October 1997

A MERCHANT POWER FABLE: THE ENGLISHMEN'S PATIENT'S

by Roger Feldman  --   Bingham, Dana and Gould, P.C.
(originally published by PMA OnLine Magazine: 04/98)

Not so long ago, two wise but indigent English brothers, both economists with Doctorates in power deregulation, set sail to the Western Hemisphere in search of the land where power could flow so freely and vigorously under their wise tutelage that there would be no difficulty in the creation of new "merchant plants". Each dreamed of becoming a power privateer, earning enough gold from the merchant plants to return to hallowed university halls and develop yet more arcane software. In mid-Atlantic their ships were separated by errant gusts from El Nino. One landed on the rocky, somber banks of Massachusetts and the other on the sunny, carefree shores of Brazil. Each brother set to work to introduce an open access, competitive power model, with the expectation that merchant plants would spring from the fertile fields of competition thus.

Each unfurled his unbundled genco-transco-disco chart; sketched an ISO in the middle; framed the picture with wavy lines of open access. Each pointed to power market facts about the country in which he had landed. That assured, he declared, the success of his deregulation model:

• Large new capacity requirements were present in each country (in Brazil, from rapid growth; in Massachusetts from nuclear death and fossil disintegration and dismemberment).

• Each country’s power economy needed to introduce new cost effective combined cycle gas plants to supplement traditional, but high new capital cost energy sources (hydro for Brazil; nuclear and oil for Massachusetts).

• Each power economy needed to import fuels and needed new fuels transportation infrastructure if its growth needs were to be met.

• Each needed to do this upon, over and around the still looming hulks of major pre-existing utilities (state owned in Brazil; state regulated in Massachusetts).

However, to his dismay each brother discovered that the natives in the country in which he had landed would not simply take his plans for a competitive market economy in which he could be a merchant plant privateer in the form he had brought to them from ye olde countries.

• The Brazilians kept talking about the continued need for governmental investment; concern over the impact on national fiscal policy of energy policy; concern with disparities in regional development and relations among States; and their distaste for importing Spanish-speaking electrons/molecules.

• The Massutins kept carping on the fairness of requirements that they bear the transition costs experienced by utilities under the plan; the need for equitable universal service, the desirability of producing "green" electrons; and their fear of low cost French- speaking electrons destroying their domestic power commerce.

In short, the plan for England’s fully served and thermally powered land could not be lifted wholesale and applied without shrewd political adaptation to other lands.

The brothers each became depressed: the model of which each was an apostle was not being accepted in the form they had sought to transplant it. Gloomily, each predicted that the sky of his country that would turn from blue to brown (out) to black, as a plague of lost opportunity revenues would strike their unbelieving lands, leaving red ink strewn in its wake, throughout their economies.

And then, entered into each host country, dashing and unafraid, some persons of a different ilk: true power privateers. In Brazil, they began buying up existing state companies (still quite bundled, with large distribution system components), who began exploring sale of newly generated power to their newly acquired "captive" companies as well as the host country good. In Massachusetts, they began plunging equity into strategically located plant sites, such as those where gas pipes crossed transmission wires or where transmission congestion was low, confident that they would not only reach the consumer market, but thrive in it, as the old nuclear plants which had serviced it toppled one by one. They simply assured that regulation did not come between them and their markets. The brothers were pressed into service by them to make eloquent speeches in various public forums about the virtues of competition, while they got on with the job.

The brothers each returned to Albion, a bit wealthier from their efforts than when they began. But each secretly nursed the knowledge that he had not become the conquistador of the power currents he had dreamed to be and that the fundamental reason was that his model required special accommodation in each setting. Neither admitted it, each brother was full of bluster, proclaiming that his intellect had triumphed over the aboriginal regulatory primitiveness of the local power poobahs of the lands each had visited. Brazil and Massachusetts (unwitting power analogous under the skin) lived happily ever after - as did the power privateers which served them.

There are three morals of this fable:

• No restructuring model is any better than its applicability to the facts to which it is applied.

• It is better to seek to apply some model than to muddle along in the regulated darkness.

• Capitalism will then find a way to make the model work, but the merchants it breeds may bear scarce resemblance to those which its intellectual progenitors imagined.

To use a cinematic paraphrase: "Given half a chance, capital merchant plants will find a way." The Brazilians keep on smiling, the Massutins intently frowning, and the power privateers serving each keep on quietly chuckling as they develop risk management strategies for deeper market penetration. Each market shows every prospect of sustained growth.

As one power privateer put it: "Ideas travel faster and wider than the specific reality which they address these days. It is fine to start as an English Doctoral patient, but it is foolhardy to be patient too long with an English Doctor’s (economic) models.

Summer at the cape; winter in Rio. That’s for me."

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.