January 2003

The Big Sweep

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2003/06/14)
 

It is almost a law of nature that new ideas and developments, whether public policies or sitcom plots in a ratings sweep, either achieve a critical mass of acceptance and go on to command their fields, or be swept away by opponents and critics and end up in some dustbin of history. So it goes with the SMD Policy, and the larger deregulation movement it is designed to salvage.

As we enter the new year, the headlines are on the fierce struggle to Congressionally curtail FERC’s efforts to effect SMD, and thereby, by its current lights, implement its vision of nationwide effective deregulation. Meanwhile, as this battle rages, the meaningfulness of the deregulatory reforms championed by FERC have been called into question, and the relative merits of state commission oversight as consumer protector are being championed in many collateral arenas.

In effect, the road to deregulation is being eroded in the guise of support for, or deference to, federalism. Even if the Congressional SMD battle is won, the ambit of deregulation as a model for the electric power industry seems likely to shrink.

With trading markets sidelined as a casualty of player behavior, two major providers of deregulation remain: (i) the introduction of new technological innovation as a consequence of grid access, as exemplified by the distributed generation ("DG") movement; and (ii) the reduction in consumer prices through retail choice, bolstered by mitigation resources preventing market manipulation. Each provides an example of how the erosion to which I refer is occurring.

Distributed Generation

Distributed generation, using new or conventional technologies, was supposed to flourish in the deregulated world overseen by a stern but benign FERC presence. At the insistence of the industry, FERC issued an ANOPR (RM02-12) proposing new interconnection standards for small generators. It has been an observation of DOE and various independent experts that resistance to interconnection had long been a mechanism of host utilities to preclude effective market entry. While the original proposal was an artificial but apparently widely subscribed to consensus document, the recent comments on it reflect the retro-splintering into the deregulation cause.

Leading, supposedly "pro" DG ISOs (California, New England and PJM), all responded with emphasis on the benefit of sensitivities to regional market requirements – and the distastefulness of prescriptive rules, which might be overly complex. The need for evaluation of true regional impacts, rather than "rigid standards," was invoked. NARUC, although a part of the group that developed the consensus, now emphasized the preferability of its own model and related forms of agreement. More pointedly, NARUC zeroed in on the fact that its model would not transfer to FERC jurisdiction, which the states currently have (because DG does not directly involve sales for resale), and that regulators were the ones with "substantial regulatory expertise [in] local electricity markets." EEI and regulated utilities supported this position. It was left only to the industry organizations that sought the consensus to continue to emphasize the need for national uniformity, as well as the fact that if interconnections took as long as a year (favored by industry), the results of the rulemaking could "take on the quality of a cruel joke." In effect, it has been left to the FERC alone to decide whether to defend the territory it earlier had sought to occupy.

Retail Choice

Of course an even larger benefit of deregulation was to be the emergence of retail choice that, in turn, would improve consumer prices and, perhaps, even service adequacy. SMD was championed as a means of breathing some potential life into retail choice, which clearly has not become the robust reality it was projected to become. Now, the Virginia SCC in a report has challenged SMD as the very development that will extinguish the flickering candle, which is consumer choice in the Commonwealth. In fact, it has suggested that since retail competition is not providing meaningful benefits anywhere in the nation, it might be beneficial to suspend retail choice if SMD is implemented. There is a broad policy reason for this finding: SMD adoption could result in states’ involuntary (or perhaps inadvertent) loss of day-to-day authority over the price and reliability of electric service for their citizens. And where would reaffirmation of this policy manifest itself, despite the abandonment of retail competition. Well, for example, in the states’ effort to encourage the interconnection of distributed generation and expedition of small power projects, of course. (Otherwise, since all of the Commonwealth’s utilities either have or are about to join PJM, these kinds of responsibilities will all disappear into the RTO maw that SMD creates.)

Mitigation Measures

One could take the above assertions – that deregulation with SMD and attendant FERC national rules on interconnection is not only anti-consumerist but also grounds for dismantling the agency’s efforts to assert jurisdiction in the name of competition – as a clarion call to the agency to clearly apply its authorities to broadly protect against anti-consumerist exercises of market power. However, judging from its decision on ISO New England’s transition to new Standard Market Design (ER02_2330; EL00_62), FERC has decided to render itself less controversial by confining the application of SMD market mitigation measures to those contexts where areas are shown to be affected by system constraints and structural problems are well defined: a careful moderate ground. Only Commissioner Massey pointed out that market power could be exercised, even where the system was unconstrained to drive up prices. The Commissioner also urged the broader principles of empowering RTOs to have the power to discourage anti-competitive conduct broadly and to effect consistency in mitigation arrangements among RTO regions. That is to say, to emphasize the broadly national benefits that effective implementation of SMD could bring to pass, if not blocked by Congressional or state action.

In short, SMD faces passage to the dustbin of history, unless its rationale is connected to a consistently held philosophy that, properly implemented, it really will do good things for the public bureaucratic compromise – leaving power management balkanized, while preserving the figment that public policy has been enacted, is policy that ultimately will be eroded in any case. We will have RTOs; we will have State commissions; and we will have limited competition or innovation.

As we enter 2003, the message for FERC and deregulation proponents seems to be: sweep back or be swept out.

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.