Don't Know Much About History
by Roger Feldman -- Bingham, Dana L.L.P.
Not so long ago, the long march toward deregulation was launched. The departure of Pat Wood from FERC, who led the good fight for deregulation, signals an appropriate time to consider what profit we can learn from the experience. In particular, it would be useful to consider it implications for on-going environmental market-based experiments and green political initiatives. What happened? Will it happen again? Is Charley Brown running to kick a football which Lucy is teeing up, to yank away?
Analysts have emphasized how different the power experience has been from that of other networked industries. They have focused on the lack of central Federal control, the physically less integrated nature of the electric transmission/distribution network, and the political stress of simultaneous efforts to tackle the retail and wholesale markets at once. In effect, an all fronts campaign was launched without sufficient logistics in place to support it. New power capacity was delivered, but so was congestion; not delivered for the most part were lower prices or an expanding coordinated sustainable whole grid.
Inevitably, however, formalistic, formulaic explanations of the fate of deregulation like these leave out the important real world business factors which inevitably morph the elegant intellectual frameworks which scholars and regulators seek to put in place.
What did the players want from the game? The initial large industrial customers pushed deregulation, as a means flowering utility prices-they were not pursuing the greatest good for the greatest number. Neither were the clever utilities, which turned deregulation on its head, into a model for offloading stranded costs, for fielding their own unregulated expansionary subsidiaries, and policies for consolidation. The “deregulated” power proponents (whether utility or non-utility) were focused on penetration of formerly insulated utility service territories at prices below those at which the “home town” players - their feet anchored in regulatory concrete - could compete. The new power trading companies wanted to increase the volume of transactions regardless, of where, as in California, flawed systems might take them - or be manipulated into taking them. And many utilities (and their regional political supporters) did not want their vertical integration disturbed, and were also seeking to prevent the export of their relatively low cost power to other regions, which deregulation demonstrably would impose on them.
In the event, all of these industry developments were blurred by the understandable propensity of those in the business of marketing capital to support schemes to achieve the respective goals of which ever parties supported growth or consolidation or other deals - right up to the point where the market overheated — and then schemes to tap the residual financial potential of distressed asset divestiture. The whole era should not, in short, be stylized or styled as one of the progressive supporters of “competition” against the recalcitrant suppliers of “regulation.”
Back in the heyday of deregulation, the environmental sector was concerned that prevention of environmental benefits would be trampled in the flight to market-based lower cost resources. It was then that the drive to special public service changes, mandatory resource performance standards and the precursors of RECs (green tags) first began to develop. A candid appraisal of the green movement’s success during the period in which large scale non-polluting combined cycle facilities were in vogue mustbe that its impact was marginal.
Which leaves the question: Is there anything that green power advocates should learn from the saga of power deregulation and its tenuous relationship to it?
They are, of course, faced with a very different energy market fuel structure than when deregulation took hold. There are renewable technologies which in the current market (taken together with tax and other incentives) are roughly competitive for smaller power production requirements. But, as with the deregulating power market, the renewables industry confronts many rate-based utilities with a limited voluntary appetite for change; a transmission infrastructure not well designed for the operating patterns of renewables; and, above all, the fact that Federalism has been pressed into the service of those with the strongest interests in their respective states. As with deregulation, it isn’t a case of complete alignment of perceived virtue and public policy: Nukes and clean coal meet some of the environmental criteria which small biomass projects do, and their proponents now seek to have us believe in” blue power.”
Is there an approach for the renewable industry to overcome these problems? Only one ultimately works in America: make the energy economy an offer it cannot refuse. Make the transmission of green RECs across State lines a simple, uniform process and define those Rocs to have significant environmental points of any type into “scores”, i.e. economic value provided they meet any of several potential green goals. In short; provide incentives for uniformity in REC tracking, measurement and securitability.
But there needs to be more . . . The green movement should seek to encourage development of “plugin” hybrid cars which can use conventional power supplements, produced from the resulting green power. By doing so, the utility industry would be brought into play in meeting our national security/imported oil displacement requirements. In short, the green movement seeks incentives for consumer benefits as well as costly consumer internalization of externalities.
It would appear that the lessons to be learned by supporters of renewable energy from the brief, brutal history of deregulation are:
• Support national goals, not abstract economic or environmental principals;
• justify uniform federal policies not fragmented multi-state regulation which only does what is needed piecemeal and ultimately fragments;
• create as many profitable opportunities for as many of the energy sector players as possible: though trading and investing swell as manufacture and consumption;
• keep your plans simple and your expectations realistic, and do not resort out of frustration to “commandant control” if they aren’t realized.
Perhaps the green-power effort can look in the fun-house history of deregulation mirror and extract some lessons. As Santayana (the philosopher not the rocker!) might have said had he been a Washington lawyer: “Those who do not learn from energy history are going to spend a great deal of money to learn it again.”
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.