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 MARCH 1997 ROCK AND ROLL: REVELATION AND RELIABILITY by Roger Feldman -- Bingham, Dana and Gould, P.C.
Question: What is the combined significance of Rock and Roll, Revelation and Reliability for those who would like to add a renaissance of private power supply to the emerging new profile of the electric power industry? Answer: Add a fourth "R" - reregulation - and make sure it has elements of the old PURPA playbook. Here’s what the "Rs" are about and why the "answer" is progressive and not retrograde: Rock and Roll David Bowie is showing the way for PG&E. Recently the British rock star issued a $55 million bond issue backed by his future record and publishing royalties. Now, starting naturally in California, utilities will be issuing securities touted as "rate deduction" bonds which securitize (in advance of actual receipt of payment) the mandated stranded cost charges which the State Commission has agreed may be issued to ease the rocky path which open access will create for utilities by rendering some of their facilities non-competitive. (The "angina posed by competitive rates", as the Wall Street Journal recently dubbed the savings which competition was supposed to produce, but which endanger the future of many utilities.) The word on the street now for the industry is this: expect a "soft landing" if stranded cost securitization is available. Expect state commissions to intuit the opposite: no stranded cost charge payments, no utility Titanic sinkings on their watch. Ah rock and roll! Revelation Item: LADWP has announced it has signed a contract with Revelation Energy Resources to sell wholesale power to members of its parent, Revelation Corp. of America, an alliance of large religious denominations. Revelation Energy is a licensed FERC power marketer. LADWP’s ambition is to make direct retail sales to the church’s members. Business Week takes notice of the larger trend in its piece entitled "High Voltage Chaos." In surveying the impact of aggregation/power marketing on end users, it reaches three conclusions: First, those most likely to be benefited are those that are able to shift their power consumption to off peak hours - such as running equipment only at night; Second, "If regulators decide to protect utilities, e.g., through stranded cost covery, savings for small business could be scant"; Finally, residential consumers will most likely only be benefited in the long term, if there is some standardization of prices, obligations and conditions of service. (Ed. note: This used to be called regulation.) Clearly marketing will be coming to the fore in the industry, and possession or creation of end user relationships will be critical. Traditional utilities may even be able to benefit from the situation, as in telecom, to the extent that cautious consumers prefer to continue to do business in the same old way. Reliability And so they will, predict some industry experts, looking to what consumers stand to gain from open access. "The states will re-regulate because citizens who have the least to gain and most to lose - vote" asserts an article in Electrical World. It focuses on reliability as a driver for state commissions dealing with ordinary citizens. It points to California’s creation of an oversight board on standards as the first glimpse of the turn toward re-regulation which the involvement of consumer/voters will trigger, as their VCRs begin blinking at 12:00 because of power failures. Put rock and roll, revelation and reliability together, and you get a world where consumer lock-in is key to success, and the providers of generation are going to have to succeed by dealing with one of four players: the three obvious ones identified by Business Week, utilities, aggregators and brokers, and a fourth, the gatekeepers of larger open access systems. For some power privateers (particularly those who are not also power marketers), the promise of open access has been "transparency": objective ability to make the cheapest power and then sell it to the consumer with minimum transmission interference. Perhaps, this is naive: as we see above, old and new players alike aspire to the middleman role. While ultimately prices determine markets, possibilities for exercise of market power never die, in a creative free market economy. There is a subtle (if somewhat retro) conclusion to this analysis: that in the overall deregulation legislative fight that will occupy the coming years (at the state as well as the federal level), privateers would be well served to continue to emphasize their rights not just to interconnection and access, but of fair treatment in the marketplace as well. Because those who stand to be in the middle are finding more and more good non-economic reasons - securitization, affinity groups, reliability - why their essential position in power markets should be given deference. It is in that sense - only - that "reregulation" should be on the lips of the private power industry. Otherwise, it may be astounded how rock and roll utilities will propound the doctrine of reliability upon the land, aggregators may be well satisfied to be their groupies, and private power will become the Pat Boone of the electric circus. 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. |
