor Lessig of Harvard, now consulting on the Microsoft antitrust case to the court. It is the "new new thing" which might abort future power-spikes without national grid domination by a mega utility Big Ten.

Technology has, of course, always been the great American hope for problem solving. Like Project Independence, it can be over touted ("American gas utilities...are at the same stage as fledgling Dot.Coms were five years ago recently suggested a trustee of the American Gas Foundation). Clearly, however, focused application of its potential is one way to obviate the increasingly sterile, self serving energy policy dialogue currently in play, which neither solves spiking nor market power problems. After all, why send Secretary Richardson when we can send reddykwh.com?

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.