by Roger Feldman -- Bingham, Dana and Gould, P.C.
The announcement of the recent Pacificorp acquisition of The Energy Company, itself a fuel and power marketing amalgam, served to emphasize to the private power industry, an ascending ladder of realities:
To cling to this newest rung of the ladder, private power industry members face a classic quandary: finding an appropriate response to the deregulation genie whose escape from the regulatory bottle it has so long promoted. The challenges are clear enough: prevent unfair exercise of competitive advantage by the new convergence mega-companies; facilitate merchant project financing in the new world of shorter term energy arrangements; reestablish a useful, functional role in the foreshortened energy food chain. In short: figure out what to sell from the corner grocery once the supermarket comes to town.
The trick, of course, is to do all of these things without taking positions or establishing strategic business alliances which inadvertently have the effect of perpetuating the old regulatory order.
Securitizing the Grocery Store Regulatory Needs & Commercial Fundamentals
The underpinning to achieving these results is to institutionalize responses to the underlying "commoditization" of the industry which convergence accelerates. On the regulatory front, this means recognizing the fact that BTUs, not Kwh or Matz, are the new stuff of energy commerce, and therefore that the current legislative focus on assuring electric transmission access, because electric supply competition already exists, is too narrow. Assurance of fair, full service ESCO (multi-energy) competition in a broadly defined BTU market needs to be the target. With respect to FERC regulation of mergers, it means an examination of the potential for undue concentration of market power arising from regional vertical integration. It even may suggest reexamination of the possibility of exercise of BTU market power by the ESCO affiliates of combination mega-utilities.
But such ornery populism would serve only limited purposes for the private power industry, if it did not serve to this the competitive energy thickets for new types of project finance by private power developers who have not (yet?) engaged in convergence. For that to be the case, private power must itself sponsor a variety of innovative financing measures, keyed to participation in the unencumbered emerging competitive BTU markets.
For a source of such innovation, looking backward - to technologies used in natural resource financing - may be more productive than looking "forward" to seeking to finance with multiple short term contracts as security. Perhaps private power should seek to share that type of market risk with its larger convergent brethren by becoming their suppliers. The reason is that this approach would open up new opportunities for "securitization".
Future power production is really a natural resource, producing pools of receivables - income streams to be monetized through public offering in the same manner as more familiar mortgage loans, credit cards, etc. Such "securitization" takes place through a special purpose vehicle purchase ("SPU") - whose credit rating is separated from that of the sponsor, or indeed from any individual contract (to make financing arrangements which characterized old-style IPPs). Such separation allows potential investors in private power project packages to focus on the economic risks presented by the private power companys portfolio, (including such hedging and other power marketing arrangements it may have made), without having to factor in the credit risks and restructuring, default and bankruptcy profiles presented by the private power company itself.
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.